10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-18050

PW EAGLE, INC.

(Exact name of registrant as specified in its Charter)

Minnesota	41-1642846
(State of incorporation)	(IRS Employer Identification No.)

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: Common Stock, $.01 par value

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Note: Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

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.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12B-2 of the Act).    Yes  ¨    No  x

The aggregate market value of our common stock held by non-affiliates as of June 30, 2006 was approximately $296,075,818 (based on the closing sale price of $30.24 per share as reported on the NASDAQ Global Market).

The number of shares of the registrant’s common stock, $.01 par value, outstanding as of February 27, 2007 was 11,528,754.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement for the registrant’s 2007 Annual Meeting of Shareholders are incorporated by reference into Items 10, 11, 12, 13 and 14 of Part III of this report.

PART I

ITEM 1. BUSINESS

General

PW Eagle, Inc., a Minnesota corporation, (also referred to as we, us, our, 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 wholly-owned subsidiary, USPoly Company, LLC, (USPoly) manufactures and distributes polyethylene (PE) pipe products and accessories. The Company was organized as a corporation under the laws of the state of Minnesota in 1989.

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

Our web address is www.pweagleinc.com. USPoly’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.

Recently Announced Transaction

On January 15, 2007, we announced that we had entered into a definitive merger agreement under which J-M Manufacturing Company, Inc. (“JMM”) will acquire all of the outstanding common shares of PW Eagle for $33.50 per share in cash. The transaction is expected to be completed during the second quarter of 2007, subject to customary closing conditions, including the receipt of regulatory approvals and approval by the shareholders of PW Eagle. JMM, headquartered in Livingston, New Jersey, operates a total of 14 plastic pipe manufacturing facilities and serves customers throughout North America.

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  ¹/2-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).

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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  ¹/2” 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.

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 offer this product in sizes 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  ¹/2” 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

In February 2003, we created a separate subsidiary, PWPoly, and in September 2003 we transferred certain assets and liabilities of our PE pipe business to PWPoly. In September 2004, we acquired substantially all of the assets of Uponor Aldyl Company Inc.’s (UAC) PE pipe business. These combined businesses are now operated as a separate wholly-owned subsidiary, USPoly Company, LLC.

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  ¹/2 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  ¹/2 inch to 12 inches, in either straight sticks or coils depending on customer requirements and diameter. We use Plastics Pipe Institute (PPI)-approved 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 produced and sold 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.

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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.

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.

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 with 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 warranteed 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. Sales to HD Supply, a customer of both the PVC and PE segments and not otherwise affiliated with the Company, totaled approximately 12% of consolidated sales in 2006. No customer accounted for more than 10% of our net sales in 2005 or 2004.

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 affected our operating margins and will continue to do so 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. 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 fittings manufacturing facility is located in Tulsa, 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. In the PE pipe manufacturing facilities, natural PE 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 resin in bulk, mainly by rail car, and are substantially dependent on one supplier. We acquire our PE resin in bulk, mainly by rail car, and are substantially dependent on two suppliers. During the years ended December 31, 2006, 2005 and 2004, purchases of PVC and PE resin from three vendors totaled 90%, 90% and 87% 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.

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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 residential and commercial construction activity is slower, and improve during the second and third quarters, when such construction activity 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 February 27, 2007, was approximately $49.9 million compared to $42.0 million on March 1, 2006.

Employees

The table below summarizes the approximate number of our employees in January 2007:

	PVC	PE	Total
Administration	135	27	162
Sales and marketing	56	11	67
Manufacturing	690	173	863
Total	881	211	1,092

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 1A. RISK FACTORS

The risks described below are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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. In response to hurricane-related supply disruptions and increasing energy and raw material costs, PVC resin producers implemented increases in September and October 2005. Starting in December 2005, and continuing through the first few months of 2006, PVC resin prices decreased, stabilized during the second quarter, and increased in the third quarter. PVC resin prices decreased significantly in the fourth quarter of 2006 in response to lower demand and decreasing raw material costs.

Our gross margins decrease 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 re-started a portion of its capacity. 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 vinyl chloride monomer (VCM), with completion expected in late 2007 for the first phase and 2008 for the second phase. During 2005, two other PVC producers announced smaller expansions of existing facilities which are expected to be completed in 2007. If these capacity increases result in industry capacity exceeding demand when they begin production, it could result in decreasing prices for PVC resin and negatively impact our gross margins.

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

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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 resin 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 ten years published PVC resin prices have fluctuated between approximately $0.24 and $0.67 per pound. Since peaking in October 2005, published PVC resin prices have decreased approximately $0.13 per pound.

We believe the main drivers of industry performance are U.S. Gross Domestic Product (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. The hurricane-related supply and demand imbalances experienced during the fourth quarter of 2005 resulted in very strong margins which continued through the first three quarters of 2006. By the fourth quarter of 2006, there was more than sufficient resin supply compared to demand which resulted in a significant reduction in margins compared to the first three quarters of 2006. Additionally, because our products are used in both new residential and commercial construction and replacement and upgrade projects, a significant or prolonged decrease in the level of construction activity in the U.S. could lead to decreased demand for PVC and PE pipe, and result in lower prices and margins.

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 substantially dependent on one supplier of PVC resin, our primary raw material. Our business and operating results could be seriously harmed if this supplier were unable to timely meet our requirements on a cost effective basis. Additionally, certain terms of our agreement with this supplier limit our business and operating flexibility.

Our key raw materials, PE and PVC resin, are procured primarily from three suppliers. The cost, quality and availability of these raw materials, chief among them PVC resin, are essential to the successful production and sale of our products. There are a limited number of suppliers of PVC resin. 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 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 have a long-term agreement in place with one PVC resin supplier and thus are substantially dependent upon our relationship with that supplier, which we believe to be good. However, if our supplier experienced a natural disaster, a serious incident at a major production facility that limited production of PVC resin, or experienced any other event that resulted in a significant and extended limitation on its ability to provide us with PVC resin or was unwilling to meet our demand for PVC resin 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.

In September and October of 2005, all five PVC resin suppliers in North America declared force majeure due to the effects of Hurricanes Katrina and Rita, and due to an accident at one resin manufacturing facility. Despite this situation, we were able to secure sufficient amounts of raw material to maintain our operations at reasonable levels, primarily because of our agreement with our PVC supplier. Since early in first quarter of 2006, resin suppliers were able to increase production to levels such that there are no longer supply limitations. However, if similar disruptions in our raw material supply occur in the future, we may be unable to effectively utilize our manufacturing capacity.

The terms of our long-term agreement with our PVC supplier provide, among other things, for the extension of the agreement at the supplier’s option through 2013, certain termination rights exercisable by the supplier without corresponding rights for us, a right of first negotiation with the supplier on the sale of the assets of one or more of our facilities that utilize PVC resin, and the supplier’s option to require a buyer of all or a substantial portion of our assets to assume the agreement. These provisions may have the effect of limiting our ability to replace the supplier, procure PVC resin under more favorable terms or divest of our assets.

A significant portion of our business and the demand for our products is seasonal in nature and any adverse weather conditions that result in a slowdown in the construction industry may adversely affect demand for our products.

Our products are used in new residential and commercial construction. Because of this, the demand for these products tends to be seasonal to correspond with increased construction activity in the late spring, summer, and early fall. Any significant or prolonged adverse weather conditions that negatively affect the construction industry or slow the growth of new construction activity may negatively affect our operating results.

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Our operating results are dependent on the price of resin and any competitive pressure in the resin industry that increases supply or decreases the price of resin may negatively affect our profitability.

The primary raw material used in most of our products is PVC resin. Generally, in periods of strong demand and limited supply of PVC resin, prices of resin tend to increase. Conversely, PVC resin prices tend to decrease when demand is weak and there is excess supply. Historically, in response to increasing resin prices, we have been able to increase the price of our products at a greater rate, resulting in better margins. During periods of decreasing resin prices, our selling prices have tended to decrease faster than our raw material costs, resulting in lower margins. In the event of a significant increase in PVC resin capacity or a significant decrease in the demand for PVC resin, resulting in a period where there is an excess supply of PVC resin, our margins and profitability could be negatively impacted.

The proposed merger with JMM is subject to conditions to closing, including the receipt of the required approval by our shareholders and regulatory approvals, which could result in the merger being delayed or not consummated, and could negatively impact our business, stock price, financial condition and operations.

The proposed merger with JMM is subject to conditions to closing as set forth in the merger agreement, including obtaining the required approval from our shareholders and obtaining all proper regulatory approvals. If any of the conditions to the merger is not satisfied or, where permissible, not waived, the merger will not be consummated. The delay or failure to consummate the merger could negatively impact our business, stock price, and financial condition. Our failure to consummate the merger may negatively impact our future business, growth, revenue, and results of operations and our ability to attract any future potential acquirer.

We are required to file a notification form with the United States Department of Justice and the Federal Trade Commission to determine whether the merger with JMM complies with applicable antitrust laws. We may not complete the merger until the expiration of a waiting period that follows the filing of the notification form. There is a risk that this regulatory approval may not be obtained or is obtained subject to conditions that are not anticipated. If such regulatory approval is not obtained or delayed, or if such regulatory approval is subject to conditions that we do not currently anticipate, the merger may not happen or at best it will be delayed. Such delay or the failure to consummate the merger may have an adverse effect on our current, and if the merger is not consummated, our future, business, stock price, financial condition and results of operations.

The uncertain effects of the pendency of the proposed merger with JMM may negatively impact our business relationships, operating results and business generally, including our ability to retain key employees, suppliers and customers during the pendency of the merger.

Because the merger with JMM is subject to various closing conditions, uncertainty exists regarding the completion of such merger. This uncertainty may cause employees, suppliers and customers to delay or defer decisions concerning us, or elect to switch to other companies or suppliers prior to the merger, which could negatively affect our business and our results of operations.

Some customers may seek alternative sources for products and services pending the completion of the merger due to, among other reasons, a desire not to do business with the combined company or perceived concerns that the combined company may not continue to maintain the same quality, or support and develop such products and services in the same manner, as we do. In addition, if the merger does not occur for any reason, our relationships with our current customers and suppliers may be adversely affected.

Some of our employees may choose not to continue with us during the pendency of the merger due to a perception of uncertainty about the merger, their job security and the surviving company.

While the terms of the merger agreement allow us to consider unsolicited alternative proposals under certain circumstances, they prohibit solicitation of other proposals by us.

Certain provisions included in the merger agreement make it difficult for us to sell our business to a party other than JMM. These provisions include the general prohibition on us from soliciting any acquisition proposal or offer for a competing transaction, and a requirement that we pay a termination fee equal to 3% of the aggregate merger consideration and the reasonable and documented out of pocket expenses of JMM in connection with the merger, not exceeding $2,500,000, if the merger agreement is terminated in specified circumstances. These provisions might discourage a third party with an interest

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in acquiring us from considering or proposing an acquisition, including a proposal that might be more advantageous to our shareholders when compared to the terms and conditions of the pending merger with JMM. Furthermore, the termination fee may result in a potential competing acquirer proposing to pay a lower per share price to acquire us than it might otherwise have proposed to pay our shareholders.

There is the potential that because of certain covenants we agreed to in the merger agreement that restrict the conduct of our business prior to the completion of the merger, there could be an adverse effect on our business, properties and operations.

Pursuant to the merger agreement, prior to the consummation of the merger with JMM, we have made certain covenants that restrict our business. These prohibitions include, but are not limited to, (i) merging or consolidating with any company other than JMM, (ii) acquiring any company, (iii) issuing, selling, pledging, disposing of, transferring or encumbering any of our shares of common stock, (iv) paying any dividends, (v) creating or incurring any lien on our assets, (vi) making any loan, advancing any money or making a capital contribution in excess of $50,000, (vii) incurring any indebtedness for borrowed money other than in the ordinary course of business not to exceed $500,000, (viii) except as disclosed in the merger agreement, making or authorizing any capital expenditure and (ix) entering into any material contract.

These covenants could have an adverse effect on our business pending the merger, by limiting our ability to take advantage of a financing, merger and acquisition or other corporate opportunity.

The financing contemplated by JMM for the consummation of the merger might not be obtained.

JMM currently has commitments from lenders to finance the merger, but these commitments may change prior to the consummation of the merger. If any of these commitments fall through, JMM will look for other acceptable alternative commitments. This may cause a delay in the consummation of the merger, which may have a negative effect on our business, stock price, financial condition and results of operations. Under the terms of the merger agreement, JMM is obligated to proceed with the merger even if it fails to obtain the necessary financing, but this may be difficult for it to do. If JMM is unable to find acceptable replacement financing, there is a chance that the merger will not be consummated. The failure to consummate the merger with JMM may have a further negative impact on our future business, stock price, customer and employee perception, financial condition and results of operations and our ability to attract any future potential acquirer.

There is a chance that the occurrence of certain events, changes or other circumstances may arise that could give rise to the termination of the merger agreement, including circumstances that may require us to pay a termination fee and related expenses to JMM.

In the merger agreement we agreed to pay JMM a termination fee equal to 3% of the aggregate merger consideration and the reasonable and documented out of pocket expenses of JMM in connection with the merger, not exceeding $2,500,000, if our board of directors terminates the merger agreement and authorizes a competing acquisition by an entity other than JMM and in the event of certain other specified events that result in termination of the merger agreement. The termination fee could discourage other companies from trying to acquire us even if another acquisition would offer greater immediate value to our shareholders.

The proposed merger with JMM may not be completed in a timely manner or at all, which may materially adversely affect our business, future prospects and the price of our common stock.

If the merger with JMM is not completed, the trading price of our common stock may decline to the extent that the current market price reflects a market assumption that the merger with JMM will be completed. In addition, our business and operations may be harmed to the extent that our customers, suppliers and others believe that we cannot effectively compete in the marketplace without the merger, or there is customer, supplier or employee uncertainty surrounding the future direction of the product and service offerings and our strategy on a stand-alone basis.

In addition, any future potential acquirer would be cautious in exploring any future transaction with us.

We have incurred, and will continue to incur, significant costs in connection with the merger with JMM.

We have incurred, and will continue to incur, substantial costs in connection with the merger. These costs are primarily associated with the fees of attorneys, accountants and financial advisors. If the merger is not completed, we will have incurred these costs but will have received little or no benefit.

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If litigation is initiated with respect to the merger with JMM, the completion of the merger may be jeopardized and our business, financial condition and results of operations may be adversely impacted.

At any time, the antitrust division of the United States Department of Justice, the Federal Trade Commission, or another federal or state governmental authority could challenge or seek to block the merger with JMM under antitrust laws, as it deems necessary or desirable in the public interest. The antitrust law section of the office of the California attorney general has requested that we voluntarily provide that office with information regarding the proposed merger, which we are doing. We do not know what, if any, antitrust issues or concerns may be raised by this state office or what impact this may have on our ability to consummate the merger in a timely fashion. Moreover, in some jurisdictions, a competitor, customer, or other third party could initiate a private action under antitrust laws challenging or seeking to enjoin the merger with JMM, before or after it is completed. We cannot be sure that a challenge to the merger with JMM will not be made or that, if a challenge is made, that we will prevail.

Further, if litigation is initiated relating to the merger by our shareholders, JMM’s shareholders, the parties to the merger, or other third parties, this may affect the completion of the merger. Such potential litigation may be costly and time consuming. If the merger is delayed or is not consummated, our business, stock price, financial condition and results of operations may be negatively impacted. Further, the perception arising from any such litigation may negatively impact our future business, stock price, financial condition and results of operations, if the merger is not consummated.

During the pendency of the merger with JMM, our management’s attention may be diverted from our ongoing business operations, which may result in our business and results of operation being adversely affected.

During the pendency of the merger, our management will be required to devote a portion of its time to help ensure that each condition necessary for the consummation of the merger with JMM is met. Our management will also be asked by JMM to help ensure that the transition of our business to JMM is done properly. The attention given to the merger may result in our management not being able to devote sufficient time to other areas of the business, especially if disputes arise between the parties or if litigation is commenced in connection with the merger.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

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 Tulsa, Oklahoma. The Tulsa and Hastings facilities are leased pursuant to long-term lease agreements.

In August 2006, we sold USPoly’s former production location in Shawnee, Oklahoma for $0.9 million.

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 93% of capacity in the first quarter of 2007.

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 2006.

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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 Global 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 2006 and 2005:

	High		Low
Year ended December 31, 2006:
First Quarter	$	28.20	$	18.52
Second Quarter		31.95		24.55
Third Quarter		37.00		24.05
Fourth Quarter		38.16		29.05
Year ended December 31, 2005:
First Quarter	$	4.39	$	2.95
Second Quarter		7.25		3.28
Third Quarter		8.53		5.15
Fourth Quarter		25.00		7.68

On February 27, 2007, there were 11,528,754 shares of common stock outstanding held by 1,034 shareholders of record (not including shares held in street name).

In December 2005, the Board of Directors declared the Company’s first quarterly dividend of $0.075 per share, payable in January 2006. Subsequent quarterly dividends of $0.075 per share were paid in April and October of 2006 and January of 2007. We have agreed in the merger agreement with JMM not to declare or pay any additional dividends from the date of the merger agreement through the closing of the merger.

During the past three years, the Registrant sold the securities listed below pursuant to exemptions from registration under the Securities Act, which were not otherwise reported on a quarterly report on Form 10-Q or a current report on Form 8-K.

On December 22, 2005, PW Eagle entered into a Common Stock and Warrant Purchase Agreement with a single investor for the private placement of 18,667 shares of the Company’s common stock at a price of $18.75 and warrants to purchase an additional 4,667 shares of common stock with an exercise price of $27.00 per share. The aggregate offering price was $350,000. The warrants contain a net exercise provision. Such securities were offered and issued in reliance on the exemption from registration provided by Rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, as a transaction not involving a public offering of securities.

The following table provides information about purchases made by us of our Common Stock in the fourth quarter of fiscal 2006.

Period	(a) Total Number of Shares (or Units) Purchased (1)	(b) Average Price Paid per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (1)
October 1 – October 31, 2006	115,198	$	31.2741	493,753	$	24.8 million
November 1 – November 30, 2006	19,196	$	33.8184	512,949	$	24.2 million
December 1 – December 30, 2006	16,916	$	33.9376	529,865	$	23.6 million
Total – Q4, 2006	151,310

(1) On June 16, 2006, our Board of Directors approved a share repurchase program, whereby the Company was authorized to repurchase up to $40 million of the Company’s common stock outstanding through June 30, 2008. Repurchases may be made in the open market and in privately negotiated transactions utilizing various hedge mechanisms, including, among other things, the sale to third parties of put options for the Company’s common shares, or otherwise. The repurchase program was announced on June 16, 2006. No share repurchase plan or program expired, or was terminated, during the period covered by this report.

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ITEM 6. SELECTED FINANCIAL DATA

	Years ended December 31
	(in thousand, except for per share amounts)
	2006			2005			2004			2003			2002
SUMMARY OF OPERATIONS
Net sales	$	714,112		$	694,244		$	474,954		$	331,787		$	251,275
Gross profit		174,642			159,389			70,136			36,749			45,479
Operating expenses		74,703			70,608			58,858			45,837			33,534
Operating income (loss)		99,939			88,781			11,278			(9,088	)		11,945
Gain on sale of investee and non-operating income		897			18,363			—			—			—
Interest expense		(3,800	)		(27,051	)		(20,668	)		(11,828	)		(11,001	)
Income (loss) from continuing operations before income taxes, minority interest and equity in undistributed earnings of unconsolidated affiliate		97,036			80,093			(9,390	)		(20,916	)		944
Income (loss) from continuing operations (net of tax)		60,695			46,950			(5,540	)		(12,912	)		571
Income from discontinued operations (net of tax)		—			—			—			194			—
Net income (loss)		60,695			46,950			(5,540	)		(12,718	)		571
PER SHARE DATA
Income (loss) from continuing operations per share:
Basic	$	5.09		$	5.28		$	(0.78	)	$	(1.89	)	$	0.09
Diluted	$	5.02		$	4.65		$	(0.78	)	$	(1.89	)	$	0.06
Income from discontinued operations per share:
Basic	$	—		$	—		$	—		$	0.03		$	—
Diluted	$	—		$	—		$	—		$	0.03		$	—
Net income (loss) per share:
Basic	$	5.09		$	5.28		$	(0.78	)	$	(1.86	)	$	0.09
Diluted	$	5.02		$	4.65		$	(0.78	)	$	(1.86	)	$	0.06
Cash dividends declared per common share	$	0.30		$	0.075		$	—		$	—		$	—
Weighted average number of common shares outstanding:
Basic		11,930			8,888			7,096			6,852			6,717
Diluted		12,096			10,094			7,096			6,852			9,376
FINANCIAL POSITION
Working capital (deficiency)	$	99,505		$	38,267		$	(17,480	)	$	(3,610	)	$	13,620
Total assets		242,574			234,456			216,726			165,178			133,402
Long-term and subordinated debt and financing lease obligation, net of current portion		19,302			19,525			54,713			59,827			58,725
Stock warrants (included under liabilities)		—			—			2,627			—			—
Stockholders’ equity		145,397			86,039			12,613			15,235			25,919

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

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes appearing under Item 8. Some of the information contained in this discussion and analysis or set forth elsewhere in this annual report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” under Item 1A, and the “Future Outlook and Risks to Our Business” comments below, for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Executive Summary

Throughout 2006, we have continued the success from 2005. Our operating performance has continued to improve, with our net income for 2006 amounting to $60.7 million compared to $47.0 million in 2005. Our resulting net cash flow from operations in 2006 amounted to $50.5 million, after paying $53.3 million in income taxes for 2005 and 2006. The positive cash from operations allowed us to pay down our revolving line of credit by $7.2 million, purchase $16.4 million of our common stock in our share repurchase program, pay $3.6 million in dividends, and still increase our cash position to $38.1 million at the end of 2006 compared to $5.7 million at the end of 2005. As a result, our financial position at December 31, 2006 is very strong.

We believe the main drivers of industry performance are U.S. gross domestic product (GDP) growth and supply and demand of PVC and PE resin. Historically, our profitability has improved during periods of strong GDP growth and decreased during periods of slower growth or recession. GDP growth has improved somewhat in 2006, with the GDP growth reported at 3.4 percent for 2006, as compared to 3.2 percent for 2005. As the PVC and PE resin industries have recovered from the hurricane related disruptions during the fourth quarter of 2005 and the first quarter of 2006, supply and demand of pipe have moved to a more balanced situation. As demand declined during the fourth quarter, our margins also declined from the first part of the year. As PVC resin and pipe prices continue the recent downward trend, our margins in the first quarter of 2007 may also decline further, but seasonal demand should increase as usual during the spring and summer months.

We provide a more detailed discussion of PVC and PE resin prices, GDP, and demand for PVC and PE pipe products under the Future Outlook and Risks to Our Business section of this discussion below, and under Item 1A. Risk Factors. We will comment in more detail on our Consolidated Results of Operations, Results of Operations by Segment, and Liquidity and Capital Resources in each of those respective sections below.

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Consolidated Results of Operations

	Years ended December 31
	(in thousand, except for per share amounts)
										Percent Change
	2006			2005			2004			06 vs 05		05 vs 04
Net sales	$	714,112		$	694,244		$	474,954		2.9	%	46.2	%
Cost of goods sold		539,470			534,855			404,818		0.9	%	32.1	%
Gross profit		174,642			159,389			70,136		9.6	%	127.3	%
Gross profit margin		24.5	%		23.0	%		14.8	%
Operating expenses:
Freight expenses		38,897			38,687			30,950		0.5	%	25.0	%
Selling expenses		18,194			17,719			14,778		2.7	%	19.9	%
General and administrative expenses		17,301			15,973			11,114		8.3	%	43.7	%
Restructuring expenses		—			—			1,608		*		*
Other expense (income)		311			(1,771	)		408		*		*
Total operating expenses		74,703			70,608			58,858		5.8	%	20.0	%
Operating income		99,939			88,781			11,278		12.6	%	687.2	%
Gain on sale of investee and non-operating income		897			18,363			—		*		*
Interest expense		(3,800	)		(27,051	)		(20,668	)	-86.0	%	30.9	%
Income (loss) from continuing operations before income taxes		97,036			80,093			(9,390	)	21.2	%	953.0	%
Income tax (expense) benefit		(36,341	)		(32,915	)		3,059		*		*
Effective tax rate		37.5	%		41.1	%		32.6	%
Minority interest		—			(228	)		173		*		*
Equity in undistributed earnings of unconsolidated affiliate, net of tax		—			—			618		*		*
Income (loss) from continuing operations		60,695			46,950			(5,540	)	29.3	%	947.5	%
Income from discontinued operations, net of tax		—			—			—		—		—
Net income (loss)	$	60,695		$	46,950		$	(5,540	)	29.3	%	947.5	%

* Percentage not applicable or meaningful.

Net Sales:

During 2006, both demand for and prices of PVC pipe have decreased from the levels seen at the end of 2005. While net sales increased by $19.9 million in 2006 compared to 2005, volume decreased by 9%. Average selling prices remained high during the first nine months of the year resulting in the overall increase. Sales prices have declined in the fourth quarter of 2006 and continue to decline into the first quarter of 2007, which is expected to result in lower overall sales in the first quarter of 2007 compared to the first quarter of 2006.

Net sales increased by $219.3 million in 2005 compared to 2004. Of this increase, $166.4 million was due to higher volume and pricing in our PVC products, $46.8 million was due to the UAC acquisition in our PE business in late 2004, and the balance of $6.1 million was due to volume and pricing in our other PE products. The PVC increase was due in large part to pricing increases. The average selling prices were above 2004 averages for all of the year, but were particularly higher during the fourth quarter of 2005. This increase in prices resulted from the PVC resin manufacturing and supply disruptions,

13

caused by hurricanes Katrina and Rita which led to a situation where demand for PVC pipe exceeded supply. See Note 2: Acquisitions and Divestitures in the Notes to the Consolidated Financial Statements for further discussion of the UAC acquisition.

Gross Profit:

The gross profit improvements as a percentage of sales during the last two years are primarily due to the increasing spread of selling prices over the cost of raw materials in our PVC business. With the recent decline of average selling prices, however, our gross profit may be lower in the first quarter of 2007 than in the first quarter of 2006.

Operating Expenses:

Operating expenses increased by $4.1 million in 2006 compared to 2005. Freight increased by $0.2 million due to the overall higher costs for freight in rates per pound even though the volume was lower.

Selling, general and administrative costs increased by $1.8 million in 2006 compared to 2005. There were several contributing factors to this increase: termination fees paid to Spell Capital Partners in 2006 amounted to $1.4 million; non-cash compensation costs were $3.4 million (primarily from FAS 123(R) costs); and consulting fees for Synergetics Installations Worldwide, Inc., a management consulting firm (Synergetics”), were $0.8 million. These increased costs were partially offset by a reduction in USPoly administrative costs of $1.8 million resulting from the consolidation of USPoly’s administrative offices with PW Eagle’s administrative offices, and sales commissions were $1.1 million lower due to the reduced sales volume. See Note 2: Acquisitions and Divestitures in the Notes to the Consolidated Financial Statements for further discussion of the USPoly merger with and into PW Eagle.

Other income and expense includes non-cash costs of $0.7 million for the previously announced relocation of USPoly’s injection molding operations, which occurred in the second quarter; and 2005 included a gain on the sale of land of $0.5 million and a gain on the sale of the metals parts business of $1.2 million.

Comparing 2005 to 2004, operating expenses increased by $11.7 million. Freight and selling costs increased by $10.7 million due to the overall volume increases and higher selling prices, and higher costs for freight both in rates per pound and special handling charges when the industry experienced shortages of available trucks. General and administrative costs increased by $4.9 million, including a $2.2 million increase in our PE products business, due largely to the UAC acquisition. The remaining increase in administrative costs was due to several items including higher overall compensation costs based on the improvement in profitability and higher professional service fees, among others. These increases were partially offset by a $0.5 million gain on the sale of land and the absence of any restructuring costs in 2005, and also because 2004 included a loss on the sale of facilities of $0.4 million. In addition, our PE business realized a gain on the sale of its metals parts business of $1.2 million in the second quarter of 2005.

Gain on Sale of Investee and Non-operating Income:

For 2006, non-operating income includes a gain on put options related to the Company’s share repurchase program of $0.4 million, and an adjustment to the gain on W.L. Plastics of $0.5 million.

In 2005, USPoly sold its approximately 23% interest in W.L. Plastics. USPoly received $23.5 million cash and an additional $1.2 million is being held in escrow for a period of 18 months and is subject to customary post-closing contingencies. As a result of this sale USPoly recorded a gain in 2005 of $18.4 million.

Interest Expense:

Interest expense decreased $23.3 million in 2006 compared to 2005, primarily due to our repayment of outstanding debt in 2005. In addition, net interest expense was reduced by $0.8 million of interest income earned on temporary cash investments during 2006.

Interest expense increased $6.4 million in 2005 compared to 2004. Included in 2005 was $4.8 million of prepayment penalties associated with our payment of all subordinated debt and term loans, and non-cash charges of $2.8 million for the related write-off of unamortized debt discount and deferred finance charges. In addition, there was an additional $5.1 million of non-cash charges for the fair value adjustments for warrants issued with the subordinated debt.

See Note 5: Financing Arrangements in the Notes to the Consolidated Financial Statements for further discussion of related debt transactions.

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Income Taxes:

The income tax provision (benefit) for the years ended December 31, 2006, 2005 and 2004 was calculated based on management’s estimates of the annual effective tax rate for each year. The annual differences in 2005 from our usual tax rate of approximately 38-39% are primarily due to permanent differences from charges related to the stock warrants.

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Results of Operations by Segment

	Years ended December 31
	(in thousand, except for per share amounts)
										Percent Change
	2006			2005			2004			06 vs 05		05 vs 04
Net sales:
PVC products	$	631,901		$	612,258		$	445,880		3.2	%	37.3	%
PE products		82,211			81,986			29,074		0.3	%	182.0	%
Consolidated net sales		714,112			694,244			474,954		2.9	%	46.2	%
Operating income:
PVC products		94,354			84,387			11,140		11.8	%	657.5	%
% of sales		14.9	%		13.8	%		2.5	%
PE products		5,585			4,394			138		27.1	%	3,084.1	%
% of sales		6.8	%		5.4	%		0.5	%
Consolidated operating income:		99,939			88,781			11,278		12.6	%	687.2	%
% of sales		14.0	%		12.8	%		2.4	%
Gain on sale of investee and non-operating income		897			18,363			—				—
Interest expense		(3,800	)		(27,051	)		(20,668	)	-86.0	%	30.9	%
Income (loss) before income taxes, minority interest and equity in undistributed earnings of unconsolidated affiliate	$	97,036		$	80,093		$	(9,390	)	21.2	%	953.0	%

PVC Products:

PVC sales increased $19.6 million in 2006 compared to 2005 due to higher selling prices, which more than offset a 9% decrease in volume. While selling prices declined in 2006 compared to the fourth quarter of 2005, they remain well above the average for 2005. Margins during the first three quarters of 2006 remained well above 2005 as product demand was relatively strong, yielding an improved gross profit level.

Operating expenses increased $4.2 million in 2006 over 2005. There were several significant contributing factors to this increase: freight costs increased $0.4 million due to higher transportation rates; selling commissions decreased $1.1 due to the lower volume; termination fees paid to Spell Capital Partners pursuant to the Management Services Agreement amounted to $1.2 million; non-cash compensation costs were $3.4 million (primarily from FAS 123(R) costs); consulting fees for Synergetics were $0.8 million; and 2005 included a gain on the sale of land of $0.5 million. The overall result was an increase in operating income of $10.0 million.

PVC sales increased $166.4 million from 2004 to 2005, due to an overall volume increase of 3.4%, amounting to $15.1 million of the sales increase, and average pricing increases amounting to $151.3 million. Most of our plants were operating at near capacity levels for much of 2005. The average selling prices were above 2004 averages for most of the year, but were particularly higher during the fourth quarter of 2005. The fourth quarter increase in prices resulted from the PVC industry manufacturing and resin supply disruptions, which were caused by the hurricanes Katrina and Rita.

The spread of selling prices over the cost of raw materials increased throughout 2005, and particularly in the fourth quarter, resulting in better gross margins. Operating expenses increased by $7.0 million in 2005 compared to 2004. Freight and selling costs increased by $6.7 million due to the higher sales and higher freight rates during the year, and general and administrative expenses increased $2.7 million. These increases were partially offset by not incurring any restructuring costs in 2005, by a gain on sale of land of $0.5 million in 2005, and 2004 included a loss on sale of facilities of $0.4 million. The result was an increase in operating income of $73.2 million from 2004 to 2005.

PE Products:

PE sales increased $0.2 million in 2006 compared to 2005. Increases in selling prices more than offset a 12% reduction in volume. The increased sales and reduced material costs resulted in a small increase in our gross margin percentage. Operating expenses decreased by $0.1 million. General and administrative costs declined $1.8 million as a result of USPoly’s consolidation with PW Eagle; 2005 had included a gain on sale of the metals business of $1.2 million; and 2006 includes the costs for relocation of the injection molding operations of $1.0 million. Freight costs decreased by $0.2 million with higher transportation rates offsetting the lower volume. The overall result was an increase in operating income of $1.2 million.

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PE sales increased $52.9 million from 2004 to 2005. Sales from the UAC acquisition late in the third quarter of 2004 contributed $46.8 million of the increase, along with increases in the other PE products of $6.1 million. Overall volume of pounds sold increased 166%, and average selling prices increased over 6%. Gross margins improved due to the volume increase overall, while the gross margins as a percentage of net sales stayed about the same. Operating expenses increased by $4.9 million in 2005 compared to 2004. This is primarily due to inclusion for the year of the costs associated with business acquired from UAC, as well as higher freight and commission costs for the higher sales volume. These cost increases were partially offset by the gain on the sale of the metals parts business of $1.2 million in the second quarter of 2005. The result was an increase in operating income of $4.3 million from 2004 to 2005.

Liquidity and Capital Resources

Our primary sources of liquidity and capital resources are cash generated from operations, and additional availability under our revolving credit facility.

Cash provided by operating activities was $50.5 million in 2006 compared to $85.3 million in 2005. Cash generated from operations in 2006 included net income of $60.7 million, offset by net changes in operating assets and other non-cash items. Included within the changes in operating assets and liabilities in 2006 are tax payments totaling $53.3 million. These tax payments included our payment of 2005 taxes of $21.8 million as well as estimated tax payments for 2006.

Investing activities used $6.2 million of cash in 2006, compared to $20.5 million provided by investing activities in 2005. The 2006 amount used was for capital expenditures of $7.6 million, offset by proceeds of $0.9 million from the sale of the Shawnee facility, and an additional $0.5 million from the sale of W.L. Plastics.

Financing activities used $11.9 million of cash in 2006 compared to $101.1 million used in 2005. The significant uses in 2006 include a net decrease in our revolving credit facility of $7.2 million, the repurchase of company shares of $16.4 million, and $3.6 million in dividend payments. These were offset by the proceeds and tax benefits from exercises of stock options, restricted stock and warrants which provided a total of $15.3 million and proceeds of $0.4 million from our sale of put options related to our share repurchase program. In June 2006, the Board of Directors authorized a repurchase of up to $40 million of our outstanding shares. This repurchase activity continued during the first quarter of 2007. During the months of January and February, 2007, the Company repurchased an additional 460,749 shares of PW Eagle, Inc. common stock for approximately $15.1 million in accordance with the provisions of the approved share repurchase program (see Note 14 of the Notes to the Condensed Consolidated Financial Statements). With the inclusion of these shares, the Company has repurchased 990,614 shares of our common stock for $31.5 million. The Rule 10b5-l purchase plan entered into on August 21, 2006 provided for $31.5 million of share repurchases. Therefore, since the maximum dollar common stock share repurchases has been completed under this plan, there will not be additional share repurchases forthcoming under the Rule 10b5-1 plan.

We had working capital of $99.5 million at December 31, 2006, which is an increase of $61.2 million from the $38.3 million at December 31, 2005. This improvement is the result of our continued high levels of profitability in 2006, and the resulting positive cash flow from operations of $50.5 million for the year ended December 31, 2006.

In addition to the improvement in working capital, we had additional availability on our revolving credit facilities of approximately $97 million at December 31, 2006.

Total assets of $242.6 million at December 31, 2006 represented a $8.1 million increase from the $234.5 million at December 31, 2005. This increase was from current assets, with cash increasing by $32.4 million, accounts receivable decreasing by $26.7 million and inventories increasing by $4.8 million. Property and equipment decreased $3.7 million as depreciation and the sale of the Shawnee, Oklahoma facility more than offset our capital expenditures. Total capitalization at December 31, 2006 was $164.9 million, consisting of $19.5 million of debt and $145.4 million of equity, with debt decreasing by $9.1 million and equity increasing by $59.4 million from December 31, 2005 amounts.

The decrease in accounts receivable was due to lower selling prices and volumes in the fourth quarter 2006 compared to the fourth quarter of 2005. Inventories were higher at the end of 2006 as our overall inventory levels at the end of 2005 were very low due to the unusually high demand in the fourth quarter of 2005. We resumed more normal inventory levels in 2006.

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Capital spending for property and equipment was $7.6 million in 2006, primarily for equipment maintenance and upgrades, and completing a new Ultra product manufacturing line. Under the recently announced merger agreement with JMM, capital spending for 2007 up to the closing date is limited to $1.2 million plus completion of existing projects.

Management believes that, for the foreseeable future, the Company can fund requirements for working capital, capital expenditures and other obligations with cash generated from operations and borrowing from existing credit facilities.

Credit Facilities

A summary of amounts outstanding under each of our credit facilities at December 31, 2006 and December 31, 2005 follows (in thousands):

	December 31, 2006		December 31, 2005
Borrowings under revolving credit facilities
PW Eagle	$	—	$	7,184
USPoly		—		—
Total amounts outstanding under revolving credit facilities	$	—	$	7,184
Long-term debt, net of discounts
PW Eagle Capital Lease Obligation	$	16,211	$	16,353
USPoly Capital Lease Obligations		3,315		3,354
Total amounts outstanding under long-term credit facilities		19,526		19,707
Total amounts outstanding	$	19,526	$	26,891

Further information on the Company’s financing arrangements can be found in Note 5 Financing Arrangements in the Notes to the Consolidated Financial Statements.

The Company’s obligations at December 31, 2006 under its financing arrangements are summarized in the table below:

Scheduled Contractual Obligations	Total		2007		2008		2009		2010		2011		After 5 Years
Capital lease obligations	$	42,398	$	2,633	$	2,633	$	2,633	$	2,618	$	2,618	$	29,263
Operating leases		2,816		943		752		719		400		2		—
Estimated interest on revolving credit facilities		—		—		—		—		—		—		—
	$	45,214	$	3,576	$	3,385	$	3,352	$	3,018	$	2,620	$	29,263

There is no estimated interest on revolving debt as there was no such debt outstanding at December 31, 2006. We had commitments for capital expenditures of $2.5 million at December 31, 2006, which we intend to fund from our revolving credit facilities, or cash flow from operations.

At December 31, 2006, the Company had a contingent liability for standby letters of credit totaling $3.1 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, 2006.

18

Under current financing agreements, PW Eagle is required to comply with a minimum fixed charge coverage ratio, if average availability for the sixty day period then ended is less than $40 million or if at any time within the fiscal quarter availability under the revolving credit facility is less than $30 million. This covenant did not apply as our availability exceeded these minimum amounts. Some of the capital lease obligations also contain covenants that mirror the senior debt covenants. At December 31, 2006, PW Eagle was in compliance with all debt covenants.

Restructuring Activities

Effective January 2004, the corporate office in Minneapolis, Minnesota was closed and all corporate office functions were transferred to the Eugene, Oregon 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. At December 31, 2004, we had $0.1 million of severance payments remaining from the restructuring, which were paid in 2005.

Future Outlook and Risks to Our Business

The statements contained in this section and statements contained in Items 1, 1A, 3, 7 and 7A of this Report on Form 10-K 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 9, 2007 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, statements regarding our expectations may prove to be inaccurate and our operating results may differ materially from our stated expectations and beliefs. For a discussion of the risks facing our business, please see Item 1.A Risk Factors.

Some of our current beliefs and expectations are discussed below.

Forward Looking Statements

PVC and PE resin manufacturers were significantly impacted by Hurricanes Katrina and Rita during the third quarter of 2005. Manufacturing plants in both Louisiana and Texas ceased operating during the storms and curtailed production thereafter due to lack of utilities and/or raw material supply. The subsequent difficulties with the rail service made the situation worse. Also, one manufacturer experienced production disruptions as a result of an accident and fire at one of its facilities. All major suppliers declared force majeure and for a period of time supplied customers on some form of allocation. These interruptions in supply resulted in significant price increases in both PE and PVC resin.

In light of the potential supply disruptions, PVC and PE pipe buyers accelerated their purchasing patterns, resulting in a very strong demand surge in September 2005 that continued into the fourth quarter of 2005. Faced with this strong demand, limited raw material supply and rising costs, we and many other pipe manufacturers implemented multiple price increases. Because we were able to increase prices at a rate ahead of increasing resin costs, we improved gross margins as well, resulting in strong sales volumes and high gross margins in the fourth quarter of 2005.

Most of the disruption in supply of PVC and PE resin caused by Hurricanes Katrina and Rita was resolved by the end of 2005, resulting in increased availability of, and decreasing prices for, resin. Starting in December 2005 and continuing through the first few months of 2006, PVC resin prices decreased and then stabilized during the second and third quarters before decreasing substantially during the fourth quarter of 2006. Prices for PVC pipe declined somewhat in the first part of 2006, stabilizing during the second and third quarters. Similar to the trend for PVC resin, PVC pipe prices decreased rapidly in the fourth quarter of 2006. Historically, during times of decreasing PVC resin prices, PVC pipe prices have decreased faster than raw material costs, resulting in lower margins and this occurred in the fourth quarter of 2006. Our business and the PVC pipe industry in general is subject to seasonality as residential and commercial construction activity typically declines in the fourth quarter. The fourth quarter of 2006 saw demand decrease somewhat more than the typical seasonal slowdown, which we believe was due to efforts by our distributors to reduce their inventory levels as pipe prices were decreasing during the quarter.

19

Industry expectations are for PVC resin prices to remain relatively stable in the first quarter of 2007, and producers have announced a price increase for March 2007. We expect our margins to remain near their current levels as the price of PVC resin stabilizes. Demand has increased in the early first quarter of 2007 compared to the fourth quarter of 2006 as distributors have resumed more normal buying patterns.

The short term expectations described above may be mitigated to some extent by the following broader trends in our business. 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. We believe that the Gross Domestic Product (GDP) is closely correlated to the demand for PVC and PE pipe, and we recognize that our business is tied to economic cycles. GDP is reported to have grown at an annual rate of 3.2% in 2005 and 3.4% in 2006. Industry growth projections call for annual sales growth rates for PVC pipe of 3% or greater in 2007. The actual growth rate may be less 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 have a long-term contract with one supplier for PVC resin, our primary raw material, and are substantially dependent on that relationship. The terms of our long-term agreement with out PVC supplier provide, among other things, for the extension of the agreement at the supplier’s option through 2013, certain termination rights exercisable by the supplier without corresponding rights for us, a right of first negotiation with the supplier on the sale of the assets of one or more of our facilities that utilize PVC resin, and the supplier’s option to require a buyer of all or a substantial portion of our assets to assume the agreement. These provisions may have the effect of limiting our ability to replace the supplier, procure PVC resin under more favorable terms or divest of our assets.

Critical Accounting Estimates

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 and Sales Discounts

We maintain an allowance for doubtful accounts 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. We wrote-off $0.2 million of uncollectible accounts during 2006, $0.1 million during 2005, and $0.2 million during 2004, while our charges to bad debt expenses amounted to $0.2 million in 2006, $0.5 million in 2005, and $0.1 million in 2004. Our allowance for doubtful accounts was $1.0 million at December 31, 2006 and $1.0 million at December 31, 2005. Had our actual write-offs been significantly higher, or had the aging deteriorated, we may have required a larger allowance at December 31, 2006.

We also maintain an allowance for sales discounts. This allowance is based on our historical experience of discounts given, and current terms of sale. The total discounts are deducted from gross sales. The dollar amount of such discounts is directly related to total gross sales, and the related terms of sale of such transactions. The allowance amount for sales discounts was $0.7 million at December 31, 2006 and $1.0 million at December 31, 2005.

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 2006, reducing pipe inventory values by $2.4 million. No lower of cost or market adjustment was required at either December 31, 2005 or 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.

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. A summary of self-insured medical/dental insurance activity follows:

(In thousands)
	2006			2005			2004
Net liability for medical/dental insurance – beginning of year	$	1,178		$	991		$	528
Accruals for medical/dental insurance during the year		5,163			6,396			4,238
Net medical/dental insurance payments		(5,592	)		(6,209	)		(3,775	)
Net liability for medical/dental insurance – end of year	$	749		$	1,178		$	991

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. A summary of our insured worker’s compensation activity follows:

(In thousands)
	2006			2005			2004
Net liability (deposit) for worker’s compensation – beginning of year	$	270		$	(300	)	$	251
Accruals for worker’s compensation during the year		717			978			482
Net payments for insurance premiums and claims		(874	)		(408	)		(1,033	)
Net liability (deposit) for worker’s compensation – end of year	$	113		$	270		$	(300	)

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. A summary of warranty related activity follows:

21

(In thousands)
	2006			2005			2004
Accrual for product warranties – beginning of year	$	325		$	325		$	450
Accruals for warranties issued during the year		565			305			328
Settlements made during the year		(615	)		(305	)		(453	)
Accrual for product warranties – end of year	$	275		$	325		$	325

Share-based compensation

The Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123(R) eliminating the alternative to use the intrinsic value method of accounting that was provided in SFAS No. 123, which generally resulted in no compensation expense recorded in the financial statements related to the issuance of equity awards to employees and directors. SFAS No. 123(R) requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. SFAS No. 123(R) establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all companies to apply a fair-value-based measurement method in accounting generally for all share-based payment transactions with employees. In accordance with the new rule, the Company adopted SFAS No. 123(R) using a modified prospective method for the recognition of share-based compensation expense on January 1, 2006.

On November 10, 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3, “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards.” The Company has elected to adopt the alternative transition method provided in this FASB Staff Position for calculating the tax effects of share-based compensation pursuant to FAS 123(R). The alternative transition method includes a simplified method to establish the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of employee share-based compensation, which is available to absorb tax deficiencies recognized subsequent to the adoption of FAS 123(R).

Under FAS 123(R), share-based compensation cost is measured at the grant date, based on the estimated fair value of the award and is recognized as expense over the stated vesting period. The Company continues to use the Black-Scholes option-pricing model as its method for valuing stock options. The key assumptions for this valuation method include the expected term of the option, stock price volatility, risk-free interest rate, dividend yield, exercise price and forfeiture rate. Many of these assumptions are judgmental and highly sensitive in the determination of compensation expense. Further information on the Company’s share-based payments can be found in Note 13 in the Notes to the Consolidated Financial Statements under ITEM 8.

Recently Issued Accounting Standards

SFAS No. 158

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” which requires employers to recognize on their balance sheets the funded status of pension and other postretirement benefit plans, effective December 31, 2006 for calendar year-end companies. In addition SFAS No. 158 requires fiscal year-end measurement of plan assets and benefit obligations, eliminating the use of earlier measurement dates currently permissible, effective for fiscal years ending after December 15, 2008. We do not have any defined benefit pension or other postretirement plans and, accordingly, the adoption of the provisions of SFAS No. 158 did not have any effect on our financial position or results of operations.

SFAS No. 157

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and requires additional disclosures about fair-value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. While we are still analyzing the effects of applying SFAS No. 157, we believe that the adoption of SFAS No. 157 will not have a material effect on our financial position or results of operations.

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Staff Accounting Bulletin No. 108

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” which addresses how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in current-year financial statements. SAB No. 108 requires companies to quantify misstatements using both the balance sheet and income statement approaches and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. SAB No. 108 is effective for annual financial statements covering the first fiscal year ending after November 15, 2006. The implementation of SAB No. 108 did not have any effect on our financial position or results of operations.

FASB Staff Position No. AUG AIR-1

In September 2006, the FASB issued Staff Position No. AUG AIR-1, “Accounting for Planned Major Maintenance Activities,” which prohibits accruing for the future cost of periodic major overhauls and planned maintenance of plant and equipment in annual and interim periods. This Staff Position is effective for fiscal years beginning after December 15, 2006 and must be retrospectively applied. We do not accrue for such costs in annual or interim periods and, accordingly, the adoption of this Staff Position will not have any effect on our financial position or results of operations.

FASB Interpretation No. 48

In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes,” which defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. FIN No. 48 applies to all tax positions accounted for under SFAS No. 109, “Accounting for Income Taxes.” FIN No. 48 is effective as of the beginning of the first fiscal year beginning after December 15, 2006. Upon adoption, the Company will adjust the financial statements if needed to reflect only those tax positions that are more-likely-than-not to be sustained as of the adoption date. Any adjustment will be recorded directly to our beginning retained earnings balance in the period of adoption and reported as a change in accounting principle. The Company is currently analyzing the effects of adopting Interpretation No. 48.

Related Party Transactions

Certain former members of the Company’s Board of Directors were members of Spell Capital Partners, LLC (Spell Capital). On March 30, 2006, the Company terminated its Management Services Agreement (the Agreement), dated January 1, 2004 with Spell Capital, pursuant to which Spell Capital provided the Company with supervisory and monitoring services, as well as advice and assistance with acquisitions, divestitures and financing activities. The Agreement was terminated based on a determination by the Board of Directors that the Company no longer required the services of Spell Capital. The terms of the Agreement permitted the Company to not renew the Agreement upon the conclusion of any quarterly term of the Agreement in exchange for a payment to Spell Capital equal to the monthly management fee currently due and owing to Spell Capital along with a payment equal to twenty-four (24) times the current monthly management fee. The amount of the termination payment paid by the Company to Spell Capital was $1,248,000. The Company’s wholly-owned subsidiary, USPoly Company, LLC, also terminated its Management Services Agreement with Spell Capital. The amount of the termination payment paid by USPoly to Spell Capital was $112,500. These termination fees are included in General and Administrative expenses in the consolidated statement of operations.

Costs incurred under these arrangements, prior to their termination discussed above, of $0.2 million, $0.8 million and $0.7 million in 2006, 2005 and 2004, respectively, are included in General and Administrative expenses in the consolidated statement of operations. In the fourth quarter of 2005, the Board of Directors approved a bonus payment to Spell Capital of $0.7 million, which was also included in General and Administrative expenses.

During 2004, PW Eagle paid certain operating expenses for USPoly. Transactions with USPoly included the rental of certain operating facilities and expenses related to certain services provided to and delivered by PW Eagle. At December 31, 2004, the inter-company balance was approximately $0.1 million. On October 17, 2005, USPoly was merged into PW Eagle. All inter-company transactions are eliminated in the consolidated financial statements.

In connection with the UAC Acquisition, USPoly paid Spell Capital a fee of $0.5 million which is included in transaction costs.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We were not exposed to any market risks on variable rate debt obligations at December 31, 2006, as we had no such obligations outstanding. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates. Market risk is estimated as the potential increase in interest expense resulting from a hypothetical one percent increase in interest rates.

From time to time, we enter into financial instruments to manage and reduce the impact of changes in interest rates on our Senior Credit Facility. At December 31, 2006, we had no outstanding interest rate derivatives.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheet of PW Eagle, Inc. and its subsidiary as of December 31, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the two years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with 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, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PW Eagle, Inc. and its subsidiary as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payments (Revised 2004) during 2006.

Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The financial statement schedule listed in the index at Item 15 is presented for purposes of additional analysis and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

We also have audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the effectiveness of PW Eagle, Inc and its subsidiary’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 14, 2007, expressed an unqualified opinion thereon.

