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                                  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 31,1997

                                       OR

    [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
            For the transition period from __________ to ___________

                         Commission File Number 0-18050

                         EAGLE PACIFIC INDUSTRIES, INC.
             (Exact name of registrant as specified in its Charter)

                 MINNESOTA                             41-1642846
         (State of incorporation)          (I.R.S. Employer Identification No.)

                            333 South Seventh Street
                            2430 Metropolitan Centre
                          Minneapolis, Minnesota 55402
                    (Address of principal executive offices)

       Registrant's telephone number, including area code: (612) 305-0339

Securities registered pursuant to Section 12(b) of the Act:  None
Securities registered pursuant to Section 12(g) of the Act:  Common Stock, $.01
                                                             par value

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __X__ No____

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

         The aggregate market value of voting stock held by non-affiliates of
the registrant as of February 27, 1998 was approximately $10,900,000 (based on
closing sale price of $2.00 per share as reported on the Nasdaq Small-Cap
Market).

         The number of shares of the registrant's Common Stock, $.01 par value
per share, outstanding as of February 27, 1998 was 6,816,174.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the Proxy Statement for Registrant's 1