/s/ Grant Thornton LLP

Portland, Oregon

March 14, 2007

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

In our opinion, the consolidated statements of operations, of stockholders’ equity and comprehensive income and of cash flows for the year ended December 31, 2004 present fairly, in all material respects, the results of operations and cash flows of PW Eagle, Inc. and its subsidiary, for the year 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 audit. We conducted our audit 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 audit provides a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Minneapolis, Minnesota

March 25, 2005

25

PW EAGLE, INC.

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

	Years ended December 31
	2006			2005			2004
Net sales	$	714,112		$	694,244		$	474,954
Cost of goods sold		539,470			534,855			404,818
Gross profit		174,642			159,389			70,136
Operating expenses:
Freight expense		38,897			38,687			30,950
Selling expense		18,194			17,719			14,778
General and administrative expense		17,301			15,973			11,114
Restructuring and related costs		—			—			1,608
Other (income) expense, net		311			(1,771	)		408
		74,703			70,608			58,858
Operating income		99,939			88,781			11,278
Gain on sale of investee and non-operating income		897			18,363			—
Interest expense		(3,800	)		(27,051	)		(20,668	)
Income (loss) before income taxes, minority interest and equity in undistributed earnings of unconsolidated affiliate		97,036			80,093			(9,390	)
Income tax (expense) benefit		(36,341	)		(32,915	)		3,059
Minority interest in USPoly Company		—			(228	)		173
Equity in undistributed earnings of unconsolidated affiliate, net of tax		—			—			618
Net income (loss)	$	60,695		$	46,950		$	(5,540	)
Net income (loss) per share:
Basic	$	5.09		$	5.28		$	(0.78	)
Diluted	$	5.02		$	4.65		$	(0.78	)
Cash dividends declared per common share	$	0.30		$	0.075		$	—
Weighted average number of common shares outstanding:
Basic		11,930			8,888			7,096
Diluted		12,096			10,094			7,096

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

26

PW EAGLE, INC.

CONSOLIDATED BALANCE SHEET (in thousands, except for share data)

At December 31,	2006		2005
ASSETS
Current assets:
Cash and cash equivalents	$	38,064	$	5,671
Accounts receivable, net		60,337		87,062
Inventories		68,990		64,239
Deferred income taxes		3,284		2,382
Other current assets		2,468		2,861
Total current assets		173,143		162,215
Property and equipment, net		52,626		56,301
Goodwill		6,441		6,441
Deferred tax asset		1,745		325
Intangible assets		3,064		4,020
Other assets		5,555		5,154
Total assets	$	242,574	$	234,456
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Borrowings under revolving credit facilities	$	—	$	7,184
Current maturities of capital lease obligations		224		182
Accounts payable		50,749		68,483
Book overdraft		—		192
Accrued liabilities		22,665		47,907
Total current liabilities		73,638		123,948
Capital lease obligations, less current maturities		19,302		19,525
Other long-term liabilities		4,237		4,944
Total liabilities		97,177		148,417
Commitments and contingencies (Notes 6 and 8)
Stockholders’ equity:
Series A preferred stock, 7% cumulative dividend; convertible; $2 per share liquidation preference; no par value; authorized 2,000,000 shares; none issued and outstanding		—		—
Undesignated stock, par value $0.01 per share; authorized 14,490,000 shares; none issued and outstanding		—		—
Stock warrants		2,953		5,844
Common stock, par value $0.01 per share; authorized 30,000,000 shares; issued and outstanding 11,965,403 and 11,210,418 shares, respectively		120		112
Class B common stock, par value $0.01 per share; authorized 3,500,000 shares; none issued and outstanding		—		—
Additional paid-in capital		66,265		61,439
Unearned compensation		—		(326	)
Accumulated other comprehensive income		387		372
Accumulated earnings		75,672		18,598
Total stockholders’ equity		145,397		86,039
Total liabilities and stockholders’ equity	$	242,574	$	234,456

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

27

PW EAGLE, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(in thousands)

Years ended December 31, 2006, 2005 and 2004	Stock Warrants			Shares of Common Stock		Common Stock			Additional Paid-in Capital			Unearned Compensation			Notes Receivable from Officers and Employees on Common Stock Purchases			Accumulated Other Comprehensive Income (Loss)			Accumulated (Deficit) Earnings			Total
Balance at December 31, 2003	$	6,936		7,259		$	73		$	31,281		$	(1,104	)	$	(350	)	$	371		$	(21,972	)	$	15,235
Comprehensive loss:
Net loss		—		—			—			—			—			—			—			(5,540	)		(5,540	)
Change in fair value of financial instrument designated as a hedge of interest rate exposure, net of taxes		—		—			—			—			—			—			(37	)		—			(37	)
Unrealized gain on securities from non-qualified deferred compensation plans		—		—			—			—			—			—			111			—			111
Other comprehensive income																									74
Comprehensive loss																									(5,466	)
Stock warrants issued		82		—			—			—			—			—			—			—			82
Exercised		(62	)	15			—			62			—			—			—			—			—
Common stock issued:
Options exercised		—		110			1			165			—			—			—			—			166
Company sponsored programs		—		133			1			900			310			—			—			—			1,211
Non-qualified stock options tax benefit		—		—			—			8			—			—			—			—			8
Payments received on notes		—		—			—			—			—			95			—			—			95
Stock compensation expense		—		—			—			—			250			—			—			—			250
Other		—		—			—			855			—			177			—			—			1,032
Balance at December 31, 2004	$	6,956		7,517		$	75		$	33,271		$	(544	)	$	(78	)	$	445		$	(27,512	)	$	12,613
Comprehensive income:
Net income		—		—			—			—			—			—			—			46,950			46,950
Change in fair value of financial instrument designated as a hedge of interest rate exposure, net of taxes		—		—			—			—			—			—			58			—			58
Unrealized gain (loss) on securities from non-qualified deferred compensation plans, net of taxes		—		—			—			—			—			—			(131	)		—			(131	)
Other comprehensive loss																									(73	)
Comprehensive income																									46,877
Stock warrants issued		4,775		—			—			92			—			—			—			—			4,867
Exercised		(5,887	)	2,302			23			11,658			—			—			—			—			5,794
Common stock issued:
Options exercised		—		32			1			327			—			—			—			—			328
Company sponsored programs		—		340			3			3,052			—			—			—			—			3,055
Private placement		—		1,019			10			13,119			—			—			—			—			13,129
Non-qualified stock options tax benefit		—		—			—			—			—			—			—			—			—
Payments received on notes receivable		—		—			—			(80	)		—			78			—			—			(2	)
Stock compensation expense		—		—			—			—			218			—			—			—			218
Dividends declared		—		—			—			—			—			—			—			(840	)		(840	)
Balance at December 31, 2005	$	5,844		11,210		$	112		$	61,439		$	(326	)	$	—		$	372		$	18,598		$	86,039
Comprehensive income:
Net income		—		—			—			—			—			—			—			60,695			60,695
Other comprehensive income (unrealized gain on securities from non-qualified deferred compensation plans, net of taxes																			15						15
Comprehensive income																									60,710
Stock warrants issued		—		—			—			—			—			—			—			—			—
Exercised		(2,891	)	445			5			5,924			—			—			—			—			3,038
Common stock issued:
Options exercised		—		840			8			4,521			—			—			—			—			4,529
Non-qualified stock options tax benefit		—		—			—			7,688			—			—			—			—			7,688
Share based compensation expense		—		—			—			3,100			326			—			—			—			3,426
Dividends declared		—		—			—			—			—			—			—			(3,621	)		(3,621	)
Shares repurchased		—		(530	)		(5	)		(16,407	)		—			—			—			—			(16,412	)
Balance at December 31, 2006	$	2,953		11,965		$	120		$	66,265		$	—		$	—		$	387		$	75,672		$	145,397

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

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PW EAGLE, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands)

Years ended December 31,	2006			2005			2004
Cash flows from operating activities:
Net income (loss)	$	60,695		$	46,950		$	(5,540	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
(Gain) loss on disposal of fixed assets		644			(500	)		483
Gain on sale of metals parts business		—			(1,256	)		—
Gain on sale of investee		(456	)		(18,363	)		—
Equity in earnings of unconsolidated affiliate, pretax		—			—			(1,002	)
Depreciation and amortization		11,077			12,618			11,497
Royalty accretion		949			1,631			772
Warrant fair value adjustment		—			5,067			984
Amortization of debt issue costs, discounts and premiums		359			3,840			7,248
Receivable provisions		(396	)		781			2,733
Inventory writedown to estimated market value		2,428			—			—
Deferred income taxes		(2,462	)		11,652			(3,195	)
Issuance of subordinated debt for interest payment		—			—			1,094
Non-cash minority interest		—			228			(173	)
Share-based compensation		3,426			218			1,669
Incremental tax benefits from share based awards		(7,688	)		—			—
Investment earnings on deferred compensation plan		26			101			—
Fair value gain for put options		(441	)		—			—
Other		—			104			—
Change in assets and liabilities, net of acquisitions
Accounts receivable		27,121			(33,233	)		(13,055	)
Income taxes payable		(14,172	)		21,716			—
Inventories		(7,179	)		(1,365	)		(10,849	)
Other current assets		393			(1,794	)		2,879
Accounts payable		(17,733	)		36,969			683
Accrued liabilities		(2,994	)		4,302			(4,933	)
Other, primarily royalty payments		(3,141	)		(4,398	)		(1,143	)
Net cash provided by (used in) operating activities		50,456			85,268			(9,848	)
Cash flows from investing activities:
Purchases of property and equipment		(7,601	)		(4,672	)		(1,986	)
Purchase of Uponor Aldyl Company		—			—			(13,907	)
Purchase of additional equity interest in affiliate		—			(3,169	)		(1,550	)
Proceeds from sale of metals parts business		—			2,534			—
Proceeds from property and equipment disposals		942			874			2,210
Proceeds from sale of affiliate – W.L. Plastics		456			24,958			—
Payments on notes receivable		—			—			95
Net cash (used in) provided by investing activities		(6,203	)		20,525			(15,138	)
Cash flows from financing activities:
Change in cash overdraft		(192	)		(1,685	)		(4,291	)
Borrowings under revolving credit facility		275,984			735,787			596,834
Payments under revolving credit facility		(283,168	)		(810,620	)		(549,448	)
Payment of notes payable		—			(4,461	)		—
Proceeds from sale-leaseback transactions		—			—			3,555
Payments on capital lease obligation		(205	)		(186	)		(222	)
Proceeds from long-term debt		—			—			35,875
Repayment of long-term debt		—			(38,073	)		(55,093	)
Payment of debt issuance costs/financing costs		—			(101	)		(3,807	)
Dividends paid		(3,564	)		—			—
Issuance of common stock upon exercise of stock options and warrants		7,568			327			166
Proceeds from sale of put options		441			—			—
Cash received for USPoly stock		—			—			2,002
Common stock repurchases		(16,412	)		—			(30	)
Incremental tax benefits from share based awards		7,688			—			—
Proceeds from private sale of stock		—			17,904			—
Net cash (used in) provided by financing activities		(11,860	)		(101,108	)		25,541
Net change in cash and cash equivalents		32,393			4,685			555
Cash and cash equivalents, beginning of year		5,671			986			431
Cash and cash equivalents, end of year	$	38,064		$	5,671		$	986

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

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PW EAGLE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES

The Company

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. The Company distributes its products throughout the United States, including Hawaii and Alaska, and a minimal amount of shipments to selected foreign countries. The Company’s wholly-owned subsidiary, USPoly Company, LLC, (USPoly) manufactures and distributes polyethylene (PE) pipe and tubing products and accessories.

Principles of Consolidation—The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All intercompany transactions and amounts have been eliminated in consolidation.

Cash Equivalents—The Company considers all highly liquid temporary investments with an original maturity of three months or less when purchased to be cash equivalents.

Accounts Receivable and Allowance for Doubtful Accounts—Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company maintains an allowance for doubtful accounts 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. The Company’s principal raw material used in production is resin, which is subject to significant market price fluctuations.

Property and Equipment—Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization of property and equipment are computed on the straight-line method over estimated useful asset lives (shorter of asset life or lease term for leasehold improvements). Useful lives range from 10 to 30 years for buildings and improvements and 3 to 8 years for equipment and fixtures. Maintenance and repairs are charged to operations as incurred. Major renewals and betterments are capitalized. Fully depreciated assets are retained in property and accumulated depreciation accounts until removed from service. Upon disposal, assets and related accumulated depreciation are removed from the accounts and the net amount, less proceeds from disposal, is charged or credited to operations. The carrying value of property and equipment is evaluated for impairment based on historical and projected undiscounted cash flows whenever events or circumstances indicate that the carrying value may not be recoverable.

Deferred Financing Costs—Deferred financing costs are amortized over the term of the related indebtedness, unless extinguished or modified, using the effective interest method.

Assets Held for Sale—Assets held for sale are stated at the lower of cost or net realizable value and are classified as other non-current assets in the balance sheet. In conjunction with the development of the West Jordan, Utah, manufacturing facility, the Company was required to purchase and develop land for an entire industrial park. This land is currently held for sale.

Goodwill—Goodwill has been recorded for the excess of the purchase price over the fair value of net assets acquired in business combinations under the purchase method of accounting. Goodwill is not subject to periodic amortization, and is tested for impairment on an annual basis. If an event or circumstances change that would indicate the carrying amount may be impaired, goodwill will be tested for impairment on an interim basis. Impairment testing for goodwill is performed at the reporting unit level. Currently, the Company has determined it has two reporting units, PVC and PE. An impairment loss would generally be recognized when the carrying amount of the reporting units net assets exceeds the estimated fair value of the reporting unit.

The estimated fair value of the reporting unit is determined using discounted cash flow analysis. The Company completed its annual goodwill impairment test in the third quarter of 2006, with no changes in the carrying value of goodwill.

Intangible Assets—Intangible assets are being amortized against income using the straight-line method over their estimated useful lives, ranging from four to twelve years. The straight-line method of amortization reflects an appropriate allocation of

30

the costs of the intangible assets to earnings in proportion to the amount of economic benefits obtained by the Company in each reporting period. The Company periodically reviews intangible assets for impairment and assesses whether significant events or changes in business circumstances indicate that the carrying value of the assets may not be fully recoverable. Recoverability is assessed by comparing anticipated undiscounted future cash flows from operations to net book value.

Fair Value of Financial Instruments—Management estimates that the carrying value of its short and long-term debt approximates fair value. The estimated fair value amounts have been determined through the use of discounted cash flow analysis using interest rates currently available to the Company for issuance of debt with similar terms and remaining maturities. All other financial instruments, including accounts receivable, accounts payable and accrued liabilities, approximate fair value because of the short-term nature of these instruments. The Company recognizes all derivative financial instruments at fair value as either assets or liabilities.

Revenue Recognition—Revenue is recognized when product has been shipped, risk of loss has passed to the purchaser and we have fulfilled all of our obligations. We provide for as a reduction of revenue sales discounts, customer rebates and allowances in the period the related revenue is recognized, based on historical experience and the terms and conditions of sales incentive agreements. Customer rebates are accrued in accordance with EITF No. 01-9 “Accounting for Consideration Given by a Vendor to a Customer” and recorded as a reduction to sales.

Product Warranty—The Company’s products are generally under warranty against defects in material and workmanship for a period of one year. The Company has established a warranty accrual for its estimated future warranty costs using historical information on the frequency and average cost of warranty claims.

Income Taxes—Deferred income tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using currently enacted tax rates in effect for the years in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.

Earnings Per Share—Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding and dilutive shares relating to stock options, warrants and restricted stock.

Comprehensive Income (Loss)—Components of comprehensive income (loss) for the Company include net income, changes in fair market value of the financial instrument designated as a hedge of interest rate exposure and changes in the fair market value of securities in the non-qualified deferred compensation plan. These amounts are presented in the Consolidated Statement of Stockholders’ Equity and Comprehensive Income.

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

Issuance of Subsidiary Stock—Adjustments to our investment in subsidiary related to a change in our ownership interest resulting from the issuance of stock by USPoly are recorded as an increase to additional paid in capital with a corresponding increase to the investment in USPoly.

Share-based compensation—In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS 123(R), “Share-Based Payment (as amended).” SFAS No. 123(R) eliminates the alternative to use the intrinsic value method of accounting that was provided in SFAS No. 123, which generally resulted in no compensation expense recorded in the financial statements related to the issuance of equity awards to employees and directors. SFAS No. 123(R) requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. SFAS No. 123(R) establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all companies to apply a fair-value-based measurement method in accounting generally for all share-based payment transactions with employees. In accordance with the new rule, the Company adopted SFAS No. 123(R) using a modified prospective method for the recognition of share-based compensation expense on January 1, 2006.

On November 10, 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3, “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards.” The Company has elected to adopt the alternative transition method provided in this FASB Staff Position for calculating the tax effects of share-based compensation pursuant to FAS 123 (R). The alternative transition method includes a simplified method to establish the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of employee share-based compensation, which is available to absorb tax deficiencies recognized subsequent to the adoption of FAS 123(R).

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Under FAS 123(R), share-based compensation cost is measured at the grant date, based on the estimated fair value of the award and is recognized as expense over the stated vesting period. The Company continues to use the Black-Scholes option-pricing model as its method for valuing stock options. The key assumptions for this valuation method include the expected term of the option, stock price volatility, risk-free interest rate, dividend yield, exercise price and forfeiture rate. Many of these assumptions are judgmental and highly sensitive in the determination of compensation expense.

Recently Issued Accounting Standards

SFAS No. 158

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” which requires employers to recognize on their balance sheets the funded status of pension and other postretirement benefit plans, effective December 31, 2006 for calendar year-end companies. In addition SFAS No. 158 requires fiscal year-end measurement of plan assets and benefit obligations, eliminating the use of earlier measurement dates currently permissible, effective for fiscal years ending after December 15, 2008. We do not have any defined benefit pension or other postretirement plans and, accordingly, the adoption of the provisions of SFAS No. 158 did not have any effect on our financial position or results of operations.

SFAS No. 157

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and requires additional disclosures about fair-value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. While we are still analyzing the effects of applying SFAS No. 157, we believe that the adoption of SFAS No. 157 will not have a material effect on our financial position or results of operations.

Staff Accounting Bulletin No. 108

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” which addresses how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in current-year financial statements. SAB No. 108 requires companies to quantify misstatements using both the balance sheet and income statement approaches and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. SAB No. 108 is effective for annual financial statements covering the first fiscal year ending after November 15, 2006. The implementation of SAB No. 108 did not have any effect on our financial position or results of operations.

FASB Staff Position No. AUG AIR-1

In September 2006, the FASB issued Staff Position No. AUG AIR-1, “Accounting for Planned Major Maintenance Activities,” which prohibits accruing for the future cost of periodic major overhauls and planned maintenance of plant and equipment in annual and interim periods. This Staff Position is effective for fiscal years beginning after December 15, 2006 and must be retrospectively applied. We do not accrue for such costs in annual or interim periods and, accordingly, the adoption of this Staff Position will not have any effect on our financial position or results of operations.

FASB Interpretation No. 48

In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes,” which defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. FIN No. 48 applies to all tax positions accounted for under SFAS No. 109, “Accounting for Income Taxes.” FIN No. 48 is effective as of the beginning of the first fiscal year beginning after December 15, 2006. Upon adoption, the Company will adjust the financial statements if needed to reflect only those tax positions that are more-likely-than-not to be sustained as of the adoption date. Any adjustment will be recorded directly to our beginning retained earnings balance in the period of adoption and reported as a change in accounting principle. The Company is currently analyzing the effects of adopting Interpretation No. 48.

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2. ACQUISITIONS & DIVESTITURES

US Poly Investment in and Sale of W.L. Plastics Corporation

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. 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 described further below, relinquishing their Board position and other changes.

On November 1, 2005, USPoly sold its interest in W.L. Plastics. USPoly received $23.5 million cash and an additional $1.2 million will be held in escrow for a period of 18 months (which is still outstanding at December 31, 2006) and is subject to customary post-closing contingencies. The gain realized in 2005 was $18.4 million. The purchase price was subject to a working capital adjustment which was resolved in 2006, resulting in an additional gain of $0.5 million. A substantial portion of the cash was used to pay down debt obligations of USPoly and PW Eagle.

Acquisition of Uponor Aldyl Company

On September 27, 2004, USPoly acquired the business of Uponor Aldyl Company, Inc. (UAC) from Uponor Corporation, a Finnish company (the UAC Acquisition). UAC was a leading extruder of PE piping systems for natural gas with annual sales of $41 million in 2003. The business had facilities in Tulsa and Shawnee, Oklahoma. UAC’s business operations were combined with those of USPoly and the combined organization was re-named USPoly Company (USPoly).

The final purchase price for UAC was $18.6 million (including direct transaction costs of $1.0 million), composed of $13.9 million of cash, $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 not included in the purchase price allocation below. Concurrent with this transaction, USPoly entered into a capital lease agreement for the Tulsa, Oklahoma manufacturing facility for $1.5 million.

The UAC Acquisition has been accounted for as a purchase business combination. The purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair values as follows (in millions):

Current assets	$	13.4
Property, plant and equipment		9.0
Intangible assets		2.5
Current liabilities		(6.3	)
	$	18.6

Acquired intangible assets consist of technology and patents.

On June 30, 2005, USPoly sold the assets of its metals parts business for $2.5 million, resulting in a gain on the sale of $1.2 million. The metals parts business had net sales of approximately $6 million in 2004.

Proforma information has not been included due to the immaterial value of the UAC Acquisition in relation to the consolidated results of operations of PW Eagle.

33

Sale of Facilities

On August 18, 2006, the Company sold the Shawnee, Oklahoma facility for $0.9 million net proceeds. A write-down to fair value of $0.7 million had been previously recorded.

On April 1, 2004, the Company sold two manufacturing facilities in Baker City, Oregon and Hastings, Nebraska for an aggregate loss of $0.4 million. Net proceeds of $1.9 million were used to pay down the Company’s Revolving Credit Facility. Prior to the sale of these facilities, PW Eagle was leasing these facilities to USPoly. After the sale of these facilities, USPoly entered into a capital lease with an independent third party for these same facilities (See Note 5).

Acquisition of Minority Interest in USPoly

On October 18, 2005, PW Eagle completed a transaction whereby it acquired all of the shares of USPoly that it did not previously own. USPoly Company was merged into a wholly-owned subsidiary of PW Eagle and the new company is known as USPoly Company, LLC. PW Eagle paid a total of $3.2 million cash and issued 351,904 shares of common stock to the holders of the minority shares in USPoly in consideration for their shares.

In connection with the merger, USPoly agreed with its subordinated lender that also held warrants to purchase shares in USPoly, to exchange the lender’s rights under those warrants for a $1.9 million note payable to the lender. The note bears interest at 12% and matures September 2009. The warrants had a put feature and were reflected as a liability on USPoly’s financial statements. This note was fully paid in 2005. In addition, former USPoly holders of 599,392 common stock options were issued 111,810 PW Eagle common stock options. This was based on a ratio of 0.1889 shares of PW Eagle for each option to purchase one share of USPoly common stock.

3. OTHER FINANCIAL STATEMENT DATA

The following provides additional information concerning selected balance sheet accounts (in thousands):

	2006			2005
Accounts receivable
Trade receivables	$	62,002		$	89,123
Sales discounts and allowances		(1,665	)		(2,061	)
	$	60,337		$	87,062
Inventories
Raw materials	$	13,308		$	14,083
Finished goods		55,682			50,156
	$	68,990		$	64,239
Property and equipment
Land	$	8,152		$	8,225
Buildings and leasehold improvements		19,677			20,889
Machinery and equipment		117,512			112,999
Furniture and fixtures		3,481			3,240
Equipment components		5,743			5,312
Construction-in-progress		4,717			2,574
		159,282			153,239
Accumulated depreciation/amortization		(106,656	)		(96,938	)
	$	52,626		$	56,301

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Included in land, buildings and leasehold improvements above are land and buildings currently held under a capital lease with a cost of $23.0 million and accumulated amortization of $5.8 million and $5.1 million at December 31, 2006 and 2005, respectively.

Other assets
Deferred financing costs, net of accumulated amortization of $976 and $640, respectively	$	1,696	$	2,032
Assets held for sale		1,447		1,447
Other		2,412		1,675
	$	5,555	$	5,154
Accrued liabilities
Income taxes payable	$	—	$	21,988
Accrued customer incentives		6,991		7,985
Accrued payroll and benefits		10,345		12,702
Accrued interest		29		86
Accrued royalty		2,637		2,954
Self insurance accruals		749		1,178
Dividends payable		897		840
Other		1,017		174
	$	22,665	$	47,907

The components of accumulated other comprehensive income are as follows:

	2006		2005		2004
Change in fair value of financial instrument designated as a hedge of interest rate exposure, net of taxes	$	—	$	—	$	(58	)
Unrealized gain on securities from non-qualified deferred compensation plans		387		372		503
Total accumulated other comprehensive income	$	387	$	372	$	445

The following provide supplemental disclosures of cash flow activity (in thousands):

35

	2006		2005		2004
Interest paid	$	3,312	$	17,301	$	13,977
Income taxes paid, net		53,324		1,346		21
Significant non-cash operating, investing and financing activities:
Issuance of warrants		—		—		1,724
Cancellation of restricted stock		—		—		(397	)
USPoly capital lease transaction		—		—		1,500
Issuance of a note to Uponor Corporation		—		—		2,125
Issuance of shares for non cash warrants exercised		2,890		11,681		—
Issuance of shares to USPoly shareholders		—		2,855		—

4. GOODWILL AND INTANGIBLE ASSETS

The Company completed its most recent annual test for impairment of goodwill in the third quarter of fiscal 2006, with no change in the carrying value of goodwill recorded. As of December 31, 2006, there have been no events or circumstances that would indicate an impairment of the Company’s goodwill and intangible assets exists.

The Company acquired intangible assets from business acquisitions consisting of customer relationships, manufacturing technology, patents and trademarks. Intangible assets have an initial weighted average life of eight years. The following table sets forth information relating to the amortization of these intangible assets (in thousands):

	2006			2005
Intangible Assets
Customer relationships	$	1,331		$	1,331
Patents and trademarks		526			526
Manufacturing technologies		4,448			4,448
		6,305			6,305
Accumulated amortization		(3,241	)		(2,285	)
	$	3,064		$	4,020
Annual amortization expense	$	956		$	955
Estimated annual amortization expense
2007	$	567
2008		382
2009		360
2010		360
2011		360
Thereafter		1,035
	$	3,064

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5. FINANCING ARRANGEMENTS

Current and long-term obligations at December 31, 2006 and 2005 consisted of the following (in thousands):

	2006			2005
Borrowings under revolving credit facilities
PW Eagle	$	—		$	7,184
USPoly		—			—
Total borrowings under revolving credit facilities	$	—		$	7,184
Long-term debt, net of discounts
PW Eagle Capital Lease Obligation	$	16,211		$	16,353
USPoly Capital Lease Obligations		3,315			3,354
Total current and long-term obligations		19,526			19,707
Less current maturities		(224	)		(182	)
Total long-term obligations	$	19,302		$	19,525

Our financing arrangements are described separately below.

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 2.25% and borrowings under the CACC bear interest at LIBOR plus 2.0%. PW Eagle is required to pay a fee equal to 0.5% per annum of the unused portion of the Revolving Credit Facility.

This Agreement was amended in April 2006, to include both PW Eagle and USPoly as co-borrowers, and to reduce the interest rates and the unused line fee. Interest rates on borrowings under the amended Agreement are currently at LIBOR plus 1%. At future measurement dates, and based upon a defined fixed charge coverage ratio, the interest rates range from LIBOR plus 1% to LIBOR plus 1.75%. At December 31, 2006 the LIBOR rate was 5.375%.

Under the amended Agreement, the Company is required to comply with a minimum fixed charge coverage ratio, as well as other customary covenants, representations, warranties and funding conditions. Borrowings under the Agreement are collateralized by substantially all of the Company’s assets. The amended Agreement expires on April 26, 2011.

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 were due on October 25, 2010, and were 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% was payable in cash monthly and 6% was deferred until October 31, 2009. The Junior Subordinated Notes bear interest at 22.5%, of which 13% was payable in cash monthly and 9.5% was deferred until October 31, 2009.

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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 EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”, the warrants have been recorded as a liability on the Company’s balance sheet for $1.5 million at December 31, 2004. During 2005 and 2004, the Company’s value for the warrants increased due to an increase in the Company’s stock price. Accordingly, the warrant liability was increased to fair value, resulting in a $4.3 million and a $0.2 million non-cash charge to interest expense in 2005 and 2004, respectively.

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.

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 debt 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 the fourth quarter of 2004 as a component of interest expense. Amortization of the deferred financing costs during 2004, prior to refinancing, was $1.4 million.

In December 2005, PW Eagle repaid all amounts outstanding under the Senior Subordinated Notes and Junior Subordinated Notes. At the date these obligations were repaid, PW Eagle had unamortized deferred financing costs of $1.0 million and unamortized debt discount of $1.0 million on the Subordinated Notes. The terms of the Subordinated Notes also required a prepayment penalty of $4.4 million. A charge of $6.4 million related to these items was recorded in the fourth quarter of 2005 as a component of interest expense.

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 financing 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 financing lease obligation. No gain or loss was recognized on the transaction. The financing lease obligation requires an annual lease payment of $0.4 million, including interest at a rate of 9.7%. The financing lease has an initial term of twenty years, upon which the lease will automatically renew for ten years. The financing lease will continue to automatically renew every ten years until the financing lease is terminated. The financing 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 common stock in PW Eagle, Inc. 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 initial term of the lease.

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 $0.3 million at December 31, 2006 and 2005, respectively.

USPoly

On September 27, 2004, USPoly acquired UAC (see Note 2). To finance this acquisition, USPoly obtained a new Senior Credit Facility. Under the new Senior Credit Facility, USPoly had a $10 million revolving credit facility and term loans

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amounting to $6.9 million. The term loans are payable in monthly installments of $0.1 million with interest at the prime rate plus 0.75% to 1.00%. The revolving credit facility bears interest at prime plus 0.5%, and a non-use fee of 0.5%. The prime rate was 5.25% at December 31, 2004. 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 also entered into a capital lease agreement for the Tulsa, Oklahoma manufacturing facility connected with the acquisition of UAC for $1.5 million. 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 the note 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, $1.2 million at December 31, 2004 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 2005 and 2004, the Company increased its estimate of the value of USPoly, based on its operating performance, the UAC Acquisition (see Note 2), and the sale of W.L. Plastics (see Note 2). Accordingly, the warrant liability was adjusted to fair value, resulting in a $0.7 million and a $0.8 million non-cash charge to interest expense in 2005 and 2004, respectively.

In connection with the UAC Acquisition, USPoly amended its Subordinated Debt Agreement with Medallion 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.

During the fourth quarter of 2005, USPoly repaid all amounts outstanding under the Senior Credit Facility and the Subordinated Debt Agreement. At the date these obligations were repaid, USPoly had unamortized deferred financing costs of $0.5 million and unamortized debt discount of $0.2 million. The terms of the loan agreements also required prepayment penalties of $0.4 million. A charge of $1.1 million related to these items was recorded in the fourth quarter of 2005 as a component of interest expense.

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 financing lease obligation of $1.9 million. The leases require monthly payments of $20,000, including interest at a rate of 11.25%. These financing 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.

Scheduled aggregate annual maturities of amounts classified as debt obligations at December 31, 2006, under terms of the capital lease obligations are (in thousands):

	Capital Lease Obligations
2007	$	2,633
2008		2,633
2009		2,633
2010		2,618
2011		2,618
Thereafter		29,263
Total scheduled cash payments		42,398
Less amounts representing interest		22,872
Total current and non current maturities		19,526
Less current maturities		(224	)
Total amount classified as debt obligations at December 31, 2006	$	19,302

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Management estimates that the fair value of borrowing under its debt agreements approximates the carrying value at December 31, 2006, as the applicable interest rates approximate current market rates.

As described above, under current financing agreements, the Company is required to comply with certain restrictive financial ratios and covenants. At December 31, 2006, the Company was in compliance with all debt covenants.

6. GUARANTEES

Product warranties: The Company’s products are generally guaranteed against defects in material and workmanship for one year. The product warranty liability is reviewed regularly by management to insure the Company’s warranty allowance is adequate based on frequency and average cost of historical warranty claims activity. Management studies trends of warranty claim activity to improve pipe quality and pipe installation techniques to minimize future claims activity.

(In thousands)
	2006			2005
Accrual for product warranties – beginning of year	$	325		$	325
Accruals for warranties issued during the year		565			305
Settlements made during the year		(615	)		(305	)
Accrual for product warranties – end of year	$	275		$	325

Standby letters of credit: The Company is required to maintain standby letters of credit totaling $3.1 million. 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 by $3.1 million. No amounts were drawn on these letters of credit as of December 31, 2006.

7. DERIVATIVE INSTRUMENTS

The Company follows Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended and interpreted (FAS 133). FAS 133 requires that all derivative instruments, such as interest rate swap contracts, be recognized in the financial statements and measured at their fair market value.

In the normal course of business, the Company is exposed to changes in interest rates. The Company has established policies and procedures that govern the management of these exposures through the use of financial instruments. The Company’s objective in managing its exposure to interest rates is to decrease the volatility that changes in interest rates might have on earnings and cash flows. To achieve this objective, the Company uses fixed rate agreements to adjust a portion, as determined by management and terms of the underlying debt agreements, of total debt that is subject to variable interest rates. Under the fixed rate agreements, the Company pays a variable rate of interest and receives a fixed rate of interest. These derivative instruments are considered to be a hedge against changes in the amount of future cash flows associated with the Company’s interest payments related to a portion of its variable rate debt obligations. Accordingly, the Company designates these

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instruments as cash flow hedges. The derivative instruments are reflected at fair value, net of the underlying debt, in the Company’s balance sheet, and the related gains or losses on this contract are deferred in shareholders’ equity as a component of comprehensive income.

Effective April 1, 2003, the Company entered into a fixed rate swap agreement for 50% of its ETI Senior Term Note. This Senior Term Note was paid in connection with the new PW Eagle Senior Credit Facility of October 25, 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 of 2007. During the fourth quarter of 2005, this fixed asset collateral portion of the credit facility was entirely paid, and the related swap contracts were terminated. At December 31, 2005 and 2006 the Company had no outstanding swap contracts.

8. COMMITMENTS AND CONTINGENCIES

Litigation

The Company is subject to various legal proceedings and claims that have arisen in the ordinary course of its business and have not been finally adjudicated. In management’s opinion, the disposition of present proceedings and claims will not have a material adverse effect on the Company’s financial position, results of operations or cash flows in future periods.

Operating Leases

The Company has non-cancelable operating leases for certain operating facilities that expire in 2011.

Future minimum lease payments at December 31, 2006, are (in thousands):

2007	$	943
2008		752
2009		719
2010		400
2011		2
	$	2,816

Rent expense under all operating leases was $1.4 million, $1.4 million and $1.3 million for the years ended December 31, 2006, 2005 and 2004, respectively.

9. COMMON STOCK PURCHASE WARRANTS

In connection with various financing arrangements, the Company has issued warrants to purchase common stock and Class B common stock as described below. In addition, multiple warrants have been exercised, also described below.

During December 2006, a cash conversion of warrants to purchase 35,000 shares of common stock was completed for $945,000.

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During August 2006, a cash conversion of warrants to purchase 50,000 shares of common stock was completed for $1,350,000.

During May 2006, a cash conversion of warrants to purchase 39,500 shares of common stock was completed for $742,620.

On February 8, 2006, Mass Mutual completed the cashless conversion of warrants to purchase 107,692 shares of the Company’s common stock and was issued 59,322 shares of common stock in the transaction.

On January 5, 2006, JP Morgan Partners (23A SIBC), L.P. completed the cashless conversion of warrants to purchase 242,308 shares of common stock and was issued 135,681 shares of common stock in the transaction.

On January 5, 2006, Corporate Properties Associates 14 Incorporated completed the cashless conversion of warrants to purchase 125,818 shares of common stock and was issued 125,745 shares of common stock in the transaction.

In December 2005, as part of the private placement transaction described in Note 14, warrants were granted to investors to purchase 304,667 shares of common stock at $27.00 per share expiring in December 2010. These warrants were valued at $13.74 per share on the date of issuance. The total value of the warrants, $4,682,076 was recorded as equity in warrants on the consolidated balance sheet.

On September 30, 2005, PW Eagle granted 12,000 warrants to a consultant at the price of $0.01 per share with an expiration date of August 1, 2015. The difference between the exercise price and the fair value, amounting to $0.1 million, was charged to expense.

On May 17, 2005, the holder of a warrant to purchase 1,343,452 shares of common stock at $0.01 per share made a cashless exercise of the warrant and received 1,340,657 shares of common stock. The warrant holder also exercised its right to require the Company to file a Registration Statement on the Form S-3, to register these shares. The Registration Statement became effective August 12, 2005. As of October 4, 2005, all shares registered with this Registration Statement had been sold.

In 2004, holders of the Senior Subordinated Note received warrants to purchase a total of 366,651 shares of the Company’s common stock at $0.01 per share that expire October 25, 2010. These warrants contained a put feature that required the Company to repurchase the shares at the fair market value of the stock on the date the warrants could be put to the Company. These warrants were included in other long-term liabilities due to their put feature. The initial valuation of the warrants was for $1.2 million and was recorded as a discount on the subordinated debt. This valuation was increased by $0.3 million to $1.5 million with an offsetting entry to interest expense due to the increase in value of the Company’s stock from October 25, 2004 to December 31, 2004. The valuation of these warrants was increased by $4.3 million to $5.8 million with an offsetting entry to interest expense due to the increase in value of the Company’s stock from January 1, 2005 to November 16, 2005. On November 16, 2005, the warrant holder elected to make a cashless exercise of their warrants to purchase 366,302 shares of common stock. The share differential represents the effect of the cashless exercise in which the holder forfeits the right to receive a certain number of warrant shares in lieu of paying the current exercise price in cash.

During 2004, the Company issued additional warrants to purchase 20,818 shares of the Company’s stock in connection with certain lease agreements. These warrants were valued at $0.1 million and were recorded as an increase to stockholder’s equity and a discount on the capital lease obligation.

The former holders of the Senior Subordinated Notes held warrants to purchase a total of 1,940,542 shares of the Company’s common stock or Class B common stock at $0.01 per share which expire September 20, 2009. The number of shares issuable upon exercise and the warrant exercise price were adjustable in the event the Company paid a dividend in common stock, subdivided or combined its common stock, or sold capital stock or options to purchase capital stock at a price less than the market price of its capital stock on the date of issuance or completed a capital reorganization or reclassification of its capital stock. The Company granted the warrant holders a right of first refusal. The Company cannot sell or issue any of its common stock, options or convertible securities unless it has first offered to sell to each warrant holder its proportionate share. Certain affiliates of the Company granted the warrant holders tagalong rights that gave the warrant holders the right to join any affiliate in the sale of any of their shares. On January 28, 2005, some warrant holders elected to make a cashless exercise of their warrants to purchase 597,090 shares of Class B common stock in exchange for 595,508 shares of Class B common stock. The share differential represented the effect of the cashless exercise in which, in lieu of paying the current exercise price in cash, the holder forfeited the right to receive a certain number of warrant shares having a fair market value equal to the warrant exercise price. The Class B common stock issued to the warrant holders was convertible, at the holders’ option, into shares of the Company’s common stock at a 1:1 ratio. On December 20, 2005, the 595,508 shares of Class B common stock were converted to regular common stock under the 1:1 ratio.

10. INCOME TAXES

Deferred tax assets and liabilities represent temporary differences between the basis of assets and liabilities for financial reporting purposes and tax purposes. Deferred tax assets are primarily related to amounts, which have been deducted for financial statement purposes but have not been deducted for income tax purposes and the tax effect of net operating loss carryforwards.

At December 31, 2006, the Company had a net deferred tax asset of approximately $5.0 million (approximately $2.7 million at December 31, 2005). The net deferred tax asset represents management’s best estimate of the tax benefits that will more likely than not be realized in future years at each reporting date.

Deferred taxes as of December 31, 2006 and 2005, are summarized as follows (in thousands):

	2006			2005
Current deferred taxes:
Inventory valuation allowance	$	1,054		$	64
Warranty reserves		105			117
Allowance for doubtful accounts		384			365
Accrued liabilities		1,277			1,435
Inventory cost capitalization		464			397
Other		—			4
	$	3,284		$	2,382
Long-term deferred taxes:
Excess tax over book depreciation	$	(1,121	)	$	(2,462	)
Non-compete agreement		67			86
Federal and state net operating loss carryforwards		—			65
State tax credit carryforwards		—			110
Non-qualified stock options		603			—
Restricted stock options		11			328
Royalty agreement		1,690			2,355
Intangibles		(437	)		(707	)
Investment earnings in non-qualified plan		924			550
Other		8			—
	$	1,745		$	325

Income tax expense (benefit) for the years ended December 31 consists of the following (in thousands):

	2006			2005		2004
Current	$	38,663		$	21,263	$	136
Deferred	$	(2,322	)	$	11,652	$	(3,195	)
Income tax expense (benefit) from operations		36,341			32,915		(3,059	)
Income tax expense for equity in earnings of unconsolidated affiliate		—			—		384
Total income tax expense (benefit)	$	36,341		$	32,915	$	(2,675	)

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A reconciliation of the expected federal income taxes, using the effective statutory federal rate of 35%, with the provision (benefit) for income taxes is as follows (in thousands):

	2006			2005			2004
Expected federal expense (benefit)	$	33,963		$	28,032		$	(2,852	)
State taxes, net of federal benefit and credits		3,115			3,444			(361	)
Permanent difference for interest charges related to stock warrants		—			1,992			584
Deduction for domestic production activities		(948	)		(720	)		—
Other		211			167			(46	)
Income tax expense (benefit)	$	36,341		$	32,915		$	(2,675	)

11. EARNINGS PER COMMON SHARE

The following tables reflect the calculation of basic and diluted earnings per share:

(in thousands, except per share amounts)	2006		2005		2004
Net income (loss)	$	60,695	$	46,950	$	(5,540	)
Weighted average shares – basic		11,930		8,888		7,096
Effect of stock options, warrants and restricted shares		166		1,206		—
Weighted average shares – diluted		12,096		10,094		7,096
Net income (loss) per share – basic	$	5.09	$	5.28	$	(0.78	)
Net income (loss) per share – diluted	$	5.02	$	4.65	$	(0.78	)

The following table summarizes outstanding securities which are excluded from the computation of diluted earnings per share because inclusion of these shares would be anti-dilutive (in thousands):

	2006	2005	2004
Stock options	—	184	807
Stock warrants	—	305	2,783
Unvested restricted stock	—	—	209

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12. EMPLOYEE BENEFIT PLANS

PW Eagle Employees’ Savings 401(k) Plan

PW Eagle’s and USPoly’s 401(k) plan covers all eligible employees. Eligible employees may elect to defer up to 25% of their eligible compensation. The plan provides for Company-paid matching contributions of 50% of participant contributions up to 6% of compensation. The match was temporarily suspended January 1, 2004 and reinstated July 1, 2004.

PW Eagle’s board of directors determines each year if an additional contribution will be made based on PW Eagle’s performance. An additional contribution of 3% was approved for 2006 and 2005. No additional contribution was approved for 2004. Total amounts charged to operations were $2.0 million, $1.9 million and $0.3 million for the years ended December 31, 2006, 2005 and 2004, respectively.

USPoly participated in PW Eagle’s retirement savings plan in 2006, and total contributions to the Plan were $0.3 million.

On December 15, 2003, a separate plan with terms similar to PW Eagle’s plan, USPoly Employees’ Savings Plan, was created for employees of USPoly, and Company matching contributions to the plan were $133,000 and $43,000 for the years ended December 31, 2005 and 2004, respectively. No discretionary profit sharing contributions were made in 2005 or 2004.

All active hourly union employees in the Company’s Buckhannon, West Virginia plant are covered by a defined contribution plan. The Company’s sole responsibility is to make contributions, in accordance with the union contract, of $95, $85 and $80 per month per employee in 2006, 2005 and 2004, respectively. Contributions by the Company in 2006, 2005 and 2004 totaled $73,000, $67,000 and $66,000, respectively.

PW Eagle Top Hat Plan

The PW Eagle Top Hat Plan (the “Plan”) allows for a select group of management, directors, or highly compensated employees to accumulate additional income and security for their retirement by contributing additional amounts above that permitted under the PW Eagle Employees’ Savings 401(k) plan.

There is no statutory limitation on the amount eligible employees can defer under this Plan. The Plan allows for Company-paid matching contributions of 50% of participant contributions up to 6% of compensation. However, this amount will be offset by the Company-paid matching contributions made to the Company’s 401(k) plan for each participant. Therefore, the maximum matching contribution paid by the Company on behalf of each participant for both PW Eagle’s Employee Savings 401(k) plan and this Plan is 6% of compensation. Company matching contributions to the Plan were $18,000, $16,000 and $2,000 for the years ended December 31, 2006, 2005 and 2004, respectively.

The Company may also make an additional annual supplemental contribution based on PW Eagle’s performance. Supplemental contributions paid to this Plan for 2006 was $21,000. There were no supplemental contributions paid to this Plan for 2005 or 2004.

The Plan also allows for a discretionary contribution by PW Eagle’s board of directors. No discretionary contributions have been made to the Plan since the date of its inception.

PW Eagle holds the contributions made into this Plan in a rabbi trust. The assets held in the rabbi trust are subject to the claims of general creditors of PW Eagle. Therefore, the Company carries the balance in the rabbi trust in both the asset and liability sections of the Consolidated Balance Sheet. The amount included therein for 2006, 2005 and 2004 was $2.4 million, $1.7 million and $1.3 million, respectively.

13. SHARE-BASED COMPENSATION

(in thousands, except per share amounts)

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS 123(R), “Share-Based Payment (as amended).” SFAS No. 123(R) eliminates the alternative to use the intrinsic value method of accounting that was provided in SFAS No. 123, which generally resulted in no compensation expense recorded in the financial statements related to the issuance of equity awards to employees and directors. SFAS No. 123(R) requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. SFAS No. 123(R) establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all companies to apply a fair-value-based measurement method in accounting generally for all share-based payment transactions with employees. In accordance with the new rule, the Company adopted SFAS No. 123(R) using a modified prospective method for the recognition of share-based compensation expense on January 1, 2006.

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On November 10, 2005, the FASB issued FASB Staff Position SFAS 123(R)-3, “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards.” The Company has elected to adopt the alternative transition method provided in this FASB Staff Position for calculating the tax effects of share-based compensation pursuant to FAS 123(R). The alternative transition method includes a simplified method to establish the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of employee share-based compensation, which is available to absorb tax deficiencies recognized subsequent to the adoption of SFAS 123(R).

Under SFAS 123(R), share-based compensation cost is measured at the grant date, based on the estimated fair value of the award and is recognized as expense over the stated vesting period. The Company continues to use the Black-Scholes option-pricing model as its method for valuing stock options. The key assumptions for this valuation method include the expected term of the option, stock price volatility, risk-free interest rate, dividend yield, exercise price and forfeiture rate. Many of these assumptions are judgmental and highly sensitive in the determination of compensation expense. The following is a discussion of our methodology for developing each of the assumptions used in the valuation model when share-based awards are granted:

Term – This is the period of time over which the options granted are expected to remain outstanding. Options granted have a maximum term of ten years.

Volatility – This is a measure of the amount by which a price has fluctuated or is expected to fluctuate. Volatilities are based on historical volatility of PW Eagle’s shares and other factors, such as expected changes in volatility arising from planned changes in PW Eagle’s business operations. An increase in the expected volatility will increase compensation expense.

Risk-Free Interest Rate – This is the U.S. Treasury rate for the date of the grant having a term equal to the expected term of the option. An increase in the risk-free interest rate will increase compensation expense.

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Dividend Yield –With share based awards granted after January 1, 2006, we have incorporated a dividend yield. Prior to 2006, we did not make any dividend payments. An increase in the dividend yield will decrease compensation expense.

Forfeiture Rate – This is the estimated percentage of options granted that are expected to be forfeited or canceled before becoming fully vested. An increase in the forfeiture rate will decrease compensation expense. Based on historical forfeitures of share-based awards, the Company has estimated a 4% forfeiture rate. The Company will annually evaluate this assumption as future forfeitures occur.

The Company granted stock options during 2006 and 2005. The Company did not grant any stock options in 2004. The Black-Scholes options pricing model was used to determine fair value of each stock option grant on the date of grant. The following assumptions were used in computing the Black-Scholes value for each stock option granted in 2006 and 2005:

	2006	2005
Expected volatility	80% - 95%	71% - 80%
Expected dividend yield	1.08%	—
Expected life (term)	7 years	7 years
Risk-free interest rate	4.8% - 5.0%	3.8% - 4.5%

The share-based compensation expense, related to all of the Company’s share-based awards, recognized for 2006, in selling, general and administrative expense was comprised as follows (in thousands, expect per share data):

	2006
Share-based compensation expense before taxes	$	3,426
Related income tax benefits		(996	)
Share-based compensation expense, net of taxes	$	2,430
Net share-based compensation expense, per common share:
Basic	$	0.20
Diluted	$	0.20

As of December 31, 2006, there was approximately $2.0 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under our share-based compensation plan. This unrecognized compensation cost is expected to be recognized over the remaining vesting period through May 26, 2009.

Prior to adopting the provisions of SFAS 123(R), we applied Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for our share-based awards. The following table details the effect on net earnings and earnings per share had compensation expense for the employee-based awards been recorded during 2005 and 2004 based on the fair value method under SFAS 123.

	2005			2004
Net income (loss) applicable to common stock, as reported	$	46,950		$	(5,540	)
Add: Stock-based employee compensation expense included in reported net (loss) income, net of tax		128			250
Less: Stock-based employee compensation expense under fair value-based method, net of tax		(743	)		(665	)
Proforma net income (loss) applicable to common stock	$	46,335		$	(5,955	)
Basic earnings (loss) per common share
As reported	$	5.28		$	(0.78	)
Pro forma		5.21			(0.84	)
Diluted earnings (loss) per common share
As reported	$	4.65		$	(0.78	)
Pro forma		4.59			(0.84	)

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Share-based Compensation Plan

As of January 1, 2006, we have one active share-based compensation plan, described below.

The PW Eagle, Inc. 1997 Stock Option Plan (the “Plan”) permits the granting of nonqualified and incentive stock options to purchase shares of common stock up to a total of 2,700,000 shares. The exercise price of an incentive or nonqualified stock option may not be less than 100% of the fair market value of the Company’s common stock on the date of grant. These options generally vest over a period of time set by the Board of Directors.

The term of an incentive stock option may not exceed ten years from the date of grant. All employees of the Company or any subsidiary are eligible to receive incentive stock options. All employees, directors and officers of, and consultants and advisors to, the Company or any subsidiary are eligible to receive nonqualified stock options. The Board of Directors may terminate or amend the Plan but may not amend the Plan to materially increase the benefits accruing to any individual or materially modify the requirements for eligibility to participate in the Plan without the approval of the Company’s shareholders. The shareholders approved an increase in the number of shares available for the granting of options under the Plan from 2,200,000 to 2,700,000 on May 26, 2006.

A summary of the status of the Company’s stock options as of December 31, 2006, 2005 and 2004, and changes during the year ended on those dates is presented below (shares in thousands):

	2006			2005				2004
	Shares		Weighted Average Exercise Price	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
Outstanding at beginning of year	1,136		7.84	807		$	4.64	1,107		$	4.30
Granted	102		25.20	371			15.04	—			—
Exercised	(840	)	5.39	(33	)		10.06	(161	)		2.13
Canceled	(34	)	5.77	(9	)		9.53	(139	)		4.84
Outstanding at end of year	364		18.57	1,136			7.84	807			4.64
Options exercisable at year end	132		17.89	759			5.55	610			4.25
Options available for future grant	374			441				303

The weighted average fair value of stock options granted in 2006 and 2005 was $20.54 and $10.53, respectively. No stock options were granted during 2004.

The total intrinsic value of outstanding and exercisable options at December 31, 2006 was $5.8 million and $2.2 million, respectively.

The total intrinsic value of options exercised during the years ended December 31, 2006, 2005 and 2004 was $18.5 million, $.2 million and $.2 million, respectively.

The following table summarizes information about stock options outstanding and exercisable at December 31, 2006 (shares in thousands):

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	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
$ 4.04 to $4.51	46	6.74	$	4.05	21	$	4.04
$5.15 to $5.82	69	6.54		5.28	22		5.27
$16.00	4	3.45		16.00	4		16.00
$23.47 - $27.85	245	9.12		25.08	85		24.62
	364	8.27	$	18.57	132	$	17.89

Restricted Stock Grants

In April 2006, the Company awarded an employee a 2,500 share restricted stock grant. The intrinsic value for this grant is $28.78 per share.

The Company did not award any restricted stock grants in 2005 or 2004. Restricted stock shares carry dividend and voting rights. Sales or transfers of these shares are restricted prior to the date of vesting. The restricted stock award granted in 2006 provides a 20% immediate vesting in 2006, an additional 30% vesting during 2007, with the remaining 50% to vest in 2008. Restricted stock is subject to forfeiture in the event of termination of employment prior to the vesting date for reasons other than death or disability. During May 2006, 144,078 shares of restricted stock vested immediately upon the election of the new Board of Directors on May 26, 2006. During 2006, 2005 and 2004, 168,998, 38,300 and 63,800 shares of restricted stock vested, respectively. A total of 2,000 and 79,300 shares of restricted stock were cancelled in 2006 and 2004, respectively, due to the departure of certain officers and employees. There were no cancellations of restricted stock shares during 2005. As of December 31, 2006, 2,000 shares of restricted stock were outstanding, of which all 2,000 are unvested.

Unearned compensation was charged for the fair value of the restricted shares at the time of award prior to the implementation of SFAS 123(R) on January 1, 2006. The unearned compensation is shown as a reduction of stockholders’ equity in the consolidated balance sheet and was being amortized ratably as compensation expense over the related vesting period. Total amounts charged to operations were $0.2 million and $0.3 million for the years ended December 31, 2005 and 2004, respectively. Upon implementation of SFAS 123(R) on January 1, 2006, the Company accounts for noncash compensation related to restricted stock grants under the share-based compensation plan.

14. STOCKHOLDERS’ EQUITY

Sale of Common Stock

In December 2005, PW Eagle sold 1,018,667 shares of common stock at a price of $18.75 per share and 304,667 warrants to purchase common stock at a price of $27.00 per share. The net proceeds of $17.9 million were used to pay down revolving debt.

Share Repurchase Program

On June 16, 2006, the Board of Directors authorized the Company to repurchase up to $40 million of the Company’s outstanding common stock. The share repurchase program has an expiration of June 30, 2008. Repurchases may be made in the open market and in privately negotiated transactions utilizing various hedge mechanisms, including, among other things, the sale to third parties of put options for the Company’s common shares, or otherwise. To facilitate the repurchase of shares of its common stock under the Company’s share repurchase program, the Company entered into a Rule 10b5-1 purchase plan on August 21, 2006 to purchase up to $31.5 million of the total $40 million approved by the Board of Directors. Through December 31, 2006, the Company repurchased 529,865 shares of PW Eagle, Inc. common stock in the open market for a total of approximately $16.4 million under the rule 10b5-l plan.

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Put Option Transactions

The Company accounts for put option transactions on Company stock in accordance with Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”, (“SFAS 150”). SFAS 150 requires put options to be measured at fair value and recognized on the balance sheet as liabilities.

As part of the share repurchase program, on August 15, 2006, the Company sold put options covering 200,000 shares of Company stock for $441,000 in premiums. The put options had a strike price of $29.85 per share. They expired on November 15, 2006 unexercised, therefore, the Company recognized the total $441,000 as non-operating income during 2006.

Dividends

Cash dividends declared during 2006 were as follows (per share):

	December 31, 2006
First Quarter	$	0.075
Second Quarter		0.075
Third Quarter		0.075
Fourth Quarter		0.075
	$	0.300

15. 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, the Company incurred restructuring charges of $1.6 million in 2004. At December 31, 2005 and 2006, the Company has no payments remaining from the restructuring.

Following is a summary of the restructuring reserve activity (in thousands):

	Severance			Other			Total
Restructuring accrual at December 31, 2003	$	1,178		$	—		$	1,178
Additions to reserve		106			41			147
Charges against reserve		(1,214	)		(41	)		(1,255	)
Restructuring accrual at December 31, 2004		70			—			70
Charges against reserve		(70	)		—			(70	)
Restructuring accrual at December 31, 2005 and 2006	$	—		$	—		$	—

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16. SEGMENT INFORMATION

Segments of Business

The Company manufactures and distributes PVC and PE pipe and fittings 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. The PE segment operates under the name USPoly. We distribute our products throughout the United States, including Hawaii and Alaska, with a minimal amount of shipments to certain foreign countries. While there are similarities in technology and manufacturing processes utilized between the segments, differences exist in products and customer base, with the PVC segment focused on the water, irrigation and electrical products and customers, and the PE segment focused primarily on the natural gas distribution products and customers.

A summary of the Company’s business activities reported by its two business segments follows (in thousands):

	2006			2005			2004
Business Segments (in thousands)
Net sales:
PVC	$	631,901		$	612,258		$	445,880
PE		82,211			81,986			29,074
	$	714,112		$	694,244		$	474,954
Operating income:
PVC	$	94,354		$	84,387		$	11,140
PE		5,585			4,394			138
Total operating income		99,939			88,781			11,278
Gain on sale of investee and non-operating income		897			18,363			—
Interest expense		(3,800	)		(27,051	)		(20,668	)
Income (loss) before income taxes and minority interest	$	97,036		$	80,093		$	(9,390	)
Expenditures for property and equipment:
PVC	$	6,316		$	3,145		$	1,582
PE		1,285			1,527			195
Total	$	7,601		$	4,672		$	1,777
Depreciation and amortization expense:
PVC	$	8,735		$	9,987		$	10,381
PE		2,342			2,631			1,116
Total	$	11,077		$	12,618		$	11,497
Goodwill:
PVC	$	3,651		$	3,651		$	3,651
PE		2,790			2,790			—
Total	$	6,441		$	6,441		$	3,651
Total Assets:
PVC	$	203,371		$	191,788		$	159,675
PE		34,174			39,961			36,742
Corporate		5,029			2,707			14,359
Total assets	$	242,574		$	234,456		$	210,776

PE assets include investment in affiliate of $0, $0, and $2.9 million for the years ended December 31, 2006, 2005 and 2004.

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17. SIGNIFICANT CONCENTRATIONS

The Company acquires its primary raw materials from various sources. During the years ended December 31, 2006, 2005 and 2004, purchases of primary raw materials from three vendors totaled 90%, 90% and 87%, respectively, of total material purchases. Materials purchased represents the largest component of the Company’s cost of sales. The loss of a key supplier could have a significant impact on our business.

Sales to HD Supply, a customer of both the PVC and PE segments, totaled approximately 12% of consolidated sales in 2006. At December 31, 2006, the account receivable balance for HD Supply was 18% of total consolidated accounts receivable. The loss of a large customer could have a significant impact on our business. No customer accounted for more than 10% of our net sales in 2005 or 2004.

18. QUARTERLY FINANCIAL DATA (UNAUDITED)

(in thousands, except per share amounts)

Quarter ended:	March		June		September		December		Year Ended
2006
Net sales	$	181,936	$	205,242	$	189,907	$	137,027	$	714,112
Gross profit		53,964		48,241		50,284		22,153		174,642
Operating income		35,529		28,115		31,457		4,838		99,939
Income before taxes		34,388		26,639		30,948		5,061		97,036
Net income		21,046		16,669		19,829		3,151		60,695
Earnings per share
Basic	$	1.85	$	1.39	$	1.61	$	0.26	$	5.09
Diluted	$	1.73	$	1.35	$	1.59	$	0.26	$	5.02
2005
Net sales	$	142,640	$	161,626	$	176,155	$	213,823	$	694,244
Gross profit		23,139		24,305		28,461		83,484		159,389
Operating income		7,986		8,491		9,965		62,339		88,781
Income before taxes		4,217		4,107		5,055		66,714		80,093
Net income		2,696		2,283		2,913		39,058		46,950
Earnings per share
Basic	$	0.35	$	0.27	$	0.31	$	3.91	$	5.28
Diluted	$	0.27	$	0.23	$	0.30	$	3.56	$	4.65

The summation of quarterly net income per share does not equate to the calculation for the full fiscal year, as quarterly calculations are performed on a discrete basis.

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19. RELATED PARTY TRANSACTIONS

Certain former members of the Company’s Board of Directors were members of Spell Capital Partners, LLC (Spell Capital). On March 30, 2006, the Company terminated its Management Services Agreement (the Agreement), dated January 1, 2004 with Spell Capital, pursuant to which Spell Capital provided the Company with supervisory and monitoring services, as well as advice and assistance with acquisitions, divestitures and financing activities. The Agreement was terminated based on a determination by the Company that the Company no longer required the services of Spell Capital. The terms of the Agreement permitted the Company to not renew the Agreement upon the conclusion of any quarterly term of the Agreement in exchange for a payment to Spell Capital equal to the monthly management fee currently due and owing to Spell Capital along with a payment equal to twenty-four (24) times the current monthly management fee. The amount of the termination payment paid by the Company to Spell Capital was $1,248,000. The Company’s wholly-owned subsidiary, USPoly Company, LLC, also terminated its Management Services Agreement with Spell Capital. The amount of the termination payment paid by USPoly to Spell Capital was $112,500. These termination fees are included in General and Administrative expenses.

Costs incurred under these arrangements, prior to their termination discussed above, of $0.2 million, $0.8 million and $0.7 million in 2006, 2005 and 2004, respectively, are included in General and Administrative expenses in the consolidated statement of operations. In the fourth quarter of 2005, the Board of Directors approved a bonus payment to Spell Capital of $0.7 million, which was also included in general and administrative expenses.

During 2004, PW Eagle paid certain operating expenses for USPoly. Transactions with USPoly included the rental of certain operating facilities and expenses related to certain services provided to and delivered by PW Eagle. At December 31, 2004, the inter-company balance was approximately $0.1 million. On October 17, 2005, USPoly was merged into PW Eagle. All inter-company transactions are eliminated in the consolidated financial statements.

In connection with the UAC Acquisition, USPoly paid Spell Capital a fee of $0.5 million which is included in transaction costs.

20. 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 owned 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 account.

As explained in Note 2, on October 18, 2005, PW Eagle purchased the remaining shares of USPoly, which it did not previously own.

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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 represented less than 4% of USPoly’s outstanding stock.

As explained in Note 2, USPoly option holders received PW Eagle options upon the acquisition of the remaining unowned shares of USPoly on October 18, 2005.

21. SUBSEQUENT EVENTS

Recently Announced Transaction

On January 15, 2007, the Company announced that it had entered into a definitive merger agreement under which J-M Manufacturing Company, Inc. (“JMM”) will acquire all of the outstanding common shares of PW Eagle for $33.50 per share in cash. The transaction is expected to be completed during the second quarter of 2007, subject to customary closing conditions, including the receipt of regulatory approvals and approval by the shareholders of PW Eagle. JMM, headquartered in Livingston, New Jersey, operates a total of 14 plastic pipe manufacturing facilities and serves customers throughout North America.

Assets Held For Sale

On January 22, 2007, the Company sold a parcel of land near its West Jordan, Utah plant location. This land has been carried as assets held for sale of $1.4 million, which is included in Other Assets as of December 31, 2006. This land is part of the assets included under a long-term capital lease obligation. Sale proceeds of $2.0 million were used to pay $1.8 million of the capital lease obligation, as well as a prepayment penalty and other selling expenses. This transaction resulted in a net gain on the sale of $0.4 million.

Share Repurchase

During the months of January and February, 2007, the Company repurchased an additional 460,749 shares of PW Eagle, Inc. common stock for approximately $15.1 million in accordance with the provisions of the approved share repurchase program (see Note 14). With the inclusion of these shares, the Company has repurchased 990,614 shares of our common stock for $31.5 million. The Rule 10b5-1 purchase plan entered into on August 21, 2006 provided for $31.5 million of share repurchases. Therefore, since the maximum dollar common stock share repurchases has been completed under the plan, there will not be additional share repurchases forthcoming under the Rule 10b5-1 purchase plan.

Warrant Exercise

On January 9, 2007, cash conversions of warrants to purchase 20,000 shares of common stock were completed for $540,000.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Based on an evaluation conducted by the Company, under the supervision and with the participation of the Company’s management, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, (the “Exchange Act”)) as of the end of the period covered by this Form 10-K, the principal executive officer and the principal financial officer of the Company have each concluded that such disclosure controls and procedures are effective and sufficient to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules of the Securities and Exchange Commission.

Changes in Internal Controls

There were no changes in the Company’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as this term is defined in Exchange Act Rule 13a-15(f). The Company’s internal control over the financial reporting process is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of change in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission on Internal Control – Integrated Framework. Based on our assessment using that criteria, our management concluded that, as of December 31, 2006, the Company’s internal control over financial reporting was effective.

Management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 has been audited by Grant Thornton LLP, an independent registered public accounting firm, as stated in their report, which is included herein.

Report of Independent Registered Public Accounting Firm

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Controls Over Financial Reporting in Item 9A, that PW Eagle, Inc. and its subsidiary maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). PW Eagle and its subsidiary’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

55

We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that PW Eagle, Inc. and its subsidiary maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also in our opinion, PW Eagle, Inc. and its subsidiary maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of PW Eagle, Inc. and its subsidiary as of December 31, 2006, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for the year then ended and our report dated March 14, 2007 expressed an unqualified opinion on those financial statements.

/s/ Grant Thornton LLP

Portland, Oregon

March 14, 2007

ITEM 9B. OTHER INFORMATION

The registrant has disclosed all information required to be disclosed in a report on Form 8 K during the fourth quarter of the year covered by this Form 10-K.

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by Item 10 relating to our directors is incorporated by reference to the sections labeled “Election of Directors” and “Code of Ethics”, and the information relating to section 16(a) of the Exchange Act is incorporated by reference to the section labeled “Section 16(a) Beneficial Ownership Reporting Compliance”, all of which appear in our definitive proxy statement for our 2007 Annual Meeting of Shareholders.

The names, ages and positions of our executive officers are as follows:

Name	Age	Position
Jerry A. Dukes	59	Chief Executive Officer and President
Scott Long	44	Executive Vice President and Chief Financial Officer
N. Michael Stickel	64	Executive Vice President—Sales and Marketing
John R. Cobb	56	Executive Vice President—Operations
Keith H. Steinbruck	57	Vice President—Technical Director
Neil R. Chinn	56	Vice President—Human Resources

Jerry A. Dukes was elected CEO and President of PW Eagle in March 2005 and President of PW Eagle in October 2003. Previously Mr. Dukes had been President of Uponor ETI since 2001, and served as its vice president of manufacturing from 1992 through 2001. Mr. Dukes joined ETI in 1988 as Director of Manufacturing. Prior to ETI, Mr. Dukes was employed by Johns Manville Corp. in various manufacturing and general management positions in plastic pipe and other construction product businesses. He has a B.S. degree from Texas Tech University in Industrial Engineering and is registered as a Professional Engineer in the State of Texas.

Scott Long was elected Executive Vice President and Chief Financial Officer of PW Eagle in March of 2005 and CFO of PW Eagle in October 2003. Previously, Mr. Long was Chairman of Uponor ETI since 2001. He served as president of Uponor ETI since 1998. Mr. Long joined ETI in 1991 as Corporate Controller. From 1994-1998, he held various financial, business development and general management positions within the Uponor organization in the United States and Europe. Prior to joining ETI, Mr. Long was a CPA in public practice. Mr. Long has a B.S. degree in Accounting and Business Administration from the University of Kansas and holds a Colorado CPA certificate (currently in inactive status).

N. Michael Stickel was elected our Executive Vice President—Sales and Marketing in February 2003. Previously, Mr. Stickel was Senior Vice President—Sales and Marketing from February 2001 through 2002. Before joining PW Eagle, Mr. Stickel was Vice President and General Manager for Simpson Paper Company. Mr. Stickel spent 8 years with PWPipe, as Vice President and General Manager of PWResin, a subsidiary of PWPipe, from 1990 through 1993, and as Vice President of Sales and Marketing for PWPipe from 1985 through 1990. Mr. Stickel also served as Vice President of Planning and Control for Longmile Rubber Company from 1981 to 1985 and General Manager of the chemicals division for Simpson Investment Company from 1976 through 1981. Mr. Stickel received a B.S. from Oregon State University and a M.B.A. from the University of Oregon.

John R. Cobb was elected our Executive Vice President—Operations in February 2003. Previously, Mr. Cobb was Senior Vice President—Operations in September 1999 through 2002. Mr. Cobb was Senior Vice President—Operations for PWPipe from 1987 through 1999. Mr. Cobb has also held the positions of production manager and plant manager with PWPipe. Mr. Cobb joined PWPipe in 1978 and has 27 years of experience in the manufacture of plastic pipe. He has received a B.S. degree from the University of Toronto and a M.B.A. from the University of Oregon. Mr. Cobb has also completed the Mahler Advanced Management Skills Program.

Keith H. Steinbruck was elected our Vice President—Technical Director in September 1999 and served through August 2002. Mr. Steinbruck returned to the company and continued to serve as our Vice President—Technical Director in November 2002. Previously, Mr. Steinbruck was Vice President—Technical Director for PWPipe from 1995 through 1999 and Technical Manager of PWPipe from 1982 through 1995. Mr. Steinbruck joined PWPipe in 1973 as a process improvement specialist and has 32 years of experience in the plastic pipe industry. Mr. Steinbruck received a B.A. degree in industrial technology from San Diego State University and completed the University of California at Berkeley’s Executive Program for Technical Managers.

57

Neil R. Chinn was elected our Vice President—Human Resources in September 1999. Previously, Mr. Chinn was Vice President—Human Resources for PWPipe from 1995 through 1999 and Employee Relations manager for PWPipe from 1986 through 1995. Mr. Chinn received a B.A. degree from the University of Leicester and M.S. and M.B.A. degrees from the University of Oregon. He has also completed graduate courses at the School of Law, University of Oregon and has attended classes with the American Compensation Association.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference to the section labeled “Executive Compensation” to be included in our definitive proxy statement for our 2007 Annual Meeting of Shareholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item is incorporated by reference to the section labeled “Security Ownership of Principal Shareholders and Management” to be included in our definitive proxy statement for our 2007 Annual Meeting of Shareholders.

The following table reflects certain information about our equity compensation plans as of December 31, 2006.

(in thousands, except for weighted average exercise price)	Number of securities to be issued upon exercise of outstanding options and warrants	Weighted- average exercise price of outstanding options and warrants		Number of securities remaining available for future issuance under equity compensation plans
Equity compensation plans approved by security holders
Stock options	364	$	18.57	374
Warrants	192	$	27.00	—
Equity compensation plans not approved by security holders	—		—	—
Total	556	$	21.39	374

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item is incorporated by reference to the section labeled “Certain Relationships and Related Transactions” to be included in our definitive proxy statement for our 2007 Annual Meeting of Shareholders.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated by reference to the section labeled “Audit Fees” to be included in our definitive proxy statement for our 2007 Annual Meeting of Shareholders.

58

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

The following documents are filed as part of this report:

			Page in Form 10-K
1		Consolidated Financial Statements
		Report of Independent Registered Public Accounting Firm (Grant Thornton LLP)	24
		Report of Independent Registered Public Accounting Firm (PricewaterhouseCoopers LLP)	25
		Statement of Operations	26
		Balance Sheet	27
		Statement of Stockholders’ Equity and Comprehensive Income	28
		Statement of Cash Flows	29
		Notes to Financial Statements	30-54
2.	Consolidated Financial Statement Schedule
		Report of Independent Registered Public Accounting Firm on Financial Statement Schedule (PricewaterhouseCoopers LLP)	61
		Schedule II Valuation and Qualifying Accounts	62
		All schedules omitted are inapplicable or the information required is shown in the financial statements or notes thereto.
3.	Exhibits
		See Exhibit Index on page following Schedule II Valuation and Qualifying Accounts.

59

SIGNATURES

Pursuant to the Requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

PW EAGLE, INC.

Dated: March 14, 2007	By:	/s/ Jerry A. Dukes
		Jerry A. Dukes, Chief Executive Officer

Power of Attorney

Each person whose signature appears below constitutes and appoints Jerry A. Dukes and Scott Long his true and lawful attorneys-in-fact and agents, each acting alone, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as he might or could do in person, hereby ratifying and confirming all said attorneys-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.

Signature	Title	Date
/s/ Jerry A. Dukes Jerry A. Dukes	Chairman of the Board, Chief Executive Officer (Principal Executive Officer)	March 14, 2007
/s/ Scott Long Scott Long	Chief Financial Officer (Principal Financial and Accounting Officer)	March 14, 2007
/s/ Thomas Hudson	Director	March 14, 2007
Thomas Hudson
	Director	March 14, 2007
Zachary George
/s/ Lee Meyer	Director	March 14, 2007
Lee Meyer
/s/ Martin White	Director	March 14, 2007
Martin White
	Director	March 14, 2007
Stephen Rathkopf
/s/ Todd Goodwin	Director	March 14, 2007
Todd Goodwin

60

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT SCHEDULE

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

Our audit of the consolidated financial statements for the year ended December 31, 2004, referred to in our report dated March 25, 2005 appearing in the 2006 Annual Report on Form 10-K also included an audit of the financial statement schedule listed in Item 15(2) of this Form 10-K for the year ended December 31, 2004. In our opinion, the financial statement schedule for the year ended December 31, 2004, presents fairly in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Minneapolis, Minnesota

March 25, 2005

61

SCHEDULE II

Valuation and Qualifying Accounts

(in thousands)

Description	Beginning Year Balance		Additions		Assumed Allowance (2)		Deductions (1)		Year End Balance
Allowance for doubtful accounts and sales discounts
Fiscal year ended December 31, 2006	$	2,061	$	11,332	$	—	$	11,728	$	1,665
Fiscal year ended December 31, 2005	$	1,279	$	11,029	$	—	$	10,247	$	2,061
Fiscal year ended December 31, 2004	$	952	$	2,167	$	211	$	2,051	$	1,279

¹ Primarily sales discounts and allowances.

² Assumed allowances from the acquisition of ETI and UAC.

62

EXHIBIT INDEX

Number	Description
2.1	Merger Agreement, dated September 30, 2005, among the Registrant, Poly Merger, LLC and USPoly Company (Incorporated by reference to the Registrant’s Form 8-K filed October 6, 2005).
2.2	Agreement and Plan of Merger, dated January 15, 2007, by and among the Company, Pipe Dream Acquisition, Inc. and J-M Manufacturing Company, Inc. (Incorporated by reference to Exhibit 2.1 to the Registrant’s Form 8-K filed January 15, 2007).
3.1	Restated Articles of Incorporation of the Registrant (as corrected by Articles of Correction filed February 6, 2007).**
3.2	Amended and Restated Bylaws of the Registrant (Incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-K filed January 15, 2007).
3.3	Statement of designation of shares of Registrant dated May 8, 1997 (Incorporated by reference to Exhibit 10.1 to Registrant’s Form 8-K dated May 19,1997).
10.1	Form of Restricted Stock Agreement between the Registrant and certain officers of the Registrant (Incorporated by reference to Exhibit 10.5 to the Registrant’s Form 8-K dated September 20, 1999).*
10.2	Employment Agreement dated September 16, 1999 between the Registrant and Keith H. Steinbruck (Incorporated by reference to Exhibit 10.9 to the Registrant’s Form 8-K dated September 20, 1999).*
10.3	Employment Agreement dated September 16, 1999 between the Registrant and John R. Cobb (Incorporated by reference to Exhibit 10.11 to the Registrant’s Form 8-K dated September 20, 1999).*
10.4	Employment Agreement dated September 16, 1999 between the Registrant and Neil R. Chinn (Incorporated by reference to Exhibit 10.12 to the Registrant’s Form 8-K dated September 20, 1999).*
10.5	Registrant’s 1991 stock plan (Incorporated by reference to Exhibit 10.22 to the Registrant’s Form 10-K for the year ended December 31, 1992).*
10.6	Registrant’s 1997 Stock Option Plan (Incorporated by reference to Exhibit 10.14 to the Registrant’s Form 10-K for the year ended December 31, 1996).*
10.7	Amendment to the Employment Agreement executed September 16, 1999 between Keith H. Steinbruck and the Registrant effective as of December 15, 1999 (Incorporated by reference to Exhibit 10.20 to the Registrant’s Form 10-K for the year ended December 31, 1999).*
10.8	Amendment to the Employment Agreement executed September 16, 1999 between Neil R. Chinn and the Registrant effective as of December 15, 1999 (Incorporated by reference to Exhibit 10.22 to the Registrant’s Form 10-K for the year ended December 31, 1999).*
10.9	Amendment to the Employment Agreement executed September 16, 1999 between John R. Cobb and the Registrant effective as of December 15, 1999 (Incorporated by reference to Exhibit 10.23 to the Registrant’s Form 10-K for the year ended December 31, 1999).*
10.10	Employment Agreement effective February 12, 2001 between the Registrant and N. Michael Stickel (Incorporated by reference to Exhibit 10.1 to Registrant’s Form 10-Q for the quarter ended June 30, 2001).*
10.11	Form of Restricted Stock Agreement between the Registrant and N. Michael Stickel (Incorporated by reference to Exhibit 10.2 to Registrant’s Form 10-Q for the quarter ended June 30, 2001).*

63

Number	Description
10.12	Second Amendment to the Employment Agreement executed September 16, 1999 between the Registrant and John R. Cobb, Senior Vice President-Operations (Incorporated by reference to Exhibit 10.5 to Registrant’s Form 10-Q for the quarter ended September 30, 2001).*
10.13	Second Amendment to the Employment Agreement executed September 16, 1999 between the Registrant and Keith H. Steinbruck, Vice President Technical Director (Incorporated by reference to Exhibit 10.6 to Registrant’s Form 10-Q for the quarter ended September 30, 2001).*
10.14	Second Amendment to the Employment Agreement executed September 16, 1999 between the Registrant, and Neil R. Chinn, Vice President of Human Resources (Incorporated by reference to Exhibit 10.7 to Registrant’s Form 10-Q for the quarter ended September 30, 2001).*
10.15	Lease Agreement, dated as of February 28, 2002, between PWE (MULTI) QRS 14-85, Inc., as Landlord, and the Registrant, as Tenant (Incorporated by reference to Exhibit 10.1 to Registrant’s Form 8-K filed March 19, 2002).
10.16	Warrant Agreement to purchase 120,000 shares of stock issued to Corporate Property Associates 14 Incorporated dated February 28, 2002 (Incorporated by reference to Exhibit 10.3 to Registrant’s Form 10-Q for the quarter ended March 31, 2002).
10.17	First Amendment to Lease Agreement, dated June 7, 2002 by and between PWE (MULTI) QRS 12-85 Inc., and the Registrant (Incorporated by reference to Exhibit 10.3 to Registrant’s Form 10-Q for the quarter ended June 30, 2002).
10.18	Second Amendment to Lease Agreement, dated March 10, 2003 by and between PWE (MULTI) QRS 14-85 Inc. and the Registrant (Incorporated by reference to Exhibit 10.1 to Registrant’s Form 10-Q for the quarter ended March 31, 2003).
10.19	Lease Agreement, dated as of March 26, 2004 between 406 22nd, LLC, a Minnesota limited liability company, and Damaras Hoppenspirger as landlord, and the Registrant as tenant (Incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended March 31, 2004).
10.20	Management Service Agreement between Spell Capital Partners, LLC and the Registrant dated January 1, 2004 (Incorporated by reference to Exhibit 10.4 to the Registrant’s Form 10-Q for the quarter ended March 31, 2004).
10.21	Landlord Covenant Waiver dated March 30, 2004, by and between PWE (MULTI) QRS 14-85 Inc. and the Registrant dated March 30, 2004 (Incorporated by reference to Exhibit 10.5 to the Registrant’s Form 10-Q for the quarter ended March 31, 2004).
10.22	Lease Agreement dated April 1, 2004 between Continental Properties, LLC a Minnesota limited liability company and PW Poly, Inc. as tenant (Incorporated by reference to Exhibit 10.7 to the Registrant’s Form 10-Q for the quarter ended June 30, 2004).
10.23	Lease Agreement dated April 1, 2004 between Continental Properties, LLC and PW Poly, Inc. as tenant (Incorporated by reference to Exhibit 10.8 to the Registrant’s Form 10-Q for the quarter ended June 30, 2004).
10.24	Contribution and Membership Interest Purchase Agreement dated September 1, 2004 among Uponor Aldyl Company, Inc., Uponor North American, Inc., Uponor Aldyl Holding Company, LLC and PW Poly Corp (Incorporated by reference to Exhibit 10.9 to the Registrant’s Form 10-Q for the quarter ended September 30, 2004).
10.25	Lease dated September 27, 2004 between Uponor Aldyl Company, Inc. as Landlord and PW Poly Corp. as Tenant (Incorporated by reference to Exhibit 10.11 to the Registrant’s Form 10-Q for the quarter ended September 30, 2004).
10.26	Third Amendment to Lease Agreement dated October 25, 2004 between PWE (MULTI) QRS 14-85 INC, and the Registrant (Incorporated by reference to Exhibit 10.56 to the Registrant’s Form 10-K for the year ended December 31, 2004).
10.27	PW Eagle Top-Hat Plan (Restated January 1, 2005).**
10.28	PW Eagle Top-Hat Plan Amendment No. 1, dated January 25, 2007.**

64

Number	Description
10.29	Amended and Restated PVC Resin Supply Agreement dated February 1, 2005 (Incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended March 31, 2005).
10.30	First Amendment to Senior Subordinated Note Purchase Agreement and Junior Subordinated Note Purchase Agreement between the Registrant and Churchill Capital Partners IV, L.P., dated March 15, 2005 (Incorporated by reference to Exhibit 10.3 to the Registrant’s Form 10-Q for the quarter ended March 31, 2005).
10.31	First Amendment to Credit and Security Agreement and Waiver of Defaults between USPoly Company and Wells Fargo Business Credit, Inc., dated March 10, 2005 (Incorporated by reference to Exhibit 10.4 to the Registrant’s Form 10-Q for the quarter ended March 31, 2005).
10.32	First Amendment to Subordination Agreement between Wells Fargo Business Credit, Inc., Medallion Capital, Inc., USPoly Company, and Spell Capital Partners, dated March 10, 2005 (Incorporated by reference to Exhibit 10.5 to the Registrant’s Form 10-Q for the quarter ended March 31, 2005).
10.33	Warrant issued to Adizes USA, dated September 30, 2005 (Incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended September 30, 2005).
10.34	Second Amendment to Fourth Amended and Restated Loan and Security Agreement and First Amendment to Subordination Agreement, dated September 30, 2005, among the Company, Bank of America, N.A. and Churchill Capital Partners IV, L.P. (Incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-Q for the quarter ended September 30, 2005).
10.35	Common Stock and Warrant Purchase Agreement, dated December 5, 2005 (Incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed December 9, 2005).
10.36	Fifth Amended and Restated Loan and Security Agreement, dated May 3, 2006 between the Company and Fleet Capital Corporation.**
10.37	Agreement, dated April 21, 2006, by and among the Company, Pirate Capital LLC, and Jolly Roger Fund LP, Jolly Roger Offshore Fund LTD, and Jolly Roger Activist Portfolio Company LTD (Incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed April 26, 2006).
10.38	Agreement, dated April 21, 2006, by and between the Company and Caxton International Limited (Incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed April 26, 2006).
10.39	Fifth Amended Loan and Security Agreement, dated April 27, 2006, between the Company, USPoly Company and Bank of America, National Association (Incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed May 2, 2006).
10.40	PW Eagle, Inc. Director Compensation Plan* (Incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed May 31, 2006).
10.41	Form of Change in Control Agreement between the Company and certain of its executive officers (Incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed November 21, 2006).*
10.42	PW Eagle, Inc. Retention Bonus Plan (Incorporated by reference to Exhibit 10.2 to the Registrant’s Form 8-K filed November 21, 2006).*
21	List of Subsidiaries of the Registrant: USPoly Company, LLC (State of Organization: Minnesota).
23.1	Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm. **
23.2	Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm. **
24	Power of Attorney from certain directors and officers – see “Signatures” on signature page of this Form 10-K.

65

Number	Description
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. **
31.2	Certification of Chief Financial Officer and Treasurer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. **
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. **
32.2	Certification of Chief Financial Officer and Treasurer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. **

* Compensatory plan or arrangement

** Filed herewith

66

EX-3.1

EXHIBIT 3.1

ARTICLES OF CORRECTION

OF

RESTATED ARTICLES OF INCORPORATION

OF

PW EAGLE, INC.

Pursuant to the provisions of Minnesota Statutes, Section 5.16, the Restated Articles of Incorporation of PW Eagle, Inc. filed with the Secretary of State of the State of Minnesota on December 5, 2006 which set forth the incorrect number of authorized and undesignated shares in Section 3.1 are hereby corrected to show Section 3.1 as follows:

3.1) Authorized Shares; Establishment of Classes and Series. The aggregate number of shares the corporation has authority to issue shall be 49,990,000 shares, which shall have a par value of $.01 per share solely for the purpose of a statute or regulation imposing a tax or fee based upon the capitalization of the corporation, and which shall consist of 30,000,000 common shares and 19,990,000 undesignated shares, of which 2,000,000 shares are designated as Series A preferred stock and 3,500,000 shares are designated as Class B common stock. The Board of Directors of the corporation is authorized to establish from the remaining undesignated shares, by resolution adopted and filed in the manner provided by law, one or more classes or series of shares, to designate each such class or series (which may include but is not limited to designation as additional common shares), and to fix the relative rights and preferences of each such class or series.

I swear that the foregoing is true and accurate and that I have the authority to sign this document on behalf of the Company.

Dated: February 6, 2007	/s/ Scott Long
	Scott Long, Secretary

- 1 -

RESTATED ARTICLES OF INCORPORATION

OF

PW EAGLE, INC.

ARTICLE 1 – NAME

1.1) The name of the corporation shall be PW Eagle, Inc.

ARTICLE 2 – REGISTERED OFFICE

2.1) The registered office of the corporation is located at Capitol Professional Building, 590 Park Street, Suite 6, St. Paul, MN 55103.

ARTICLE 3 – CAPITAL STOCK

3.1) Authorized Shares; Establishment of Classes and Series. The aggregate number of shares the corporation has authority to issue shall be 50,000,000 shares, which shall have a par value of $.01 per share solely for the purpose of a statute or regulation imposing a tax or fee based upon the capitalization of the corporation, and which shall consist of 30,000,000 common shares and 20,000,000 undesignated shares. The Board of Directors of the corporation is authorized to establish from the undesignated shares, by resolution adopted and filed in the manner provided by law, one or more classes or series of shares, to designate each such class or series (which may include but is not limited to designation as additional common shares), and to fix the relative rights and preferences of each such class or series.

3.2) Issuance of Shares. The Board of Directors of the corporation is authorized from time to time to accept subscriptions for, issue, sell and deliver shares of any class or series of the corporation to such persons, at such times and upon such terms and conditions as the Board shall determine, valuing all nonmonetary consideration and establishing a price in money or other consideration, or a minimum price, or a general formula or method by which the price will be determined.

3.3) Issuance of Rights to Purchase Shares. The Board of Directors is further authorized from time to time to grant and issues rights to subscribe for, purchase, exchange securities for, or convert securities into, shares of the corporation of any class or series, and to fix the terms, provisions and conditions of such rights, including the exchange or conversion basis or the price at which such shares may be purchased or subscribed for.

3.4) Issuance of Shares to Holders of Another Class or Series. The Board is further authorized to issue shares of one class or series to holders of that class or series or to holders of another class or series to effectuate share dividends or splits.

- 2 -

ARTICLE 4 – RIGHTS OF SHAREHOLDERS

4.1) No Preemptive Rights. No shares of any class or series of the corporation shall entitle the holders to any preemptive rights to subscribe for or purchase additional shares of that class or series or any other class or series of the corporation now or hereafter authorized or issued.

4.2) No Cumulative Voting Rights. There shall be no cumulative voting by the shareholders of the corporation.

ARTICLE 5 – DIRECTORS

5.1) Written Action by Directors. Any action required or permitted to be taken at a Board meeting may be taken by written action signed by all of the directors.

ARTICLE 6 – MERGER, EXCHANGE, SALE OF ASSETS AND DISSOLUTION

6.1) Where approval of shareholders is required by law, the affirmative vote of the holders of at least a majority of the voting power of all shares entitled to vote shall be required to authorize the corporation (i) to merge into or with one or more other corporations, (ii) to exchange its shares for shares of one or more other corporations, (iii) to sell, lease, transfer or otherwise dispose of all or substantially all of its property and assets, including its good will, or (iv) to commence voluntary dissolution.

ARTICLE 7 – AMENDMENT OF ARTICLES OF INCORPORATION

7.1) After the issuance of shares by the corporation, any provision contained in these Articles of Incorporation may be amended, altered, changed or repealed by the affirmative vote of the holders of at least a majority of the voting power of the shares present and entitled to vote at a duly held meeting or such greater percentage as may be otherwise prescribed by the laws of the State of Minnesota.

ARTICLE 8 – LIMITATION OF DIRECTOR LIABILITY

8.1) To the fullest extent permitted by Chapter 302A, Minnesota Statutes, as the same exists or may hereafter be amended, a director of this corporation shall not be personally liable to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director.

- 3 -

PW EAGLE, INC.

DESIGNATION OF SERIES A 7% CONVERTIBLE PREFERRED STOCK

2,000,000 shares of the corporation’s undesignated shares shall be designated as Series A 7% Convertible Preferred Stock. The rights and preferences of the Series A 7% Convertible Preferred Stock (the “Series A Shares”) shall be as follows:

(a) Dividends. The holders of the Series A Shares shall be entitled to receive out of any funds at any time legally available for the declaration of dividends, when and as declared by the Board of Directors, cash dividends at the rate of 7% of the liquidation payment provided in subparagraph (c) hereof per annum per share, such dividends to be payable quarterly each March 31, June 30, September 30 and December 31, provided that the first dividend shall not be payable until March 31, 1994. Dividends on shares of the Series A Shares shall on the date they are issued be cumulative, whether or not earned. In no event shall any dividend be paid or declared, nor shall any distribution be made on the corporation’s Common Stock, nor shall any Common Stock be purchased, redeemed or otherwise acquired by the corporation for value, unless all dividends on the Series A Shares for all past periods shall have been paid or declared and a sum sufficient for the payment thereof set apart for payment.

(b) Voting. Each holder of Series A Shares will have the right to vote for all shareowner purposes the number of votes that is equal to the number of shares of Common Stock into which such holder’s Series A Shares are then convertible, as hereinafter provided. Except as otherwise required by law, the holders of Series A Shares shall vote together with the holders of Common Stock as though the Series A Shares and Common Stock were a single class.

(c) Liquidation. In the event of any liquidation, dissolution or winding-up of the corporation, whether voluntary or involuntary, before any other distribution or payment is made to the holders of the Common Stock, the holders of Series A Shares will be entitled to receive, out of the assets of the corporation legally available therefore, a liquidation payment in cash for Series A Share equal to $2.00 (subject to equitable adjustment in the event of any stock dividend, split, distribution or combination with respect to Series A Shares). In addition to such amount, a further amount equal to the dividends accumulated and unpaid thereon to the date of such liquidation payment will also be paid. At any time prior to the making of a liquidation payment, a holder of the Series A Shares made convert, at the holder’s option, the holder’s Series A Shares into shares of Common Stock in accordance with the provisions set forth below. If upon any liquidation or dissolution of the corporation, the assets available for distribution are insufficient to pay the holders of all outstanding Series A Shares such amount per Series A Share, the holders of Series A Shares will share pro rata in any distribution of assets.

(d) Redemption. Neither the holders of Series A Shares nor the corporation will have the right to require the redemption of all or any part of the outstanding Series A Shares.

- 4 -

(e) Conversion Right. At the option of the holder thereof, each Series A Shares will be convertible into a number of fully paid and nonassessable shares (calculated as to each conversion to the nearest 1/100^th of s share) of Common Stock of the corporation equal to the number obtained by dividing $2.00 by the Conversion Price (determined as hereinafter provided) in effect at the time of conversion. The initial price at which shares of Common Stock will be delivered upon conversion of a Series A Share (the “Conversion Price”) will be $2.00 per share of Common Stock and, accordingly, the initial conversion rate shall be one share of Common Stock for each Series A Share. The initial Conversion Price will be subject to adjustment from time to time in certain instances as hereinafter provided. The following provisions will govern such right of conversion:

(1) Certificates. In order to convert Series A Shares into shares of Common Stock of the corporation, the holder thereof will surrender at the office of the corporation (or at such other office or offices, if any, as the Board of Directors may designate), the certificate or certificates therefore, duly endorsed to the corporation or in blank. Further, the holder will give written notice to the corporation at such office that such holder elects to convert such shares. Series A Shares will be deemed to have been converted immediately prior to the close of business on the day of the surrender of such shares for conversion as herein provided. The person entitled to receive the shares of Common Stock of the corporation issuable upon such conversion will be treated for all purposes as the record holder of such shares of Common Stock at such time. As promptly as practicable on or after the conversion date, the corporation will issue and deliver, or cause to be issued and delivered, at such office a certificate or certificates for the number of shares of Common Stock of the corporation issuable upon conversion.

(2) Adjustment to Conversion Price. The Conversion Price will be subject to adjustment from time to time as hereinafter provided. Upon each adjustment of the Conversion price each holder of Series A Shares will thereafter be entitled to receive the number of shares of Common Stock of the corporation obtained by dividing $2.00 by the Conversion Price after the adjustment.

(3) Subdivision of Shares. In case the corporation at any time subdivides its outstanding shares of Common Stock into a greater number of shares, whether by stock split, stock dividend or otherwise, the Conversion Price in effect immediately prior to such Subdivision will be proportionately reduced. Conversely, in case the outstanding shares of Common Stock of the corporation are combined into a smaller number of shares, whether by reverse stock split or otherwise, the Conversion Price in effect immediately prior to such combination will be proportionately increased.

(4) Reorganizations; Mergers, Etc. If any capital reorganization or reclassification of the capital stock of the corporation, or consolidation or merger of the corporation with another corporation, or the sale of all or substantially all of its assets to another corporation is effected in such a way that holders of the Common Stock are entitled to receive stock,

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securities or assets with respect to or in exchange for Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provision will be made whereby the holders of Series A Shares will thereafter have the right to receive (upon the basis and the terms and conditions specified herein) upon the conversion of Series A Shares, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of Common Stock equal to the number of shares of such stock immediately theretofore receivable upon the conversion of the Series A Shares had such reorganization, reclassification, consolidation, merger or sale not taken place. In any such case, appropriate provision will be made with respect to the rights and interests of the holders of Series A Shares to the end that the provisions hereof (including, without limitation, provisions for adjustments of the Conversion Price and of the number of shares receivable upon the conversion of Series A Shares) are thereafter applicable, as nearly as may be in relation to any shares of stock, securities or assets thereafter receivable upon the conversion of Series A Shares. The corporation will not effect any such consolidation, merger or sale, unless prior to the consummation thereof the successor corporation (if other than the corporation) resulting from such consolidation or merger, or the corporation purchasing such assets, assumes by written instrument executed and mailed to the holders of Series A Shares, as the last addresses of such holders appearing on the books of the corporation, the obligation to deliver to such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to receive.

(5) Adjustment Notices. Upon any adjustment of the Conversion Price, then and in each case the corporation will give written notice thereof, by first class mail, postage prepaid, addressed to the holders of Series A Shares at the addresses of such holders as shown on the books of the corporation. Such notice will state the Conversion Price resulting from such adjustment and the increase or decrease, if any, and the number of shares receivable at such price upon the conversion of Series A Shares. Such notice will set forth in reasonable detail the method of calculation and the facts upon which such calculation is based.

(6) Prior Notice of Certain Events. In case at any time:

(A) the corporation shall pay any dividends payable in stock upon its shares of Common Stock, or makes any distribution other than cash distributions to the holders of its shares of Common Stock;

(B) the corporation offers for subscription pro rata to the holders of its Common Stock any additional shares of stock of any class or other rights;

(C) there is any capital reorganization, or reclassification of the capital stock of the corporation, or consolidation or merger of the corporation with, or sale of all or substantially all of its assets to, another corporation; or

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(D) there is a voluntary or involuntary dissolution, liquidation or winding up of the corporation;

then, in any one or more of such cases, the corporation will give written notice, by first class mail, postage prepaid, addressed to the holders of Series A Shares at the addresses of such holders as shown on the books of the corporation, of the date on which (i) the books of the corporation will close or a record will be taken for such dividend, distribution or subscription rights, or (ii) such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up will take place, as the case may be. Such notice will also specify the date as of which the holders of Common Stock of record will participate in such dividend, distribution or subscription rights, or will be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, or winding up, as the case may be. Such written notice will be given at least 20 days prior to the action in question and not less than 20 days prior to the record date or the date on which the corporation’s transfer books are closed with respect thereto. At any time prior to such date the holders of the Series A Shares, at their option, may convert their Series A Shares into shares of Common Stock in accordance with the terms hereof.

(7) Common Stock. As used in this Section 3.4(e), the term “Common Stock” means and includes the corporation’s presently authorized shares of Common Stock. The term “Common Stock” also includes any capital stock of any class of the corporation hereafter authorized which is not limited to a fixed amount or percentage in respect of the rights of the holders thereof to participate in dividends or in the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the corporation; provided that the shares receivable pursuant to conversion of Series A Shares will include shares designated as Common Stock of the corporation as of the date of issuance of such Series A Shares.

(8) Factional Shares. The corporation shall not be required to issue fractional shares of Common Stock upon conversion of the Series A Shares. If the corporation does not issue fractional shares, the corporation will pay a cash amount equal to the same fraction of the Market Price per share of Common Stock as of the close of business on the day of conversion. As used in this Section (e), “Market Price” means the average of the high and low prices of the Common Stock sales on all exchanges on which the Common Stock may at the time be listed. If there will have been no sales on any such exchange on any such day, the Market Price means the average of the bid and asked prices at the end of such day. If the Common Stock is not so listed, the Market Price means the average of the bid and asked prices at the end of the day in the over-the-counter market, the Market Price will be deemed to be the higher of (i) the book value thereof as determined by any firm or independent public accountants of recognized standing selected by the Board of Directors of the corporation as of the last day of any month ending with 60 days preceding the date as of which the determination is to be made, or (ii) the corporation as of or date which is within 15 days of the date as of which the determination is to be made.

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(f) Mandatory Conversion. The Series A Shares may be converted into shares of Common Stock of the corporation upon five days notice by the Board of Directors of the corporation to the holders of the Series A Shares at any time after the Common Stock of the corporation trades in a public market for 20 consecutive trading days at an average of the bid and asked prices greater than $4.00 per share. Each holder of the former Series A Shares so converted will be entitled to receive the full number of shares of Common Stock into which such Series A Shares held by such holder would have been converted if such holder had exercised such holder’s conversion prior to the conversion and the corporation shall forthwith issue and deliver to such holder the certificate(s) therefore. Upon such conversion, each holder of Series A Shares shall forthwith surrender such holder’s certificate(s) for such former Series A Shares.

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PW EAGLE, INC.

DESIGNATION OF CLASS B COMMON STOCK

As used in this Designation of Class B Common Stock, the term “Common Stock” shall mean the corporation’s presently authorized shares of common stock, $.01 par value.

(a) Designation and Number. The class of common stock established hereby shall be designated as Class B Common Stock (herein called the “Class B Common Stock”) which shall have a par value of $.01 per share and the authorized number of the shares of such class shall be 3,500,000, which authorized number shall not be subject to increase. Except as otherwise provided by law and except as stated below, all shares of Class B Common Stock shall be identical in all respects and have equal rights and privileges including without limitation the right to share ratably, together with all other shares of Common Stock, on a per share basis (i) in such cash, stock, or other dividends and distributions as from time to time may be declared by the Board of Directors of the corporation and (ii) in all distributions in assets or funds of the corporation upon the voluntary or involuntary liquidation, dissolution or winding up of the affairs of the corporation.

(b) Voting Rights. Except as otherwise required by law, the holders of Class B Common Stock shall not be entitled to vote on any matter submitted to stockholders for a vote.

(c) Conversion. Each holder of Class B Common Stock shall have the right at any time and from time to time to convert any or all shares of Class B Common Stock registered in the name of such holder into an equal number of shares of Common Stock.

(d) Mergers, Consolidations, Sales. In the case of any consolidation or merger of the corporation with another entity, or any reorganization or reclassification of the Common Stock or other equity securities of the corporation, then, as a condition of such consolidation, merger, reorganization or reclassification, lawful and adequate provision shall be made whereby the holders of the Class B Common Stock shall thereafter have the right to receive upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock immediately theretofore receivable hereunder, such shares of stock, securities or assets as may (by virtue of such consolidation, merger, sale, reorganization or reclassification) be issued or payable with respect to or in exchange for a number of outstanding shares of Common Stock equal to the number of shares of Common Stock immediately theretofore so receivable hereunder had such consolidation, merger, sale, reorganization or reclassification not taken place, and in any such case appropriate provisions shall be made with respect to the rights and interests of the holders of the Class B Common Stock to the end that the provisions hereof shall thereafter be applicable as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the conversion of such Class B Common Stock.

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EX-10.27

Exhibit 10.27

PW EAGLE TOP-HAT PLAN

Effective January 1, 2000

Restated January 1, 2005

TABLE OF CONTENTS

		Page
BACKGROUND		1
ARTICLE I	Definitions	2
1.1        General Rules		2
1.2        Special Rules		5
ARTICLE II	Eligibility and Participation	5
2.1        Eligibility		5
2.2        Termination of Participation		6
ARTICLE III	Contributions	6
3.1        Participant/Director Contributions		6
3.2        Company Matching Contributions		7
3.3        Bonus Deferral		7
3.4        Company Supplemental Contribution		7
3.5        Company Discretionary Pension Contribution		8
3.6        Accounts		8
ARTICLE IV	Vesting	9
4.1        Determination of Vesting		9
ARTICLE V	Distribution of Accounts	9
5.1        Form of Distributions		9
5.2        Commencement of Distributions		10
5.3        Other Distributions		10
5.4        Special Tax Payment		10
5.5        Designation of Beneficiary		11
5.6        Special Rule for Key Employees		11
ARTICLE VI	Administration of the Plan	12
6.1        Establishment of Committee		12
6.2        Meetings		12
6.3        Quorum		12
6.4        Powers and Duties of Committee		12
6.5        Fiduciary Status		13

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6.6        Liability; Indemnification		13
6.7        Conflict of Interest		13
6.8        Information From Company		13
6.9        Information to Participant or Director		14
6.10      Compensation		14
ARTICLE VII	Miscellaneous	14
7.1        Benefits Payable by Company		14
7.2        Amendment or Termination		15
7.3        Relationship to Other Plans		15
7.4        Withholding		16
7.5        Status of Employment		16
7.6        Payment to Minor and Incompetents		16
7.7        Inalienability of Benefits		16
7.8        Claims Procedure		17
7.9        Severability		20
7.10      Governing Law		20
7.11      Transfers from Other Plan or Arrangement		20

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PW EAGLE TOP-HAT PLAN

BACKGROUND

Effective as of January 1, 2000, Eagle Pacific Industries, Inc. (the “Company”) established the PWEagle Top-Hat Plan (the “Plan”) as a successor to the Mitsubishi Chemical America, Inc. Top-Hat (the “Mitsubishi Plan”). Benefits payable to participants who were employed by Pacific Western Extruded Plastics Company (“PWPipe”) on September 20, 1999, and who were participants in the Mitsubishi Plan on December 31, 1999, were transferred to and paid under this Plan. Effective as of September 30, 2004, the PWEagle Deferred Compensation Plan (the “Deferred Compensation Plan”) merged with this Plan, and all benefits payable under the Deferred Compensation Plan were transferred to and paid under this Plan. The Plan has been amended and restated, generally effective January 1, 2005, to comply with Section 409A of the Internal Revenue Code of 1986, as amended, and the notices, regulations and other guidance of general applicability issued thereunder, and, effective June 1, 2006, to permit nonemployee directors to defer the receipt of their board fees.

The Plan will continue to (i) provide deferred compensation for a select group of management or highly compensated employees employed by the Company or its Affiliates; (ii) provide certain retirement benefits that would have been provided under the PWEagle Employees’ Savings Plan (the “401(k) Plan”) but for the amendment to Code Section 401(a)(17) by the Omnibus Budget Reconciliation Act of 1993, as amended; (iii) provide a mechanism for deferring all or a portion of any annual bonus payment; and (iv) provide a discretionary contribution. The Company intends the Plan to be an unfunded, nonqualified benefit plan as described in Sections 201(2), 301(a)(3), and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). The Plan shall be administered and construed so as to effectuate this intent. The Company may in its sole discretion establish a “rabbi” trust” trust in connection with this Plan.

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ARTICLE I

Definitions

1.1 General Rules

Unless otherwise required by the context, the following terms shall have the following meanings.

“Account” means the account (including each subaccount) established in the name of each Participant or Director pursuant to Section 3.6.

“Affiliate” means any corporation, partnership, or other entity (other than the Company) which is (i) a member of a “controlled group of corporations” as that term is defined in Code § 414(b) of which the Company is a member; (ii) a member of any trade or business under “common control” (as that term is defined in Code § 414(c)) with the Company; or (iii) a Participating Affiliate (as defined in the 401(k) Plan) in the 401(k) Plan.

“Beneficiary” means the person, including, without limitation, a trust, designated by a Participant or Director, in accordance with the provisions of Section 5.5 hereof, to receive any payment of Plan benefits due after the Participant’s or Director’s death.

“Board of Directors” means the Board of Directors of the Company as constituted from time to time.

“Code” means the Internal Revenue Code of 1986, as amended from time to time.

“Committee” means the committee appointed by the Board of Directors who are responsible for the administration of the Plan in accordance with Article VI.

“Company” means PW Eagle, Inc., a Minnesota corporation, and any successor thereto.

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“Compensation” means the total cash remuneration otherwise payable to the Participant but for his or her deferral election hereunder excluding any amounts payable under this Plan or any other plan sponsored by the Company or Affiliate. With respect to a Director, “Compensation” shall mean the board fees paid to such Director.

“Director” means a nonemployee director of the Board of Directors of the Company or an Affiliate.

“Disability” means a medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of at least twelve (12) months, which results in the Participant’s or Director’s qualification for benefits under the Federal Social Security Act, whether or not such Participant or Director actually receives such benefits.

“Effective Date” means January 1, 2000, which was the original effective date of the Plan. Except as otherwise provided herein, the Effective Date of this restatement is January 1, 2005.

“401(k) Plan” shall mean the PW Eagle Employees’ Savings Plan, as amended from time to time.

“Fair Market Value” means (i) if the Stock is listed on the Nasdaq National Market, Nasdaq SmallCap Market, or an established stock exchange, the price of such stock at the close of the regular trading session of such market or exchange on the Valuation Date, as reported by The Wall Street Journal or a comparable reporting service, or, if no sale of such stock shall have occurred on such Valuation Date, on the next preceding day on which there was a sale of stock; (ii) if the Stock is not so listed on the Nasdaq National Market, Nasdaq SmallCap Market, or an established stock exchange, the average of the closing “bid” and “asked” prices quoted by the OTC Bulletin Board, the National Quotation Bureau, or any comparable reporting

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service on the Valuation date or, if there are no quoted “bid” and “asked” prices on such date, on the next preceding Valuation Date for which there are such quotes; or (iii) if such stock is not publicly traded as of such Valuation Date, the per share value as determined by the Board of Directors.

“Participant” means an employee who has satisfied the eligibility conditions set forth in Section 2.1.

“Plan” means the PW Eagle Top-Hat Plan, as amended from time to time.

“Plan Year” means the calendar year.

“Separation from Service” means termination of employment with or termination as a Director of the Company and all Affiliates for any reason, including but not limited to voluntary resignation, termination by the Company (either with or without cause) or death. A Participant or Director shall not be deemed to have a Separation from Service while the Participant or Director is on military leave, sick leave or other bona fide leave of absence if the period of the leave does not exceed six (6) months or, if longer, the Participant’s right to reemployment with the Company or the Director’s right to reinstatement on the Board of Directors is provided either by statute or contract. If the period of leave exceeds six (6) months and the Participant’s right to reemployment or the Director’s right to reinstatement is not provided either by statute or contract, the Participant or Director shall be deemed to have a Separation from Service on the first day immediately following such six (6) month period.

“Stock” means the Company’s Common Stock.

“Unforeseen Emergency” means the Participant’s or Director’s severe financial hardship resulting from an illness or accident of the Participant, the Director or his or her spouse or dependents; loss of the Participant’s or Director’s property due to casualty (including the need to rebuild a home following damage to a home not otherwise covered by insurance such as from

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a natural disaster); or similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant or Director, including, but not limited to, imminent foreclosure or eviction from the Participant’s or Director’s primary residence, medical expenses, or funeral expenses. The determination of whether the Participant or Director is faced with an Unforeseen Emergency shall be based on the relevant facts and circumstances and shall be made in accordance with Code Section 409A and the regulations, notices and other guidance of general applicability issued thereunder.

“Valuation Date” means each day of the Plan Year during which the New York Stock Exchange is open for business.

1.2 Special Rules

Where applicable, words used in the masculine herein shall be read and construed in the feminine and words used in the feminine herein shall be read and construed in the masculine. Also, as used herein, singular pronouns shall include the plural and vice versa. Any reference to a “Section” or “Article” shall mean the indicated section or article of this Plan.

ARTICLE II

Eligibility and Participation

2.1 Eligibility

(a) Each employee of the Company or Affiliate shall be eligible to participate in the Plan if (i) he or she is one of the select group of management or highly compensated employees within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA; and (ii) he or she is designated as being eligible to participate in the Plan by the Company or Affiliate (such determination to be made annually), in accordance with the procedures established by the Committee.

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(b) Effective June 1, 2006, each Director of the Company or Affiliate shall be eligible to participate in the Plan.

2.2 Termination of Participation

(a) Once an individual becomes a Participant, he or she shall remain a Participant until the earlier of (i) the date a determination is made by the Company or Affiliate, in its sole discretion, that a Participant ceases to be eligible to participate in this Plan for any reason; or (ii) the date he or she receives all of the benefits to which he or she is entitled hereunder. The Account of a Participant, to the extent vested, shall be distributed to such Participant in accordance with the provisions in Article V.

(b) A Director shall remain eligible to participate in the Plan until the Director no longer serves as a member of the Board of Directors of the Company or Affiliate for any reason and the Director receives all of the benefits to which he or she is entitled hereunder.

ARTICLE III

Contributions

3.1 Participant/Director Contributions

Subject to such restrictions and limitations as the Committee may impose, each Participant or Director may elect to have the Company or Affiliate defer the receipt of all or a portion of his or her Compensation. Such election must be irrevocable and must be made prior to the later of (i) the first day of the Plan Year, and (ii) the 31st day after the Participant or Director becomes eligible to participate in the Plan. Such election shall apply only to Compensation earned for services performed after the date the election is filed with the Committee. Amounts so deferred shall be credited to the Participant’s or Director’s Account. Notwithstanding the foregoing, a Participant’s or Director’s election shall be immediately revoked if the Participant or Director receives a hardship distribution from the Company’s

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401(k) Plan. An election to defer Compensation under this Section 3.1 shall be made in accordance with such other requirements and procedures as may be established by the Committee from time to time.

3.2 Company Matching Contributions

The Company or Affiliate shall credit the Account of a Participant with a matching contribution equal to the difference between (i) 50% of the first 6% of such Participant’s Compensation contributed to this Plan pursuant to Section 3.1, up to a maximum of 3% of such Participant’s Compensation; and (ii) the matching contribution the Company or Affiliate makes to the 401(k) Plan on behalf of such Participant. In no event shall the matching contribution exceed the dollar limit set forth in Code Section 402(g) and Code Section 409A, as amended from time to time. Directors shall not be eligible for any matching contributions.

3.3 Bonus Deferral

Subject to such restrictions and limitations as the Committee may impose, each Participant may elect to have the Company or Affiliate defer the receipt of all or a portion of any bonus payment received from the Company or Affiliate. An election to defer a bonus payment under this Section 3.3 shall be made in accordance with the requirements of Code Section 409A and such other requirements or procedures established by the Committee. Directors shall not be eligible to make bonus deferrals.

3.4 Company Supplemental Contribution

The Company, in its sole discretion and upon the approval of the Board, may authorize that the Account of any Participant be credited by the Company or an Affiliate, as applicable, with a supplemental contribution based upon factors such as Company or business unit financial performance. Directors shall not be eligible for supplemental contributions.

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3.5 Company Discretionary Pension Contribution

The Company, in its sole discretion and upon the approval of the Board, may authorize that the Account of any Participant be credited by the Company or an Affiliate, as applicable, with a supplemental pension contribution. Directors shall not be eligible for supplemental pension contributions.

3.6 Accounts

(a) General. The Committee shall establish an Account for each Participant or Director. Each Account shall consist of separate subaccounts representing credits made in respect of Sections 3.1 through 3.5, respectively. A Participant’s or Director’s Account shall be (i) credited with amounts deferred by the Participant or Director pursuant to Sections 3.1 or 3.3 as of the date or dates such amounts would otherwise have become payable to such Participant or Director; (ii) credited with amounts contributed pursuant to Section 3.2 at such time and in such manner as matching contributions are made to the 401(k) Plan; (iii) credited with amounts contributed pursuant to Sections 3.4 or 3.5 at such time and in such manner as determined by the Company; (v) increased or decreased to reflect the experience of the Participant’s or Director’s investments, as described in Section 3.6(b); (vi) charged with any distributions made to the Participant or Director pursuant to Article V; and (vii) reduced, on a pro rata basis, by the amount of any Plan or Trust expense which the Company may, in its discretion, charge the Trust.

(b) Investment. Each Participant or Director shall be entitled to direct the manner in which such Participant’s or Director’s Account shall be deemed to be invested among any of the investment choices selected by the Committee. A Participant’s or Director’s election of a particular investment option shall be made in accordance with the procedures established by the Committee. If the Participant or Director directs that his or her Account

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should be deemed to be invested in Stock, the number of shares of Stock deemed credited to the Participant’s or Director’s Account shall be determined by dividing the dollar amount of that portion of the Participant’s Account that is deemed invested in Stock by the per share Fair Market Value of the Stock as of the Valuation Date coinciding with the date of the Participant’s or Director’s investment direction. As of each Valuation Date, and at such other times as may be required by the Plan, the value of the Participant’s or Director’s Account shall be adjusted for increases or decreases in the per share Fair Market Value of the Stock.

ARTICLE IV

Vesting

4.1 Determination of Vesting

A Participant’s Account balance attributable to deferrals and amounts credited under Sections 3.1 through 3.5, including any earnings thereon, shall be nonforfeitable at all times.

ARTICLE V

Distribution of Accounts

5.1 Form of Distributions

(a) The total balance of a Participant’s Account shall be distributed to the Participant (or, in the event of his or her death, to his or her Beneficiary) in a lump sum payment or in installment form over a period of time as elected by the Participant and subject to such rules as may be adopted by the Committee from time to time. Notwithstanding the foregoing, if the total balance of a Participant’s Account does not exceed $5,000 upon the date distributions would commence under Section 5.2, or if the Participant does not elect a form of distribution, the Participant’s Account shall be paid in a lump sum payment. Such payment(s) may be made in cash, in Stock or in any combination of cash and Stock as the Administrator, in its sole discretion, determines.

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(b) The total balance of a Director’s Account shall be distributed to the Director (or, in the event of his or her death, to his or her Beneficiary) in a lump sum payment. Such payment(s) may be made in cash, in Stock or in any combination of cash and Stock as the Administrator, in its sole discretion, determines.

5.2 Commencement of Distributions

Subject to Section 5.6, distributions under the Plan shall commence as soon as practicable following the earliest of (i) the date of the Participant’s or Director’s Separation from Service; (ii) the date specified by the Participant or Director, (iii) the Participant’s or Director’s death; or (iv) the date of the Participant’s or Director’s Disability. The Participant or Director may elect a new distribution date for his or her Account; provided, however, that such election must be made at least twelve (12) months prior to the original distribution date and must postpone payment for at least five (5) years after such original distribution date.

5.3 Other Distributions

The Company may, in its discretion and upon written application of the Participant or Director to the Committee, permit an earlier distribution of all or a portion of the then-current value of such Participant’s or Director’s vested Account due to an Unforeseen Emergency. The amount of any distribution for an Unforeseen Emergency shall be limited to the amount necessary to meet such Unforeseen Emergency.

5.4 Special Tax Payment

If it shall be determined by a final administrative decision of the Internal Revenue Service (which is not appealed by the Participant or the Director), by a final decision of a court of competent jurisdiction (which is not appealed by the Participant or the Director), or by counsel

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to the Company that the value of all or any part of the Participant’s or Director’s Account is includable in the income of the Participant or Director prior to the actual receipt of such amount due to a violation of Code Section 409A, the Company or Affiliate shall make a special payment to such Participant or Director from his or her Account, which shall, to that extent, discharge the Company’s or Affiliate’s obligations to make distributions to such Participant or Director under this Plan, in an amount equal to such Participant’s or Director’s estimated tax liabilities related to such inclusion and to the inclusion in income of such special payment; provided, however, that such special payment shall not exceed the then-current value of the Participant’s or Director’s Account.

5.5 Designation of Beneficiary

A Participant or Director may designate a beneficiary or beneficiaries to receive any amount due him or her hereunder after his or her death by executing a form prescribed by the Committee and delivering it to the Committee at any time prior to his or her death. A Participant or Director may revoke or change his or her beneficiary designation without the beneficiary’s consent by executing a new form and delivering it to the Committee at any time and from time to time prior to his or her death. If a Participant or Director shall have failed to designate a beneficiary, or if no such beneficiary shall survive the Participant or Director, then such amounts shall be paid to his or her spouse, if then living, or, if not, to his or her estate.

5.6 Special Rule for Key Employees.

Notwithstanding anything in this Article 5 to the contrary, if the Company determines that the Participant or Director is a “specified employee” as defined in Code Section 409A as of the date of the Participant’s or Director’s Separation from Service, payment of the Participant’s or Director’s Account shall not be made or commence earlier than the date that is six months after the date of the Participant’s or Director’s Separation from Service, but shall be made or commence during the calendar year following the year in which the Separation from Service occurs and within 30 days of the earliest possible date permitted under Code Section 409A.

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ARTICLE VI

Administration of the Plan

6.1 Establishment of Committee

The Committee shall be responsible for the management, operation and administration of the Plan.

6.2 Meetings

The Committee shall hold meetings upon such notice and at such place or places and at such intervals as it may from time to time determine; provided, however, that a meeting shall also be held upon written notice of at least ten (10) business days by any member of the Committee.

6.3 Quorum

A majority of the members of the Committee at any time in office shall constitute a quorum for the transaction of business. All resolutions or other actions taken by the Committee shall be by a vote of a majority of those present at a meeting of the Committee or without a meeting by an instrument in writing signed by a majority of the members of the Committee.

6.4 Powers and Duties of Committee

The Committee shall have such powers and duties as are specified in the Plan and such implied powers and duties as may be necessary to carry out the provisions of the Plan, including the power to delegate any of its administrative responsibilities hereunder as well as any powers and duties granted to the administrative committees under the 401(k) Plan including, without limitation, the discretionary authority to construe the Plan.

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6.5 Fiduciary Status

Neither the Committee nor its individual members shall be deemed to be a fiduciary with respect to the Plan.

6.6 Liability; Indemnification

No member of the Committee shall be directly or indirectly responsible or under any liability by reason of any action or default by him or her as a member of the Committee, or the exercise of or failure to exercise any power or discretion as such member, except for his or her own fraud or willful misconduct. No member of the Committee shall be liable in any way for the acts or defaults of any other member of the Committee, or any of its advisors, agents or representatives. To the extent permitted by law, the Company shall indemnify the members of the Committee from all claims for liability, loss or damage (including the payment of expenses in connection with the defense against any such claim) arising from any act or failure to act, except expenses and liabilities arising out of a Committee member’s own fraud or willful misconduct.

6.7 Conflict of Interest

No member of the Committee may act, vote or otherwise influence a decision of the Committee specifically relating to his or her benefits, if any, under this Plan.

6.8 Information From Company

The Company or Affiliate shall furnish to the Committee in writing all information the Company or Affiliate deems appropriate for the Committee to exercise its duties hereunder. Such information may include, but shall not be limited to, the names of all Participants, Directors, their Compensation and their dates of birth, employment, termination of employment, retirement or death.

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6.9 Information to Participant or Director

The Committee shall make available to each Participant, Director and Beneficiary for examination at the principal office of the Company (or at such other location as may be determined by the Committee), a copy of the Plan and such of its records, or copies thereof, as may pertain to any benefits of such Participant, Director or Beneficiary.

6.10 Compensation

Members of the Committee who are employees of the Company or Affiliate shall receive no compensation for their services rendered as members of the Committee. Any other members of the Committee may receive such reasonable compensation for their services as may be authorized from time to time by the Board of Directors and, except as otherwise provided in this Article, shall be entitled to receive their reasonable expenses incurred in administering the Plan.

ARTICLE VII

Miscellaneous

7.1 Benefits Payable by Company

All benefits payable under this Plan shall constitute an unfunded obligation of the Company or its Affiliates, as applicable. Payments shall be made, as due, from the general funds of the Company or its Affiliates, as applicable. The Company or its Affiliates, as applicable, at its option, may maintain one or more reserve accounts to reflect its obligations under the Plan and may make such investments as it may deem desirable to assist it in meeting such obligations. Any such investments shall be assets of the Company or its Affiliates, as applicable, subject to claims of its general creditors. No person eligible for a benefit under this Plan shall have any right, title, interest or claim either now or at any time in the future, in or to any specific asset, fund, reserve, account, insurance or annuity policy or contract, or other property of any kind whatever owned by the Company or its Affiliates, or in which the Company or its Affiliates may have any right, title, or interest now or at any time in the future.

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7.2 Amendment or Termination

The Company, acting through a writing executed by the Committee, reserves the right to amend, modify, suspend or terminate the Plan; provided, however, no such action by the Company shall adversely affect any of the rights to which a Participant, Director or Beneficiary was entitled immediately prior to such amendment, modification, suspension or termination. Notwithstanding the foregoing, the Company expressly reserves the right to amend the Plan to the extent necessary or desirable to comply with the requirements of the Code Section 409A and the regulations, notices and other guidance of general applicability issued thereunder without the consent of any Participant, Director or Beneficiary.

In the event the Board of Directors terminates the Plan, distribution of all Participants’ and Directors’ deferred compensation benefits shall be made within the time prescribed by and in accordance with Code Section 409A. Further, the Company shall terminate all deferred compensation arrangements required to be aggregated with this Plan under Code Section 409A, and shall not establish a new deferred compensation arrangement at any time within five (5) years following the date of the termination of this Plan if such new arrangement would be aggregated with this Plan under Code Section 409A.

7.3 Relationship to Other Plans

Any benefits accrued under this Plan are in addition to any and all benefits to which a Participant or a Director may otherwise be entitled under any other contract, arrangement or voluntary pension, profit sharing or other compensation arrangement of the Company or Affiliate, whether or not funded, and this Plan shall not affect or impair the rights or obligations of the Company, Affiliate or a Participant or Director under any other such contract, arrangement or voluntary pension, profit sharing or other compensation plan.

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7.4 Withholding

The Company or Affiliate retains the right to deduct and withhold from any payments made hereunder all sums that it may be required to deduct or withhold pursuant to any applicable statute, law, regulation or order of any jurisdiction whatsoever.

7.5 Status of Employment

Nothing herein contained shall be deemed (i) to give to any Participant the right to be retained in the employ of the Company or Affiliate; (ii) to affect the right of the Company or Affiliate to discipline, including but not limited by specification to discharge, any Participant at any time; (iii) to give the Company or Affiliate the right to require any Participant to remain in its employ; or (iv) to affect any Participant’s right to terminate his or her employment at any time. Further, nothing herein contained shall be deemed to give any Director the right to remain on the Board of Directors of the Company or any Affiliate.

7.6 Payment to Minor and Incompetents

If a Participant, Director or Beneficiary entitled to receive any benefits hereunder is a minor or is deemed by the Committee or is adjudged to be legally incapable of giving valid receipt and discharge for such benefits, such benefits will be paid to the duly appointed guardian of such minor or incompetent or to such other legally appointed person as the Committee might designate. Such payment shall, to the extent made, be deemed a complete discharge of any liability for such payment under the Plan.

7.7 Inalienability of Benefits

The right of any person to any benefit or payment under the Plan shall not be subject to voluntary or involuntary transfer, alienation or assignment and, to the fullest extent

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permitted by law, shall not be subject to attachment, execution, garnishment, sequestration or other legal or equitable process. In the event a person who is receiving or is entitled to receive benefits under the Plan attempts to assign, transfer or dispose of such right or if an attempt is made to subject said right to such process, such assignment, transfer or disposition shall be null and void.

7.8 Claims Procedure

(a) Claims Procedure. The Company has established a procedure for resolving any disputes or claims arising under the Plan. Unless otherwise established by the Company, the following is the claims procedure under the Plan:

(i) Filing and Denial of Claim. The Participant, Director or Beneficiary (hereinafter referred to in this section as the “Claimant”) may file a written claim with the Company requesting a benefit under the Plan or objecting to the determination of the benefits payable hereunder at any time prior to the expiration of 30 days subsequent to the date payment of benefits is to commence, or would commence if any benefits were payable. If the Company denies, in whole or in part, any claim so filed, notice of such denial shall be furnished in writing to the Claimant within 90 days after the Company’s receipt of the claim unless the Company determines that special circumstances require an extension of time for processing the claim, in which case the Company shall provide written notice of the extension to the Claimant prior to the expiration of the initial 90-day period. Such notice of extension shall describe the special circumstances requiring an extension of time and the date by which the Company expects to render the benefit determination, which date shall not be later than 90 days after the end of the initial 90-day period. The written denial shall state, in a manner calculated to be understood by the Claimant:

(A) The specific reasons for denial;

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(B) Specific references to applicable Plan provisions upon which the denial is based;

(C) A description of additional material or information necessary, if any, for the Claimant to perfect the claim and an explanation of why such material or information is necessary; and

(D) A description of the Plan’s review procedures and the time limits applicable to such procedures, including a statement of the Claimant’s right to bring a civil action under ERISA Section 502 following denial on review.

(ii) Review of Denial. In the event a claim for benefits is denied, in whole or in part, pursuant to the provisions under Section 7.8(a)(i) above, the Claimant or his or her authorized representative may request in writing, within 60 days of the Claimant’s receipt of the Company’s denial, a review of such denial. The Claimant may submit written comments, documents, records, and other information relating to his or her claim for benefits. The Claimant shall be provided, upon request and free of charge, reasonable access to and copies of all documents, records, and other information relevant to the Claimant’s claim for benefits. Such review shall consider all comments, documents, records, and other information submitted by the Claimant relating to the claim, regardless of what was reviewed and considered in the initial benefit determination. Except as otherwise provided in 29 C.F.R. § 2560.503-1(i)(1)(ii) (applicable when a committee or board of trustees is delegated authority to consider the claim and has regularly scheduled quarterly or more frequent meetings), the Company must provide to the Claimant, within 60 days after receipt of the Claimant’s request for review, a written decision of its disposition of the claim on review; provided, however, that if the Company determines that special circumstances (such as the need to hold a hearing) require an

18

extension of time for processing the claim on review, the Company shall provide written notice of the extension to the Claimant prior to the expiration of the initial 60-day period. Such notice of extension shall disclose the special circumstance and the date upon which the Company expects to render the determination, which date shall not be later than 60 days from the initial 60-day period. The Company may hold a hearing for the review of any claim if the Claimant so requests in the Claimant’s written request for review and if the Company, in its sole discretion, determines such a hearing is necessary due to the complexity of issues involved or the nature of the claim. The Company shall provide a Claimant with written notification of the Plan’s benefit determination on review. If the determination is adverse to the Claimant, the notification shall set forth, in a manner calculated to be understood by the Claimant:

(A) The specific reasons for denial on review;

(B) Specific references to applicable Plan provisions upon which the denial or review is based;

(C) A statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the Claimant’s claim for benefits; and

(D) A statement of the Claimant’s right to bring an action under ERISA Section 502(a).

(iii) Notice Periods and Legal Action. The Company shall inform the Claimant in writing, in a timely fashion, of any time limits with respect to filing claims, requests, denials, notices or decisions hereunder. If a Claimant fails to give proper notice or otherwise comply with the rules and procedures set forth under Section 7.8, such Claimant shall be barred from any further legal action, including arbitration proceedings, to contest any determination made under the Plan with respect to benefits.

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(iv) Interpretation. The provisions under Section 7.8 shall be interpreted in a manner that is consistent with 29 C.F.R. § 2560.503-1, as amended from time to time.

7.9 Severability

If any term or condition of the Plan shall be invalid or unenforceable to any extent or in any application, then the remainder of the Plan, with the exception of such invalid or unenforceable provision, shall not be affected thereby and shall continue in effect and application to its fullest extent.

7.10 Governing Law

Except to the extent preempted by federal law, the provisions of the Plan will be construed according to the laws of the State of Minnesota, without regard to its conflict of law provisions.

7.11 Transfers from Other Plan or Arrangement

The Company shall not accept transfers of funds held pursuant to any nonqualified deferred compensation plan or arrangement except for other nonqualified deferred compensation plans maintained by the Company.

IN WITNESS WHEREOF, PW Eagle, Inc. has caused this amended and restated Plan to be executed this      day of                     , 2006.

PW EAGLE, INC.

By:

And:

ATTEST:

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EX-10.28

EXHIBIT 10.28

AMENDMENT NO. 1

TO

PW EAGLE TOP-HAT PLAN

WHEREAS, the Board of Directors of PW Eagle, Inc. (the “Company”) previously adopted the PW Eagle Top-Hat Plan (the “Plan”), originally effective January 1, 2000, which Plan was amended and restated generally effective January 1, 2005; and

WHEREAS, pursuant to Section 7.2 of the Plan, the Compensation Committee of the Board of Directors has the authority to amend the Plan at any time; and

WHEREAS, the Board of Directors deems it necessary to amend the Plan, effective January 1, 2007, to permit the termination of the Plan in the event of a change of control transaction;

NOW, THEREFORE, RESOLVED, that the PW Eagle Top-Hat Plan be and it is hereby amended as follows:

1. Section 1.1 of Article 1 of the Plan is hereby amended by adding a new definition of “Change of Control,” which shall read as follows:

“ ‘Change of Control’ shall mean:

(a) The purchase or other acquisition by any one person, or more than one person acting as a group, of stock of the Company that, together with stock held by such person or group, constitutes more than 50% of the total combined value or total combined voting power of all classes of stock issued by the Company; provided, however, that if any one person or more than one person acting as a group is considered to own more than 50% of the total combined value or total combined voting power of such stock, the acquisition of additional stock by the same person or persons shall not be considered a Change of Control;

(b) A merger or consolidation to which the Company is a party if the individuals and entities who were shareholders of the Company immediately prior to the effective date of such merger or consolidation have, immediately following the effective date of such merger or consolidation, beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of less than fifty percent (50%) of the total combined voting power of all classes of securities issued by the surviving entity for the election of directors of the surviving corporation;

(c) Any one person, or more than one person acting as a group, acquires or has acquired during the twelve (12) month period ending on the date of the most recent acquisition by such person or persons, direct or indirect

beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of stock of the Company constituting more thirty-five percent (35%) or more of the total combined voting power of all classes of stock issued by the Company;

(d) The purchase or other acquisition by any one person, or more than one person acting as a group, of substantially all of the total gross value of the assets of the Company during the twelve-month period ending on the date of the most recent purchase or other acquisition by such person or persons. For purposes of this subsection (d), “gross value” means the value of the assets of the Company or the value of the assets being disposed of, as the case may be, determined without regard to any liabilities associated with such assets;

(e) A change in the composition of the Board of the Company at any time during any consecutive twelve (12) month period such that the “Continuity Directors” cease for any reason to constitute at least a fifty percent (50%) majority of the Board. For purposes of this event, “Continuity Directors” means those members of the Board who either:

(1) were directors at the beginning of such consecutive twelve (12) month period; or

(2) were elected by, or on the nomination or recommendation of, at least a two-thirds (2/3) majority of the then-existing Board of Directors.

In all cases, the determination of whether a Change of Control has occurred shall be made in accordance with Code Section 409A and the regulations, notices and other guidance of general applicability issued thereunder.”

2. Section 7.2 of Article 7 of the Plan is hereby amended in its entirety to read as follows:

“7.2 Amendment or Termination

(a) Amendment or Termination. The Company, acting through a writing executed by the Committee, reserves the right to amend, modify, suspend or terminate the Plan; provided, however, no such action by the Company shall adversely affect any of the rights to which a Participant, Director or Beneficiary was entitled immediately prior to such amendment, modification, suspension or termination. Notwithstanding the foregoing, the Company expressly reserves the right to amend the Plan to the extent necessary or desirable to comply with the requirements of the Code Section 409A and the regulations, notices and other guidance of general applicability issued thereunder without the consent of any Participant, Director or Beneficiary.

Except as otherwise provided in Section 7.2(b) below, in the event the Board of Directors terminates the Plan, distribution of all Participants’ and Directors’

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deferred compensation benefits shall be made within the time prescribed by and in accordance with Code Section 409A. Further, the Company shall terminate all deferred compensation arrangements required to be aggregated with this Plan under Code Section 409A, and shall not establish a new deferred compensation arrangement at any time within five (5) years following the date of the termination of this Plan if such new arrangement would be aggregated with this Plan under Code Section 409A.

(b) Change of Control Termination. The Company, acting through a writing executed by the Committee, reserves the right to terminate the Plan in the event of a Change of Control. Such termination shall occur not more than thirty (30) days prior to or nor more than twelve (12) months following the effective date of the Change of Control. Further, the Company shall terminate all deferred compensation arrangements required to be aggregated with this Plan under Code Section 409A, and distribution of all Participants’ and Directors’ deferred compensation benefits shall be made within the time prescribed by and in accordance with Code Section 409A.”

3. Except as expressly modified herein, all other provisions of the Plan shall remain in full force and effect.

IN WITNESS WHEREOF, the Company has caused this instrument to be executed as of this 25th day of January, 2007.

PW EAGLE, INC.
By	/s/ Neil R. Chinn
Its	Vice President

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EX-10.36

Exhibit 10.36

Execution Version

PW EAGLE, INC.,

AND

USPOLY COMPANY, LLC

AS CO-BORROWERS

FIFTH AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT

Dated: April 27, 2006

BANK OF AMERICA, N.A.,

Individually and as Agent for any Lender which is

or becomes a Party hereto

TABLE OF CONTENTS

		Page
SECTION 1.	CREDIT FACILITY	1
1.1	Loans.	1
1.2	Letters of Credit; LC Guaranties	4
SECTION 2.	INTEREST, FEES AND CHARGES	5
2.1	Interest.	5
2.2	Computation of Interest and Fees	5
2.3	Fee Letter	6
2.4	Letter of Credit Fees and LC Guaranty Fees	6
2.5	Unused Line Fee	6
2.6	Prepayment Fee	6
2.7	Audit Fees	7
2.8	Reimbursement of Expenses	7
2.9	Bank Charges	8
2.10	Collateral Protection Expenses; Appraisals	8
2.11	Payment of Charges	8
2.12	No Deductions	8
2.13	Increase of Aggregate Revolving Loan Commitments.	9
SECTION 3.	LOAN ADMINISTRATION	10
3.1	Manner of Borrowing Revolving Credit Loans/LIBOR Option	10
3.2	Payments	13
3.3	Mandatory and Optional Prepayments.	14
3.4	Application of Payments and Collections.	15
3.5	All Loans to Constitute One Obligation	16
3.6	Loan Account	16
3.7	Statements of Account	16
3.8	Increased Costs	16
3.9	Basis for Determining Interest Rate Inadequate	17
3.10	Sharing of Payments, Etc	18
SECTION 4.	TERM AND TERMINATION	18
4.1	Term of Agreement	18
4.2	Termination.	18
SECTION 5.	SECURITY INTERESTS	19
5.1	Security Interest in Collateral	19
5.2	Other Collateral.	20
5.3	Lien Perfection; Further Assurances	21
5.4	Lien on Realty	21
SECTION 6.	COLLATERAL ADMINISTRATION	22
6.1	General.	22

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6.2	Administration of Accounts.	23
6.3	Administration of Inventory	24
6.4	Administration of Equipment.	24
6.5	Payment of Charges	25
SECTION 7.	REPRESENTATIONS AND WARRANTIES	25
7.1	General Representations and Warranties	25
7.2	Continuous Nature of Representations and Warranties	32
7.3	Survival of Representations and Warranties	32
SECTION 8.	COVENANTS AND CONTINUING AGREEMENTS	32
8.1	Affirmative Covenants	32
8.2	Negative Covenants	35
8.3	Specific Financial Covenants	39
SECTION 9.	CONDITIONS PRECEDENT	39
9.1	Documentation	40
9.2	No Default	40
9.3	Other Conditions	40
9.4	No Litigation	40
9.5	Material Adverse Effect	40
9.6	Availability	40
9.7	Closing Fees	40
9.8	Environmental Matters	40
SECTION 10.	EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT	40
10.1	Events of Default	40
10.2	Acceleration of the Obligations	43
10.3	Other Remedies	43
10.4	Set Off and Sharing of Payments	44
10.5	Remedies Cumulative; No Waiver	45
SECTION 11.	AGENT	46
11.1	Authorization and Action	46
11.2	Agent’s Reliance, Etc	46
11.3	Bank of America and Affiliates	47
11.4	Lender Credit Decision	47
11.5	Indemnification	47
11.6	Rights and Remedies to be Exercised by Agent Only	48
11.7	Agency Provisions Relating to Collateral	48
11.8	Agent’s Right to Purchase Commitments	49
11.9	Right of Sale, Assignment, Participations	49
11.10	Amendment	51
11.11	Resignation of Agent; Appointment of Successor	51
11.12	Audit and Examination Reports; Disclaimer by Lenders	52
SECTION 12.	MISCELLANEOUS	52

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12.1	Power of Attorney	52
12.2	Indemnity	53
12.3	Sale of Interest	54
12.4	Severability	54
12.5	Successors and Assigns	54
12.6	Cumulative Effect; Conflict of Terms	54
12.7	Execution in Counterparts	54
12.8	Notice	54
12.9	Consent	55
12.10	Credit Inquiries	56
12.11	Time of Essence	56
12.12	Entire Agreement	56
12.13	Interpretation	56
12.14	Confidentiality	56
12.15	GOVERNING LAW; CONSENT TO FORUM	56
12.16	WAIVERS BY CO-BORROWERS	57
12.17	Advertisement	58
12.18	No Novation	58
12.19	Joint and Several Liability and Reimbursement	58
12.20	Defaulting Lender.	59

iii

FIFTH AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT

THIS FIFTH AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT is made as of this 27th day of April, 2006, by and among BANK OF AMERICA, N.A., a national banking association (“Bank of America”), with an office at One South Wacker Drive, Suite 3400, Chicago, Illinois 60606, individually as a Lender and as Agent (“Agent”) for itself and any other financial institution which is or becomes a party hereto (each such financial institution, including Bank of America, is referred to hereinafter individually as a “Lender” and collectively as “Lenders”), LENDERS, PW EAGLE, INC., a Minnesota corporation with its chief executive office and principal place of business at 1550 Valley River Drive, Eugene, Oregon 97401 (“Borrower”) and USPOLY COMPANY, LLC, a Minnesota limited liability company with its chief executive office and principal place of business at 7901 North Kickapoo Street, Shawnee, Oklahoma 74804 (“USPoly”). Borrower and USPoly are sometimes hereinafter referred to collectively as “Co-Borrowers” and individually as “Co-Borrower”. Capitalized terms used in this Agreement have the meanings assigned to them in Appendix A, General Definitions. Accounting terms not otherwise specifically defined herein shall be construed in accordance with GAAP consistently applied.

RECITALS

A. Borrower, Agent’s predecessor-in-interest, Fleet Capital Corporation, and certain Lenders, entered into a certain Fourth Amended and Restated Loan and Security Agreement dated as of October 25, 2004 (said Fourth Amended and Restated Loan and Security Agreement, as amended from time to time, is hereinafter referred to as the “Original Loan Agreement”);

B. Co-Borrowers, Agent and Lenders wish to amend and restate the Original Loan Agreement pursuant to the terms hereof; and

C. Accordingly, in consideration of the mutual agreements contained herein, and subject to the terms and conditions hereof, the parties hereto agree as follows:

SECTION 1. CREDIT FACILITY

Subject to the terms and conditions of, and in reliance upon the representations and warranties made in, this Agreement and the other Loan Documents, Lenders, severally and not jointly, agree to make a Total Credit Facility available upon Co-Borrowers’ request therefor, as follows:

1.1 Loans.

1.1.1 Revolving Credit Loans. Each Lender agrees, severally and not jointly, for so long as no Default or Event of Default exists, to make Revolving Credit Loans to Co-Borrowers from time to time during the period from the date hereof to but not including the last day of the Term, as requested by Borrower, on its own behalf and on behalf of each other Co-Borrower, in the manner set forth in subsection 3.1.1 hereof, up to a maximum principal amount at any time outstanding equal to the lesser of (i) such Lender’s Revolving Loan Commitment minus the product of such Lender’s Revolving Loan Percentage and the LC Amount minus the product of such Lender’s Revolving Loan Percentage and reserves, if any and (ii) the product of

such Lender’s Revolving Loan Percentage and an amount equal to the Borrowing Base at such time minus the LC Amount minus reserves, if any. Agent shall have the right to establish reserves in such amounts, and with respect to such matters, as Agent shall deem necessary or appropriate in its sole judgment, or as it may from time to time be directed to do so by Majority Lenders, against the amount of Revolving Credit Loans which Borrower may otherwise request under this subsection 1.1.1, including, without limitation, with respect to (i) price adjustments, damages, unearned discounts, returned products or other matters for which credit memoranda are issued in the ordinary course of Co-Borrowers’ business; (ii) potential dilution related to Accounts; (iii) shrinkage, spoilage and obsolescence of Co-Borrowers’ Inventory; (iv) slow moving Inventory; (v) other sums chargeable against Co-Borrowers’ Loan Account as Revolving Credit Loans under any section of this Agreement; (vi) amounts owing by any Co-Borrower to any Person to the extent secured by a Lien on, or trust over, any Property of a Co-Borrower (other than Permitted Liens); (vii) amounts owing by Co-Borrowers in connection with Product Obligations; and (viii) such other specific events, conditions or contingencies as to which Agent, in its sole judgment or at the direction of Majority Lenders, determines reserves should be established from time to time hereunder. The Revolving Credit Loans shall be repayable in accordance with the terms of the Revolving Notes and shall be secured by all of the Collateral.

1.1.2 Overadvances. Insofar as Borrower may request, on its own behalf and on behalf of each other Co-Borrower and Agent or Majority Lenders (as provided below), may be willing in their sole and absolute discretion to make Revolving Credit Loans to Co-Borrowers at a time when the unpaid balance of Revolving Credit Loans plus the sum of the LC Amount plus the amount of LC Obligations that have not been reimbursed by Co-Borrowers or funded with a Revolving Credit Loan, plus reserves, exceeds, or would exceed with the making of any such Revolving Credit Loan, the Borrowing Base (and such Loan or Loans being herein referred to individually as an “Overadvance” and collectively, as “Overadvances”), Agent shall enter such Overadvances as debits in the Loan Account. All Overadvances shall be repaid on demand, shall be secured by the Collateral and shall bear interest as provided in this Agreement for Revolving Credit Loans generally. Any Overadvance made pursuant to the terms hereof shall be made by all Lenders ratably in accordance with their respective Revolving Loan Percentages. Overadvances in the aggregate amount of One Million Dollars ($1,000,000) or less may, unless a Default or Event of Default (other than an Event of Default resulting from the applicable Overadvance) has occurred and is continuing, be made in the sole and absolute discretion of Agent. Overadvances in an aggregate amount of more than One Million Dollars ($1,000,000) but less than Three Million Dollars ($3,000,000) may, unless a Default or an Event of Default (other than an Event of Default resulting from the Overadvance) has occurred and is continuing, be made in the sole and absolute discretion of the Majority Lenders. Overadvances in an aggregate amount of Three Million Dollars ($3,000,000) or more and Overadvances to be made after the occurrence and during the continuation of a Default or an Event of Default shall require the consent of all Lenders. The foregoing notwithstanding, in no event, unless otherwise consented to by all Lenders, (w) shall any Overadvances be outstanding for more than ninety (90) consecutive days, (x) after all outstanding Overadvances have been repaid, shall Agent or Lenders make any additional Overadvances unless sixty (60) days or more have expired since the last date on which any Overadvances were outstanding, (y) shall Overadvances be outstanding on more than ninety (90) days within any one hundred eighty day (180) period or (z) shall Agent make Revolving Credit Loans on behalf of Lenders under this subsection 1.1.2 to the extent such Revolving Credit Loans would cause a Lender’s share of the Revolving Credit Loans to exceed such Lender’s Revolving Loan Commitment minus such Lender’s Revolving Loan Percentage of the LC Amount.

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1.1.3 Use of Proceeds. The Revolving Credit Loans shall be used solely for (i) Co-Borrowers’ general operating capital needs in a manner consistent with the provisions of this Agreement and all applicable laws and (ii) other purposes permitted under this Agreement.

1.1.4 Swingline Loans.

(a) In order to reduce the frequency of transfers of funds from Lenders to Agent for making Revolving Credit Loans and for so long as no Default or Event of Default exists, Agent shall be permitted (but not required) to make Revolving Credit Loans to Co-Borrowers upon request by Borrower, on its own behalf and on behalf of each other Co-Borrower (such Revolving Credit Loans to be designated as “Swingline Loans”), provided that the aggregate amount of Swingline Loans outstanding at any time will not (i) exceed Five Million Dollars ($5,000,000); (ii) when added to the principal amount of Agent’s other Revolving Credit Loans then outstanding plus Agent’s Revolving Loan Percentage of the LC Amount, exceed Agent’s Revolving Credit Commitment; or (iii) when added to the principal amount of all other Revolving Credit Loans then outstanding plus the LC Amount, exceed the Borrowing Base. Within the foregoing limits, Co-Borrowers may borrow, repay and reborrow Swingline Loans. All Swingline Loans shall be treated as Revolving Credit Loans for purposes of this Agreement, except that (a) all Swingline Loans shall be included within the Base Rate Revolving Portion and (b) notwithstanding anything herein to the contrary (other than as set forth in the next succeeding sentence), all principal and interest paid with respect to Swingline Loans shall be for the sole account of Agent in its capacity as the lender of Swingline Loans. Notwithstanding the foregoing, not more than 2 Business Days after (1) Lenders receive notice from Agent that a Swingline Loan has been advanced in respect of a drawing under a Letter of Credit or LC Guaranty or (2) in any other circumstance, demand is made by Agent during the continuance of an Event of Default, each Lender shall irrevocably and unconditionally purchase and receive from Agent, without recourse or warranty from Agent, an undivided interest and participation in each Swingline Loan to the extent of such Lender’s Revolving Loan Percentage thereof (and to the extent such Swingline Loan has not been refinanced with Revolving Loans pursuant to subsection 1.1.4(b)), by paying to Agent, in same day funds, an amount equal to such Lender’s Revolving Loan Percentage of such Swingline Loan.

(b) As frequently as determined by Agent, but not less frequently than one day per each week (which day shall be a Business Day), Agent shall notify each Lender of the aggregate amount of Swingline Loans outstanding as of the end of the previous day and the amount of Revolving Loans required to be made by each Lender to refinance such outstanding Swingline Loans (which shall be in the amount of each Lender’s Revolving Loan Percentage of such outstanding Swingline Loans). Upon its receipt of a request from Agent under the first sentence of this subsection 1.1.4(b), each Lender (including Bank of America) shall make a Revolving Loan (which shall not be made as a Swingline Loan) in an amount equal to its Revolving Loan Percentage of the aggregate principal amount of Swingline Loans to be refinanced, and make the proceeds

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of such Revolving Loans available to Agent, in immediately available funds, at the main office of Agent not later than 12:00 noon (Chicago time) on the date such notice was received. Notwithstanding anything to the contrary, a Lender shall not be obligated to make any Revolving Loan or purchase any participation in any Swingline Loan under this Section unless (A) Agent believed in good faith that all conditions to making the subject Revolving Loan were satisfied at the time the related Swingline Loan was made, or (B) such Lender has actual knowledge, by receipt of the statements furnished to it pursuant to Section 8.1.3 or otherwise, that any such condition had not been satisfied and failed to notify Agent in a writing received by Agent prior to the time it made such Swingline Loan that Agent was not authorized to make a Swingline Loan until such condition has been satisfied. The proceeds of Revolving Loans made pursuant to the preceding sentence shall be delivered to Agent (and not to any Co-Borrower) and applied to the outstanding Swingline Loans.

1.1.5 Agent Loans. Upon the occurrence and during the continuance of an Event of Default, Agent, in its sole discretion, may make Revolving Credit Loans on behalf of Lenders, in an aggregate amount not to exceed Two Million Dollars ($2,000,000), if Agent, in its reasonable business judgment, deems that such Revolving Credit Loans are necessary or desirable (i) to protect all or any portion of the Collateral, (ii) to enhance the likelihood, or maximize the amount of, repayment of the Loans and the other Obligations, or (iii) to pay any other amount chargeable to Co-Borrowers pursuant to this Agreement, including without limitation costs, fees and expenses as described in Sections 2.8 and 2.9 that have not been reimbursed by Co-Borrowers or Lenders (hereinafter, “Agent Loans”); provided, that in no event shall (a) the principal amount of Agent Loans cause the Revolving Credit Loans to exceed the aggregate Revolving Loan Commitments and (b) Majority Lenders may at any time revoke Agent’s authorization to make Agent Loans. Any such revocation must be in writing and shall become effective prospectively upon Agent’s receipt thereof. Each Lender shall be obligated to advance its Revolving Loan Percentage of each Agent Loan in the manner provided in subsection 3.1.3 hereof. If Agent Loans are made pursuant to the preceding sentence, then (a) the Borrowing Base shall be deemed increased by the amount of such permitted Agent Loans, but only for so long as Agent allows such Agent Loans to be outstanding, and (b) all Lenders that have committed to make Revolving Credit Loans shall be bound to make, or permit to remain outstanding, such Agent Loans based upon their Revolving Loan Percentages in accordance with the terms of this Agreement.

1.2 Letters of Credit; LC Guaranties. Agent agrees, for so long as no Default or Event of Default exists and if requested by Borrower, on its own behalf and on behalf of each other Co-Borrower, (i) to issue its, or cause to be issued by Bank or another Affiliate of Agent, on the date requested by Borrower, on its behalf and on behalf of each other Co-Borrower, Letters of Credit for the account of Co-Borrowers or (ii) execute LC Guaranties by which Agent, Bank or another Affiliate of Agent, on the date requested by Borrower, on its behalf and on behalf of each other Co-Borrower, shall guaranty the payment or performance by Co-Borrowers of their reimbursement obligations with respect to Letters of Credit provided that the LC Amount shall not exceed Ten Million Dollars ($10,000,000) at any time. No Letter of Credit or LC Guaranty may have an expiration date after the last day of the Term. Each Letter of Credit shall be payable on sight draft only. Notwithstanding anything to the contrary contained herein, Co-Borrowers, Agent and Lenders hereby agree that all LC Obligations and all obligations of Co-

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Borrowers relating thereto shall be satisfied by the prompt issuance of one or more Revolving Credit Loans that are Base Rate Portions, which Co-Borrowers hereby acknowledge are requested and Lenders hereby agree to fund. In the event that any Lender does not promptly make its portion of such Revolving Credit Loans, for any reason, to satisfy its ratable portion of all then existing LC Obligations, such Lender hereby agrees to pay to Agent, on demand, an amount equal to such LC Obligations multiplied In such Lender’s Revolving Loan Percentage, and until so paid, such amount shall be secured by the Collateral and shall bear interest and be payable at the same rate and in the same manner as Base Rate Portions. Immediately upon the issuance of a Letter of Credit or an LC Guaranty under this Agreement, each Lender shall be deemed to have irrevocably and unconditionally purchased and received from Agent, without recourse or warranty, an undivided interest and participation therein equal to the relevant LC Obligations multiplied by such Lender’s Revolving Loan Percentage.

SECTION 2. INTEREST, FEES AND CHARGES

2.1 Interest.

2.1.1 Rates of Interest. Interest shall accrue on the principal amount of the Base Rate Portions outstanding at the end of each day at a fluctuating rate per annum equal to the Applicable Margin then in effect plus the Base Rate. Said rate of interest shall increase or decrease by an amount equal to any increase or decrease in the Base Rate, effective as of the opening of business on the day that any such change in the Base Rate occurs. If Borrower, on its own behalf and on behalf of each other Co-Borrower, exercises its LIBOR Option as provided in Section 3.1, interest shall accrue on the principal amount of the LIBOR Portions outstanding at the end of each day at a rate per annum equal to the Applicable Margin then in effect plus the LIBOR applicable to each LIBOR Portion for the corresponding Interest Period.

2.1.2 Default Rate of Interest. At the option of Agent or the Majority Lenders, upon and after the occurrence of an Event of Default, and during the continuation thereof, the principal amount of all Loans shall bear interest at a rate per annum equal to 2.0% plus the interest rate otherwise applicable thereto (the “Default Rate”).

2.1.3 Maximum Interest. In no event whatsoever shall the aggregate of all amounts deemed interest hereunder or under the Notes and charged or collected pursuant to the terms of this Agreement or pursuant to the Notes exceed the highest rate permissible under any law which a court of competent jurisdiction shall, in a final determination, deem applicable hereto. If any provisions of this Agreement or the Notes are in contravention of any such law, such provisions shall be deemed amended to conform thereto (the “Maximum Rate”). If at any time, the amount of interest paid hereunder is limited by the Maximum Rate, and the amount at which interest accrues hereunder is subsequently below the Maximum Rate, the rate at which interest accrues hereunder shall remain at the Maximum Rate, until such time as the aggregate interest paid hereunder equals the amount of interest that would have been paid had the Maximum Rate not applied.

2.2 Computation of Interest and Fees. Interest, Letter of Credit and LC Guaranty fees and Unused Line Fees hereunder shall be calculated daily and shall be computed on the actual

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number of days elapsed over a year of 360 days. Fee Letter. Co-Borrower shall pay to Agent certain fees and other amounts in accordance with the terms of the fee letter between Co-Borrower and Agent (the “Fee Letter”).

2.3 Letter of Credit Fees and LC Guaranty Fees. Co-Borrowers shall pay to Agent: for standby Letters of Credit and LC Guaranties of standby Letters of Credit, for the ratable benefit of Lenders a per annum fee, payable monthly in arrears, equal to the Applicable Margin then in effect of the daily average aggregate undrawn available amount of such Letters of Credit and LC Guaranties of such standby Letters of Credit outstanding during the applicable month, plus all normal and customary charges associated with the issuance, processing and administration thereof, which fees and charges shall be deemed fully earned upon issuance of each such Letter of Credit or LC Guaranty of such standby Letters of Credit or as advised by Agent or Bank. Such amounts shall be due and payable monthly in arrears on the first Business Day of each month following the issuance of such standby Letter of Credit or LC Guaranty of such standby Letter of Credit or as advised by Agent or Bank and shall not be subject to rebate or proration upon the termination of this Agreement for any reason; for documentary Letters of Credit and LC Guaranties of documentary Letters of Credit, for the ratable benefit of Lenders, a per annum fee, payable monthly in arrears, equal to the Applicable Margin then in effect of the undrawn available amount of each such documentary Letter of Credit or LC Guaranties of such documentary Letters of Credit outstanding during the applicable month plus all normal and customary charges associated with the issuance, processing and administration of each such documentary Letter of Credit or LC Guaranty of such documentary Letters of Credit (which fees and charges shall be fully earned upon issuance, renewal or extension (as the case may be) of each such documentary Letter of Credit or LC Guaranty of such documentary Letters of Credit or as otherwise advised by Agent or Bank. Such amounts shall be due and payable monthly in arrears on the first Business Day of each month following the issuance of such documentary Letter of Credit or LC Guaranty of such documentary Letter of Credit or as otherwise advised by Agent or Bank, and shall not be subject to rebate or proration upon the termination of this Agreement for any reason; and, with respect to all Letters of Credit and LC Guaranties, for the account of Agent only, a per annum fronting fee equal to 0.125% of the aggregate average daily undrawn available amount of such Letters of Credit or LC Guaranties outstanding during the applicable month, which fronting fees shall be payable monthly in arrears on the first Business Day of each month and shall not be subject to rebate or proration upon the termination of this Agreement for any reason.

2.4 Unused Line Fee. Co-Borrowers shall pay to Agent, for the ratable benefit of Lenders, a fee (the “Unused Line Fee”) equal to the Applicable Margin per annum multiplied by the average daily amount by which the Revolving Credit Maximum Amount exceeds the sum of (i) the outstanding principal balance of the Revolving Credit Loans plus (ii) the LC Amount; provided, that for purposes of allocating the Unused Line Fee among Lenders, outstanding Swingline Loans shall not be included as part of the outstanding balance of the Loans for purposes of calculating such fees owed to Lenders other than Agent. The Unused Line Fee shall be payable monthly in arrears on the first day of each month hereafter. Prepayment Fee. At the effective date of termination of this Agreement for any reason other than a Change in Control, Co-Borrowers shall pay to Agent, for the ratable benefit of Lenders (in addition to the then outstanding principal, accrued interest and other charges owing under the terms of this

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Agreement and any of the other Loan Documents) and any amounts owing pursuant to subsection 3.2.5, as liquidated damages for the loss of the bargain and not as a penalty, an amount equal to one-half of one percent ( ¹/2%) of the Total Credit Facility if termination occurs during the period from the Closing Date to October 26, 2007, one-quarter of one percent ( ¹/4%) of the Total Credit Facility if termination occurs during the period from October 27, 2007 through October 26, 2008 or one-eighth of one percent (0.125%) if termination occurs after October 26, 2008 but prior to April 26, 2011. If termination occurs on April 26, 2011, no termination charge shall be payable

2.5 Audit Fees. Co-Borrowers shall pay to Agent audit fees in accordance with Agent’s current schedule of fees in effect from time to time in connection with audits of the books and records and Properties of Borrower and its Subsidiaries and such other matters as Agent shall deem appropriate in its sole judgment, plus all reasonable out-of-pocket expenses incurred by Agent in connection with such audits, whether such audits are conducted by employees of Agent or by third parties hired by Agent. Such audit fees and out-of-pocket expenses shall be payable on the first day of the month following the date of issuance by Agent of a request for payment thereof to Co-Borrowers. Agent may, in its discretion, provide for the payment of such amounts by making appropriate Revolving Credit Loans to Co-Borrowers and charging Co-Borrowers’ Loan Account therefor. The foregoing notwithstanding, Co-Borrowers shall not be required to reimburse Agent for the costs of more than one (1) audit within any calendar year unless an Event of Default has occurred and is continuing. Reimbursement of Expenses. If, at any time or times regardless of whether or not an Event of Default then exists, (i) Agent incurs legal or accounting expenses or any other costs or out-of-pocket expenses in connection with (1) the negotiation and preparation of this Agreement or any of the other Loan Documents, any amendment of or modification of this Agreement or any of the other Loan Documents, or any syndication or attempted syndication of the Obligations (including, without limitation, printing and distribution of materials to prospective Lenders and all costs associated with bank meetings, but excluding any closing fees paid to Lenders in connection therewith) or (2) the administration of this Agreement or any of the other Loan Documents and the transactions contemplated hereby and thereby; or (ii) Agent or any Lender incurs legal or accounting expenses or any other costs or out-of-pocket expenses in connection with (1) any litigation, contest, dispute, suit, proceeding or action (whether instituted by Agent, any Lender, any Co-Borrower or any other Person) relating to the Collateral, this Agreement or any of the other Loan Documents or any Co-Borrowers’, any of their Subsidiaries’ or any Guarantor’s affairs; (2) any attempt to enforce any rights of Agent or any Lender against any Co-Borrower or any other Person which may be obligated to Agent or any Lender by virtue of this Agreement or any of the other Loan Documents, including, without limitation, the Account Debtors; or (3) any attempt to inspect, verify, protect, preserve, restore, collect, sell, liquidate or otherwise dispose of or realize upon the Collateral; then all such legal and accounting expenses, other costs and out of pocket expenses of Agent or any Lender, as applicable, shall be charged to Co-Borrowers; provided that Co-Borrowers shall not be responsible for such costs and out-of-pocket expenses to the extent incurred because of the gross negligence or willful misconduct of Agent or any Lender. All amounts chargeable to Co-Borrowers under this Section 2.8 shall be Obligations secured by all of the Collateral, shall be payable on demand to Agent or such Lender, as the case may be, and shall bear interest from the date such demand is made until paid in full at the rate applicable to Base Rate Revolving Portions from time to time. Co-Borrowers shall also reimburse Agent for expenses incurred by Agent in its administration of the Collateral to the

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extent and in the manner provided in Sections 2.9 and 2.10 hereof. The foregoing notwithstanding, Co-Borrowers shall not be required to reimburse Agent or any Lender for any costs or expenses incurred in any action where there is entered a final non-appealable court order pursuant to which Agent or Lenders are not the prevailing party (as determined by said order).

2.6 Bank Charges. Co-Borrowers shall pay to Agent, on demand, any and all fees, costs or expenses which Agent or any Lender pays to a bank or other similar institution arising out of or in connection with (i) the forwarding to any Co-Borrower or any other Person on behalf of any Co-Borrower, by Agent or any Lender, of proceeds of Loans made to Co-Borrowers pursuant to this Agreement and (ii) the depositing for collection by Agent or any Lender of any check or item of payment received or delivered to Agent or any Lender on account of the Obligations.

2.7 Collateral Protection Expenses; Appraisals. All out-of-pocket expenses incurred in protecting, storing, warehousing, insuring, handling, maintaining and shipping the Collateral, and any and all excise, property, sales, and use taxes imposed by any state, federal, or local authority on any of the Collateral or in respect of the sale thereof shall be borne and paid by Co-Borrowers. If Co-Borrowers fail to promptly pay any portion thereof when due, Agent may, at its option, but shall not be required to, pay the same and charge Co-Borrowers therefor. Additionally, from time to time, Agent may, at Co-Borrowers’ expense, obtain appraisals from appraisers (who may be personnel of Agent), stating the then current fair market value of all or any portion of the real estate or personal Property of Borrower or any of its Subsidiaries, including without limitation the Inventory of Borrower and its Subsidiaries; provided that unless an Event of Default has occurred and is continuing, Agent shall not be permitted to obtain at Co-Borrowers’ expense more than one such appraisal per calendar year with respect to Borrower’s and its Subsidiaries’ Inventory or more than one such appraisal per calendar year with respect to Borrower’s and its Subsidiaries’ Equipment and real Property.

2.8 Payment of Charges. All amounts chargeable to Co-Borrowers under this Agreement shall be Obligations secured by all of the Collateral, shall be, unless specifically otherwise provided, payable on demand and shall bear interest from the date demand was made or such amount is due, as applicable, until paid in full at the rate applicable to Base Rate Portions from time to time.

2.9 No Deductions. Any and all payments or reimbursements made hereunder shall be made free and clear of and without deduction for any and all taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto; excluding, however, the following: taxes imposed on the income of Agent or any Lender or franchise taxes by the jurisdiction under the laws of which Agent or any Lender is organized or doing business or any political subdivision thereof and taxes imposed on its income by the jurisdiction of Agent’s or such Lender’s applicable lending office or any political subdivision thereof or franchise taxes (all such taxes, levies, imposts, deductions, charges or withholdings and all liabilities with respect thereto excluding such taxes imposed on net income and franchise taxes, herein “Tax Liabilities”). If Co-Borrowers shall be required by law to deduct any such Tax Liabilities from or in respect of any sum payable hereunder to Agent or any Lender, then the sum payable hereunder shall be increased as may be necessary so that, after all required deductions are made, Agent or such Lender receives an amount equal to the sum it would have received had no such deductions been made.

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2.10 Increase of Aggregate Revolving Loan Commitments.

(i) At any time, Borrower may request (in consultation with Agent) that the aggregate Revolving Loan Commitments be increased by an aggregate amount of up to $25,000,000 without the prior written consent of the Majority Lenders, provided that the aggregate Revolving Loan Commitments shall at no time exceed $125,000,000. Such request shall be made in a written notice given to Agent and Lenders by Borrower not less than twenty (20) Business Days prior to the proposed effective date of such increase, which notice (a “Commitment Increase Notice”) shall specify the amount of the proposed increase in the aggregate Revolving Loan Commitments and the proposed effective date of such increase. No Lender shall have any obligation to increase its Revolving Loan Commitment pursuant to a Commitment Increase Notice.

(ii) Not later than three (3) Business Days prior to the proposed effective date, Borrower may notify Agent of any financial institution that shall have agreed to become a “Lender” party hereto (a “Proposed New Lender”) in connection with the Commitment Increase Notice. Any Proposed New Lender shall be subject to the consent of Agent (which consent shall not be unreasonably withheld). Agent shall notify Borrower and Lenders on or before the Business Day immediately prior to the proposed effective date of the amount of each Lender’s and Proposed New Lender’s Revolving Loan Commitment (the “Effective Commitment Amount”) and the amount of the aggregate Revolving Loan Commitments, which amount shall be effective on the following Business Day.

(iii) Any increase in the aggregate Revolving Loan Commitments shall be subject to the following conditions: (a) as of the date of the Commitment Increase Notice and as of the proposed effective date of the increase in the aggregate Revolving Loan Commitments, all representations and warranties set forth in Section 7 hereof shall be true and correct as though made on such date (unless any such representation and warranty is made as of a specific date, in which case, such representation and warranty shall be true and correct as of such date) and no Default or Event of Default shall have occurred and then be continuing, (b) Borrower, Agent and each Proposed New Lender or Lender that shall have agreed to provide a “Revolving Loan Commitment” in support of such increase in the aggregate Revolving Loan Commitments shall have executed and delivered a Commitment Agreement and Acceptance in a form reasonably acceptable to Agent and (c) Borrower and any Proposed New Lender shall otherwise have executed and delivered such other instruments, documents and agreements as Agent shall have reasonably requested in connection with such increase. Upon satisfaction of the conditions precedent to any increase in the aggregate Revolving Loan Commitments, Agent shall promptly advise Borrower and each Lender of the effective date of such increase. Upon the effective date of any increase in the aggregate Revolving Loan Commitments that is provided by a Proposed New Lender, such Proposed New Lender shall be a party to this Agreement as a Lender and shall have the rights and obligations of a Lender hereunder. Nothing contained herein shall constitute, or otherwise be deemed to be, a commitment on the part of any Lender to increase its Revolving Loan Commitment hereunder at any time.

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(iv) Upon the execution and delivery of such Commitment Agreement and Acceptance, Agent shall reallocate any outstanding Loans and LC Amounts ratably among Lenders after giving effect to each such increase in the aggregate Revolving Loan Commitments; provided that Co-Borrowers hereby agree to compensate each Lender for all losses, expenses and liabilities incurred by such Lender in connection with the sale and assignment of any LIBOR Portions on the terms and in the manner set forth in subsection 3.2.5.

SECTION 3. LOAN ADMINISTRATION

3.1 Manner of Borrowing Revolving Credit Loans/LIBOR Option, Borrowings under the credit facility established pursuant to Section 1 hereof shall be as follows:

3.1.1 Loan Requests; Revolving Credit Loans. A request for a Revolving Credit Loan shall be made, or shall be deemed to be made, in the following manner: (a) Borrower, on its own behalf and on behalf of each other Co-Borrower, may give Agent notice of its intention to borrow, in which notice Borrower shall specify the amount of the proposed borrowing of a Revolving Credit Loan and the proposed borrowing date, which shall be a Business Day, no later than 11:00 a.m. (Chicago, Illinois time) on the proposed borrowing date (or in accordance with subsection 3.1.7, 3.1.8 or 3.1.9, as applicable, in the case of a request for a LIBOR Revolving Portion) provided, however, that no such request may be made at a time when there exists a Default or an Event of Default; and (b) the becoming due of any amount required to be paid under this Agreement, or the Notes, whether as interest or for any other Obligation, shall be deemed irrevocably to be a request for a Revolving Credit Loan on the due date in the amount required to pay such interest or other Obligation.

3.1.2 Disbursement. Co-Borrowers hereby irrevocably authorize Agent to disburse the proceeds of each Loan requested, or deemed to be requested, pursuant to subsection 3.1.1(a) as follows: (i) the proceeds of each Revolving Credit Loan requested under subsection 3.1.1(a) shall be disbursed by Agent in lawful money of the United States of America in immediately available funds, in the case of the initial borrowing, in accordance with the terms of the written disbursement letter from Borrower, and in the case of each subsequent borrowing, by wire transfer to such bank account as may be agreed upon by Borrower and Agent from time to time or elsewhere if pursuant to a written direction from Borrower; and (ii) the proceeds of each Revolving Credit Loan deemed requested under subsection 3.1.1(b) shall be disbursed by Agent by way of direct payment of the relevant interest or other Obligation. If at any time any Loan is funded by Agent or Lenders in excess of the amount requested or deemed requested by Borrower, Co-Borrowers agree to repay the excess to Agent immediately upon the earlier to occur of (a) a Co-Borrower’s discovery of the error and (b) notice thereof to Co-Borrowers from Agent or any Lender.

3.1.3 Payment by Lenders. Agent shall give to each Lender prompt written notice by facsimile of the receipt by Agent from Borrower of any request for a Revolving Credit Loan. Each such notice shall specify the requested date and amount of such Revolving Credit

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Loan, whether such Revolving Credit Loan shall be subject to the LIBOR Option, and the amount of each Lender’s advance thereunder (in accordance with its applicable Revolving Loan Percentage). Each Lender shall, not later than 12:00 p.m. (Chicago time) on such requested date, wire to a bank designated by Agent the amount of that Lender’s Revolving Loan Percentage of the requested Revolving Credit Loan. The failure of any Lender to make the Revolving Credit Loans to be made by it shall not release any other Lender of its obligations hereunder to make its Revolving Credit Loan. Neither Agent nor any other Lender shall be responsible for the failure of any other Lender to make the Revolving Credit Loan to be made by such other Lender. The foregoing notwithstanding, Agent, in its sole discretion, may from its own funds make a Revolving Credit Loan on behalf of any Lender; provided that Agent shall not make any Revolving Loan on behalf of a Lender if Agent has received prior written notice from such Lender that such Lender will not make such Revolving Loan. In such event, the Lender on behalf of whom Agent made the Revolving Credit Loan shall reimburse Agent for the amount of such Revolving Credit Loan made on its behalf, on a weekly (or more frequent, as determined by Agent in its sole discretion) basis. On each such settlement date, Agent will pay to each Lender the net amount owing to such Lender in connection with such settlement, including without limitation amounts relating to Loans, fees, interest and other amounts payable hereunder. The entire amount of interest attributable to such Revolving Credit Loan for the period from the date on which such Revolving Credit Loan was made by Agent on such Lender’s behalf until Agent is reimbursed by such Lender, shall be paid to Agent for its own account.

3.1.4 Authorization. Co-Borrowers hereby irrevocably authorize Agent, in Agent’s sole discretion, to advance to Co-Borrowers, and to charge to Co-Borrowers’ Loan Account hereunder as a Revolving Credit Loan (which shall be a Base Rate Revolving Portion), a sum sufficient to pay all interest accrued on the Obligations during the immediately preceding month and to pay all fees, costs and expenses and other Obligations at any time owed by Co-Borrowers to Agent or any Lender hereunder on the due date therefore.

3.1.5 Letter of Credit and LC Guaranty Requests. A request for a Letter of Credit or LC Guaranty shall be made in the following manner: Borrower, on its own behalf and on behalf of each other Co-Borrower, may give Agent and Bank a written notice of its request for the issuance of a Letter of Credit or LC Guaranty, not later than 11:00 a.m. (Chicago, Illinois time), one Business Day before the proposed issuance date thereof, in which notice Borrower shall specify the proposed issuance date and format and wording for the Letter of Credit being requested (which shall be satisfactory to Agent and the Person being asked to issue such Letter of Credit); provided, that no such request may be made at a time when there exists a Default or Event of Default. Such request shall be accompanied by an executed application and reimbursement agreement in form and substance satisfactory to Agent and the Person being asked to issue the Letter of Credit or LC Guaranty, as well as any required resolutions.

3.1.6 Method of Making Requests. As an accommodation to Co-Borrowers, unless a Default or an Event of Default is then in existence, (i) Agent shall permit telephonic or electronic requests for Revolving Credit Loans to Agent, (ii) Agent and Bank may, in their discretion, permit electronic transmittal of requests for Letters of Credit or LC Guaranties to them, and (iii) Agent may, in Agent’s discretion, permit electronic transmittal of instructions, authorizations, agreements or reports to Agent. Unless Borrower specifically directs Agent or Bank in writing not to accept or act upon telephonic or electronic communications from any Co-

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Borrower, neither Agent nor Bank shall have any liability to Co-Borrowers for any loss or damage suffered by Co-Borrowers as a result of Agent’s or Bank’s honoring of any requests, execution of any instructions, authorizations or agreements or reliance on any reports communicated to it telephonically or electronically and purporting to have been sent to Agent or Bank by a Co-Borrower, and neither Agent nor Bank shall have any duty to verify the origin of any such communication or the authority of the Person sending it. Each telephonic request for a Revolving Credit Loan, Letter of Credit or LC Guaranty accepted by Agent and Bank, if applicable, hereunder shall be promptly followed by a written confirmation of such request from Borrower to Agent and Bank, if applicable.

3.1.7 LIBOR Portions. Provided that as of both the date of the LIBOR Request and the first day of the Interest Period, no Default or Event of Default exists, in the event Borrower desires to obtain a LIBOR Portion, Borrower on its own behalf and on behalf of each other Co-Borrower, shall give Agent a LIBOR Request no later than 11:00 a.m. (Chicago, Illinois time) on the third Business Day prior to the requested borrowing date. Each LIBOR Request shall be irrevocable and binding on Co-Borrowers. In no event shall Co-Borrowers be permitted to have outstanding at any one time LIBOR Portions with more than four (4) different Interest Periods.

3.1.8 Conversion of Base Rate Portions. Provided that as of both the date of the LIBOR Request and the first day of the Interest Period, no Default or Event of Default exists, Borrower, on its own behalf and on behalf of each other Co-Borrower, may, on any Business Day, convert any Base Rate Portion into a LIBOR Portion. If Borrower desires to convert a Base Rate Portion, Borrower shall give Agent a LIBOR Request no later then 11:00 a.m. (Chicago, Illinois time) on the third Business Day prior to the requested conversion date. After giving effect to any conversion of Base Rate Portions to LIBOR Portions, Co-Borrowers shall not be permitted to have outstanding at any one time LIBOR Portions with more than four (4) different Interest Periods.

3.1.9 Continuation of LIBOR Portions. Provided that as of both the date of the LIBOR Request and the first day of the Interest Period, no Default or Event of Default exists, Borrower, on its own behalf and on behalf of each other Co-Borrower, may, on any Business Day, continue any LIBOR Portions into a subsequent Interest Period of the same or a different permitted duration. If Borrower desires to continue a LIBOR Portion, Borrower shall give Agent a LIBOR Request no later than 11:00 a.m. (Chicago, Illinois time) on the third Business Day prior to the requested continuation date. After giving effect to any continuation of LIBOR Portions, Co-Borrowers shall not be permitted to have outstanding at any one time LIBOR Portions with more than four (4) different Interest Periods. If Borrower shall fail to give timely notice of its election to continue any LIBOR Portion or portion thereof as provided above, or if such continuation shall not be permitted, such LIBOR Portion or portion thereof, unless such LIBOR Portion shall be repaid, shall automatically be converted into a Base Rate Portion at the end of the Interest Period then in effect with respect to such LIBOR Portion.

3.1.10 Inability to Make LIBOR Portions. Notwithstanding any other provision hereof, if any applicable law, treaty, regulation or directive, or any change therein or in the interpretation or application thereof, shall make it unlawful for any Lender (for purposes of this subsection 3.1.10, the term “Lender” shall include the office or branch where such Lender or any

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corporation or bank then controlling such Lender makes or maintains any LIBOR Portions) to make or maintain its LIBOR Portions, or if with respect to any Interest Period, Agent is unable to determine the LIBOR relating thereto, or adverse or unusual conditions in, or changes in applicable law relating to, the London interbank market make it, in the reasonable judgment of Agent or any Lender, impracticable to fund therein any of the LIBOR Portions, or make the projected LIBOR unreflective of the actual costs of funds therefor to any Lender, the obligation of Agent and Lenders to make or continue LIBOR Portions or convert Base Rate Portions to LIBOR Portions hereunder shall forthwith be suspended during the pendency of such circumstances and Borrower shall, if any affected LIBOR Portions are then outstanding, promptly upon request from Agent, convert such affected LIBOR Portions into Base Rate Portions.

3.2 Payments. The Obligations shall be payable as follows:

3.2.1 Principal. Principal on account of Revolving Credit Loans shall be payable by Co-Borrowers to Agent for the ratable benefit of Lenders immediately upon the earliest of (i) the receipt by Agent or any Co-Borrower of any proceeds of any of the Collateral (except as otherwise provided herein), including without limitation pursuant to subsections 3.3.1 and 6.2.4, to the extent of said proceeds, subject to Co-Borrowers’ rights to reborrow such amounts in compliance with subsection 1.1.1 hereof; (ii) the occurrence of an Event of Default in consequence of which Agent or Majority Lenders elect to accelerate the maturity and payment of the Obligations, or (iii) termination of this Agreement pursuant to Section 4 hereof; provided, however, that, if an Overadvance shall exist at any time, Co-Borrowers shall, on demand, repay the Overadvance. Each payment (including principal prepayment) by Co-Borrowers on account of principal of the Revolving Credit Loans shall be applied first to Base Rate Revolving Portions and then to LIBOR Revolving Portions.

3.2.2 Interest.

(i) Base Rate Portion. Interest accrued on the Base Rate Portion shall be due and payable on each of the following dates (1) the first calendar day of each month (for the immediately preceding month), computed through the last calendar day of the preceding month, (2) the occurrence of an Event of Default in consequence of which Agent or Majority Lenders elect to accelerate the maturity and payment of the Obligations or (3) termination of this Agreement pursuant to Section 4 hereof.

(ii) LIBOR Portion. Interest accrued on each LIBOR Portion shall be due and payable on each LIBOR Interest Payment Date and on each of the following dates (1) the occurrence of an Event of Default in consequence of which Agent or Majority Lenders elect to accelerate the maturity and payment of the Obligations or (2) termination of this Agreement pursuant to Section 4 hereof

3.2.3 Costs, Fees and Charges. Costs, fees and charges payable pursuant to this Agreement shall be payable by Co-Borrowers, as and when provided in Section 2 or Section 3 hereof, as applicable to Agent or a Lender, as applicable, or to any other Person designated by Agent or such Lender in writing.

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3.2.4 Other Obligations. The balance of the Obligations requiring the payment of money, if any, shall be payable by Co-Borrowers to Agent for distribution to Lenders, as appropriate, as and when provided in this Agreement, the Other Agreements or the Security Documents, or on demand, whichever is later.

3.2.5 Prepayment of/Failure to Borrow LIBOR Portions. Co-Borrowers may prepay a LIBOR Portion only upon three (3) Business Days’ prior written notice to Agent (which notice shall be irrevocable). In the event of (i) the payment of any principal of any LIBOR Portion other than on the last day of the Interest Period applicable thereto (including as a result of an Event of Default), (ii) the conversion of any LIBOR Portion other than on the last day of the Interest Period applicable thereto, or (iii) the failure to borrow, convert, continue or prepay any LIBOR Portion on the date specified in any notice delivered pursuant hereto, then, in any such event, Co-Borrowers shall compensate Lenders ratably for the loss, cost and expense attributable to such event, as determined by Agent in a manner consistent with its customs and practices.

3.3 Mandatory and Optional Prepayments.

3.3.1 Proceeds of Sale, Loss, Destruction or Condemnation of Collateral. Except as provided in subsections 6.4.2 and 8.2.9, if Borrower or any of its Subsidiaries sells any of the Collateral or if any of the Collateral is lost, damaged or destroyed or taken by condemnation, Co-Borrowers shall, unless otherwise agreed by Majority Lenders, pay to Agent for the ratable benefit of Lenders as and when received by Borrower or such Subsidiary and as a mandatory prepayment of the Loans, as herein provided, a sum equal to the cash proceeds (including insurance payments but net of costs and taxes incurred in connection with such sale or event) received by Borrower or such Subsidiary from such sale, damage, loss, destruction or condemnation. The applicable prepayment shall be applied to reduce the outstanding principal balance of the Revolving Credit Loans. Subject to the provisions of the following sentence, the Fixed Asset Maximum Amount shall be reduced by the Net Appraised Orderly Liquidation Value of the particular item of Co-Borrowers’ Equipment or the Net Appraised Fair Market Value of the particular piece of Co-Borrowers’ real Property so sold, lost, destroyed or condemned, whether any such sale is permitted by the provisions of this subsection 3.3.1, subsection 6.4.2 or subsection 8.2.9. Notwithstanding the foregoing, if the proceeds of insurance (net of costs and taxes incurred) with respect to any loss, damage or destruction of Equipment or real Property (i) are less than $750,000, unless an Event of Default is then in existence, Agent shall remit such proceeds to Co-Borrowers for use in replacing or repairing the damaged Collateral or (ii) are equal to or greater than $750,000 and Borrower, on its own behalf and on behalf of each other Co-Borrower, has requested that Agent agree to permit Borrower or the applicable Subsidiary to repair or replace the damaged Collateral, then such amounts shall be provisionally applied to reduce the outstanding principal balance of the Revolving Credit Loans (and the Fixed Asset Maximum Amount shall not be so reduced) and, unless an Event of Default has occurred and is continuing, thereafter remitted to Co-Borrowers for use in replacing or repairing the damaged Collateral. If, however, Borrower or the applicable Subsidiary does not effect such repair or replacement within 180 days from the date of such request, the Fixed Asset Maximum Amount shall be reduced as provided above.

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3.3.2 Proceeds from Issuance of Additional Indebtedness or Equity. If, at any time when an Event of Default has occurred and is continuing, any Co-Borrower issues any additional Indebtedness (other than Indebtedness permitted by Section 8.2.3) or issues any additional equity in a manner permitted under this Agreement, Co-Borrowers shall pay to Agent for the ratable benefit of Lenders, when and as received by Borrower and as a mandatory prepayment of the Obligations, a sum equal to one hundred percent (100%) of the net cash proceeds to Borrower of the issuance of such Indebtedness or equity, which payment shall be due on receipt of such proceeds. Any such prepayment shall be applied to the Loans in the manner specified in the last sentence of subsection 3.2.1 until payment thereof in full.

3.3.3 LIBOR Portions. If the application of any payment made in accordance with the provisions of this Section 3.3 at a time when no Event of Default has occurred and is continuing would result in termination of a LIBOR Portion prior to the last day of the Interest Period for such LIBOR Portion, the amount of such prepayment shall not be applied to such LIBOR Portion, but will, at Borrower’s option, be held by Agent in a non-interest bearing account at a Lender or another bank satisfactory to Agent in its discretion, which account is in the name of Agent and from which account only Agent can make any withdrawal, in each case to be applied as such amount would otherwise have been applied under this Section 3.3 at the earlier to occur of (i) the last day of the relevant Interest Period or (ii) the occurrence of a Default or an Event of Default.

3.4 Application of Payments and Collections.

3.4.1 Collections. All items of payment received by Agent by 12:00 noon, Chicago, Illinois, time, on any Business Day shall be deemed received on that Business Day. All items of payment received after 12:00 noon, Chicago, Illinois, time, on any Business Day shall be deemed received on the following Business Day. If as the result of collections of Accounts as authorized by subsection 6.2.4 hereof or otherwise, a credit balance exists in the Loan Account, such credit balance shall not accrue interest in favor of Co-Borrower, but shall be disbursed to Co-Borrowers or otherwise at Borrower’s direction in the manner set forth in subsection 3.1.2, upon Borrower’s request at any time, so long as no Default or Event of Default then exists. Agent may at its option, offset such credit balance against any of the Obligations upon and during the continuance of an Event of Default.

3.4.2 Apportionment, Application and Reversal of Payments. Principal and interest payments shall be apportioned and distributed by Agent ratably among Lenders (according to their respective Revolving Loan Percentages). All payments shall be remitted to Agent and all such payments not relating to principal or interest of specific Loans, or not constituting payment of specific fees, and all proceeds of Accounts, or, except as provided in subsection 3.3.1, other Collateral received by Agent after the occurrence and during the continuation of an Event of Default, shall be applied, ratably, subject to the provisions of this Agreement, first, to pay any fees, indemnities, or expense reimbursements (other than amounts related to Product Obligations) then due to Agent or Lenders from Borrower; second, to pay interest due from Borrower in respect of all Loans, including Swingline Loans and Agent Loans; third to pay or prepay principal of Swingline Loans and Agent Loans; fourth to pay or prepay principal of the Revolving Credit Loans (other than Swingline Loans and Agent Loans) and unpaid reimbursement obligations in respect of Letters of Credit; fifth, to pay an amount to

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Agent equal to all outstanding Letter of Credit Obligations to be held as cash Collateral for such Obligations; sixth to the payment of any other Obligation (other than amounts related to Product Obligations) due to Agent or any Lender by Co-Borrowers; and seventh, to pay any fees, indemnities or expense reimbursements related to Product Obligations.

3.5 All Loans to Constitute One Obligation. The Loans and LC Guarantees shall constitute one general Obligation of Co-Borrowers, and shall be secured by Agent’s Lien upon all of the Collateral.

3.6 Loan Account. Agent shall enter all Loans as debits to a loan account (the “Loan Account”) and shall also record in the Loan Account all payments made by Co-Borrowers on any Obligations and all proceeds of Collateral which are finally paid to Agent, and may record therein, in accordance with customary accounting practice, other debits and credits, including interest and all charges and expenses properly chargeable to Co-Borrowers.

3.7 Statements of Account. Agent will account to Co-Borrowers monthly with a statement of Loans, charges and payments made pursuant to this Agreement during the immediately preceding month, and such account rendered by Agent shall be deemed final, binding and conclusive upon Co-Borrowers absent demonstrable error unless Agent is notified by Borrower in writing to the contrary within 30 days of the date each accounting is received by Co-Borrowers. Such notice shall only be deemed an objection to those items specifically objected to therein.

3.8 Increased Costs. If any law or any governmental or quasi-governmental rule, regulation, policy, guideline or directive (whether or not having the force of law) adopted or implemented after the date of this Agreement and having general applicability to all banks or finance companies within the jurisdiction in which any Lender operates (excluding, for the avoidance of doubt, the effect of and phasing in of capital requirements or other regulations or guidelines passed prior to the date of this Agreement), or any interpretation or application thereof by any governmental authority charged with the interpretation or application thereof, or the compliance of such Lender therewith, shall:

(i) (1) subject such Lender to any tax with respect to this Agreement (other than (a) any tax based on or measured by net income or otherwise in the nature of a net income tax, including, without limitation, any franchise tax or any similar tax based on capital, net worth or comparable basis for measurement and (b) any tax collected by a withholding on payments and which neither is computed by reference to the net income of the payee nor is in the nature of an advance collection of a tax based on or measured by the net income of the payee) or (2) change the basis of taxation of payments to such Lender of principal, fees, interest or any other amount payable hereunder or under any Loan Documents (other than in respect of (a) any tax based on or measured by net income or otherwise in the nature of a net income tax, including, without limitation, any franchise tax or any similar tax based on capital, net worth or comparable basis for measurement and (b) any tax collected by a withholding on payments and which neither is computed by reference to the net income of the payee nor is in the nature of an advance collection of a tax based on or measured by the net income of the payee);

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(ii) impose, modify or hold applicable any reserve (except any reserve taken into account in the determination of the applicable LIBOR), special deposit, assessment or similar requirement against assets held by, or deposits in or for the account of, advances or loans by, or other credit extended by, any office of such Lender, including (without limitation) pursuant to Regulation D of the Board of Governors of the Federal Reserve System; or

(iii) impose on such Lender or the London interbank market any other condition with respect to any Loan Document;

and the result of any of the foregoing is to increase the cost to such Lender of making, renewing or maintaining Loans hereunder or the result of any of the foregoing is to reduce the rate of return on such Lender’s capital as a consequence of its obligations hereunder, or the result of any of the foregoing is to reduce the amount of any payment (whether of principal, interest or otherwise) in respect of any of the Loans, then, in any such case, Co-Borrowers shall pay such Lender, upon demand and certification not later than sixty (60) days following its receipt of notice of the imposition of such increased costs, such additional amount as will compensate such Lender for such additional cost or such reduction, as the case may be, to the extent such Lender has not otherwise been compensated, with respect to a particular Loan, for such increased cost as a result of an increase in the Base Rate or the LIBOR. An officer of the applicable Lender shall determine the amount of such additional cost or reduced amount using reasonable averaging and attribution methods and shall certify the amount of such additional cost or reduced amount to Co-Borrowers, which certification shall include a written explanation of such additional cost or reduction to Co-Borrowers. Such certification shall be conclusive absent demonstrable error. If a Lender claims any additional cost or reduced amount pursuant to this Section 3.8, then such Lender shall use reasonable efforts (consistent with legal and regulatory restrictions) to designate a different lending office or to file any certificate or document reasonably requested by Borrower if the making of such designation or filing would avoid the need for, or reduce the amount of, any such additional cost or reduced amount and would not, in the sole discretion of such Lender, be otherwise disadvantageous to such Lender.

3.9 Basis for Determining Interest Rate Inadequate. In the event that Agent or any Lender shall have determined that:

(i) reasonable means do not exist for ascertaining the LIBOR for any Interest Period; or

(ii) Dollar deposits in the relevant amount and for the relevant maturity are not available in the London interbank market with respect to a proposed LIBOR Portion, or a proposed conversion of a Base Rate Portion into a LIBOR Portion; then

Agent or such Lender shall give Borrower prompt written, telephonic or electronic notice of the determination of such effect. If such notice is given, (i) any such requested LIBOR Portion shall be made as a Base Rate Portion, unless Borrower shall notify Agent no later than 10:00 a.m. (Chicago, Illinois time) three (3) Business Days prior to the date of such proposed borrowing that the request for such borrowing shall be canceled or made as an unaffected type of LIBOR Portion, and (ii) any Base Rate Portion which was to have been converted to an affected type of

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LIBOR Portion shall be continued as or converted into a Base Rate Portion, or, if Borrower shall notify Agent, no later than 10:00 a.m. (Chicago, Illinois time) three (3) Business Days prior to the proposed conversion, shall be maintained as an unaffected type of LIBOR Portion.

3.10 Sharing of Payments, Etc. If any Lender shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of any Loan made by it in excess of its ratable share of payments on account of Loans made by all Lenders, such Lender shall forthwith purchase from each other Lender such participation in such Loan as shall be necessary to cause such purchasing Lender to share the excess payment ratably with each other Lender; provided that if all or any portion of such excess payment is thereafter recovered from such purchasing Lender, such purchase from each Lender shall be rescinded and such Lender shall repay to the purchasing Lenders the purchase price to the extent of such recovery, together with an amount equal to such Lender’s ratable share (according to the proportion of (i) the amount of such Lender’s required repayment to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. Co-Borrowers agree that any Lender so purchasing a participation from another Lender pursuant to this Section 3.10 may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of setoff) with respect to such participation as fully as if such Lender were the direct creditor of Co-Borrowers in the amount of such participation. Notwithstanding anything to the contrary contained herein, all purchases and repayments to be made under this Section 3.10 shall be made through Agent.

SECTION 4. TERM AND TERMINATION

4.1 Term of Agreement. Subject to the right of Lenders to cease making Loans to Co-Borrowers during the continuance of any Default or Event of Default, this Agreement shall be in effect for a period through and including April 26, 2011 (the “Term”), unless terminated as provided in Section 4.2 hereof.

4.2 Termination.

4.2.1 Termination by Lenders. Agent may, and at the direction of Majority Lenders shall, terminate this Agreement without notice upon or after the occurrence and during the continuance of an Event of Default.

4.2.2 Termination by Borrower. Upon at least 90 days prior written notice to Agent and Lenders, Borrower may, at its option, on its own behalf and on behalf of each other Co-Borrower, terminate this Agreement; provided, however no such termination shall be effective until Co-Borrowers have paid or collateralized to Agent’s satisfaction all of the Obligations in immediately available funds, all Letters of Credit and LC Guaranties have expired, terminated or have been cash collateralized to Agent’s satisfaction and Co-Borrowers have complied with Section 2.6 and subsection 3.2.5. Any notice of termination given by Borrower shall be irrevocable unless all Lenders otherwise agree in writing and no Lender shall have any obligation to make any Loans or issue or procure any Letters of Credit or LC Guaranties on or after the termination date stated in such notice. Borrower may elect to terminate this Agreement in its entirety only. No section of this Agreement or type of Loan available hereunder may be terminated singly.

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4.2.3 Effect of Termination. All of the Obligations shall be immediately due and payable upon the termination date stated in any notice of termination of this Agreement. All Obligations, undertakings, agreements, covenants, warranties and representations of Co-Borrowers contained in the Loan Documents shall survive any such termination and Agent shall retain its Liens in the Collateral and Agent and each Lender shall retain all of its rights and remedies under the Loan Documents notwithstanding such termination until all Obligations have been discharged or paid, in MI, in immediately available funds, including, without limitation, all Obligations under Section 2.6 and subsection 3.2.5 resulting from such termination. Notwithstanding the foregoing or the payment in full of the Obligations, Agent shall not be required to terminate its Liens in the Collateral unless, with respect to any loss or damage Agent may incur as a result of dishonored checks or other items of payment received by Agent from any Co-Borrower or any Account Debtor and applied to the Obligations, Agent shall, at its option, (i) have received a written agreement satisfactory to Agent, executed by Co-Borrowers and by any Person whose loans or other advances to Co-Borrowers are used in whole or in part to satisfy the Obligations, indemnifying Agent and each Lender from any such loss or damage or (ii) have retained cash Collateral or other Collateral for such period of time as Agent, in its discretion, may deem necessary to protect Agent and each Lender from any such loss or damage.

SECTION 5. SECURITY INTERESTS

5.1 Security Interest in Collateral. To secure the prompt payment and performance to Agent and each Lender of the Obligations, each Co-Borrower hereby grants to Agent for the benefit of itself and each Lender a continuing Lien upon all of such Co-Borrower’s assets, including all of the following Property and interests in Property of such Co-Borrower, whether now owned or existing or hereafter created, acquired or arising and wheresoever located:

(i) Accounts;

(ii) Certificated Securities;

(iii) Chattel Paper;

(iv) Computer Hardware and Software and all rights with respect thereto, including, any and all licenses, options, warranties, service contracts, program services, test rights, maintenance rights, support rights, improvement rights, renewal rights and indemnifications, and any substitutions, replacements, additions or model conversions of any of the foregoing;

(v) Contract Rights;

(vi) Deposit Accounts;

(vii) Documents;

(viii) Equipment;

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(ix) Financial Assets;

(x) Fixtures;

(xi) General Intangibles, including Payment Intangibles and Software;

(xii) Goods (including all of its Equipment, Fixtures and Inventory), and all accessions, additions, attachments, improvements, substitutions and replacements thereto and therefor;

(xiii) Instruments;

(xiv) Intellectual Property;

(xv) Inventory;

(xvi) Investment Property;

(xvii) money (of every jurisdiction whatsoever);

(xviii) Letter-of-Credit Rights;

(xix) Payment Intangibles;

(xx) Security Entitlements;

(xxi) Software;

(xxii) Supporting Obligations;

(xxiii) Uncertificated Securities; and

(xxiv) to the extent not included in the foregoing, all other personal property of any kind or description;

together with all books, records, writings, data bases, information and other property relating to, used or useful in connection with, or evidencing, embodying, incorporating or referring to any of the foregoing, and all Proceeds, products, offspring, rents, issues, profits and returns of and from any of the foregoing.

5.2 Other Collateral.

5.2.1 Commercial Tort Claims. Co-Borrowers shall promptly notify Agent in writing upon incurring or otherwise obtaining a Commercial Tort Claim after the Closing Date against any third party and, upon request of Agent, promptly enter into an amendment to this Agreement and do such other acts or things deemed appropriate by Agent to give Agent a security interest in any such Commercial Tort Claim. Borrower represents and warrants that as of the date of this Agreement, to its knowledge, neither it nor any of its Subsidiaries possess any Commercial Tort Claims.

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5.2.2 Other Collateral. Co-Borrowers shall promptly notify Agent in writing upon acquiring or otherwise obtaining any Collateral after the date hereof consisting of Deposit Accounts, Investment Property, Letter-of-Credit Rights or Electronic Chattel Paper and, upon the request of Agent, promptly execute such other documents, and do such other acts or things deemed appropriate by Agent to deliver to Agent control with respect to such Collateral; promptly notify Agent in writing upon acquiring or otherwise obtaining any Collateral after the date hereof consisting of Documents or Instruments and, upon the request of Agent, will promptly execute such other documents, and do such other acts or things deemed appropriate by Agent to deliver to Agent possession of such Documents which are negotiable and Instruments, and, with respect to nonnegotiable Documents, to have such nonnegotiable Documents issued in the name of Agent; and with respect to Collateral in the possession of a third party, other than Certificated Securities and Goods covered by a Document, obtain an acknowledgement from the third party that it is holding the Collateral for the benefit of Agent.

Lien Perfection; Further Assurances. Co-Borrowers shall execute such UCC-1 financing statements as are required by the UCC and such other instruments, assignments or documents as are necessary to perfect Agent’s Lien upon any of the Collateral and shall take such other action as may be required to perfect or to continue the perfection of Agent’s Lien upon the Collateral. Unless prohibited by applicable law, each Co-Borrower hereby authorizes Agent to execute and file any such financing statement, including, without limitation, financing statements that indicate the Collateral (i) as all assets of such Co-Borrower or words of similar effect, or (ii) as being of an equal or lesser scope, or with greater or lesser detail, than as set forth in Section 5.1, on such Co-Borrower’s behalf. Each Co-Borrower also hereby ratifies its authorization for Agent to have filed in any jurisdiction any like financing statements or amendments thereto if filed prior to the date hereof The parties agree that a carbon, photographic or other reproduction of this Agreement shall be sufficient as a financing statement and may be filed in any appropriate office in lieu thereof. At Agent’s request, each Co-Borrower shall also promptly execute or cause to be executed and shall deliver to Agent any and all documents, instruments and agreements deemed necessary by Agent, to give effect to or carry out the terms or intent of the Loan Documents.

5.3 Lien on Realty. The due and punctual payment and performance of the Obligations shall also be secured by the Lien created by the Mortgages upon all real Property of each Co-Borrower described therein. If any Co-Borrower shall acquire at any time or times hereafter any fee simple interest in other real Property (other than leasehold interests in sales offices or warehouses), such Co-Borrower agrees promptly to execute and deliver to Agent, for its benefit and the ratable benefit of Lenders, as additional security and Collateral for the Obligations, deeds of trust, security deeds, mortgages or other collateral assignments reasonably satisfactory in form and substance to Agent and its counsel (herein collectively referred to as “New Mortgages”) covering such real Property. The Mortgages and each New Mortgage shall be duly recorded (at Co-Borrowers’ expense) in each office where such recording is required to constitute a valid Lien on the real Property covered thereby. In respect to any Mortgage or any New Mortgage, Co-Borrowers shall deliver to Agent, at Co-Borrowers’ expense, mortgagee title insurance policies issued by a title insurance company reasonably satisfactory to Agent, which policies shall be in form and substance reasonably satisfactory to Agent and shall insure a valid Lien in favor of Agent for the benefit of itself and each Lender on the Property covered thereby, subject only to Permitted Liens and those other exceptions reasonably acceptable to Agent and

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its counsel. Co-Borrowers shall also deliver to Agent such other usual and customary documents, including, without limitation, ALTA Surveys of the real Property, environmental surveys and, if requested by Agent, local counsel opinions described in the Mortgages or any New Mortgage, as Agent and its counsel may reasonably request relating to the real Property subject to the Mortgages or the New Mortgages. The foregoing notwithstanding, Agent and Lenders acknowledge and agree that USPoly shall not be required to grant Agent a Mortgage on USPoly’s facility at Shawnee, Oklahoma unless requested to do so by Agent after the occurrence and during the continuance of an Event of Default.

SECTION 6. COLLATERAL ADMINISTRATION

6.1 General.

6.1.1 Location of Collateral. All Collateral, other than Inventory in transit and motor vehicles, will at all times be kept by Borrower and its Subsidiaries at one or more of the business locations set forth in Exhibit 6.1.1 hereto, as updated by Borrower providing prior written notice to Agent of any new location.

6.1.2 Insurance of Collateral. Borrower shall maintain and pay for insurance upon all Collateral wherever located and with respect to the business of Borrower and each of its Subsidiaries, covering casualty, hazard, public liability, workers’ compensation and such other risks in such amounts and with such insurance companies as are reasonably satisfactory to Agent. Borrower shall deliver certified copies of such policies to Agent as promptly as practicable, with satisfactory lender’s loss payable endorsements, naming Agent as a loss payee, assignee or additional insured, as appropriate, as its interest may appear, and showing only such other loss payees, assignees and additional insureds as are satisfactory to Agent. Each policy of insurance or endorsement shall contain a clause requiring the insurer to give not less than 10 days’ prior written notice to Agent in the event of cancellation of the policy for nonpayment of premium and not less than 30 days’ prior written notice to Agent in the event of cancellation of the policy for any other reason whatsoever and a clause specifying that the interest of Agent shall not be impaired or invalidated by any act or neglect of Borrower, any of its Subsidiaries or the owner of the Property or by the occupation of the premises for purposes more hazardous than are permitted by said policy. Borrower agrees to deliver to Agent, promptly as rendered, true copies of all reports made in any reporting forms to insurance companies. All proceeds of business interruption insurance (if any) of Borrower and its Subsidiaries shall be remitted to Agent for application to the outstanding balance of the Revolving Credit Loans.

Unless Borrower provides Agent with evidence of the insurance coverage required by this Agreement, Agent may purchase insurance at Co-Borrowers’ expense to protect Agent’s interests in the Properties of Borrower and its Subsidiaries. This insurance may, but need not, protect the interests of Borrower and its Subsidiaries. The coverage that Agent purchases may not pay any claim that Borrower or any Subsidiary makes or any claim that is made against Borrower or any such Subsidiary in connection with said Property. Borrower may later cancel any insurance purchased by Agent, but only after providing Agent with evidence that Borrower and its Subsidiaries have obtained insurance as required by this Agreement. If Agent purchases insurance, Co-Borrowers will be responsible for the costs of that insurance, including interest and any other charges Agent may impose in connection with the placement of insurance,

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until the effective date of the cancellation or expiration of the insurance. The costs of the insurance shall be added to the Obligations. The costs of the insurance may be more than the cost of insurance that Borrower and its Subsidiaries may be able to obtain on their own.

6.1.3 Protection of Collateral. Neither Agent nor any Lender shall be liable or responsible in any way for the safekeeping of any of the Collateral or for any loss or damage thereto (except for reasonable care in the custody thereof while any Collateral is in Agent’s or any Lender’s actual possession) or for any diminution in the value thereof, or for any act or default of any warehouseman, carrier, forwarding agency, or other person whomsoever, but the same in each case shall be at Co-Borrowers’ sole risk.

6.2 Administration of Accounts.

6.2.1 Records, Schedules and Assignments of Accounts. Co-Borrowers shall keep accurate and complete records of its and their Subsidiaries’ Accounts and all payments and collections thereon and shall submit to Agent on such periodic basis as Agent shall request a sales and collections report for the preceding period, in form acceptable to Agent. Within 15 days after the end of each month, or more frequently as requested by Agent, from and after the date hereof, Borrower shall deliver to Agent a detailed aged trial balance of all of its and its Subsidiaries’ Accounts, specifying the names, addresses, face values, dates of invoices and due dates for each Account Debtor obligated on an Account so listed (“Schedule of Accounts”), and upon Agent’s request therefor, copies of proof of delivery and the original copy of all documents, including, without limitation, repayment histories and present status reports relating to the Accounts so scheduled and such other matters and information relating to the status of then existing Accounts as Agent shall request. If requested by Agent, Borrower and each other Co-Borrower shall execute and deliver to Agent formal written assignments of all of its Accounts weekly or daily, which shall include all Accounts that have been created since the date of the last assignment, together with copies of invoices or invoice registers related thereto.

6.2.2 Discounts, Allowances, Disputes. If any Co-Borrower grants any discounts, allowances or credits that are not shown on the face of the invoice for the Account involved, Co-Borrowers shall report such discounts, allowances or credits, as the case may be, to Agent as part of the next required Schedule of Accounts.

6.2.3 Account Verification. Any of Agent’s officers, employees or agents shall have the right, at any time or times hereafter, in the name of Agent, any designee of Agent or any Co-Borrower, to verify the validity, amount or any other matter relating to any Accounts by mail, telephone, electronic communication or otherwise. Borrower and its Subsidiaries shall cooperate fully with Agent in an effort to facilitate and promptly conclude any such verification process.

6.2.4 Maintenance of Dominion Account. As of the Closing Date, with respect to Borrower and as of the date which is sixty (60) days after the Closing Date, with respect to USPoly, each Co-Borrower shall maintain a Dominion Account or Accounts pursuant to lockbox and blocked account arrangements acceptable to Agent with banks as may be selected by Co-Borrowers and be acceptable to Agent. The applicable Co-Borrower shall issue to any such banks an irrevocable letter of instruction directing such banks to deposit all payments or

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other remittances received in the lockbox and blocked accounts to the Dominion Account for application on account of the Obligations as provided in subsection 3.2.1. All funds deposited in any Dominion Account shall immediately become the property of Agent, for the ratable benefit of Lenders, and Co-Borrowers shall obtain the agreement by such banks in favor of Agent to waive any recoupment, setoff rights, and any security interest in, or against, the funds so deposited. Agent assumes no responsibility for such lockbox and blocked account arrangements, including, without limitation, any claim of accord and satisfaction or release with respect to deposits accepted by any bank thereunder.

6.2.5 Collection of Accounts, Proceeds of Collateral. Each Co-Borrower agrees that all invoices rendered and other requests made by Co-Borrowers for payment in respect of Accounts shall contain a written statement directing payment in respect of such Accounts to be paid to a lockbox established pursuant to subsection 6.2.4. To expedite collection, Co-Borrowers shall endeavor in the first instance to make collection of its Accounts for Agent. All remittances received by Co-Borrowers on account of Accounts, together with the proceeds of any other Collateral, shall be held as Agent’s property, for its benefit and the benefit of Lenders, by Co-Borrowers as trustee of an express trust for Agent’s benefit and Co-Borrowers shall immediately deposit same in kind in the Dominion Account. Agent retains the right at all times after the occurrence and during the continuance of a Default or an Event of Default to notify Account Debtors that Co-Borrowers’ Accounts have been assigned to Agent and to collect Co-Borrowers’ Accounts directly in its own name, or in the name of Agent’s agent, and to charge the collection costs and expenses, including attorneys’ fees, to Co-Borrowers.

6.2.6 Taxes. If an Account includes a charge for any tax payable to any governmental taxing authority, Agent is authorized, in its sole discretion, to pay the amount thereof to the proper taxing authority for the account of a Co-Borrower and to charge Co-Borrowers therefor, except for taxes that (i) are being actively contested in good faith and by appropriate proceedings and with respect to which Co-Borrowers maintain reasonable reserves on their books therefor and (ii) would not reasonably be expected to result in any Lien other than a Permitted Lien. In no event shall Agent or any Lender be liable for any taxes to any governmental taxing authority that may be due by any Co-Borrower.

6.3 Administration of Inventory. Borrower shall keep records of its and its Subsidiaries’ Inventory which records shall be complete and accurate and complete in all material respects. Borrower shall furnish to Agent Inventory reports concurrently with the delivery of each Borrowing Base Certificate described in subsection 8.1.4 or more frequently as requested by Agent, which reports will be in such other format and detail as Agent shall request and shall include a current list of all locations of Borrower’s Inventory. Borrower shall conduct a physical inventory no less frequently than annually and shall provide to Agent a report based on each such physical inventory promptly thereafter, together with such supporting information as Agent shall reasonably request.

6.4 Administration of Equipment.

6.4.1 Records and Schedules of Equipment. Borrower shall keep records of its and its Subsidiaries’ Equipment which shall be complete and accurate in all material respects itemizing and describing the kind, type, quality, quantity and book value of its and its

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Subsidiaries’ Equipment and all dispositions made in accordance with subsection 6.4.2 hereof, and Borrower shall, and shall cause each of its Subsidiaries to, furnish Agent with a current schedule containing the foregoing information on at least an annual basis and more often if requested by Agent. Promptly after the request therefor by Agent, Co-Borrowers shall deliver to Agent any and all evidence of ownership, if any, of any of its and its Subsidiaries’ Equipment.

6.4.2 Dispositions of Equipment. Borrower shall not, and shall not permit any of its Subsidiaries to, sell, lease or otherwise dispose of or transfer any of its respective Equipment or other fixed assets or any part thereof without the prior written consent of Agent; provided, however, that the foregoing restriction shall not apply, for so long as no Default or Event of Default exists and is continuing, to (i) dispositions of Equipment and other fixed assets which, in the aggregate during any consecutive twelve-month period, have a fair market value or a book value, whichever is less, of $750,000 or less, provided that all proceeds thereof are remitted to Agent for application to the Loans as provided in subsection 3.3.1, or (ii) replacements of Equipment or other fixed assets that are substantially worn, damaged or obsolete with Equipment or other fixed assets of like kind, function and value, provided that the replacement Equipment or other fixed assets shall be acquired within 90 days after any disposition of the Equipment or other fixed assets that are to be replaced and the replacement Equipment or other fixed assets shall be free and clear of Liens other than Permitted Liens that are not Purchase Money Liens.

6.5 Payment of Charges. All amounts chargeable to Co-Borrowers under Section 6 hereof shall be Obligations secured by all of the Collateral, shall be payable on demand and shall bear interest from the date such advance was made until paid in full at the rate applicable to Base Rate Portions from time to time.

SECTION 7. REPRESENTATIONS AND WARRANTIES

7.1 General Representations and Warranties. To induce Agent and each Lender to enter into this Agreement and to make advances hereunder, Co-Borrowers warrant, represent and covenant to Agent and each Lender that:

7.1.1 Qualification. Borrower and each of its Subsidiaries is a corporation, limited partnership or limited liability company duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization. Borrower and each of its Subsidiaries is duly qualified and is authorized to do business and is in good standing as a foreign limited liability company, limited partnership or corporation, as applicable, in each state or jurisdiction listed on Exhibit 7.1.1 hereto and in all other states and jurisdictions in which the failure of Borrower or any of its Subsidiaries to be so qualified could reasonably be expected to have a Material Adverse Effect.

7.1.2 Power and Authority. Borrower and each of its Subsidiaries is duly authorized and empowered to enter into, execute, deliver and perform this Agreement and each of the other Loan Documents to which it is a party. The execution, delivery and performance of this Agreement and each of the other Loan Documents have been duly authorized by all necessary corporate or other relevant action and do not and will not: (i) require any consent or approval of the shareholders of Borrower or any of the shareholders, partners or members, as the

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case may be, of any Subsidiary of Borrower; (ii) contravene Borrower’s or any of its Subsidiaries’ charter, articles or certificate of incorporation, partnership agreement, certificate of formation, by-laws, limited liability agreement, operating agreement or other organizational documents (as the case may be); (iii) violate, or cause Borrower or any of its Subsidiaries to be in default under, any provision of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award in effect having applicability to Borrower or any of its Subsidiaries, the violation of which could reasonably be expected to have a Material Adverse Effect; (iv) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which Borrower or any of its Subsidiaries is a party or by which it or its Properties may be bound or affected, the breach of or default under which could reasonably be expected to have a Material Adverse Effect; or (v) result in, or require, the creation or imposition of any Lien (other than Permitted Liens) upon or with respect to any of the Properties now owned or hereafter acquired by Borrower or any of its Subsidiaries.

7.1.3 Legally Enforceable Agreement. This Agreement is, and each of the other Loan Documents when delivered under this Agreement will be, a legal, valid and binding obligation of Borrower and each of its Subsidiaries party thereto, enforceable against it in accordance with its respective terms.

7.1.4 Capital Structure. Exhibit 7.1.4 hereto states, as of the date hereof, (i) the correct name of each of the Subsidiaries of Borrower, its jurisdiction of incorporation or organization and the percentage of its Voting Stock owned by Borrower, (ii) the name of Borrower’s and each of its Subsidiaries’ corporate or joint venture relationships and the nature of the relationship, (iii) the numbers and nature of all outstanding Securities of Borrower and the holder of Securities of each Subsidiary of Borrower and (iv) the number of authorized, issued and treasury Securities of Borrower and each Subsidiary of Borrower. Borrower has good title to all of the Securities it purports to own of each of such Subsidiaries, free and clear in each case of any Lien other than Permitted Liens. All such Securities have been duly issued and are fully paid and non-assessable. Except as set forth on Exhibit 7.1.4, as of the date hereof, there are no outstanding options to purchase, or any rights or warrants to subscribe for, or any commitments or agreements to issue or sell, or any powers of attorney relating to any Securities, or Obligations convertible into Securities of Borrower or any of its Subsidiaries, which in each case, have been granted by Borrowers or any of its Subsidiaries. Except as set forth on Exhibit 7.1.4, as of the date hereof, there are no outstanding agreements or instruments binding upon any of Borrower’s or any of its Subsidiaries’ partners, members or shareholders, as the case may be, relating to the ownership of its Securities to which Borrower or any of its Subsidiaries are a party. Exhibit 7.1.4 shall be deemed to be updated as permitted by Section 7.2 by each of Borrower’s Public Filings made after the date hereof, so long as Borrower has delivered a copy of such Public Filing to Agent.

7.1.5 Names; Organization. Neither Borrower nor any of its Subsidiaries has been known as or has used any legal, fictitious or trade names except those listed on Exhibit 7.1.5 hereto. Except as set forth on Exhibit 7.1.5, neither Borrower nor any of its Subsidiaries has been the surviving entity of a merger or consolidation or has acquired all or substantially all of the assets of any Person. Each of Borrower’s and each of its Subsidiaries’ state(s) of incorporation or organization, Type of Organization and Organizational I.D. Number is set forth on Exhibit 7.1.5. The exact legal name of Borrower and each of its Subsidiaries is set forth on Exhibit 7.1.5.

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7.1.6 Business Locations; Agent for Process. Each of Borrower’s and each of its Subsidiary’s chief executive office, location of books and records and other places of business are as listed on Exhibit 6.1.1 hereto, as updated from time to time by Borrower in accordance with the provisions of subsection 6.1.1. During the preceding one-year period, neither Borrower nor any of its Subsidiaries has had an office, place of business or agent for service of process, other than as listed on Exhibit 6.1.1. All tangible Collateral is and will at all times be kept by Borrower and its Subsidiaries in accordance with subsection 6.1.1. Except as shown on Exhibit 6.1.1, as of the date hereof, no Inventory is stored with a bailee, distributor, warehouseman or similar party, nor is any Inventory consigned to any Person.

7.1.7 Title to Properties; Priority of Liens. Borrower and each of its Subsidiaries has good, indefeasible and marketable title to and fee simple ownership of, or valid and subsisting leasehold interests in, all of its real Property, and good title to all of the Collateral and all of its other Property, in each case, free and clear of all Liens except Permitted Liens. Borrower and each of its Subsidiaries has paid or discharged all lawful claims which, if unpaid, might become a Lien against any of Borrower’s or such Subsidiary’s Properties that is not a Permitted Lien. The Liens granted to Agent under Section 5 hereof are first priority Liens, subject only to Permitted Liens.

7.1.8 Accounts. Agent may rely, in determining which Accounts are Eligible Accounts, on all statements and representations made by Borrower with respect to any Account or Accounts. With respect to each of Borrower’s Accounts, whether or not such Account is an Eligible Account, unless otherwise disclosed to Agent in writing:

(i) It is genuine and in all respects what it purports to be, and it is not evidenced by a judgment;

(ii) It arises out of a completed, bona fide sale and delivery of goods or rendition of services by a Co-Borrower, in the ordinary course of its business and in accordance with the terms and conditions of all purchase orders, contracts or other documents relating thereto and forming a part of the contract between a Co-Borrower and the Account Debtor;

(iii) It is for a liquidated amount maturing as stated in the duplicate invoice covering such sale or rendition of services, a copy of which has been furnished or is available to Agent;

(iv) There are no facts, events or occurrences which in any way impair the validity or enforceability of any Accounts or tend to reduce the amount payable thereunder from the face amount of the invoice and statements delivered or made available to Agent with respect thereto;

(v) To the best of Co-Borrowers’ knowledge, the Account Debtor thereunder (1) had the capacity to contract at the time any contract or other document giving rise to the Account was executed and (2) such Account Debtor is Solvent; and

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(vi) To the best of Co-Borrowers’ knowledge, there are no proceedings or actions which are threatened or pending against the Account Debtor thereunder which might result in any material adverse change in such Account Debtor’s financial condition or the collectibility of such Account.

7.1.9 Equipment. The Equipment of Borrower and its Subsidiaries is in good operating condition and repair, and all necessary replacements of and repairs thereto shall be made so that the operating efficiency thereof shall be maintained and preserved, reasonable wear and tear excepted. Neither Borrower nor any of its Subsidiaries will permit any Equipment to become affixed to any real Property leased to Borrower or any of its Subsidiaries so that an interest arises therein under the real estate laws of the applicable jurisdiction unless the landlord of such real Property has executed a landlord waiver or leasehold mortgage in favor of and in form reasonably acceptable to Agent, and Borrower will not permit any of the Equipment of Borrower or any of its Subsidiaries to become an accession to any personal Property other than Equipment that is subject to first priority Liens (except for Permitted Liens) in favor of Agent.

7.1.10 Financial Statements; Fiscal Year. The Consolidated balance sheets of Borrower and its Subsidiaries (including the accounts of all Subsidiaries of Borrower and their respective Subsidiaries for the respective periods during which a Subsidiary relationship existed) as of December 31, 2005, and the related statements of income, changes in shareholder’s equity, and changes in financial position for the periods ended on such dates, have been prepared in accordance with GAAP, and present fairly in all material respects the financial positions of Borrower and such Persons, at such dates and the results of Borrower’s and such Persons’ operations, for such periods. As of the date hereof, since December 31, 2005, there has been no material adverse change in the financial position of Borrower and such other Persons, taken as a whole, as reflected in the Consolidated balance sheet as of such date. As of the date hereof, the fiscal year of Borrower and each of its Subsidiaries ends on December 31 of each year.

7.1.11 Full Disclosure. The financial statements referred to in subsection 7.1.10 hereof do not, nor does this Agreement or any other written statement of Borrower to Agent or any Lender contain any untrue statement of a material fact or omit a material fact necessary to make the statements contained therein or herein not misleading.

7.1.12 Solvent Financial Condition. Borrower and each of its Subsidiaries, is and will be Solvent.

7.1.13 Surety Obligations. Except as set forth on Exhibit 7.1.13, as of the date hereof, neither Borrower nor any of its Subsidiaries is obligated as surety or indemnitor under any surety or similar bond or other contract or has issued or entered into any agreement to assure payment, performance or completion of performance of any undertaking or obligation of any Person.

7.1.14 Taxes. Borrower’s federal tax identification number is 41-1642846. USPoly’s federal tax identification number is 20-3575436. The federal tax identification number of each other Subsidiary of Borrower is shown on Exhibit 7.1.14 hereto. Borrower and each of its Subsidiaries has filed all federal, state and local tax returns and other reports relating to taxes it is required by law to file, and has paid, or made provision for the payment of, all taxes,

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assessments, fees, levies and other governmental charges upon it, its income and Properties as and when such taxes, assessments, fees, levies and charges are due and payable, unless and to the extent any thereof are being actively contested in good faith and by appropriate proceedings and Borrower and each of its Subsidiaries maintains reasonable reserves on its books therefor. The provision for taxes on the books of Borrower and its Subsidiaries is adequate for all years not closed by applicable statutes, and for the current fiscal year.

7.1.15 Brokers. Except as shown on Exhibit 7.1.15 hereto, there are no claims for brokerage commissions, finder’s fees or investment banking fees in connection with the transactions contemplated by this Agreement.

7.1.16 Patents, Trademarks, Copyrights and Licenses. Borrower and each of its Subsidiaries owns, possesses or licenses or has the right to use all the patents, trademarks, service marks, trade names, copyrights, licenses and other Intellectual Property necessary for the present and planned future conduct of its business without any known conflict with the rights of others, except for such conflicts as could not reasonably be expected to have a Material Adverse Effect. All such patents, trademarks, service marks, trade names, copyrights, licenses, and other similar rights are listed on Exhibit 7.1.16 hereto. No claim, which could reasonably be expected to have a Material Adverse Effect, has been asserted to Borrower or any of its Subsidiaries which is currently pending that their use of their Intellectual Property or the conduct of their business does or may infringe upon the Intellectual Property rights of any third party. To the knowledge of Borrower and except as set forth on Exhibit 7.1.16 hereto, as of the date hereof, no Person is engaging in any activity that infringes in any material respect upon Borrower’s or any of its Subsidiaries’ material Intellectual Property. Except as set forth on Exhibit 7.1.16 Borrower’s and each of its Subsidiaries’ (i) material trademarks, service marks, and copyrights are registered with the U.S. Patent and Trademark Office or in the U.S. Copyright Office, as applicable and (ii) material license agreements and similar arrangements relating to its Inventory (1) permits, and does not restrict, the assignment by Borrower or any of its Subsidiaries to Agent, or any other Person designated by Agent, of all of Borrower’s or such Subsidiary’s, as applicable, rights, title and interest pertaining to such license agreement or such similar arrangement and (2) would permit the continued use by Borrower or such Subsidiary, or Agent or its assignee, of such license agreement or such similar arrangement and the right to sell Inventory subject to such license agreement for a period of no less than 6 months after a default or breach of such agreement or arrangement. The consummation and performance of the transactions and actions contemplated by this Agreement and the other Loan Document, including without limitation, the exercise by Agent of any of its rights or remedies under Section 10, will not result in the termination or impairment of any of Borrower’s or any of its Subsidiaries’ ownership or rights relating to its Intellectual Property, except for such Intellectual Property rights the loss or impairment of which could not reasonably be expected to have a Material Adverse Effect. Except as listed on Exhibit 7.1.16 and except as could not reasonably be expected to have a Material Adverse Effect, (i) neither Borrower nor any of its Subsidiaries is in breach of, or default under, any term of any license or sublicense with respect to any of its Intellectual Property and (ii) to the knowledge of Borrower, no other party to such license or sublicense is in breach thereof or default thereunder, and such license is valid and enforceable.

7.1.17 Governmental Consents. Borrower and each of its Subsidiaries has, and is in good standing with respect to, all governmental consents, approvals, licenses,

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authorizations, permits, certificates, inspections and franchises necessary to continue to conduct its business as heretofore or proposed to be conducted by it and to own or lease and operate its Properties as now owned or leased by it, except where the failure to possess or so maintain such rights could not reasonably be expected to have a Material Adverse Effect.

7.1.18 Compliance with Laws. Borrower and each of its Subsidiaries has duly complied, and its Properties, business operations and leaseholds are in compliance with, the provisions of all federal, state and local laws, rules and regulations applicable to Borrower or such Subsidiary, as applicable, its Properties or the conduct of its business, except for such noncompliance as could not reasonably be expected to have a Material Adverse Effect, and there have been no citations, notices or orders of noncompliance issued to Borrower or any of its Subsidiaries under any such law, rule or regulation, except where such noncompliance could not reasonably be expected to have a Material Adverse Effect. Borrower and each of its Subsidiaries has established and maintains an adequate monitoring system to insure that it remains in compliance in all material respects with all federal, state and local rules, laws and regulations applicable to it. No Inventory has been produced in violation of the Fair Labor Standards Act (29 U.S.C. §201 et seq.), as amended.

7.1.19 Restrictions. Neither Borrower nor any of its Subsidiaries is a party or subject to any contract or agreement which restricts its right or ability to incur Indebtedness, other than as set forth on Exhibit 7.1.19 hereto, none of which prohibit the execution of or compliance with this Agreement or the other Loan Documents by Borrower or any of its Subsidiaries, as applicable.

7.1.20 Litigation. Except as set forth on Exhibit 7.1.20 hereto, there are no actions, suits, proceedings or investigations pending, or to the knowledge of Borrower, threatened, against or affecting Borrower or any of its Subsidiaries, or the business, operations, Properties, prospects, profits or condition of Borrower or any of its Subsidiaries which, singly or in the aggregate, could reasonably be expected to have a Material Adverse Effect. Neither Borrower nor any of its Subsidiaries is in default with respect to any order, writ, injunction, judgment, decree or rule of any court, governmental authority or arbitration board or tribunal, which, singly or in the aggregate, could reasonably be expected to have a Material Adverse Effect.

7.1.21 No Defaults. No event has occurred and no condition exists which would, upon or after the execution and delivery of this Agreement or Borrower’s performance hereunder, constitute a Default or an Event of Default. Neither Borrower nor any of its Subsidiaries is in default in (and no event has occurred and no condition exists which constitutes, or with the passage of time or the giving of notice or both would constitute, a default in) the payment of any Indebtedness to any Person for Money Borrowed in excess of Seven Hundred Fifty Thousand Dollars ($750,000).

7.1.22 Leases. Exhibit 7.1.22 hereto is a complete listing of all capitalized and operating personal property leases of Borrower and its Subsidiaries and all real property leases of Borrower and its Subsidiaries. Borrower and each of its Subsidiaries is in full compliance with all of the terms of each of its respective capitalized and operating leases, except where the failure to so comply could not reasonably be expected to have a Material Adverse Effect.

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7.1.23 Pension Plans. Except as disclosed on Exhibit 7.1.23 hereto, neither Borrower nor any of its Subsidiaries has any Plan. Borrower and each of its Subsidiaries is in compliance with the requirements of ERISA and the regulations promulgated thereunder with respect to each Plan, except where the failure to so comply could not reasonably be expected to have a Material Adverse Effect. No fact or situation that could reasonably be expected to result in a material adverse change in the financial condition of Borrower and its Subsidiaries exists in connection with any Plan. Neither Borrower nor any of its Subsidiaries has any withdrawal liability in connection with a Multiemployer Plan.

7.1.24 Trade Relations. There exists no actual or, to Co-Borrowers’ knowledge, threatened termination, cancellation or limitation of, or any modification or change in, the business relationship between Borrower or any of its Subsidiaries and any customer or any group of customers whose purchases individually or in the aggregate are material to the business of Borrower and its Subsidiaries, or with any material supplier, except in each case, where the same could not reasonably be expected to have a Material Adverse Effect, and there exists no present condition or state of facts or circumstances which would prevent Borrower or any of its Subsidiaries from conducting such business after the consummation of the transactions contemplated by this Agreement in substantially the same manner in which it has heretofore been conducted.

7.1.25 Labor Relations. Except as described on Exhibit 7.1.25 hereto, as of the date hereof, neither Borrower nor any of its Subsidiaries is a party to any collective bargaining agreement. There are no material grievances, disputes or controversies with any union or any other organization of Borrower’s or any of its Subsidiaries’ employees, or threats of strikes, work stoppages or any asserted pending demands for collective bargaining by any union or organization, except those that could not reasonably be expected to have a Material Adverse Effect.

7.1.26 Related Businesses. Co-Borrowers are engaged in the businesses of the manufacture and distribution of plastic pipe as of the Closing Date, as well as in certain other businesses. These operations require financing on a basis such that the credit supplied can be made available from time to time to Co-Borrowers, as required for the continued successful operation of Co-Borrowers taken as a whole. Co-Borrowers have requested the Lenders to make credit available hereunder primarily for the purposes set forth in subsection 1.1.3 and generally for the purposes of financing the operations of Co-Borrowers. Each Co-Borrower and each Subsidiary of each Co-Borrower expects to derive benefit (and the Board of Directors of each Co-Borrower and each Subsidiary of each Co-Borrower has determined that such Co-Borrower or Subsidiary may reasonably be expected to derive benefit), directly or indirectly, from a portion of the credit extended by Lenders hereunder, both in its separate capacity and as a member of the group of companies, since the successful operation and condition of each Co-Borrower and each Subsidiary of each Co-Borrower is dependent on the continued successful performance of the functions of the group as a whole. Each Co-Borrower acknowledges that, but for the agreement of each of the other Co-Borrowers to execute and deliver this Agreement, Agent and Lenders would not have made available the credit facilities established hereby on the terms set forth herein.

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Continuous Nature of Representations and Warranties. Each representation and warranty contained in this Agreement and the other Loan Documents shall be continuous in nature and shall remain accurate, complete and not misleading at all times during the term of this Agreement, except for changes in the nature of Borrower’s or any of Borrower’s Subsidiary’s business or operations that would render the information in any exhibit attached hereto or to any other Loan Document either inaccurate, incomplete or misleading, so long as Majority Lenders have consented to such changes or such changes are expressly permitted by this Agreement or such changes do not have or evidence a Material Adverse Effect. Without limiting the generality of the foregoing, each Loan request made or deemed made pursuant to subsection 3.1.1 hereof shall constitute Borrower’s reaffirmation, as of the date of each such loan request, of each representation, warranty or other statement made or furnished to Agent or any Lender by or on behalf of Borrower, any Subsidiary of Borrower, or any Guarantor in this Agreement, any of the other Loan Documents, or any instrument, certificate or financial statement furnished in compliance with or in reference thereto, as any such representation, warranty or other statement may be modified or amended as provided in the previous sentence. To the extent Borrowers have not delivered new exhibits to be attached hereto, then the corresponding exhibit attached to the Original Loan Agreement shall be deemed attached to this Agreement and Borrowers shall be deemed to have represented and warranted to Agent and Lenders that the information contained in any such exhibit is true and correct in all material respects.

7.2 Survival of Representations and Warranties. All representations and warranties of Borrower contained in this Agreement or any of the other Loan Documents shall survive the execution, delivery and acceptance thereof by Agent and each Lender and the parties thereto and the closing of the transactions described therein or related thereto.

SECTION 8. COVENANTS AND CONTINUING AGREEMENTS

8.1 Affirmative Covenants. During the Term, and thereafter for so long as there are any Obligations outstanding, each Co-Borrower covenants that, unless otherwise consented to by Majority Lenders, in writing, it shall:

8.1.1 Visits and Inspections; Lender Meeting. Permit (i) representatives of Agent, and during the continuation of any Default or Event of Default any Lender, from time to time, as often as may be reasonably requested, but only during normal business hours, to visit and inspect the Properties of Borrower and each of its Subsidiaries, inspect, audit and make extracts from its books and records, and discuss with its officers, its employees and its independent accountants, Borrower’s and each of its Subsidiaries’ business, assets, liabilities, financial condition, business prospects and results of operations and (ii) appraisers engaged pursuant to Section 2.10 (whether or not personnel of Agent), from time to time, as often as may be reasonably requested, but only during normal business hours and subject to the limitations contained in Section 2.10 of the Agreement, to visit and inspect the Properties of Borrower and each of its Subsidiaries, for the purpose of completing appraisals pursuant to Section 2.10. Agent, if no Default or Event of Default then exists, shall give Borrower reasonable prior notice of any such inspection or audit. Without limiting the foregoing, Borrower will participate and will cause key management personnel of each Co-Borrower to participate in a meeting with Agent and Lenders periodically during each year, which meeting(s) shall be held at such times and such places as may be reasonably requested by Agent.

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8.1.2 Notices. Promptly notify Agent in writing of the occurrence of any event or the existence of any fact which renders any representation or warranty in this Agreement or any of the other Loan Documents inaccurate, incomplete or misleading in any material respect as of the date made or remade. In addition, Borrower agrees to provide Agent with prompt written notice of any change in the information disclosed in any Exhibit hereto (other than changes which are expressly permitted by this Agreement), in each case after giving effect to the materiality limits and Material Adverse Effect qualifications contained therein.

8.1.3 Financial Statements. Keep, and cause each of its Subsidiaries to keep, adequate records and books of account with respect to its business activities in which proper entries are made in accordance with customary accounting practices reflecting all its financial transactions; and cause to be prepared and furnished to Agent and each Lender, the following, all to be prepared in accordance with GAAP applied on a consistent basis, unless Borrower’s certified public accountants concur in any change therein and such change is disclosed to Agent and is consistent with GAAP:

(i) not later than 90 days after the close of each fiscal year of Borrower, unqualified (except for a qualification for a change in accounting principles with which the accountant concurs) audited financial statements of Borrower and its Subsidiaries as of the end of such year, on a Consolidated and consolidating basis, certified by a firm of independent certified public accountants of recognized standing selected by Borrower but acceptable to Agent and, within a reasonable time thereafter a copy of any management letter issued in connection therewith;

(ii) not later than 30 days after the end of each month hereafter, including the last month of Borrower’s fiscal year, unaudited interim financial statements of Borrower and its Subsidiaries as of the end of such month and of the portion of the fiscal year then elapsed, on a Consolidated and consolidating basis, certified by the principal financial officer of Borrower as prepared in accordance with GAAP and fairly presenting in all material respects the financial position and results of operations of Borrower and its Subsidiaries for such month and period subject only to changes from audit and year-end adjustments and except that such statements need not contain notes;

(iii) together with each delivery of financial statements pursuant to clause (i) of this subsection 8.1.3 and clause (ii) of this subsection 8.1.3 for the months of March, June, September and December, a management report (1) setting forth in comparative form the corresponding figures for the corresponding periods of the previous fiscal year and the corresponding figures from the most recent Projections for the current fiscal year delivered pursuant to subsection 8.1.7 and (2) identifying the reasons for any significant variations. The information above shall be presented in reasonable detail and shall be certified by the chief financial officer of Borrower to the effect that such information fairly presents in all material respects the results of operation and financial condition of Borrower and its Subsidiaries as at the dates and for the periods indicated;

(iv) promptly after the sending or filing thereof, as the case may be, copies of any proxy statements, financial statements or reports which Borrower has made available to its Securities holders and copies of any regular, periodic and special reports

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or registration statements which Borrower or any of its Subsidiaries files with the Securities and Exchange Commission or any governmental authority which may be substituted therefor, or any national securities exchange;

(v) upon request of Agent, copies of any annual report to be filed with ERISA in connection with each Plan; and

(vi) such other data and information (financial and otherwise) as Agent or any Lender, from time to time, may reasonably request, bearing upon or related to the Collateral or Borrower’s or any of its Subsidiaries’ financial condition or results of operations.

The foregoing notwithstanding, Agent and Lenders agree that in respect to operating divisions, Borrower shall only be required to deliver income statements pursuant to clauses (i) and (ii) above.

Concurrently with the delivery of the financial statements described in clause (i) of this subsection 8.1.3, Borrower shall forward to Agent a copy of the accountants’ letter to Borrower’s management that is prepared in connection with such financial statements and also shall cause to be prepared and shall furnish to Agent a certificate of the aforesaid certified public accountants certifying to Agent that, based upon their examination of the financial statements of Borrower and its Subsidiaries performed in connection with their examination of said financial statements, they are not aware of any Default or Event of Default, or, if they are aware of such Default or Event of Default, specifying the nature thereof. Concurrently with the delivery of the annual financial statements described in paragraph (i) and the interim financial statements described in paragraph (ii) for the months of March, June, September and December and of this subsection 8.1.3, or more frequently if reasonably requested by Agent, Borrower shall cause to be prepared and furnished to Agent a Compliance Certificate in the form of Exhibit 8.1.3 hereto executed by the Chief Financial Officer of Borrower (a “Compliance Certificate”).

8.1.4 Borrowing Base Certificates. On or before the 20th of each month from and after the date hereof, Borrower shall deliver to Agent, in form acceptable to Agent, a monthly Borrowing Base Certificate as of the last day of the immediately preceding month, with such supporting materials as Agent shall reasonably request. If Borrower deems it advisable, or Agent shall request, Borrower shall execute and deliver to Agent Borrowing Base Certificates more frequently than monthly.

8.1.5 Landlord, Processor and Storage Agreements. Provide Agent with copies of all agreements between Borrower or any of its Subsidiaries and any landlord, warehouseman, processor, distributor or consignee which owns or is the lessee of any premises at which any Collateral may, from time to time, be kept. With respect to any lease (other than leases for sales offices), warehousing agreement or any processing agreement in any case entered into after the Closing Date, Borrower shall provide Agent with landlord waivers, bailee letters or processor letters with respect to such premises. Such landlord waivers, bailee letters or processor letters shall be in a form supplied by Agent to Borrower with such reasonable revisions as are customarily accepted by Agent or by similar financial institutions in similar financial transactions.

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8.1.6 Intentionally Omitted.

8.1.7 Projections. No later than 30 days prior to the end of each fiscal year of Borrower, deliver to Agent Projections of Borrower and each of its Subsidiaries for the forthcoming fiscal year, month by month.

8.1.8 Subsidiaries. Cause each Subsidiary of Borrower (other than a Co-Borrower), whether now or hereafter in existence, promptly upon Agent’s request therefor, to execute and deliver to Agent a Guaranty Agreement and a security agreement pursuant to which such Subsidiary guaranties the payment of all Obligations and grants to Agent a first priority Lien (subject only to Permitted Liens) on all of its Properties of the types described in Section 5.1. Additionally, Borrower shall execute and deliver to Agent a pledge agreement pursuant to which Borrower grants to Agent a first priority Lien (subject only to Permitted Liens) with respect to all of the issued and outstanding Securities of each such Subsidiary.

8.1.9 Deposit and Brokerage Accounts. For each deposit account or brokerage account that any Co-Borrower at any time opens or maintains, such Co-Borrower shall, at Agent’s request and option, pursuant to an agreement in form and substance reasonably satisfactory to Agent, cause the depository bank or securities intermediary, as applicable, to agree to comply at any time with instructions from Agent to such depository bank or securities intermediary, as applicable, directing the disposition of funds from time to time credited to such deposit or brokerage account, without further consent of the applicable Co-Borrower. With respect to any automated clearing house (ACH) services offered by Agent or Bank to any Co-Borrower, Agent agrees to cause Bank to require Co-Borrowers to pre-fund any such ACH transfer if (x) an Event of Default has occurred and is continuing or (y) any two Lenders deliver to Agent a written request to require Co-Borrowers to do so.

Negative Covenants. During the Term, and thereafter for so long as there are any Obligations outstanding, each Co-Borrower covenants that, unless otherwise consented to by Majority Lenders, in writing, it shall not:

8.1.10 Mergers; Consolidations; Acquisitions; Structural Changes. Merge or consolidate, or permit any Subsidiary of Borrower to merge or consolidate, with any Person; nor change its or any of its Subsidiaries’ state of incorporation or organization, Type of Organization or Organizational I.D. Number; nor change its or any of its Subsidiaries’ legal name; nor acquire, nor permit any of its Subsidiaries to acquire, all or any substantial part of the Properties of any Person, except for:

(i) mergers or other consolidations of any Subsidiary of Borrower into Borrower or another wholly-owned Subsidiary of Borrower; and

(ii) acquisitions of assets consisting of fixed assets or real property that constitute Capital Expenditures;

(iii) Permitted Limited Acquisitions; and

(iv) Permitted Acquisitions.

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8.1.11 Loans. Except as provided in Section 8.2.7 hereof, make, or permit any Subsidiary of Borrower to make, any loans or other advances of money (other than for salary, travel, advances, advances against commissions and other similar advances in the ordinary course of business) to any Person, except that if after giving effect to any such loans or advances there is no existing and continuing Default or Event of Default, Borrower may make loans and advances to its officers and executives for the purpose of financing the purchase by such officers and executives in the open market of shares of Borrower’s Common Stock; provided that the aggregate amount of such loans and advances under this clause does not exceed at any point in time Two Million Dollars ($2,000,000).

8.1.12 Total Indebtedness. Create, incur, assume, or suffer to exist, or permit any Subsidiary of Borrower to create, incur or suffer to exist, any Indebtedness, except:

(i) Obligations owing to Agent and Lenders;

(ii) Indebtedness of any Subsidiary of Borrower to Borrower;

(iii) accounts payable to trade creditors and current operating expenses (other than for Funded Debt) which are not aged more than 30 days from the due date, in each case incurred in the ordinary course of business and paid within such time period, unless the same are being actively contested in good faith and by appropriate and lawful proceedings; and Borrower or such Subsidiary shall have set aside such reserves, if any, with respect thereto as are required by GAAP and deemed adequate by Borrower or such Subsidiary and its independent accountants;

(iv) Obligations to pay Rentals permitted by Section 8.2.18;

(v) Permitted Purchase Money Indebtedness;

(vi) contingent liabilities arising out of endorsements of checks and other negotiable instruments for deposit or collection in the ordinary course of business;

(vii) Indebtedness under Capitalized Leases listed on Exhibit 7.1.22;

(viii) Indebtedness incurred in connection with performance bonds, workmen’s compensation bonds or the like;

(ix) Indebtedness under the leases of Borrower’s manufacturing plants at 2220 Nugget Way, Eugene, Oregon and at 101 East Avenue M, Conroe, Texas;

(x) Indebtedness under the leases of real Property at 2150 Port of Tacoma Road, Tacoma, Washington, 8875 Avenue 304, Visalia, California and 1820 Midvale Road, Sunnyside, Washington;

(xi) Indebtedness under the Sale and Leaseback Documents;

(xii) Permitted Indebtedness; and

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(xiii) Indebtedness not included in paragraphs (i) through (xii) above which does not exceed at any time, in the aggregate, the sum of $1,000,000.

8.1.13 Affiliate Transactions. Enter into, or be a party to, or permit any Subsidiary of Borrower to enter into or be a party to, any transaction with any Affiliate of Borrower or any holder of any Securities of Borrower, who is also an Affiliate of Borrower, including without limitation any management, consulting or similar fees, except (x) in the ordinary course of and pursuant to the reasonable requirements of Borrower’s or such Subsidiary’s business and upon fair and reasonable terms which are fully disclosed to Agent and are no less favorable to Borrower or such Subsidiary than would be obtained in a comparable arms-length transaction with a Person not an Affiliate or Security holder of Borrower, or (y) the payment of management, consulting or similar fees in an amount not to exceed $500,000 per year, if the agreement governing the payment of such fees provides that such management, consulting or similar fees are payable no less frequently than quarterly and that any payment of such management, consulting or similar fees would be continually deferred if after giving effect to any such payment, an Event of Default (including, without limitation, an Event of Default under Section 8.3 hereof) would exist and be continuing.

8.1.14 Limitation on Liens. Create or suffer to exist, or permit any Subsidiary of Borrower to create or suffer to exist, any Lien upon any of its Property, income or profits, whether now owned or hereafter acquired, except:

(i) Liens at any time granted in favor of Agent for its benefit and the ratable benefit of Lenders;

(ii) Liens for taxes (excluding any Lien imposed pursuant to any of the provisions of ERISA) not yet due, or being contested in the manner described in Section 7.1.14 hereto, but only if in Agent’s judgment such Lien does not adversely affect Agent’s or Lenders’ rights or the priority of Agent’s Lien in the Collateral;

(iii) Liens arising in the ordinary course of Co-Borrowers’ business by operation of law or regulation or to secure the performance of contracts (other than for Funded Debt), statutory obligations, surety, appeal bonds or the like, but only if payment in respect of any such Lien is not at the time required and such Liens do not, in the aggregate, materially detract from the value of the Property of Co-Borrowers or materially impair the use thereof in the operation of Co-Borrowers’ business;

(iv) Purchase Money Liens securing Permitted Purchase Money Indebtedness;

(v) Liens securing Indebtedness of one of Borrower’s Subsidiaries to Borrower or another such Subsidiary;

(vi) such other Liens as appear on Exhibit 8.2.5 hereto;

(vii) zoning restrictions, easements, licenses, reservations, provisions, covenants, conditions, waivers, restrictions on the use of property or minor irregularities of title (and with respect to leasehold interest, mortgages, obligations, liens and other

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encumbrances incurred, created, assumed or permitted to exist and arising by, through or under a landlord or owner of the leased Property, with or without consent of the lessee) which do not in the aggregate impair the use of any Property material to the operation of the business of Borrower or its Subsidiaries or the value of such Property for the purpose of the business of Borrower or its Subsidiaries;

(viii) such other Liens as Required Lenders may hereafter approve in writing; and

(ix) extensions, renewals and replacements of the Liens referred to in paragraphs (i) through (viii) hereof

8.1.15 Subordinated Debt and Other Indebtedness. Make, or permit any Subsidiary of Borrower to make, any payment, redemption or repurchase of any part or all of any Subordinated Debt or take any other action or omit to take any other action in respect of any Subordinated Debt, except in accordance with any applicable subordination agreement.

8.1.16 Distributions. Declare or make, or permit any Subsidiary of Borrower to declare or make, any Distributions other than Distributions payable by a Subsidiary of Borrower to Borrower and Permitted Distributions.

8.1.17 Intentionally Omitted.

8.1.18 Disposition of Assets. Sell, lease or otherwise dispose of any of, or permit any Subsidiary of Borrower to sell, lease or otherwise dispose of any of, its Properties, including any disposition of Property as part of a sale and leaseback transaction, to or in favor of any Person, except for:

(i) sales of Inventory in the ordinary course of business;

(ii) transfers of Property to Borrower by a Subsidiary of Borrower;

(iii) dispositions of Property that is substantially worn, damaged, uneconomic or obsolete (subject to subsection 6.4.2 hereof);

(iv) dispositions of investments described in paragraphs (iv), (v), (vi) and (vii) of the definition of the term “Restricted Investments”; and

(v) other dispositions expressly authorized by this Agreement (including, without limitation, subsection 8.2.7).

8.1.19 Securities of Subsidiaries. Permit any of its Subsidiaries to issue any additional Securities except to Borrower and except for director’s qualifying Securities.

8.1.20 Bill-and-Hold Sales, Etc. Make, or permit any Subsidiary of Borrower to make, a sale to any customer on a bill-and-hold, guaranteed sale, sale and return, sale on approval, repurchase or return or consignment basis.

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8.1.21 Restricted Investment. Except as otherwise provided by subsection 8.2.2 of the Agreement or make or have, or permit any Subsidiary of Borrower to make or have, any Restricted Investment.

8.1.22 Subsidiaries and Joint Ventures. Create, acquire or otherwise suffer to exist, or permit any Subsidiary of Borrower to create, acquire or otherwise suffer to exist, any Subsidiary or joint venture arrangement not in existence as of the date hereof

8.1.23 Tax Consolidation. File or consent to the filing of any consolidated income tax return with any Person other than Borrower’s Subsidiaries.

8.1.24 Organizational Documents. Agree to, or suffer to occur, any amendment, supplement or addition to its or any of its Subsidiaries’ charter, articles or certificate of incorporation, certificate of formation, limited partnership agreement, bylaws, limited liability agreement, operating agreement or other organizational documents (as the case may be), that would reasonably be expected to have a Material Adverse Effect.

8.1.25 Fiscal Year End. Change, or permit any Subsidiary of Borrower to change, its fiscal year end.

8.1.26 Negative Pledges. Enter into any agreement limiting the ability of Borrower or any of its Subsidiaries to voluntarily create Liens upon any of its Property.

8.1.27 Leases. Become, or permit any of its Subsidiaries to become, a lessee under any operating lease (other than a lease under which Borrower or any of its Subsidiaries is lessor) of Property if the aggregate Rentals payable during any current or future of 12 consecutive months under the lease in question and all other leases under which Borrower or any of its Subsidiaries is then lessee would exceed One Million Five Hundred Thousand Dollars ($1,500,000). Lease payments made with respect to the Sale and Leaseback Transaction are capital lease payments not operating lease payments. The term “Rentals” means, as of the date of determination, all payments which the lessee is required to make by the terms of any lease.

8.2 Specific Financial Covenants. During the Term, and thereafter for so long as there are any Obligations outstanding, Co-Borrowers covenant that, unless otherwise consented to by Majority Lenders, in writing, they shall comply with all of the financial covenants set forth in Exhibit 8.3 hereto. If GAAP changes from the basis used in preparing the audited financial statements delivered to Agent by Borrower on or before the Closing Date, Borrower will provide Agent with certificates demonstrating compliance with such financial covenants and will include, at the election of Borrower or upon the request of Agent, calculations setting forth the adjustments necessary to demonstrate how Borrower is also in compliance with such financial covenants based upon GAAP as in effect on the Closing Date.

SECTION 9. CONDITIONS PRECEDENT

Notwithstanding any other provision of this Agreement or any of the other Loan Documents, and without affecting in any manner the rights of Agent or any Lender under the other sections of this Agreement, no Lender shall be required to make the initial Loan, nor shall Agent be required to or issue or procure the initial Letter of Credit or LC Guaranty unless and until each of the following conditions has been and continues to be satisfied:

9.1 Documentation. Agent shall have received, in form and substance satisfactory to Agent and its counsel, a duly executed copy of this Agreement and the other Loan Documents, together with such additional documents, instruments, opinions and certificates as Agent and its counsel shall require in connection therewith from time to time, all in form and substance satisfactory to Agent and its counsel.

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9.2 No Default. No Default or Event of Default shall exist.

9.3 Other Conditions. Each of the conditions precedent set forth in the Loan Documents shall have been satisfied.

9.4 No Litigation. No action, proceeding, investigation, regulation or legislation shall have been instituted, threatened or proposed before any court, governmental agency or legislative body to enjoin, restrain or prohibit, or to obtain damages in respect of, or which is related to or arises out of this Agreement or the consummation of the transactions contemplated hereby.

9.5 Material Adverse Effect. As of the Closing Date, since December 31, 2005, there has not been any material adverse change in its business, assets, financial condition, income or prospects.

9.6 Availability. Agent shall have determined immediately after the payment of all expenses incurred in connection herewith, Availability shall equal or exceed $30,000,000.

9.7 Closing Fees. Co-Borrowers shall have paid to Agent for the benefit of the applicable Lenders the fees provided for in Section 2.3.

9.8 Environmental Matters. Agent shall be satisfied as to the existing potential liability of Borrower and its Subsidiaries with respect to environmental matters including compliance with all laws and regulations relating to environmental protection.

SECTION 10. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT

10.1 Events of Default. The occurrence of one or more of the following events shall constitute an “Event of Default”:

10.1.1 Payment of Obligations. Co-Borrowers shall fail to pay any of the Obligations hereunder or under any Note on the due date thereof (whether due at stated maturity, on demand, upon acceleration or otherwise).

10.1.2 Misrepresentations. Any representation, warranty or other statement made or furnished to Agent or any Lender by or on behalf of Borrower, any Subsidiary of Borrower or any Guarantor in this Agreement, any of the other Loan Documents or any instrument, certificate or financial statement furnished in compliance with or in reference thereto proves to have been false or misleading in any material respect when made, furnished or reaffirmed pursuant to Section 7.2 hereof

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10.1.3 Breach of Specific Covenants. Co-Borrowers shall fail or neglect to perform, keep or observe any covenant contained in Section or subsection 5.2, 5.3, 5.4, 6.1.1, 6.1.2, 6.2.4, 6.2.5, 8.1.1, 8.1.4, 8.1.9, 8.2 or 8.3 hereof on the date that Co-Borrower (or any one of them) are (is) required to perform, keep or observe such covenant or shall fail or neglect to perform, keep or observe any covenant contained in Section 8.1.3 or 8.1.7 hereof within 5 days following the date on which Co-Borrower (or any one of them) are (is) required to perform, keep or observe such covenant.

10.1.4 Breach of Other Covenants. Borrower or any Subsidiary of Borrower shall fail or neglect to perform, keep or observe any covenant contained in this Agreement (other than a covenant which is dealt with specifically elsewhere in Section 10.1 hereof) and the breach of such other covenant is not cured to Majority Lenders’ satisfaction within fifteen (15) days after the sooner to occur of Borrower’s receipt of notice of such breach from Agent or any Lender or the date on which such failure or neglect first becomes known to any officer of Borrower or any Subsidiary of any Borrower; provided, however, that if a cure cannot be effected within such fifteen (15) day period, Co-Borrowers shall have ten (10) additional days to effect such cure if during such ten-day period Co-Borrowers are diligent in pursuing such a cure.

10.1.5 Default Under Security Documents or Other Agreements. Any event of default shall occur under, or Borrower or any of its Subsidiaries shall default in the performance or observance of any term, covenant, condition or agreement contained in, any of the Security Documents, or the Other Agreements and such default shall continue beyond any applicable grace period.

10.1.6 Other Defaults. There shall occur any default or event of default on the part of Borrower or any Subsidiary of Borrower under any agreement, document or instrument to which Borrower or such Subsidiary of Borrower is a party or by which Borrower, such Subsidiary of Borrower or any of its Property is bound, evidencing or relating to any Indebtedness (other than the Obligations) with an outstanding principal balance in excess of $750,000, if the payment or maturity of such Indebtedness is or could be accelerated in consequence of such event of default or demand for payment of such Indebtedness is made or could be made in accordance with the terms thereof

10.1.7 Uninsured Losses. Any material loss, theft, damage or destruction of any portion of the Collateral having a fair market value of $750,000, in the aggregate, if not fully covered (subject to such deductibles and self-insurance retentions as Agent shall have permitted) by insurance.

10.1.8 Insolvency and Related Proceedings. Borrower or any Subsidiary of Borrower shall cease to be Solvent or shall suffer the appointment of a receiver, trustee, custodian or similar fiduciary, or shall make an assignment for the benefit of creditors, or any petition for an order for relief shall be filed by or against Borrower or any Subsidiary of Borrower under U.S. federal bankruptcy laws (if against Borrower or any Subsidiary of Borrower the continuation of such proceeding for more than 30 days), or Borrower or any Subsidiary of Borrower shall make any offer of settlement, extension or composition to their respective unsecured creditors generally.

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10.1.9 Business Disruption; Condemnation. There shall occur a cessation of a substantial part of the business of Borrower or any Subsidiary of Borrower for a period which materially adversely affects Borrower’s or such Subsidiary’s capacity to continue its business on a profitable basis; or Borrower or any Subsidiary of Borrower shall suffer the loss or revocation of any material license or permit now held or hereafter acquired by Borrower or any Subsidiary of Borrower which is necessary to the continued or lawful operation of its business; or Borrower or any Subsidiary of Borrower shall be enjoined, restrained or in any way prevented by court, governmental or administrative order from conducting all or any material part of its business affairs; or any material lease or agreement pursuant to which Borrower or any Subsidiary of Borrower leases, uses or occupies any Property shall be canceled or terminated prior to the expiration of its stated term, except any such lease or agreement the cancellation or termination of which could not reasonably be expected to have a Material Adverse Effect; or any material portion of the Collateral shall be taken through condemnation or the value of such Property shall be impaired through condemnation.

10.1.10 Change of Control. A Change of Control shall have occurred and, with respect to a Board Change of Control only, Agent or Majority Lenders shall have declared in writing that such Board Change constitutes an Event of Default within [30] days after the occurrence of such Board Change of Control. Agent and Lenders agree not to charge Co-Borrowers any fee in order to waive or not declare an Event of Default as a result of a Board Change of Control.

10.1.11 ERISA. A Reportable Event shall occur which, in Agent’s reasonable determination, constitutes grounds for the termination by the Pension Benefit Guaranty Corporation of any Plan or for the appointment by the appropriate United States district court of a trustee for any Plan, or any Plan shall be terminated or any such trustee shall be requested or appointed, or if Borrower or any Subsidiary of Borrower is in “default” (as defined in Section 4219(c)(5) of ERISA) with respect to payments to a Multiemployer Plan resulting from Borrower’s or such Subsidiary’s complete or partial withdrawal from such Plan and any such event could reasonably be expected to have a Material Adverse Effect.

10.1.12 Challenge to Agreement. Borrower or any Subsidiary of Borrower, or any Affiliate of any of them, shall challenge or contest in any action, suit or proceeding the validity or enforceability of this Agreement or any of the other Loan Documents, the legality or enforceability of any of the Obligations or the perfection or priority of any Lien granted to Agent.

10.1.13 Criminal Forfeiture. Borrower or any Subsidiary of Borrower or any other Guarantor shall be criminally indicted or convicted under any law that could lead to a forfeiture of any Property of Borrower or any Subsidiary of Borrower.

10.1.14 Judgments. Any money judgments, writ of attachment or similar processes (collectively, “Judgments”) are issued or rendered against Borrower or any Subsidiary of Borrower, or any of their respective Property (i) in the case of money judgments, in an amount of Two Hundred Fifty Thousand Dollars ($250,000) or more for all such judgments, attachments or processes in the aggregate, in each case in excess of any applicable insurance with respect to which the insurer has admitted liability, and (ii) in the case of non-monetary Judgments, such

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Judgment or Judgments (in the aggregate) could reasonably be expected to have a Material Adverse Effect, in each case which Judgment is not stayed, released or discharged within 30 days.

10.1.15 Senior Management. Borrower’s chief executive officer or chief financial officer shall resign or otherwise cease to be employed by Borrower and such individual(s) is (are) not replaced within 60 days after the date on which such officer(s) is (are) no longer employed by Borrower with an individual(s) acceptable to Agent.

10.2 Acceleration of the Obligations. Upon or at any time after the occurrence and during the continuance of an Event of Default, (i) the Revolving Loan Commitments shall, at the option of Agent or Majority Lenders be terminated and/or (ii) Agent or Majority Lenders may declare all or any portion of the Obligations at once due and payable without presentment, demand, protest or further notice by Agent or any Lender, and Co-Borrowers shall forthwith pay to Agent, the full amount of such Obligations, provided, that upon the occurrence of an Event of Default specified in subsection 10.1.8 hereof, the Revolving Loan Commitments shall automatically be terminated and all of the Obligations shall become automatically due and payable, in each case without declaration, notice or demand by Agent or any Lender.

10.3 Other Remedies. Upon the occurrence and during the continuance of an Event of Default, Agent shall have and may and, upon receiving an instruction from Majority Lenders in accordance with Section 11.1, shall exercise from time to time the following other rights and remedies:

10.3.1 All of the rights and remedies of a secured party under the UCC or under other applicable law, and all other legal and equitable rights to which Agent or Lenders may be entitled, all of which rights and remedies shall be cumulative and shall be in addition to any other rights or remedies contained in this Agreement or any of the other Loan Documents, and none of which shall be exclusive.

10.3.2 The right to take immediate possession of the Collateral, and to (i) require Borrower and each of its Subsidiaries to assemble the Collateral, at Co-Borrowers’ expense, and make it available to Agent at a place designated by Agent which is reasonably convenient to both parties, and (ii) enter any premises where any of the Collateral shall be located and to keep and store the Collateral on said premises until sold (and if said premises be the Property of Borrower or any Subsidiary of Borrower, Borrower agrees not to charge, or permit any of its Subsidiaries to charge, Agent for storage thereof).

10.3.3 The right to sell or otherwise dispose of all or any Collateral in its then condition, or after any further manufacturing or processing thereof, at public or private sale or sales, with such notice as may be required by law, in lots or in bulk, for cash or on credit, all as Agent, in its sole discretion, may deem advisable. Agent may, at Agent’s option, disclaim any and all warranties regarding the Collateral in connection with any such sale. Co-Borrowers agree that 10 days’ written notice to Borrower or any of its Subsidiaries of any public or private sale or other disposition of Collateral shall be reasonable notice thereof, and such sale shall be at such locations as Agent may designate in said notice. Agent shall have the right to conduct such sales on Borrower’s or any of its Subsidiaries’ premises, without charge therefor, and such sales

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may be adjourned from time to time in accordance with applicable law. Agent shall have the right to sell, lease or otherwise dispose of the Collateral, or any part thereof, for cash, credit or any combination thereof, and Agent, on behalf of Lenders, may purchase all or any part of the Collateral at public or, if permitted by law, private sale and, in lieu of actual payment of such purchase price, may set off the amount of such price against the Obligations. The proceeds realized from the sale of any Collateral shall be applied, after allowing 2 Business Days for collection, first to the costs, expenses and attorneys’ fees incurred by Agent in collecting the Obligations, in enforcing the rights of Agent and Lenders under the Loan Documents and in collecting, retaking, completing, protecting, removing, storing, advertising for sale, selling and delivering any Collateral and second as provided in subsection 3.4.2 hereof. If any deficiency shall arise, Co-Borrowers shall remain jointly and severally liable to Agent and Lenders therefor.

10.3.4 Agent is hereby granted a license or other right to use, without charge, Borrower’s and each of its Subsidiary’s labels, patents, copyrights, licenses, rights of use of any name, trade secrets, trade names, trademarks and advertising matter, or any Property of a similar nature, as it pertains to the Collateral, in completing, advertising for sale and selling any Collateral and Borrower’s and each of its Subsidiary’s rights under all licenses and all franchise agreements shall inure to Agent’s benefit.

10.3.5 Agent may, at its option, or shall, if so required by Majority Lenders, require Co-Borrowers to deposit with Agent funds equal to the LC Amount; provided that upon the occurrence of an Event of Default specified in Section 10.1.8 hereof, Co-Borrowers shall automatically deposit with Agent funds equal to the LC Amount and, if Co-Borrowers fail to promptly make such deposit, Agent may advance such amount as a Revolving Credit Loan (whether or not an Overadvance is created thereby). Each such Revolving Credit Loan shall be secured by all of the Collateral and shall constitute a Base Bate Portion. Any such deposit or advance shall be held by Agent as a reserve to fund future payments on such LC Guaranties and future drawings against such Letters of Credit. At such time as all LC Guaranties have been paid or terminated and all Letters of Credit have been drawn upon or expired, any amounts remaining in such reserve shall be applied against any outstanding Obligations, or, if all Obligations have been indefeasibly paid in full, returned to Co-Borrowers.

10.4 Set Off and Sharing of Payments. In addition to any rights now or hereafter granted under applicable law and not by way of limitation of any such rights, during the continuance of any Event of Default, each Lender is hereby authorized by each Co-Borrower at any time or from time to time, with prior written consent of Agent and with reasonably prompt subsequent notice to Co-Borrowers (any prior or contemporaneous notice to Co-Borrowers being hereby expressly waived) to set off and to appropriate and to apply any and all (i) balances held by such Lender at any of its offices for the account of Borrower or any of its Subsidiaries (regardless of whether such balances are then due to Borrower or its Subsidiaries), and (ii) other property at any time held or owing by such Lender to or for the credit or for the account of Borrower or any of its Subsidiaries, against and on account of any of the Obligations. Any Lender exercising a right to set off shall, to the extent the amount of any such set off exceeds its Revolving Loan Percentage of the amount set off, purchase for cash (and the other Lenders shall sell) interests in each such other Lender’s pro rata share of the Obligations as would be necessary to cause such Lender to share such excess with each other Lender in accordance with their respective Revolving Loan Percentages. Each Co-Borrower agrees, to the fullest extent

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permitted by law, that any Lender may exercise its right to set off with respect to amounts in excess of its pro rata share of the Obligations and upon doing so shall deliver such excess to Agent for the benefit of all Lenders in accordance with the Revolving Loan Percentages.

10.5 Remedies Cumulative; No Waiver. All covenants, conditions, provisions, warranties, guaranties, indemnities, and other undertakings of Co-Borrowers contained in this Agreement and the other Loan Documents, or in any document referred to herein or contained in any agreement supplementary hereto or in any schedule or in any Guaranty Agreement given to Agent or any Lender or contained in any other agreement between any Lender and any or all Co-Borrower(s) or between Agent and any or all Co-Borrower(s) heretofore, concurrently, or hereafter entered into, shall be deemed cumulative to and not in derogation or substitution of any of the terms, covenants, conditions, or agreements of Co-Borrowers herein contained. The failure or delay of Agent or any Lender to require strict performance by Co-Borrowers of any provision of this Agreement or to exercise or enforce any rights, Liens, powers, or remedies hereunder or under any of the aforesaid agreements or other documents or security or Collateral shall not operate as a waiver of such performance, Liens, rights, powers and remedies, but all such requirements, Liens, rights, powers, and remedies shall continue in full force and effect until all Loans and other Obligations owing or to become owing from Co-Borrowers to Agent and each Lender have been fully satisfied. None of the undertakings, agreements, warranties, covenants and representations of Co-Borrowers contained in this Agreement or any of the other Loan Documents and no Default or Event of Default by Co-Borrowers under this Agreement or any other Loan Documents shall be deemed to have been suspended or waived by Lenders, unless such suspension or waiver is by an instrument in writing specifying such suspension or waiver and is signed by a duly authorized representative of Agent and directed to Borrower, on its own behalf and on behalf of each other Co-Borrower.

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SECTION 11. AGENT

11.1 Authorization and Action , Each Lender hereby appoints and authorizes Agent to take such action on its behalf and to exercise such powers under this Agreement and the other Loan Documents as are delegated to Agent by the terms hereof and thereof, together with such powers as are reasonably incidental thereto. Each Lender hereby acknowledges that Agent shall not have by reason of this Agreement assumed a fiduciary relationship in respect of any Lender. In performing its functions and duties under this Agreement, Agent shall act solely as agent of Lenders and shall not assume, or be deemed to have assumed, any obligation toward, or relationship of agency or trust with or for, Co-Borrowers. As to any matters not expressly provided for by this Agreement and the other Loan Documents (including without limitation enforcement and collection of the Notes), Agent may, but shall not be required to, exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Majority Lenders, whenever such instruction shall be requested by Agent or required hereunder, or a greater or lesser number of Lenders if so required hereunder, and such instructions shall be binding upon all Lenders; provided, that Agent shall be fully justified in failing or refusing to take any action which exposes Agent to any liability (for which Agent, in the reasonable exercise of its discretion, believes it is not adequately indemnified against) or which is contrary to this Agreement, the other Loan Documents or applicable law, unless Agent is indemnified to its satisfaction by the other Lenders against any and all liability and expense which it may incur by reason of taking or continuing to take any such action. If Agent seeks the consent or approval of the Majority Lenders (or a greater or lesser number of Lenders as required in this Agreement), with respect to any action hereunder, Agent shall send notice thereof to each Lender and shall notify each Lender at any time that the Majority Lenders (or such greater or lesser number of Lenders) have instructed Agent to act or refrain from acting pursuant hereto.

11.2 Agent’s Reliance, Etc. Neither Agent, any Affiliate of Agent, nor any of their respective directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them under or in connection with this Agreement or the other Loan Documents, except for its or their own gross negligence or willful misconduct. Without limitation of the generality of the foregoing, Agent: (i) may treat each Lender party hereto as the holder of Obligations until Agent receives written notice of the assignment or transfer or such lender’s portion of the Obligations signed by such Lender and in form reasonably satisfactory to Agent; (ii) may consult with legal counsel, independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts, (iii) makes no warranties or representations to any Lender and shall not be responsible to any Lender for any recitals, statements, warranties or representations made in or in connection with this Agreement or any other Loan Documents; (iv) shall not have any duty beyond Agent’s customary practices in respect of loans in which Agent is the only lender, to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement or the other Loan Documents on the part of Co-Borrowers, to inspect the property (including the books and records) of Co-Borrowers, to monitor the financial condition of Co-Borrowers or to ascertain the existence or possible existence or continuation of any Default or Event of Default; (v) shall not be responsible to any Lender for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or the other Loan Documents or any other

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instrument or document furnished pursuant hereto or thereto; (vi) shall not be liable to any Lender for any action taken, or inaction, by Agent upon the instructions of Majority Lenders pursuant to Section 11.1 hereof or refraining to take any action pending such instructions; (vii) shall not be liable for any apportionment or distributions of payments made by it in good faith pursuant to Section 3 hereof; (viii) shall incur no liability under or in respect of this Agreement or the other Loan Documents by acting upon any notice, consent, certificate, message or other instrument or writing (which may be by telephone, facsimile, telegram, cable or telex) believed in good faith by it to be genuine and signed or sent by the proper party or parties; and (ix) may assume that no Event of Default has occurred and is continuing, unless Agent has actual knowledge of the Event of Default, has received notice from Co-Borrowers or Co-Borrowers’ independent certified public accounts stating the nature of the Event of Default, or has received notice from a Lender stating the nature of the Event of Default and that such Lender considers the Event of Default to have occurred and to be continuing. In the event any apportionment or distribution described in clause (vii) above is determined to have been made in error, the sole recourse of any Person to whom payment was due but not made shall be to recover from the recipients of such payments any payment in excess of the amount to which they are determined to have been entitled.

11.3 Bank of America and Affiliates. With respect to its commitment hereunder to make Loans, Bank of America shall have the same rights and powers under this Agreement and the other Loan Documents as any other Lender and may exercise the same as though it were not Agent; and the terms “Lender,” “Lenders” or “Majority Lenders” shall, unless otherwise expressly indicated, include Bank of America in its individual capacity as a Lender. Bank of America and its Affiliates may lend money to, and generally engage in any kind of business with, any Co-Borrower, and any Person who may do business with or own Securities of any Co-Borrower all as if Bank of America were not Agent and without any duty to account therefor to any other Lender.

11.4 Lender Credit Decision. Each Lender acknowledges that it has, independently and without reliance upon Agent or any other Lender and based on the financial statements referred to herein and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement. Agent shall not have any duty or responsibility, either initially or on an ongoing basis, to provide any Lender with any credit or other similar information regarding Co-Borrowers, except for any reports or information that Agent is expressly required to give Lenders pursuant to the terms of this Agreement.

11.5 Indemnification. Lenders agree to indemnify Agent (to the extent not reimbursed by Co-Borrowers), in accordance with their respective Aggregate Percentages, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against Agent in any way relating to or arising out of this Agreement or any other Loan Document or any action taken or omitted by Agent under this Agreement; provided that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties,

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actions, judgments, suits, costs, expenses or disbursements resulting from Agent’s gross negligence or willful misconduct or resulting from Product Obligations offered by Agent or its Affiliates to any Co-Borrower. Without limitation of the foregoing, each Lender agrees to reimburse Agent promptly upon demand for its ratable share, as set forth above, of any out-of-pocket expenses (including reasonable attorneys’ fees) incurred by Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiation, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement and each other Loan Document, to the extent that Agent is not reimbursed for such expenses by Co-Borrowers. The obligations of Lenders under this Section 11.5 shall survive the payment in full of all Obligations and the termination of this Agreement. If after payment and distribution of any amount by Agent to Lenders, any Lender or any other Person, including any Co-Borrower, any creditor of a Co-Borrower, a liquidator, administrator or trustee in bankruptcy, recovers from Agent any amount found to have been wrongfully paid to Agent or disbursed by Agent to Lenders, then Lenders, in accordance with their respective Aggregate Percentages, shall reimburse Agent for all such amounts.

11.6 Rights and Remedies to be Exercised by Agent Only. Each Lender agrees that, except as set forth in Section 10.4 and except, at times when no Person is acting as Agent, for any action to sue for and collect a judgment upon its Note, no Lender shall have any right individually (i) to realize upon the security created by this Agreement or any other Loan Document, (ii) to enforce any provision of this Agreement or any other Loan Document, or (iii) to make demand under this Agreement or any other Loan Document.

11.7 Agency Provisions Relating to Collateral. Each Lender authorizes and ratifies Agent’s entry into this Agreement and the Security Documents for the benefit of Lenders. Each Lender agrees that any action taken by Agent with respect to the Collateral in accordance with the provisions of this Agreement or the Security Documents, and the exercise by Agent of the powers set forth herein or therein (other than any act or omission that is contrary to the written instructions of Majority Lenders given pursuant to Section 11.1.), together with such other powers as are reasonably incidental thereto, shall be authorized and binding upon all Lenders. Agent is hereby authorized on behalf of all Lenders, without the necessity of any notice to or further consent from any Lender to take any action with respect to any Collateral or the Loan Documents which may be necessary to perfect and maintain perfected Agent’s Liens upon the Collateral, for its benefit and the ratable benefit of Lenders. Lenders hereby irrevocably authorize Agent, at its option and in its discretion, to release any Lien granted to or held by Agent upon any Collateral (i) upon termination of the Agreement and payment and satisfaction of all Obligations; or (ii) constituting property being sold or disposed of if Borrower, on its own behalf and on behalf of each other Co-Borrower, certifies to Agent that the sale or disposition is made in compliance with subsection 8.2.9 hereof (and Agent may rely conclusively on any such certificate, without further inquiry); or (iii) constituting property in which no Co-Borrower owned any interest at the time the Lien was granted or at any time thereafter; or (iv) in connection with any foreclosure sale or other disposition of Collateral after the occurrence and during the continuation of an Event of Default or (v) if approved, authorized or ratified in writing by Agent at the direction of all Lenders. Upon request by Agent at any time, Lenders will confirm in writing Agent’s authority to release particular types or items of Collateral pursuant hereto. Agent shall have no obligation whatsoever to any Lender or to any other Person to assure that the Collateral exists or is owned by a Co-Borrower or is cared for, protected or insured or

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has been encumbered or that the Liens granted to Agent herein or pursuant to the Security Documents have been properly or sufficiently or lawfully created, perfected, protected or enforced or are entitled to any particular priority, or to exercise at all or in any particular manner or under any duty of care, disclosure or fidelity, or to continue exercising, any of its rights, authorities and powers granted or available to Agent in this Section 11.7 or in any of the Loan Documents, it being understood and agreed that in respect of the Collateral, or any act, omission or event related thereto, Agent may act in any manner it may deem appropriate, in its sole discretion, exercised in good faith, but consistent with the provisions of this Agreement, including given Agent’s own interest in the Collateral as a Lender and that Agent shall have no duty or liability whatsoever to any Lender.

11.8 Agent’s Right to Purchase Commitments. Agent shall have the right, but shall not be obligated, at any time upon written notice to any Lender and with the consent of such Lender, which may be granted or withheld in such Lender’s sole discretion, to purchase and assume for Agent’s own account all of such Lender’s interests in this Agreement, the other Loan Documents and the Obligations, for the unpaid balance of the outstanding Obligations owed to such Lender, including without limitation all accrued and unpaid interest and fees.

11.9 Right of Sale, Assignment, Participations. Each Co-Borrower hereby consents to any Lender’s participation, sale, assignment, transfer or other disposition, at any time or times hereafter, of this Agreement and any of the other Loan Documents, or of any portion hereof or thereof, including, without limitation, such Lender’s rights, title, interests, remedies, powers, and duties hereunder or thereunder subject to the terms and conditions set forth below:

11.9.1 Sales, Assignments. Each assigning Lender hereby agrees that, with respect to any sale or assignment (i) no such sale or assignment shall be for an amount of less than $5,000,000 or an integral multiple of $1,000,000 in excess thereof, (ii) each such sale or assignment shall be made on terms and conditions which are customary in the industry at the time of the transaction, (iii) Agent and, in the absence of a Default or Event of Default, Borrower, on its own behalf and on behalf of each other Co-Borrower, must consent, such consent not to be unreasonably withheld, to each such assignment to a Person that is not an original signatory to this Agreement, (iv) the assigning Lender shall pay to Agent a processing and recordation fee of $3,500 and any reasonable out-of-pocket attorneys’ fees and expenses incurred by Agent in connection with any such sale or assignment and (v) Agent, the assigning Lender and the assignee Lender shall each have executed and delivered an Assignment and Acceptance Agreement. After such sale or assignment has been consummated (x) the assignee Lender thereupon shall become a “Lender” for all purposes of this Agreement and (y) the assigning Lender shall have no further liability for funding the portion of Revolving Loan Commitments assumed by such other Lender. Notwithstanding any other provision of this Agreement, any Lender may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement and any note held by it in favor of any federal reserve bank in accordance with Regulation A of the Board or U.S. Treasury Regulation 31 CFR § 203.14, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law.

11.9.2 Participations. Any Lender may grant participations in its extensions of credit hereunder to any other Lender or other lending institution (a “Participant”), provided that

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(i) no such participation shall be for an amount of less than $5,000,000, (ii) no Participant shall thereby acquire any direct rights under this Agreement, (iii) no Participant shall be granted any right to consent to any amendment, except to the extent any of the same pertain to (1) reducing the aggregate principal amount of, or interest rate on, or fees applicable to, any Loan or (2) extending the final stated maturity of any Loan or the stated maturity of any portion of any payment of principal of, or interest or fees applicable to, any of the Loans; provided, that the rights described in this subclause (2) shall not be deemed to include the right to consent to any amendment with respect to or which has the effect of requiring any mandatory prepayment of any portion of any Loan or any amendment or waiver of any Default or Event of Default, (iv) no sale of a participation in extensions of credit shall in any manner relieve the originating Lender of its obligations hereunder, (v) the originating Lender shall remain solely responsible for the performance of such obligations, (vi) Co-Borrowers and Agent shall continue to deal solely and directly with the originating Lender in connection with the originating Lender’s rights and obligations under this Agreement and the other Loan Documents, (vii) in no event shall any financial institution purchasing the participation grant a participation in its participation interest in the Loans without the prior written consent of Agent, and, in the absence of a Default or an Event of Default, Borrower, on its own behalf and on behalf of each other Co-Borrower, which consents shall not unreasonably be withheld and (viii) all amounts payable by Co-Borrowers hereunder shall be determined as if the originating Lender had not sold any such participation. Notwithstanding the sale by any Lender of any participation hereunder, no Participant shall be deemed to be or have the rights and obligations of a Lender hereunder except that (a) any participant shall have a right of setoff under Section 10.4 as if it were such Lender and the amount of its participation were owing directly to such participant by the Co-Borrowers and (b) each such Participant shall be entitled to the benefits of Sections 3.8, 3.9 and 12.2 with respect to its participation.

11.9.3 Certain Agreements of Co-Borrowers. Each Co-Borrower agrees that (i) it will use commercially reasonable best efforts to assist and cooperate with each Lender in any manner reasonably requested by such Lender to effect the sale of participation in or assignments of any of the Loan Documents or any portion thereof or interest therein, including, without limitation, assisting in the preparation of appropriate disclosure documents and making members of management available at reasonable times and upon reasonable notice to meet with and answer questions of potential assignees and Participants; and (ii) subject to the provisions of Section 12.14 hereof, such Lender may disclose credit information regarding Co-Borrowers to any potential Participant or assignee.

11.9.4 Non U.S. Resident Transferees. If, pursuant to this Section 11.9, any interest in this Agreement or any Loans is transferred to any transferee which is organized under the laws of any jurisdiction other than the United States or any state thereof, the transferor Lender shall cause such transferee (other than any Participant), and may cause any Participant, concurrently with and as a condition precedent to the effectiveness of such transfer, to (i) represent to the transferor Lender (for the benefit of the transferor Lender, Agent, and Co-Borrowers) that under applicable law and treaties no taxes will be required to be withheld by Agent, Co-Borrowers or the transferor Lender with respect to any payments to be made to such transferee in respect of the interest so transferred, (ii) furnish to the transferor Lender, Agent and Co-Borrowers either United States Internal Revenue Service Form W-8BEN or United States Internal Revenue Service Form W-8ECI (wherein such transferee claims entitlement to complete

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exemption from United States federal withholding tax on all interest payments hereunder), and (iii) agree (for the benefit of the transferor Lender, Agent and Co-Borrowers) to provide the transferor Lender, Agent and Co-Borrowers a new Form W-8BEN or Form W-8ECI upon the obsolescence of any previously delivered form and comparable statements in accordance with applicable United States laws and regulations and amendments duly executed and completed by such transferee, and to comply from time to time with all applicable United States laws and regulations with regard to such withholding tax exemption.

11.10 Amendment. No amendment or waiver of any provision of this Agreement or any other Loan Document (including without limitation any Note), nor consent to any departure by Co-Borrowers therefrom, shall in any event be effective unless the same shall be in writing and signed by the Majority Lenders and Co-Borrowers, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given, provided, that no amendment, waiver or consent shall be effective, unless (i) in writing and signed by each Lender, to any of the following: (1) except as expressly permitted by Section 2.13, increase or decrease the aggregate Loan Commitments or any Lender’s Revolving Loan Commitment, (2) reduce the principal of, or interest on, any amount payable hereunder or under any Note, other than those payable only to Bank of America in its capacity as Agent, which may be reduced by Bank of America unilaterally, (3) amend the definition of Applicable Margin or increase or decrease any interest rate payable hereunder (other than the waiver or rescission of interest charged at the Default Rate which waiver or rescission may be effected by Majority Lenders), (4) postpone any date fixed for any payment of principal of, or interest on, any amounts payable hereunder or under any Note, other than those payable only to Bank of America in its capacity as Agent, which may be postponed by Bank of America unilaterally, (5) increase any advance percentage (including, without limitation, the Inventory Advance Percentage) contained in the definition of the term Borrowing Base, (6) reduce the number of Lenders that shall be required for Lenders or any of them to take any action hereunder, (7) release or discharge any Person liable for the performance of any obligations of Co-Borrowers hereunder or under any of the Loan Documents, (8) amend any provision of this Agreement that requires the consent of all Lenders or consent to or waive any breach thereof, (9) amend the definition of the term “Majority Lenders”, (10) amend subsection 3.4.2, subsection 8.1.11 or this Section 11.10, (11) release any substantial portion of the Collateral, unless otherwise permitted pursuant to Section 11.7 hereof, (12) amend the definition of Borrowing Base in any manner that materially increases the principal amount of Revolving Credit Loans that Co-Borrowers are able to obtain or (13) amend clause (iii) of subsection 8.2.3; or (ii) in writing and signed by Agent in addition to the Lenders required above to affect the rights or duties of Agent under this Agreement, any Note or any other Loan Document.

11.11 Resignation of Agent; Appointment of Successor. Agent may resign as Agent by giving not less than thirty (30) days’ prior written notice to Lenders and Borrower, on its own behalf and on behalf of each other Co-Borrower. If Agent shall resign under this Agreement, then, (i) subject to the consent of Co-Borrowers (which consent shall not be unreasonably withheld and which consent shall not be required during any period in which a Default or an Event of Default exists), Majority Lenders shall appoint from among Lenders a successor agent for Lenders or (ii) if a successor agent shall not be so appointed and approved within the thirty (30) day period following Agent’s notice to Lenders and Co-Borrowers of its resignation, then Agent shall appoint a financial institution as successor agent who shall serve as Agent until such

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time as Majority Lenders appoint a successor agent, subject to Co-Borrowers’ consent as set forth above. Upon its appointment, such successor agent shall succeed to the rights, powers and duties of Agent and the term “Agent” shall mean such successor effective upon its appointment, and the former Agent’s rights, powers and duties as Agent shall be terminated without any other or further act or deed on the part of such former Agent or any of the parties to this Agreement. After the resignation of any Agent hereunder, the provisions of this Section 11 shall inure to the benefit of such former Agent and such former Agent shall not by reason of such resignation be deemed to be released from liability for any actions taken or not taken by it while it was an Agent under this Agreement.

11.12 Audit and Examination Reports; Disclaimer by Lenders. By signing this Agreement, each Lender:

(a) is deemed to have requested that Agent furnish such Lender, promptly after it becomes available, a copy of each audit or examination report (each a “Report” and collectively, “Reports”) prepared by or on behalf of Agent;

(b) expressly agrees and acknowledges that Agent (i) does not make any representation or warranty as to the accuracy of any Report, and (ii) shall not be liable for any information contained in any Report;

(c) expressly agrees and acknowledges that the Reports are not comprehensive audits or examinations, that Agent or other party performing any audit or examination will inspect only specific information regarding Borrower and will rely significantly upon Borrower’s books and records, as well as on representations of Borrower’s personnel;

(d) agrees to keep all Reports confidential and strictly for its internal use, and not to distribute except to its participants, or use any Report in any other manner, in accordance with the provisions of Section 12.14; and

(e) without limiting the generality of any other indemnification provision contained in this Agreement, agrees: (i) to hold Agent and any such other Lender preparing a Report harmless from any action the indemnifying Lender may take or conclusion the indemnifying Lender may reach or draw from any Report in connection with any loans or other credit accommodations that the indemnifying Lender has made or may make to Co-Borrowers, or the indemnifying Lender’s participation in, or the indemnifying Lender’s purchase of, a loan or loans of Co-Borrowers; and (ii) to pay and protect, and indemnify, defend and hold Agent and any such other Lender preparing a Report harmless from and against, the claims, actions, proceedings, damages, costs, expenses and other amounts (including attorney’s fees and expenses) incurred by Agent and any such other Lender preparing a Report as the direct or indirect result of any third parties who might obtain all or part of any Report through the indemnifying Lender.

SECTION 12. MISCELLANEOUS

12.1 Power of Attorney. Each Co-Borrower hereby irrevocably designates, makes, constitutes and appoints Agent (and all Persons designated by Agent) as such Co-Borrower’s

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true and lawful attorney (and agent-in-fact), solely with respect to the matters set forth in this Section 12.1, and Agent, or Agent’s agent, may, without notice to Co-Borrowers and in Co-Borrower’s or Agent’s name, but at the cost and expense of Co-Borrowers:

12.1.1 At such time or times as Agent or said agent, in its sole discretion, may determine, endorse any Co-Borrower’s name on any checks, notes, acceptances, drafts, money orders or any other evidence of payment or proceeds of the Collateral which come into the possession of Agent or under Agent’s control.

12.1.2 At such time or times upon or after the occurrence and during the continuance of an Event of Default (provided that the occurrence of an Event of Default shall not be required with respect to clauses (iv), (vi), (viii) and (ix) below), as Agent or its agent in its sole discretion may determine: (i) demand payment of the Accounts from the Account Debtors, enforce payment of the Accounts by legal proceedings or otherwise, and generally exercise all of Co-Borrowers’ rights and remedies with respect to the collection of the Accounts; (ii) settle, adjust, compromise, discharge or release any of the Accounts or other Collateral or any legal proceedings brought to collect any of the Accounts or other Collateral; (iii) sell or assign any of the Accounts and other Collateral upon such terms, for such amounts and at such time or times as Agent deems advisable, and at Agent’s option, with all warranties regarding the Collateral disclaimed; (iv) take control, in any manner, of any item of payment or proceeds relating to any Collateral; (v) prepare, file and sign any Co-Borrower’s name to a proof of claim in bankruptcy or similar document against any Account Debtor or to any notice of lien, assignment or satisfaction of lien or similar document in connection with any of the Collateral; (vi) receive, open and dispose of all mail addressed to any Co-Borrower and notify postal authorities to change the address for delivery thereof to such address as Agent may designate; (vii) endorse the name of any Co-Borrower upon any of the items of payment or proceeds relating to any Collateral and deposit the same to the account of Agent on account of the Obligations; (viii) endorse the name of any Co-Borrower upon any chattel paper, document, instrument, invoice, freight bill, bill of lading or similar document or agreement relating to the Accounts, Inventory and any other Collateral; (ix) use any Co-Borrower’s stationery and sign the name of any Co-Borrower to verifications of the Accounts and notices thereof to Account Debtors; (x) use the information recorded on or contained in any data processing equipment and Computer Hardware and Software relating to the Accounts, Inventory, Equipment and any other Collateral; (xi) make and adjust claims under policies of insurance; and (xii) do all other acts and things necessary, in Agent’s determination, to fulfill Co-Borrowers’ obligations under this Agreement.

The power of attorney granted hereby shall constitute a power coupled with an interest and shall be irrevocable.

12.2 Indemnity. Co-Borrowers hereby agree to indemnify Agent and each Lender (and each of their Affiliates, attorneys, employees, officers, directors and agents) and hold Agent and each Lender (and each of their Affiliates, attorneys, employees, officers, directors and agents) harmless from and against any liability, loss, damage, suit, action or proceeding ever suffered or incurred by any such Person (including reasonable attorneys fees and legal expenses) (a) as the result of Co-Borrowers’ failure to observe, perform or discharge Co-Borrowers’ duties hereunder; (b) by reason of, relating to or in connection with the execution, delivery, performance or enforcement of any Loan Document, any commitments relating thereto, or any

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transaction contemplated by any Loan Document; or (c) by reason of, relating to or in connection with any credit extended or used under the Loan Documents or any act done or omitted by any Person, or the exercise of any rights or remedies thereunder, including the acquisition of any collateral by the Lender by way of foreclosure of the lien thereon, deed or bill of sale in lieu of such foreclosure or otherwise, except those resulting from the gross negligence or intentional misconduct of Agent, any Lender, any Affiliate of Agent or any Lender or any of their attorneys, employees, officers, directors or agents. In addition, Co-Borrowers shall defend Agent and each Lender (and each of their Affiliates) against and save it harmless from all claims of any Person with respect to the Collateral (except those resulting from the gross negligence or intentional misconduct of Agent, any Lender or any Affiliate of Agent or any Lender, as applicable). Without limiting the generality of the foregoing, these indemnities shall extend to any claims asserted against Agent or any Lender (and each of their Affiliates) by any Person under any Environmental Laws by reason of Co-Borrowers’ or any other Person’s failure to comply with laws applicable to solid or hazardous waste materials or other toxic substances. Notwithstanding any contrary provision in this Agreement, the obligation of Co-Borrowers under this Section 12.2 shall survive the payment in full of the Obligations and the termination of this Agreement.

12.3 Sale of Interest. No Co-Borrower may sell, assign or transfer any interest in this Agreement, any of the other Loan Documents, or any of the Obligations, or any portion thereof, including, without limitation, Co-Borrowers’ rights, title, interests, remedies, powers, and duties hereunder or thereunder.

12.4 Severability. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement.

12.5 Successors and Assigns, This Agreement, the Other Agreements and the Security Documents shall be binding upon and inure to the benefit of the successors and assigns of each Co-Borrower, Agent and each Lender permitted under Section 11.9 hereof

12.6 Cumulative Effect; Conflict of Terms. The provisions of the Other Agreements and the Security Documents are hereby made cumulative with the provisions of this Agreement. Except as otherwise provided in any of the other Loan Documents by specific reference to the applicable provision of this Agreement, if any provision contained in this Agreement is in direct conflict with, or inconsistent with, any provision in any of the other Loan Documents, the provision contained in this Agreement shall govern and control.

12.7 Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which counterparts taken together shall constitute but one and the same instrument.

12.8 Notice. Except as otherwise provided herein, all notices, requests and demands to or upon a party hereto, to be effective, shall be in writing, and shall be sent by certified or registered mail, return receipt requested, by personal delivery against receipt, by overnight

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courier or by facsimile and, unless otherwise expressly provided herein, shall be deemed to have been validly served, given, delivered or received immediately when delivered against receipt, three (3) Business Days’ after deposit in the mail, postage prepaid, one (1) Business Day after deposit with an overnight courier or, in the case of facsimile notice, when sent with respect to machine confirmed, addressed as follows:

If to Agent:	Bank of America, N.A. One South Wacker Drive Suite 3400 Chicago, Illinois 60606 Attention: Loan Administration Manager Facsimile No.: (312) 332-6537
With a copy to:	Vedder, Price, Kaufman & Kammholz, P.C. 222 North LaSalle Street Suite 2600 Chicago, Illinois 60601 Attention: John T. McEnroe Facsimile No.: (312) 609-5005
If to Co-Borrowers:	PW Eagle, Inc. 1550 Valley River Drive Eugene, Oregon 97440 Attention: Scott M. Long Facsimile No.: (541) 686-9248
With a copy to:	Fredrikson & Byron, P.A. 200 South Sixth Street, Suite 4000 Minneapolis, MN 55402-1425 Attention: K. Lisa Holter Facsimile No.: (612) 492-7077
If to any Lender:	at the address of such Lender indicated in its signature page hereto

or to such other address as each party may designate for itself by notice given in accordance with this Section 12.8; provided, however, that any notice, request or demand to or upon Agent or a Lender pursuant to subsection 3.1.1 or 4.2.2 hereof shall not be effective until received by Agent or such Lender.

12.9 Consent. Whenever Agent’s, Majority Lenders’ or all Lenders’ consent is required to be obtained under this Agreement, any of the Other Agreements or any of the Security Documents as a condition to any action, inaction, condition or event, except as otherwise specifically provided herein, Agent, Majority Lenders or all Lenders, as applicable, shall be authorized to give or withhold such consent in their sole and absolute discretion and to condition its consent upon the giving of additional Collateral security for the Obligations, the payment of money or any other matter.

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12.10 Credit Inquiries. Each Co-Borrower hereby authorizes and permits Agent and each Lender to respond to usual and customary credit inquiries from third parties concerning such Co-Borrower or any of its Subsidiaries, consistent with usual and customary practices in the industry.

12.11 Time of Essence. Time is of the essence of this Agreement, the Other Agreements and the Security Documents.

12.12 Entire Agreement. This Agreement and the other Loan Documents, together with all other instruments, agreements and certificates executed by the parties in connection therewith or with reference thereto, embody the entire understanding and agreement between the parties hereto and thereto with respect to the subject matter hereof and thereof and supersede all prior agreements, understandings and inducements, whether express or implied, oral or written.

12.13 Interpretation. No provision of this Agreement or any of the other Loan Documents shall be construed against or interpreted to the disadvantage of any party hereto by any court or other governmental or judicial authority by reason of such party having or being deemed to have structured or dictated such provision.

12.14 Confidentiality. Agent and each Lender shall hold all nonpublic information in accordance with Agent’s and such Lender’s customary procedures for handling confidential information of this nature and in accordance with safe and sound banking practices and in any event may make disclosure reasonably required by a prospective participant or assignee in connection with the contemplated participation or assignment or as required or requested by any governmental authority or representative thereof or pursuant to legal process and shall require any such participant or assignee to agree to comply with this Section 12.14. Agent and each Lender shall advise Borrower in writing of any such disclosure. Neither Agent nor any Lender shall use any nonpublic information concerning Borrower in contravention of state or federal securities laws. Agent and each Lender acknowledges that it is aware, and that it will advise its directors, officers, employees and representatives, that the United States securities laws prohibit any person who has received from an issuer material, non-public information concerning that issuer from purchasing or selling securities of such issuer or from communicating such information to any other person under circumstances under which it is reasonably foreseeable that such person is likely to purchase or sell securities of such issuer.

12.15 GOVERNING LAW; CONSENT TO FORUM. THIS AGREEMENT HAS BEEN NEGOTIATED, EXECUTED AND DELIVERED IN AND SHALL BE DEEMED TO HAVE BEEN MADE IN CHICAGO, ILLINOIS. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS; PROVIDED, HOWEVER, THAT IF ANY OF THE COLLATERAL SHALL BE LOCATED IN ANY JURISDICTION OTHER THAN ILLINOIS, THE LAWS OF SUCH JURISDICTION SHALL GOVERN THE METHOD, MANNER AND PROCEDURE FOR FORECLOSURE OF AGENT’S LIEN UPON SUCH COLLATERAL AND THE ENFORCEMENT OF AGENT’S OTHER REMEDIES IN RESPECT OF SUCH COLLATERAL TO THE EXTENT THAT THE LAWS OF SUCH JURISDICTION ARE DIFFERENT FROM OR INCONSISTENT WITH THE LAWS OF ILLINOIS. AS PART OF THE CONSIDERATION FOR NEW VALUE RECEIVED,

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AND REGARDLESS OF ANY PRESENT OR FUTURE DOMICILE OR PRINCIPAL PLACE OF BUSINESS OF ANY CO-BORROWER, AGENT OR ANY LENDER, EACH CO-BORROWER, AGENT AND EACH LENDER HEREBY CONSENTS AND AGREES THAT THE CIRCUIT COURT OF COOK COUNTY, ILLINOIS, OR, AT AGENT’S OPTION, THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS, EASTERN DIVISION, SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN ANY CO-BORROWER ON THE ONE HAND AND AGENT OR ANY LENDER ON THE OTHER HAND PERTAINING TO THIS AGREEMENT OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT. EACH CO-BORROWER EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND EACH CO-BORROWER HEREBY WAIVES ANY OBJECTION WHICH SUCH CO-BORROWER MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT. EACH CO-BORROWER HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO BORROWER (ON ITS OWN BEHALF AND ON BEHALF OF EACH OTHER CO-BORROWER) AT THE ADDRESS SET FORTH IN THIS AGREEMENT AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF BORROWER’S ACTUAL RECEIPT THEREOF OR 3 DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID. NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO AFFECT THE RIGHT OF AGENT OR ANY LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW, OR TO PRECLUDE THE ENFORCEMENT BY AGENT OR ANY LENDER OF ANY JUDGMENT OR ORDER OBTAINED IN SUCH FORUM OR THE TAKING OF ANY ACTION UNDER THIS AGREEMENT TO ENFORCE SAME IN ANY OTHER APPROPRIATE FORUM OR JURISDICTION.

12.16 WAIVERS BY CO-BORROWERS. EACH CO-BORROWER, AGENT AND EACH LENDER WAIVES THE RIGHT TO TRIAL BY JURY (WHICH AGENT AND EACH LENDER HEREBY ALSO WAIVES) IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO ANY OF THE LOAN DOCUMENTS, THE OBLIGATIONS OR THE COLLATERAL. EACH CO-BORROWER WAIVES (i) PRESENTMENT, DEMAND AND PROTEST AND NOTICE OF PRESENTMENT, PROTEST, DEFAULT, NON PAYMENT, MATURITY, RELEASE, COMPROMISE, SETTLEMENT, EXTENSION OR RENEWAL OF ANY OR ALL COMMERCIAL PAPER, ACCOUNTS, CONTRACT RIGHTS, DOCUMENTS, INSTRUMENTS, CHATTEL PAPER AND GUARANTIES AT ANY TIME HELD BY AGENT OR ANY LENDER ON WHICH ANY CO-BORROWER MAY IN ANY WAY BE LIABLE AND HEREBY RATIFIES AND CONFIRMS WHATEVER AGENT OR ANY LENDER MAY DO IN THIS REGARD; (ii) NOTICE PRIOR TO AGENT’S TAKING POSSESSION OR CONTROL OF THE COLLATERAL

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OR ANY BOND OR SECURITY WHICH MIGHT BE REQUIRED BY ANY COURT PRIOR TO ALLOWING AGENT TO EXERCISE ANY OF AGENT’S REMEDIES; (iii) THE BENEFIT OF ALL VALUATION, APPRAISEMENT AND EXEMPTION LAWS; (iv) NOTICE OF ACCEPTANCE HEREOF AND (v) EXCEPT AS PROHIBITED BY LAW, ANY RIGHT TO CLAIM OR RECOVER ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES. EACH CO-BORROWER ACKNOWLEDGES THAT THE FOREGOING WAIVERS ARE A MATERIAL INDUCEMENT TO AGENT’S AND EACH LENDER’S ENTERING INTO THIS AGREEMENT AND THAT AGENT AND EACH LENDER IS RELYING UPON THE FOREGOING WAIVERS IN ITS FUTURE DEALINGS WITH CO-BORROWERS. EACH CO-BORROWER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THE FOREGOING WAIVERS WITH ITS LEGAL COUNSEL AND HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.

12.17 Advertisement. Co-Borrowers hereby authorize Agent to publish the name of Borrower and the amount of the credit facility provided hereunder in any “tombstone” or comparable advertisement which Agent elects to publish.

12.18 No Novation. Notwithstanding anything to the contrary contained herein, this Agreement is not intended to and does not serve to effect a novation of the Obligations. Instead, it is the express intention of the parties hereto to reaffirm the indebtedness created under the Original Loan Agreement which is evidenced by the notes provided for therein and secured by the Collateral. Each Co-Borrower acknowledges and confirms that the Liens granted pursuant to the Loan Documents secured the indebtedness, liabilities and obligations of Borrower to Agent and the applicable Lenders under the Original Loan Agreement, as amended and restated hereby, and that the term “Obligations” as used in the Loan Documents (or any other terms used therein to describe or refer to the indebtedness, liabilities and obligations of Co-Borrowers to Agent and Lenders) includes, without limitation, the indebtedness, liabilities and obligations of each Co-Borrower under the Notes to be delivered hereunder, and under the Original Loan Agreement, all as amended and restated hereby, as the same may be further amended, modified, supplemented or restated from time to time. The Loan Documents and all agreements, instruments and documents executed or delivered in connection with any of the foregoing shall each be deemed to be amended to the extent necessary to give effect to the provisions of this Agreement. Cross-references in the Loan Documents to particular section numbers in the Original Loan Agreement shall be deemed to be cross-references to the corresponding sections, as applicable, to this Agreement.

12.19 Joint and Several Liability and Reimbursement. The undertaking by Co-Borrowers to repay the Obligations and each representation, warranty or covenant of each Borrower are and shall be joint and several. Subject to the last sentence of this Section 12.19, to the extent that any Co-Borrower shall be required to pay a portion of the Obligations which shall exceed the amount of loans, advances or other extensions of credit received by such Co-Borrower and all interest, costs, fees and expenses attributable to such loans, advances or other

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extensions of credit, then such Co-Borrower shall be reimbursed by the other Co-Borrowers for the amount of such excess. This Section 12.19 is intended only to define the relative rights of Co-Borrowers, and nothing set forth in Section 12.19 is intended or shall impair the obligations of each Co-Borrower, jointly and severally, to pay to Agent and Lenders the Obligations as and when the same shall become due and payable in accordance with the terms hereof. Notwithstanding anything to the contrary set forth in this Section 12.19 or any other provisions of this Agreement, it is the intent of the parties hereto that the liability incurred by each Co-Borrower in respect of the Obligations of the other Co-Borrowers (and any Lien granted by each Co-Borrower to secure such Obligations), not constitute a fraudulent conveyance or fraudulent transfer under the provisions of any applicable law of any state or other governmental unit (“Fraudulent Conveyance”). Consequently, each Co-Borrower, Agent and each Lender hereby agree that if a court of competent jurisdiction determines that the incurrence of liability by any Co-Borrower in respect of the Obligations of any other Co-Borrower (or any Liens granted by such Co-Borrower to secure such Obligations) would, but for the application of this sentence, constitute a Fraudulent Conveyance, such liability (and such Liens) shall be valid and enforceable only to the maximum extent that would not cause the same to constitute a Fraudulent Conveyance, and this Agreement and the other Loan Documents shall automatically be deemed to have been amended accordingly, nunc pro tunc. The obligations of the Co-Borrowers hereunder shall not be released, in whole or in part, by any action or thing which might, but for this provision of this Agreement, be deemed a legal or equitable discharge of a surety or guarantor, other than irrevocable payment and performance in full of the Obligations at a time after any obligation of the Lenders and the Agent to extend financial accommodations to the Co-Borrowers shall have expired or been terminated. Notwithstanding any payment or payments made by any Co-Borrower hereunder or any setoff or application of funds of any Co-Borrower by any Lender or the Agent, such Co-Borrower shall not be entitled to be subrogated to any of the rights of any Lender or the Agent against any other Co-Borrower or any other guarantor or any collateral security or guaranty or right of offset held by any Lender or the Agent for the payment of the Obligations, nor shall such Co-Borrower seek or be entitled to seek any contribution or reimbursement from any other Co-Borrower or any other guarantor in respect of payments made by such Borrower hereunder, until all amounts owing to the Lenders and the Agent by the Co-Borrowers on account of the Obligations are irrevocably paid in full and all commitments of the Lenders and the Agent to extend financial accommodations to the Co-Borrowers have been terminated.

12.20 Defaulting Lender.

(a) Remedies Against a Defaulting Lender. In addition to the rights and remedies that may be available to Agent or Co-Borrowers under this Agreement or applicable law, if at any time a Lender defaults on its obligations to make Loans herein (any such Lender a “Defaulting Lender”), such Defaulting Lender’s right to collect unused line fees or to participate in the administration of the Loans, this Agreement and the other Loan Documents, including without limitation, any right to vote in respect of, to consent to or to direct any action or inaction of Agent or to be taken into account in the calculation of the Majority Lenders, shall be suspended while such Lender remains a Defaulting Lender provided, however, that the Revolving Loan Commitments of such Lender may not be increased and the period of such Revolving Loan Commitments may not be extended without such Defaulting Lender’s prior written consent. If a Lender is a

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Defaulting Lender because it has failed to make timely payment to Agent of any amount required to be paid to Agent hereunder (without giving effect to any notice or cure periods), in addition to other rights and remedies which Agent or Co-Borrowers may have under the immediately preceding provisions or otherwise, Agent shall be entitled (i) to collect interest from such Defaulting Lender on such delinquent payment for the period from the date on which the payment was due until the date on which the payment is made at the Prime Rate, (ii) to withhold or setoff and to apply in satisfaction of the defaulted payment and any related interest, any amounts otherwise payable to such Defaulting Lender under this Agreement or any other Loan Document until such defaulted payment and related interest has been paid in MI and such default no longer exists and (iii) to bring an action or suit against such Defaulting Lender in a court of competent jurisdiction to recover the defaulted amount and any related interest. Any amounts received by Agent in respect of a Defaulting Lender’s Loans shall not be paid to such Defaulting Lender and shall be held uninvested by Agent and either applied against the purchase price of such Loans under the following subsection (b) or paid to such Defaulting Lender upon the default of such Defaulting Lender being cured.

(b) Purchase from Defaulting Lender. Any Lender that is not a Defaulting Lender shall have the right, but not the obligation, in its sole discretion, to acquire all of a Defaulting Lender’s Commitments. If more than one Lender exercises such right, each such Lender shall have the right to acquire such proportion of such Defaulting Lender’s Commitments on a pro rata basis. Upon any such purchase, the Defaulting Lender’s interest in its Loans and its rights hereunder (but not its liability in respect thereof of under the Loan Documents or this Agreement to the extent the same relate to the period prior to the effective date of the purchase) shall terminate on the date of purchase, and the Defaulting Lender shall promptly execute all documents reasonably requested to surrender and transfer such interest to the purchaser thereof subject to and in accordance with the requirements set forth in subsection 11.9.1, including an Assignment and Acceptance Agreement in form acceptable to Agent. The purchase price for the Commitments of a Defaulting Lender shall be equal to the amount of the principal balance of the Loans outstanding and owed by the Co-Borrowers to the Defaulting Lender. The purchaser shall pay to the Defaulting Lender in immediately available funds on the date of such purchase the principal of and accrued and unpaid interest and fees on the Loans made by such Defaulting Lender hereunder (it being understood that such accrued and unpaid interest and fees may be paid pro rata to the purchasing Lender and the Defaulting Lender by Agent at a subsequent date upon receipt of payment of such amounts from the Co-Borrowers). Prior to payment of such purchase price to a Defaulting Lender, Agent shall apply against such purchase price any amounts retained by Agent pursuant to the last sentence of the immediately preceding subsection (a). The Defaulting Lender shall be entitled to receive amounts owed to it by Co-Borrowers under the Loan Documents which accrued prior to the date of the default by the Defaulting Lender, to the extent the same are received by Agent from or on behalf of the Co-Borrowers. There shall be no recourse against any Lender or Agent for the payment of such sums except to the extent of the receipt of payments from any other party or in respect of the Loans.

(Signature Page Follows)

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Fifth Amended and Restated Loan and Security Agreement Signature Page

IN WITNESS WHEREOF, this Agreement has been duly executed on the day and year specified at the beginning of this Agreement.

PW EAGLE, INC., a Minnesota corporation, as a Borrower
By:	/s/ Scott Long
Name:	Scott Long
Title:	CFO
USPOLY COMPANY, LLC, a Minnesota limited liability company, as a Borrower
By:	/s/ Scott Long
Name:	Scott Long
Title:	CFO

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Fifth Amended and Restated Loan and Security Agreement Signature Page

BANK OF AMERICA, N.A., as Agent and as a Lender
By:	/s/ Brian Conole
Name:	Brian Conole
Title:	Senior Vice-President
Revolving Loan Commitment: $50,000,000

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Fifth Amended and Restated Loan and Security Agreement Signature Page

WELLS FARGO BUSINESS CREDIT, INC., as a Lender
By:	/s/ Ronald E. Gockowski
Name:	Ronald E. Gockowski
Title:	Vice-President
Revolving Loan Commitment: $25,000,000
Address:
Wells Fargo Center
N9312-040 MAC
Sixth and Marquette Avenue Minneapolis, Minnesota 55479
Attention: Ronald E. Gockowski
Telephone No.: 612-673-8577
Facsimile No.: 612-673-8589

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Fifth Amended and Restated Loan and Security Agreement Signature Page

THE CIT GROUP/BUSINESS CREDIT, INC., as a Lender
By:	/s/ Jack A. Myers
Name:	Jack A. Myers
Title:	Vice President
Revolving Loan Commitment: $25,000,000
Address:
Ten South LaSalle Street, 22nd Floor
Chicago, IL 60603
Attention: Jack A. Myers
Telephone No.: 312.424.9700
Facsimile No.: 312.424.9740

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APPENDIX A

GENERAL DEFINITIONS

When used in the Fifth Amended and Restated Loan and Security Agreement dated as of April 27, 2006, by and among Bank of America, N.A., individually and as Agent, the other financial institutions which are or become parties thereto (“Lenders”) and PW Eagle, Inc. and USPoly Company, LLC (a) the terms Account, Certificated Security, Chattel Paper, Commercial Tort Claims, Deposit Account, Document, Electronic Chattel Paper, Equipment, Financial Asset, Fixture, General Intangibles, Goods, Instruments, Inventory, Investment Property, Letter-of-Credit Rights, Payment Intangibles, Proceeds, Security, Security Entitlement Software, Supporting Obligations, Tangible Chattel Paper and Uncertificated Security have the respective meanings assigned thereto under the UCC; (b) all terms affecting Collateral having the meanings assigned thereto under the UCC shall be deemed to mean such Property, whether now owned or hereafter created or acquired by any Co-Borrower or in which a Co-Borrower now has or hereafter acquires any interest; (c) capitalized terms which are not otherwise defined have the respective meanings assigned thereto in said Loan and Security Agreement; and (d) the following terms shall have the following meanings (terms defined in the singular to have the same meaning when used in the plural and vice versa):

Account Debtor – any Person who is or may become obligated under or on account of any Account, Contract Right, Chattel Paper or General Intangible.

Affiliate – a Person (other than a Subsidiary): (i) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, a Person; (ii) which beneficially owns or holds 5% or more of any class of the Voting Stock of a Person; or (iii) 5% or more of the Voting Stock (or in the case of a Person which is not a corporation, 5% or more of the equity interest) of which is beneficially owned or held by a Person or a Subsidiary of a Person.

Agent – Bank of America, N.A., in its capacity as agent for the Lenders under the Agreement and any successor in that capacity appointed pursuant to subsection 11.11 of the Agreement.

Agent Loans – as defined in subsection 1.1.5 of the Agreement.

Aggregate Percentage – with respect to each Lender, the percentage equal to the quotient of (i) such Lender’s Loan Commitment divided by (ii) the aggregate of all Loan Commitments.

Agreement – the Fifth Amended and Restated Loan and Security Agreement referred to in the first sentence of this Appendix A, all Exhibits and Schedules thereto and this Appendix A, as each of the same may be amended from time to time.

ALTA Survey – a survey prepared in accordance with the standards adopted by the American Land Title Association and the American Congress on Surveying and Mapping in 1997, known as the “Minimum Standard Detail Requirements of Land Title Surveys”. The ALTA Survey shall be in sufficient form to satisfy the requirements of [Name of] Title Insurance Company to provide extended coverage over survey defects and shall also show the location of

A-1

all easements, utilities, and covenants of record, dimensions of all improvements, encroachments from any adjoining property, and certify as to the location of any flood plain area affecting the subject real estate. The ALTA Survey shall contain the following certification: “To PW Eagle, Inc., Bank of America, N.A., as Agent, and              Title Insurance Company. This is to certify that this map of plat and the survey on which it is based were made in accordance with the “Minimum Standard Detail Requirements for Land Title Surveys” jointly established and adopted by ALTA and ACSM in 1997. (signed (SEAL) License No.             ”.

Applicable Margin – from the Closing Date to, but not including, the first Adjustment Date (as hereinafter defined) the percentages set forth below with respect to the Base Rate Portion, the LIBOR Portion, the L/C Fee and the Unused Line Fee:

Base Rate Portion	-.50	%
LIBOR Portion	1.00	%
L/C Fee	1.00	%
Unused Line Fee	.50	%

The percentages set forth above will be adjusted on the first day of the month following delivery by Borrower to Agent of the financial statements required to be delivered pursuant to subsection 8.1.3 of the Agreement for each December 31, March 31, June 30 and September 30 during the Term, commencing with the month ending March 31, 2007 (each such date an “Adjustment Date”), effective prospectively, by reference to the applicable “Financial Measurement” (as defined below) for the four quarters most recently ending in accordance with the following:

Financial Measurement	Base Rate Portion	LIBOR Portion	L/C Fee	Unused Line Fee
£ 1.25 to 1	0.00%	1.75%	1.75%	0.375%
> 1.25 to 1, but £ 1.75 to 1	0.00%	1.50%	1.50%	0.25%
>1.75 to 1, but £ 2.75 to 1	0.25%	1.25%	1.25%	0.25%
>2.25 to 1	-0.50%	1.00%	1.00%	0.25%

provided that, if Borrower fails to deliver the financial statements required to be delivered pursuant to subsection 8.1.3 of the Agreement on or before the due date thereof, and such failure has not been cured to Agent’s reasonable satisfaction, the Applicable Margin shall automatically adjust to the highest interest rate or fee set forth above, effective prospectively from such due date until the next Adjustment Date. For purposes hereof, “Financial Measurement” shall mean the Fixed Charge Coverage Ratio. The foregoing notwithstanding, with respect to the Applicable Margin for Unused Line Fees, from April 1, 2006 until the date when Co-Borrowers have paid Agent for periods after the Closing Date Unused Line Fees in an amount equal to $125,000 over the amount that Co-Borrowers would have paid Agent for Unused Line Fees for such period if the Applicable Margin for Unused Line Fees had been 0.25%, the Applicable Margin for Unused Line Fees shall remain at 0.50%. On and after such date, the Applicable Margin for Unused Line Fees shall be 0.25% (or such higher number as applicable as of the most recent Adjustment Date per the above grid).

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Assignment and Acceptance Agreement – an assignment and acceptance agreement in form and content reasonably acceptable to Agent pursuant to which a Lender assigns to another Lender all or any portion of any of such Lender’s Revolving Loan Commitment, as permitted pursuant to the terms of this Agreement.

Availability – the amount of additional money which Co-Borrowers are entitled to borrow from time to time as Revolving Credit Loans, such amount being the difference derived when the sum of the principal amount of Revolving Credit Loans then outstanding (including any amounts which Agent or any Lender may have paid for the account of Co-Borrowers pursuant to any of the Loan Documents and which have not been reimbursed by Co-Borrowers), the LC Amount and any reserves, without duplication, is subtracted from the Borrowing Base. If the amount outstanding is equal to or greater than the Borrowing Base, Availability is $0.

Bank – Bank of America, N.A. and/or Fleet National Bank.

Base Rate – the rate of interest announced or quoted by Bank from time to time as its prime rate for commercial loans, whether or not such rate is the lowest rate charged by Bank to its most preferred borrowers; and, if such prime rate for commercial loans is discontinued by Bank as a standard, a comparable reference rate designated by Bank as a substitute therefor shall be the Base Rate.

Base Rate Portion or Base Rate Revolving Portion – that portion of the Revolving Loans that is not subject to a LIBOR Option.

Board Change of Control- as defined in the definition of Change of Control.

Borrowing Base – as at any date of determination thereof, an amount equal to the lesser of:

(i) The Revolving Credit Maximum Amount; or

(ii) an amount equal to the sum (such sum the “Collateral Borrowing Base”) of:

(a) the sum of (x) eighty-five percent (85%) of the net amount of Eligible Accounts (other than Eligible Accounts with Dating Terms) outstanding at such date, plus (y) the lesser of eighty-five percent (85%) of the net amount of Eligible Accounts with Dating Terms outstanding at such date and Ten Million Dollars ($10,000,000);

PLUS

(b) the lesser of (1) Fifty Million Dollars ($50,000,000); or (2) the sum of (x) the Inventory Advance Percentage of the value of Eligible Inventory at such date calculated on the basis of the lower of cost or market with the cost of raw materials and finished goods calculated on a first-in, first-out basis;

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PLUS

(c) an amount (the “FACC”) equal to the Fixed Asset Maximum Amount.

For purposes hereof, the net amount of Eligible Accounts at any time shall be the face amount of such Eligible Accounts less any and all returns, rebates, discounts (which may, at Agent’s option, be calculated on shortest terms), credits, allowances or excise taxes of any nature at any time issued, owing, claimed, granted, outstanding or payable in connection with such Accounts at such time. Agent and Lenders agree that Accounts derived from sales on items of “FOB Seller’s (Borrower’s) plant” (or the equivalent) may be included within Eligible Accounts from the date of any such sale.

Borrowing Base Certificate – a certificate by a responsible officer of Borrower, on its own behalf and on behalf of each other Borrower, substantially in the form of Exhibit 8.1.4 (or another form acceptable to Agent) setting forth the calculation of the Borrowing Base, including a calculation of each component thereof, all in such detail as shall be satisfactory to Agent. All calculations of the Borrowing Base in connection with the preparation of any Borrowing Base Certificate shall originally be made by Borrower and certified to Agent; provided, that Agent shall have the right to review and adjust, in the exercise of its credit judgment, any such calculation after giving notice thereof to Borrower, (1) to reflect its reasonable estimate of declines in value of any of the Collateral described therein, and (2) to the extent that Agent determines that such calculation is not in accordance with this Agreement.

Business Day – any day excluding Saturday, Sunday and any day which is a legal holiday under the laws of the State of Wisconsin or the State of Illinois or is a day on which banking institutions located in either of such states are closed.

Capital Expenditures – expenditures made or liabilities incurred for the acquisition of any fixed assets or improvements, replacements, substitutions or additions thereto which have a useful life of more than one year, including the total principal portion of Capitalized Lease Obligations.

Capitalized Lease Obligation – any Indebtedness represented by obligations under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP.

Change of Control – means the occurrence of any of the following events: (i) all or substantially all of Borrower’s assets, on a consolidated basis, are sold as an entirety to any Person or related group of Persons or there shall be consummated any consolidation or merger of Borrower (A) in which Borrower is not the continuing or surviving company (other than a consolidation or merger with a wholly owned Subsidiary in which all shares of Common Stock outstanding immediately prior to the effectiveness thereof are changed into or exchanged for the same consideration) or (B) pursuant to which the Common Stock would be converted into cash, securities or other property, in any case, other than a sale of assets or consolidation or merger of Borrower in which the holders of the Common Stock immediately prior to the sale of assets or consolidation or merger have, directly or indirectly, at least a majority of the Common Stock of the transferee or continuing or surviving company immediately after such sale of assets or consolidation or merger, (ii) any “person”(as such term is used in Sections 13(d) and 14(d) of the

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Exchange Act) other than any such person existing as of the Closing Date, is or becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 of the Exchange Act provided that such person shall be deemed to have “beneficial ownership” of all shares that such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 35% of the total voting power of the outstanding voting securities of Borrower, or (iii) other than in connection with the election of new directors at Borrower’s 2006 Annual Stockholders Meeting, which new directors have been disclosed to Agent and Lenders, during any period of six consecutive months, individuals who at the beginning of such period constituted the Board cease for any reason to constitute a majority of the Board of Directors of Borrower then in office. A Change of Control resulting from the circumstances described in clause (iii) above is referred to as a “Board Change of Control.”

Closing Date – the date on which all of the conditions precedent in Section 9 of the Agreement are satisfied or waived.

Collateral – all of the Property and interests in Property described in Section 5 of the Agreement, and all other Property and interests in Property that now or hereafter secure the payment and performance of any of the Obligations.

Collateral Borrowing Base – as defined in the definition of Borrowing Base.

Commitment and Acceptance Agreement – a commitment and acceptance agreement in form and content reasonably acceptable to Agent pursuant to which a Person undertakes to become a Lender under this Agreement with the Revolving Loan Commitment provided for therein as permitted pursuant to the terms of this Agreement.

Common Stock – means (i) the Common Stock, $.O1 par value of Borrower, (ii) the Class B Common Stock and (iii) the other class of capital stock of Borrower hereafter authorized that is not limited to a fixed sum or percentage of par or stated or liquidation value with respect to the rights of the holders thereof to participate in dividends or in the distribution of assets upon any liquidation, dissolution or winding up of Borrower.

Compliance Certificate – as defined in subsection 8.1.3 of the Agreement.

Computer Hardware and Software – all of any Co-Borrower’s rights (including rights as licensee and lessee) with respect to (i) computer and other electronic data processing hardware, including all integrated computer systems, central processing units, memory units, display terminals, printers, computer elements, card readers, tape drives, hard and soft disk drives, cables, electrical supply hardware, generators, power equalizers, accessories, peripheral devices and other related computer hardware; (ii) all Software and all software programs designed for use on the computers and electronic data processing hardware described in clause (i) above, including all operating system software, utilities and application programs in any form (source code and object code in magnetic tape, disk or hard copy format or any other listings whatsoever); (iii) any firmware associated with any of the foregoing; and (iv) any documentation for hardware, Software and firmware described in clauses (i), (ii) and (iii) above, including flow charts, logic diagrams, manuals, specifications, training materials, charts and pseudo codes.

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Consolidated – the consolidation in accordance with GAAP of the accounts or other items as to which such term applies or as the context may require.

Contract Right – any right of any Co-Borrower to payment under a contract for the sale or lease of goods or the rendering of services, which right is at the time not yet earned by performance.

Default – an event or condition the occurrence of which would, with the lapse of time or the giving of notice, or both, become an Event of Default.

Default Rate – as defined in subsection 2.1.2 of the Agreement.

Defaulting Lender – as defined in Section 12.21.

Derivative Obligations – every obligation of a Person under any forward contract, futures contract, exchange contract, swap, option or other financing agreement or arrangement (including, without limitation, caps, floors, collars and similar agreement), the value of which is dependent upon interest rates, currency exchange rates, commodities or other indices.

Distribution – in respect of any Person means and includes: (i) the payment of any dividends or other distributions on Securities (except distributions in such Securities) and (ii) the redemption or acquisition of Securities of such Person, as the case may be, unless made contemporaneously from the net proceeds of the sale of Securities.

Dominion Account – a special bank account or accounts of Agent established by a Co-Borrower pursuant to subsection 6.2.4 of the Agreement at banks selected by Co-Borrowers, but acceptable to Agent in its discretion, and over which Agent shall have sole and exclusive access and control for withdrawal purposes.

EBITDA – as defined in Exhibit 8.3 of the Agreement.

Eligible Account – an Account arising in the ordinary course of the business of a Co-Borrower, on its own behalf and on behalf of each other Co-Borrower, from the sale of goods or rendition of services which Agent, in its reasonable judgment, deems to be an Eligible Account. Without limiting the generality of the foregoing, no Account shall be an Eligible Account if:

(i) it arises out of a sale made by a Co-Borrower to a Subsidiary or an Affiliate of a Co-Borrower or to a Person controlled by an Affiliate of a Co-Borrower; or

(ii) in respect to Accounts without dating terms, it is unpaid for more than 60 days after the original due date shown on the invoice; or

(iii) in respect to Accounts without dating terms, it is due or unpaid more than 90 days after the original invoice date; or

(iv) in respect to Accounts with dating terms, it is due or unpaid for more than 210 days after the original invoice date; provided, however, that invoices qualifying for dating hereunder cannot be issued prior to December 15 or after March 15 of the subsequent year, and any invoice issued with dating terms must be paid on or before the next May 31;

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(v) 25% or more of the Accounts from the relevant Account Debtor are not deemed Eligible Accounts hereunder; or

(vi) the total unpaid Accounts of the relevant Account Debtor exceed 20% of the net amount of all Eligible Accounts, to the extent of such excess; or

(vii) any covenant, representation or warranty contained in the Agreement with respect to such Account has been breached; or

(viii) the relevant Account Debtor is also a Co-Borrower’s creditor or supplier, or the Account Debtor has disputed liability with respect to such Account, or the Account Debtor has made any claim with respect to any other Account due from such Account Debtor to Co-Borrower, or the Account otherwise is or may become subject to any right of setoff by the Account Debtor; or

(ix) the Account Debtor has commenced a voluntary case under the federal bankruptcy laws, as now constituted or hereafter amended, or made an assignment for the benefit of creditors, or a decree or order for relief has been entered by a court having jurisdiction in the premises in respect of the Account Debtor in an involuntary case under the federal bankruptcy laws, as now constituted or hereafter amended, or any other petition or other application for relief under the federal bankruptcy laws has been filed against the Account Debtor, or if the Account Debtor has failed, suspended business, ceased to be Solvent, or consented to or suffered a receiver, trustee, liquidator or custodian to be appointed for it or for all or a significant portion of its assets or affairs; or

(x) it arises from a sale to an Account Debtor outside the United States, Ontario, Canada or any other province of Canada in which the Personal Property Security Act has been adopted in substantially the same form as currently in effect in Ontario, unless the sale is on letter of credit, guaranty or acceptance terms in each case acceptable to Agent in its sole discretion; or

(xi) it arises from a sale to the Account Debtor on a bill-and-hold, guaranteed sale, sale-or-return, sale-on-approval, consignment or any other repurchase or return basis; or

(xii) the Account Debtor is the United States of America or any department, agency or instrumentality thereof, unless Borrower assigns its right to payment of such Account to Agent, for its benefit and the ratable benefit of Lenders, in a manner satisfactory to Agent so as to comply with the Assignment of Claims Act of 1940 (31 U.S.C. §203 et seq., as amended); or

(xiii) the Account is subject to a Lien other than a Permitted Lien; or

(xiv) the goods giving rise to such Account have not been delivered to and accepted by the Account Debtor or the services giving rise to such Account have not been performed by a Co-Borrower and accepted by the Account Debtor or the Account otherwise does not represent a final sale; or

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(xv) the Account is evidenced by chattel paper or an instrument of any kind, or has been reduced to judgment; or

(xvi) a Co-Borrower has made any agreement with the Account Debtor for any deduction therefrom, except for discounts or allowances which are made in the ordinary course of business for prompt payment and which discounts or allowances are reflected in the calculation of the face value of each invoice related to such Account; or

(xvii) the Account is not at all times subject to Agent’s duly perfected, first priority security interest and no other Lien except a Permitted Lien; or

(xviii) a Co-Borrower has made an agreement with the Account Debtor to extend the time of payment thereof.

Eligible Accounts with Dating Terms – any Eligible Account that does not satisfy the criteria of clauses (ii) or (iii) of the definition of Eligible Accounts but does satisfy the criteria of clause (iv) of the definition of Eligible Accounts.

Eligible Inventory – such Inventory of a Co-Borrower (other than packaging materials, supplies, consigned Inventory, ropes and reels) which Agent in its reasonable credit judgment deems to be Eligible Inventory. Without limiting the generality of the foregoing, no Inventory shall be Eligible Inventory if:

(i) it is not raw materials or finished goods that is, in Agent’s opinion, readily marketable in its current form; or

(ii) it is not in good, new and saleable condition; or

(iii) it is slow-moving, obsolete or unmerchantable; or

(iv) it does not meet all standards imposed by any governmental agency or authority; or

(v) it does not conform in all respects to the warranties and representations set forth in the Agreement; or

(vi) it is not at all times subject to Agent’s duly perfected, first priority security interest and no other Lien except a Permitted Lien; or

(vii) it is not situated at a location that is either owned by a Co-Borrower or is subject to a landlord or bailee waiver reasonably acceptable to Agent and is otherwise in compliance with the Agreement or is in transit; or

(viii) it is not situated at a location in the United States of America.

Environmental Laws – all federal, state and local laws, rules, regulations, ordinances, orders and consent decrees relating to health, safety and environmental matters.

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ERISA – the Employee Retirement Income Security Act of 1974, as amended, and any successor statute, and all rules and regulations from time to time promulgated thereunder.

ETI – Extrusion Technologies, Inc., a former Subsidiary of Borrower that has been either (x) merged into Borrower or (y) dissolved and whose assets were distributed to Borrower.

Event of Default – as defined in Section 10.1 of the Agreement.

FACC – shall have the meaning contained in the definition of Borrowing Base.

Fixed Asset Maximum Amount – as of any date Eighteen Million Dollars ($18,000,000) reduced by Eight Hundred Forty-Six Thousand One Hundred Fifty-Four Dollars ($846,154.00) on each March 31, June 30, September 30 and December 31 commencing March 31, 2006; provided that the Fixed Asset Maximum Amount shall be further reduced from time to time as provided in Section 3.3.1.

Fixed Charge Coverage Ratio – as defined in Exhibit 8.3 of the Agreement.

Funded Debt – (i) Indebtedness arising from the lending of money by any Person to Borrower or any of its Subsidiaries; (ii) Indebtedness, whether or not in any such case arising form the lending by any Person of money to Borrower or any of its Subsidiaries (A) which is represented by notes payable or drafts accepted that evidence extensions of credit, (B) which constitutes obligations evidenced by bonds, debentures, notes or similar instruments, or (C) upon which interest charges are customarily paid (other than accounts payable) or that was issued or assumed as full or partial payment for property; (iii) Indebtedness that constitutes a Capitalized Lease Obligation; (iv) reimbursement obligations with respect to letters of credit or guaranties of letters of credit; and (v) Indebtedness of Borrower or any of its Subsidiaries under any guaranty of obligations that would constitute Funded Debt under clauses (i) through (iv) hereof if owed directly by Borrower or any of its Subsidiaries.

GAAP – generally accepted accounting principles in the United States of America in effect from time to time.

Indebtedness – as applied to a Person means, without duplication:

(i) all items which in accordance with GAAP would be included in determining total liabilities as shown on the liability side of a balance sheet of such Person as at the date as of which Indebtedness is to be determined, including, without limitation, Capitalized Lease Obligations;

(ii) all obligations of other Persons which such Person has guaranteed;

(iii) all reimbursement obligations in connection with letters of credit or letter of credit guaranties issued for the account of such Person;

(iv) Derivative Obligations; and

(v) in the case of Co-Borrowers (without duplication), the Obligations.

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Intellectual Property – means: all past, present and future: trade secrets, know-how and other proprietary information; trademarks, internet domain names, service marks, trade dress, trade names, business names, designs, logos, slogans (and all translations, adaptations, derivations and combinations of the foregoing) indicia and other source and/or business identifiers, and the goodwill of the business relating thereto and all registrations or applications for registrations which have heretofore been or may hereafter be issued thereon throughout the world; copyrights (including copyrights for computer programs) and copyright registrations or applications for registrations which have heretofore been or may hereafter be issued throughout the world and all tangible property embodying the copyrights, unpatented inventions (whether or not patentable); patent applications and patents; industrial design applications and registered industrial designs; license agreements related to any of the foregoing and income therefrom; books, records, writings, computer tapes or disks, flow diagrams, specification sheets, computer software, source codes, object codes, executable code, data, databases and other physical manifestations, embodiments or incorporations of any of the foregoing; the right to sue for all past, present and future infringements of any of the foregoing; all other intellectual property; and all common law and other rights throughout the world in and to all of the foregoing.

Interest Period – as applicable to any LIBOR Portion, a period commencing on the date such LIBOR Portion is advanced, continued or converted, and ending on the date which is one (1) month, two (2) months, three (3) months, or six (6) months later, as may then be requested by Borrower; provided that (i) any Interest Period which would otherwise end on a day which is not a Business Day shall end in the next preceding or succeeding Business Day as is Agent’s custom in the market to which such LIBOR Portion relates; (ii) there remains a minimum of one (1) month, two (2) months, three (3) months or six (6) months (depending upon which Interest Period Borrower selects) in the Term, unless Co-Borrowers, Agent and Lenders have agreed to an extension of the Term beyond the expiration of the Interest Period in question; and (iii) all Interest Periods of the same duration which commence on the same date shall end on the same date; provided that Co-Borrowers shall not be required to pay double interest even though the preceding Interest Period ends and all new Interest Period begins on the same day.

Inventory Advance Percentage – shall mean sixty percent (60%) between and including each December 1 and April 30 within the Term and fifty-five percent (55%) between and including each May 1 and November 30 within the Term.

LC Amount – at any time, the aggregate undrawn face amount of all Letters of Credit and LC Guaranties then outstanding plus the aggregate amount of all unreimbursed drawings under a Letter of Credit or LC Guaranty.

LC Guaranty – any guaranty pursuant to which Agent or any affiliate of Agent shall guaranty the payment or performance by Co-Borrowers of their or any one of their reimbursement obligation under any Letter of Credit.

LC Obligations – Any Obligations that arise from any draw against any Letter of Credit or against any Letter of Credit supported by an LC Guaranty.

Lessor – as defined in the definition of Sale and Leaseback Documents.

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Letter of Credit – any standby or documentary letter of credit issued by Agent or any Affiliate of Agent for the account of Co-Borrowers or any one of them.

LIBOR – as applicable to any LIBOR Portion, for the applicable Interest Period, the rate per annum (rounded upward, if necessary, to the nearest 1/8 of one percent) as determined on the basis of the offered rates for deposits in U.S. dollars, for a period of time comparable to such Interest Period which appears on the Telerate page 3750 as of 11:00 a.m. (London time) on the day that is two (2) London Banking Days preceding the first day of such Interest Period; provided, however, if the rate described above does not appear on the Telerate System on any applicable interest determination date, the LIBOR shall be the rate (rounded upwards as described above, if necessary) for deposits in U.S. dollars for a period substantially equal to the Interest Period on the Reuters Page “LIBO” (or such other page as may replace the LIBO Page on that service for the purpose of displaying such rates), as of 11:00 a.m. (London Time), on the day that is two (2) London Banking Days prior to the first day of such Interest Period. If both the Telerate and Reuters systems are unavailable, then the rate for that date will be determined on the basis of the offered rates for deposits in U.S. dollars for a period of time comparable to such Interest Period which are offered by four (4) major banks in the London interbank market at approximately 11:00 a.m. (London time), on the day that is two (2) London Banking Days preceding the first day of such Interest Period as selected by Agent. The principal London office of each of the major London banks so selected will be requested to provide a quotation of its U.S. dollar deposit offered rate. If at least two (2) such quotations are provided, the rate for that date will be the arithmetic mean of the quotations. If fewer than two quotations are provided as requested, the rate for that date will be determined on the basis of the rates quoted for loans in U.S. dollars to leading European banks for a period of time comparable to such Interest Period offered by major banks in New York City at approximately 11:00 a.m. (New York City time), on the day that is two (2) London Banking Days preceding the first day of such Interest Period. In the event that Agent is unable to obtain any such quotation as provided above, it will be determined that LIBOR pursuant to an Interest Period cannot be determined. In the event that the Board of Governors of the Federal Reserve System shall impose a Reserve Percentage with respect to LIBOR deposits of Bank then for any period during which such Reserve Percentage shall apply, LIBOR shall be equal to the amount determined above divided by an amount equal to 1 minus the Reserve Percentage.

LIBOR Portion or LIBOR Revolving Portion – that portion of the Revolving Loans specified in a LIBOR Request (including any portion of Revolving Loans which is being borrowed by Borrower concurrently with such LIBOR Request) which, as of the date of the LIBOR Request specifying such LIBOR Portion, has met the conditions for basing interest on the LIBOR in Section 3.1 of the Agreement and the Interest Period of which has not terminated.

LIBOR Interest Payment Date – the first day of each calendar month during and immediately following the applicable Interest Period.

LIBOR Option – the option granted pursuant to Section 3.1 of the Agreement to have the intent on all or any portion of the principal amount of the Revolving Credit Loans based on LIBOR.

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LIBOR Request – a notice in writing (or by telephone confirmed electronically or by telecopy or other facsimile transmission on the same day as the telephone request) from Borrower to Agent requesting that interest on a Revolving Credit Loan be based on the LIBOR, specifying: (i) the first day of the Interest Period (which shall be a Business Day); (ii) the length of the Interest Period; (iii) whether the LIBOR Portion is a new Loan, a conversion of a Base Rate Portion, or a continuation of a LIBOR Portion, and (iv) the dollar amount of the LIBOR Portion, which shall be in an amount not less than $1,000,000 or an integral multiple of $100,000 in excess thereof.

Lien – any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on common law, statute or contract. The term “Lien” shall also include rights of seller under conditional sales contracts or title retention agreements, reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting Property. For the purpose of the Agreement, a Co-Borrower shall be deemed to be the owner of any Property which it has acquired or holds subject to a conditional sale agreement or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person for security purposes.

Loan Account – the loan account established on the books of Agent pursuant to Section 3.6 of the Agreement.

Loan Commitment – with respect to any Lender, the amount of such Lender’s Revolving Loan Commitment.

Loan Documents – the Agreement, the Other Agreements and the Security Documents.

Loans – all loans and advances of any kind made by Agent, any Lender, or any Affiliate of Agent or any Lender, pursuant to the Agreement.

London Banking Day – any date on which commercial banks are open for business in London, England.

Majority Lenders – as of any date, Lenders holding 66-2/3% of the Revolving Loan Commitments determined on a combined basis and following the termination of the Revolving Loan Commitments, Lenders holding 66-2/3% or more of the outstanding Loans, LC Amounts and LC Obligations not yet reimbursed by Co-Borrowers or funded with a Revolving Credit Loan; provided, that (i) in each case, if there are 2 or more Lenders with outstanding Loans, LC Amounts, unfunded and unreimbursed LC Obligations or Revolving Loan Commitments, at least 2 Lenders shall be required to constitute Majority Lenders; (ii) if there are 2 or fewer Lenders with outstanding Loans, LC Amounts, unfunded and unreimbursed LC Obligations or Revolving Loan Commitments, then all Lenders shall be required to constitute Majority Lenders; and (iii) prior to termination of the Revolving Loan Commitments, if any Lender breaches its obligation to fund any requested Revolving Credit Loan, for so long as such breach exists, its voting rights hereunder shall be calculated with reference to its outstanding Loans, LC Amounts and unfunded and unreimbursed LC Obligations, rather than its Revolving Loan Commitment.

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Material Adverse Effect – (i) a material adverse effect on the business, condition (financial or otherwise), operation, performance or properties of Co-Borrowers, (ii) a material adverse effect on the rights and remedies of Agent or Lenders under the Loan Documents, or (iii) the material impairment of the ability of Borrower or any of its Subsidiaries to perform its obligations hereunder or under any Loan Document.

Medallion Note – the Loan Agreement dated January 15, 2004 between USPoly and Medallion Capital, Inc. as amended from time to time.

Mid-States – Mid-States Plastics, Inc., a former Subsidiary of Borrower that has been either (x) merged into Borrower or (y) dissolved and whose assets were distributed to Borrower or sold in exchange for consideration paid to Borrower.

Money Borrowed – means, (i) Indebtedness arising from the lending of money by any Person to Borrower or any of its Subsidiaries; (ii) Indebtedness, whether or not in any such case arising from the lending by any Person of money to Borrower or any of its Subsidiaries, (1) which is represented by notes payable or drafts accepted that evidence extensions of credit, (2) which constitutes obligations evidenced by bonds, debentures, notes or similar instruments, or (3) upon which interest charges are customarily paid (other than accounts payable) or that was issued or assumed as full or partial payment for Property; (iii) Indebtedness that constitutes a Capitalized Lease Obligation; (iv) reimbursement obligations with respect to letters of credit or guaranties of letters of credit and (v) Indebtedness of Borrower or any of its Subsidiaries under any guaranty of obligations that would constitute Indebtedness for Money Borrowed under clauses (i) through (iii) hereof, if owed directly by Borrower or any of its Subsidiaries. Money Borrowed shall not include trade payables or accrued expenses.

Mortgages – the mortgages, deeds of trust, security deeds and/or leasehold mortgages executed prior to the Closing Date by a Co-Borrower (or a predecessor-in-interest to Borrower by merger) granting in favor of Agent as security for the Obligations, a Lien upon the real Property owned by a Co-Borrower and located in or at (i) Cameron Park, California; (ii) Buckhannon, West Virginia; (iii) Columbia, Missouri; and (iv) Perris, California.

Multiemployer Plan – has the meaning set forth in Section 4001(a)(3) of ERISA. New Mortgages – as defined in Section 5.4 of the Agreement.

Net Appraised Fair Market Value – with respect to any of any Co-Borrower’s real Property subject to a Mortgage, the amount estimated to be realized, net of reasonable sale expenses (as estimated by Agent), in a sale of such real Property by a willing buyer to a willing seller, such amount to be determined by an appraisal of such real Property conducted by Hilco Appraisal Services or another qualified company selected by Agent in its reasonable discretion as provided in Section 2.10 of the Agreement.

Net Appraised Orderly Liquidation Value – with respect to any item of Collateral in which Agent for its benefit and the benefit of Lenders has a first perfected security interest (subject to Permitted Liens), the amount estimated to be recoverable in the orderly liquidation of such item of Collateral over a three month period with respect to Inventory or a six month period with respect to Equipment or any other item of such Collateral, net of liquidation expenses (as

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estimated by Agent), such amount to be determined by an appraisal of such item of Collateral conducted by Hilco Appraisal Services or another qualified company selected by Agent in its reasonable discretion as provided in Section 2.10 of the Agreement.

Notes – the Revolving Notes.

Obligations – all Loans, all LC Obligations and all other advances, debts, liabilities, obligations, covenants and duties, together with all interest, fees and other charges thereon, owing, arising, due or payable from Co-Borrowers to Agent, for its own benefit, from Co-Borrowers or any one of them to Agent for the benefit of any Lender, from Co-Borrowers or any one of them to any Lender or from Co-Borrowers or any one of them to Bank or any other Affiliate of Agent, of any kind or nature, present or future, whether or not evidenced by any note, guaranty or other instrument, arising under the Agreement or any of the other Loan Documents, whether direct or indirect (including those acquired by assignment), absolute or contingent, primary or secondary, due or to become due, now existing or hereafter arising and however acquired and any Product Obligations owing to Agent, any Lender, Bank or any Affiliate of Bank or Agent.

Organizational I.D. Number – with respect to any Person, the organizational identification number assigned to such Person by the applicable governmental unit or agency of the jurisdiction of organization of such Person.

Other Agreements – any and all agreements, instruments and documents (other than the Agreement and the Security Documents), heretofore, now or hereafter executed by Co-Borrowers, any Subsidiary of Borrower or any other third party and delivered to Agent or any Lender in respect of the transactions contemplated by the Agreement.

Overadvance – as defined in subsection 1.1.2 of the Agreement.

Patent Assignment – (x) the Amended and Restated Patent Security Agreement executed by Borrower on or about September 30, 1999 in favor of Agent and by which Borrower assigned to Agent and granted to Agent a security interest in, as security for all of the Obligations, all of Borrower’s rights, title and interest in and to all of its patents, as the same may be amended from time to time, (y) the Patent Security Agreements executed by ETI and Mid-States on or about March 14, 2003 in favor of Agent and by which Mid-States and ETI assigned to Agent and granted to Agent a security interest in, as security for all of the Obligations, all of Mid-States’ and ETI’s rights, title and interest in and to all of its patents, as the same may be amended from time to time and (z) the Patent Security Agreements executed by USPoly on or about the Closing Date in favor of Agent and by which USPoly has assigned to Agent and granted to Agent a security interest in, as security for all of the Obligations, all of USPoly’s rights, title and interest in and to all of its patents, as the same may be amended from time to time.

Permitted Acquisitions – any acquisition(s) by a Co-Borrower of all or substantially all of the assets or outstanding capital stock or other ownership interests of a Person, or an operating division of a Person or a merger of a Person with a Co-Borrower, which in either case, constitutes a business unit so long as each of the following conditions precedent (collectively, the “Acquisition Conditions”) have been fulfilled to the satisfaction of Agent: (i) no Default or

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Event of Default shall have occurred and be continuing at the time of such acquisition or would occur as a result thereof; (ii) the business unit being acquired (the “Target”) is primarily located in the United States of America and is in the same or related line of business as a Co-Borrower; (iii) if the acquisition in question is not an asset acquisition, Borrowers shall require Target to comply with the provisions of Section 8.1.8 or to become an additional Co-Borrower hereunder, or if the acquisition in question is an asset acquisition, the applicable Co-Borrower shall have executed such financing statements and other collateral documents as reasonably requested by Agent to grant to Agent a perfected security interest subject only to Permitted Liens in substantially all of the acquired assets; (iv) Availability on an average pro forma basis after giving effect to the acquisition in question for the 60 days immediately prior to the closing date of such acquisition and immediately after the closing of such acquisition equals or exceeds $30,000,000; (v) Suppressed Availability on an average pro forma basis after giving effect to the acquisition in question for the 60 days immediately prior to the closing date of such acquisition and immediately after the closing of such acquisition equals or exceeds $40,000,000; (vi) the Fixed Charge Coverage Ratio shall be greater than or equal to 1.25 to 1 (x) for the twelve-month period immediately preceding the making of such acquisition and (y) on a pro forma basis for the twelve-month period following the making of such acquisition, after giving effect to the making of such acquisition, such pro forma calculation to be demonstrated to Agent and to be reasonably acceptable to Agent in its reasonable credit judgment based on projections prepared using reasonable assumptions by Borrower; (vii) all conditions precedent to the consummation of the transactions relating to such acquisition shall have been satisfied in all material respects; and (viii) Agent shall have received a copy of the purchase agreement (or substantially final draft) with respect to such acquisition in question, certified as true and correct by Borrower and such other agreements, documents, and instruments as Agent may request in its reasonable credit judgment. No Account or piece of Inventory, Equipment or real Property acquired in a Permitted Acquisition or a Permitted Limited Acquisition shall be included within Eligible Accounts, Eligible Inventory or within the appraised value of Co-Borrowers’ Equipment or real Property until Agent has conducted an audit and/or appraisal of such Accounts, Inventory, Equipment or real Property and the results of such audit and/or appraisal are satisfactory to Agent in its reasonable discretion.

Permitted Distributions – any Distribution so long as each of the following conditions precedent (collectively, the “Permitted Distribution Conditions”) has been fulfilled to the satisfaction of Agent: (i) no Default or Event of Default shall have occurred and be continuing at the time of such Distribution or would occur as a result thereof; (ii) Availability on an average pro forma basis after giving effect to the Distribution in question for the 60 days immediately prior to the making of such Distribution and immediately after the making of such Distribution equals or exceeds $30,000,000; (iii) Suppressed Availability on an average pro forma basis after giving effect to the Distribution in question for the 60 days immediately prior to the making of such Distribution and immediately after the making of such Distribution equals or exceeds $40,000,000; (iv) the Fixed Charge Coverage Ratio shall be greater than or equal to 1.25 to 1 (x) for the twelve-month period immediately preceding the making of such Distribution and (y) on a pro forma basis for the twelve-month period following the making of such Distribution, after giving effect to the making of such Distribution, such pro forma calculation to be demonstrated to Agent and to be reasonably acceptable to Agent in its reasonable credit judgment based on projections prepared using reasonable assumptions by Borrowers; and (v) the aggregate amount of any such Distributions do not exceed $30,000,000 within any twelve month period.

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Permitted Indebtedness – any Indebtedness incurred by a Borrower so long as each of the following conditions precedent (collectively, the “Permitted Indebtedness Conditions”) has been fulfilled to the satisfaction of Agent: (i) no Default or Event of Default shall have occurred and be continuing at the time of the incurrence of such Indebtedness or would occur as a result thereof; (ii) Availability on an average pro forma basis after giving effect to the incurrence of such Indebtedness in question for the 60 days immediately prior to the incurrence of such Indebtedness and immediately after the incurrence of such Indebtedness equals or exceeds $20,000,000; (iii) the Fixed Charge Coverage Ratio shall be greater than or equal to 1.25 to 1 (x) for the twelve-month period immediately preceding the incurrence of such Indebtedness and (y) on a pro forma basis for the twelve-month period following the incurrence of such Indebtedness, after giving effect to the incurrence of such Indebtedness, such pro forma calculation to be demonstrated to Agent and to be reasonably acceptable to Agent in its reasonable credit judgment based on projections prepared using reasonable assumptions by Borrowers; (iv) Agent and the holders of any such Permitted Indebtedness shall have entered into such intercreditor agreements as may be reasonably requested by Agent or Majority Lenders; and (v) the aggregate principal amount of such Permitted Indebtedness does not exceed at any time $10,000,000.

Permitted Liens – any Lien of a kind specified in subsection 8.2.5 of the Agreement.

Permitted Limited Acquisitions – any acquisition by a Borrower of all or substantially all of the assets or capital stock or other ownership interests of a Person, or an operating division of a Person or a merger of a Person with a Borrower, which, in either case, consists of a business unit which satisfies items (i), (iii), (iv), (v), (vi), (vii) and (viii) of the definition of Permitted Acquisitions (but not condition (ii)) and so long as the aggregate purchase price (including, without limitation, assumed Indebtedness) paid (x) in connection with any one such acquisition does not exceed $5,000,000 and (y) in connection with all such acquisitions consummated within the Term does not exceed $10,000,000.

Permitted Purchase Money Indebtedness – Purchase Money Indebtedness of Co-Borrowers incurred after the date hereof which is secured by a Purchase Money Lien and the principal amount of which, when aggregated with the principal amount of all other such Indebtedness and Capitalized Lease Obligations of Borrower and its Subsidiaries at the time outstanding, does not exceed $1,250,000. For the purposes of this definition, the principal amount of any Purchase Money Indebtedness consisting of capitalized leases (as opposed to operating leases) shall be computed as a Capitalized Lease Obligation.

Person – an individual, partnership, corporation, limited liability company, joint stock company, land trust, business trust, or unincorporated organization, or a government or agency or political subdivision thereof.

Plan – an employee benefit plan now or hereafter maintained for employees of Borrower or any of its Subsidiaries that is covered by Title IV of ERISA.

Pledge Agreement – the Pledge Agreement executed by Borrower on or about the Closing Date in favor of Agent for its benefit and the ratable benefit of Lenders with respect to the outstanding equity Securities of USPoly, as such Pledge Agreement has or will be amended from time to time.

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Poly Senior Debt – the Amended and Restated Credit and Security Agreement by and between USPoly, Uponor North America, Inc., Uponor Aldyl Company, Inc., Uponor Aldyl Holding Company, LLC and Wells Fargo Business Credit, Inc., as of September 27, 2004 as amended from time to time.

Product Obligations – every obligation of any Co-Borrower under and in respect of any one or more of the following types of services or facilities extended to a Co-Borrower by Bank, Agent, any Lender or any Affiliate of Bank or Agent: (i) credit cards, (ii) cash management or related services including the automatic clearing house transfer of funds for the account of a Co-Borrower pursuant to agreement or overdraft, (iii) cash management, including controlled disbursement services and (iv) Derivative Obligations.

Projections – Borrower’s forecasted Consolidated and consolidating (i) balance sheets, (ii) profit and loss statements, (iii) cash flow statements, and (iv) capitalization statements, all prepared on a consistent basis with the historical financial statements of Borrower and its Subsidiaries, together with appropriate supporting details and a statement of underlying assumptions.

Property – any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible.

Public Filings – all filings required to be made by Borrower with the Securities and Exchange Commission from and after the Closing Date under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

Purchase Money Indebtedness – means and includes (i) Indebtedness (other than the Obligations) for the payment of all or any part of the purchase price of any fixed assets, (ii) any Indebtedness (other than the Obligations) incurred at the time of or within 10 days prior to or after the acquisition of any fixed assets for the purpose of financing all or any part of the purchase price thereof, and (iii) any renewals, extensions or refinancings thereof, but not any increases in the principal amounts thereof outstanding at the time.

Purchase Money Lien – a Lien upon fixed assets which secures Purchase Money Indebtedness, but only if such Lien shall at all times be confined solely to the fixed assets the purchase price of which was financed through the incurrence of the Purchase Money Indebtedness secured by such Lien.

Rentals – as defined in subsection 8.2.18 of the Agreement.

Reportable Event – any of the events set forth in Section 4043(c) of ERISA.

Reserve Percentage – the maximum aggregate reserve requirement (including all basic, supplemental, marginal and other reserves) which is imposed on member banks of the Federal Reserve System against “Euro-currency Liabilities” as defined in Regulation D.

Restricted Investment – any investment made in cash or by delivery of Property to any Person, whether by acquisition of stock, Indebtedness or other obligation or Security, or by loan, advance or capital contribution, or otherwise, or in any Property except the following:

(i) investments by Borrower, to the extent existing on the Closing Date, in one or more Subsidiaries of Borrower;

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(ii) Property to be used in the ordinary course of business;

(iii) Current Assets arising from the sale of goods and services in the ordinary course of business of Borrower or any of its Subsidiaries;

(iv) investments in direct obligations of the United States of America, or any agency thereof or obligations guaranteed by the United States of America, provided that such obligations mature within one year from the date of acquisition thereof;

(v) investments in certificates of deposit maturing within one year from the date of acquisition and fully insured by the Federal Deposit Insurance Corporation;

(vi) investments in commercial paper given the highest rating by a national credit rating agency and maturing not more than 270 days from the date of creation thereof;

(vii) investments in money market, mutual or similar funds having assets in excess of $100,000,000 and the investments of which are limited to investment grade securities;

(viii) investments existing on the date hereof and listed on Exhibit 8.2.12 hereto; and

(ix) investments otherwise expressly permitted pursuant to the Agreement.

Revolving Credit Loan – a Loan made by any Lender pursuant to Section 1.1 of the Agreement.

Revolving Credit Maximum Amount – the lesser of One Hundred Million Dollars ($100,000,000) or the aggregate amount of Revolving Loan Commitments of all Lenders, as such amount may be increased pursuant to Section 2.13.

Revolving Loan Commitment – with respect to any Lender, the amount of such Lender’s Revolving Loan Commitment pursuant to subsection 1.1.1 of the Agreement, as set forth below such Lender’s name on the signature page hereof or any Assignment and Acceptance Agreement executed by such Lender.

Revolving Loan Percentage – with respect to each Lender, the percentage equal to the quotient of such Lender’s Revolving Loan Commitment divided by the aggregate of all Revolving Loan Commitments.

Revolving Notes – the Revolving Notes to be executed by Co-Borrowers on or about the Closing Date in favor of each Lender to evidence the Revolving Credit Loans, which shall be in the form of Exhibit 1.1 to the Agreement, together with any replacement or successor notes therefor.

Sale and Leaseback Documents – the Sale and Leaseback Agreement together with all exhibits, schedules and related documents.

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Sale and Leaseback Transaction – the sale and leaseback by Borrower of its real Property located in Perris, California, Eugene, Oregon, West Jordan, Utah and Tacoma, Washington pursuant to that certain Lease Agreement (“Sale and Leaseback Agreement”) dated as of February 28, 2002, by and between Borrower and PWE (Multi) 14-85, Inc. (“Lessor”).

Schedule of Accounts – as defined in subsection 6.2.1.

Security – all shares of stock, partnership interests, membership interests, membership units or other ownership interests in any other Person and all warrants, options or other rights to acquire the same.

Security Documents – the Mortgages, any New Mortgage, the Patent Assignment, the Pledge Agreement, the Trademark Assignment and all other instruments and agreement now or at any time hereafter securing the whole or any part of the Obligations.

Solvent – as to any Person, that such Person (i) owns Property whose fair saleable value is greater than the amount required to pay all of such Person’s Indebtedness (including contingent debts), (ii) is able to pay all of its Indebtedness as such Indebtedness matures and (iii) has capital sufficient to carry on its business and transactions and all business and transactions in which it is about to engage.

Spell Group shall mean collectively William H. Spell, (ii) Harry W. Spell, Richard W. Perkins, Bruce A. Richard, and any of their spouses or any family trust which is controlled by any of the foregoing.

Subordinated Debt – Indebtedness of Borrower or any Subsidiary of Borrower that is subordinated to the Obligations in a manner satisfactory to Agent and contains terms, including without limitation, payment terms, satisfactory to Agent.

Subsidiary – any Person of which another Person owns, directly or indirectly through one or more intermediaries, more than 50% of the Voting Stock at the time of determination.

Suppressed Availability – an amount equal to the difference derived when the sum of the principal amount of Revolving Credit Loans then outstanding (including any amounts which Agent or any Lender may have paid for the account of Co-Borrowers pursuant to any of the Loan Documents and which have not been reimbursed by Co-Borrowers), the LC Amount and any reserves, without duplication, is subtracted from the Collateral Borrowing Base. If the amount outstanding is equal to or greater than the Collateral Borrowing Base, Suppressed Availability is $0.

Swingline Loans – as defined in subsection 1.1.4 of the Agreement.

Term – as defined in Section 4.1 of the Agreement.

Total Credit Facility – the lesser of One Hundred Million Dollars ($100,000,000) or the aggregate amount of Revolving Loan Commitments of all Lenders, as such amount may be increased pursuant to Section 2.13.

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Trademark Assignment – (x) the Amended and Restated Trademark Security Agreement executed by Borrower on or about September 20, 1999 in favor of Agent and by which Borrower assigned to Agent, and granted to Agent a security interest in, as security for the Obligations all of Borrower’s rights, title and interest in and to all of its trademarks, as the same may be amended from time to time, (y) the Trademark Security Agreements executed by ETI and Mid-States on or about March 14, 2003 in favor of Agent and by which Mid-States and ETI assigned to Agent, and granted to Agent a security interest in, as security for the Obligations all of Mid-States’ and ETI’s rights, title and interest in and to all of its trademarks, as the same may be amended from time to time and (z) the Trademark Security Agreements executed by USPoly on or about the Closing Date in favor of Agent and by which USPoly has assigned to Agent, and granted to Agent a security interest in, as security for the Obligations all of USPoly’s rights, title and interest in and to all of its trademarks, as the same may be amended from time to time.

Type of Organization – with respect to any Person, the kind or type of entity by which such Person is organized, such as a corporation or limited liability company.

UCC – the Uniform Commercial Code as in effect in the State of Illinois on the date of this Agreement, as it may be amended or otherwise modified.

Unused Line Fee – as defined in Section 2.5 of the Agreement.

Voting Stock – Securities of any class or classes of a corporation, limited partnership or limited liability company or any other entity the holders of which are ordinarily, in the absence of contingencies, entitled to vote with respect to the election of corporate directors (or Persons performing similar functions).

Other Terms. All other terms contained in the Agreement shall have, when the context so indicates, the meanings provided for by the UCC to the extent the same are used or defined therein.

Certain Matters of Construction. The terms “herein”, “hereof’ and “hereunder” and other words of similar import refer to the Agreement as a whole and not to any particular section, paragraph or subdivision. Any pronoun used shall be deemed to cover all genders. The section titles, table of contents and list of exhibits appear as a matter of convenience only and shall not affect the interpretation of the Agreement. All references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations. All references to any of the Loan Documents shall include any and all modifications thereto and any and all extensions or renewals thereof.

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LIST OF EXHIBITS AND SCHEDULES

Exhibit 1.1	Form of Revolving Note
Exhibit 6.1.1	Business Locations
Exhibit 7.1.1	Jurisdictions in which Borrower and each Subsidiary is Authorized to do Business
Exhibit 7.1.4	Capital Structure of Borrower and each Subsidiary
Exhibit 7.1.5	Names; Organization
Exhibit 7.1.13	Surety Obligations
Exhibit 7.1.14	Tax Identification Numbers of Subsidiaries
Exhibit 7.1.15	Brokers’ Fees
Exhibit 7.1.16	Patents, Trademarks, Copyrights and Licenses
Exhibit 7.1.19	Contracts Restricting Right to Incur Debts
Exhibit 7.1.20	Litigation
Exhibit 7.1.22	Capitalized and Operating Leases
Exhibit 7.1.23	Pension Plans
Exhibit 7.1.25	Labor Relations
Exhibit 8.1.3	Form of Compliance Certificate
Exhibit 8.1.4	Form of Borrowing Base Certificate
Exhibit 8.2.3	Existing Indebtedness
Exhibit 8.2.5	Permitted Liens
Exhibit 8.2.12	Permitted Investments
Exhibit 8.3	Financial Covenants

List of Exhibits and Schedules

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have issued our report dated March 14, 2007, accompanying the consolidated financial statements included in the Annual Report of PW Eagle Inc. on Form 10-K for the year ended December 31, 2006. We hereby consent to the incorporation by reference of said report in the Registration Statements of PW Eagle, Inc. on Forms S-8 (File Nos. 333-135627, 333-134514, 333-133773, 333-17027, 333-26047, 333-34492, 333-64002) and Form S-1 (File No. 333-130869).

/s/ Grant Thornton LLP

Grant Thornton LLP

Portland, Oregon

March 14, 2007

EX-23.2

Exhibit 23.2

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-135627, 333-134514, 333-133773, 333-17027, 333-26047, 333-34492 and 333-64002) and Form S-1 (File No. 333-130869) of PW Eagle, Inc. (formerly Eagle Plastics Industries, Inc.) of our reports dated March 25, 2005 relating to the financial statements and financial statement schedule which appears in this Form 10-K.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Minneapolis, Minnesota

March 14, 2007

EX-31.1

Exhibit 31.1

CERTIFICATION

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Jerry A. Dukes, Chief Executive Officer of PW Eagle, Inc., certify that:

1. I have reviewed this report on Form 10-K of PW Eagle, Inc.;

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

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

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and we have:

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

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: March 14, 2007

Signature:	/s/ JERRY A. DUKES
	Jerry A. Dukes Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Scott Long, Chief Financial Officer of PW Eagle, Inc., certify that:

1. I have reviewed this report on Form 10-K of PW Eagle, Inc.;

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

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

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and we have:

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

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: March 14, 2007

Signature:	/s/ SCOTT LONG
	Scott Long Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of PW Eagle, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2006 as filed with the Securities and Exchange Commission (the “Report”), I, Jerry A. Dukes, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: March 14, 2007

/s/ JERRY A. DUKES

Jerry A. Dukes

Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of PW Eagle, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2006 as filed with the Securities and Exchange Commission (the “Report”), I, Scott Long, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: March 14, 2007

/s/ SCOTT LONG

Scott Long

Chief Financial Officer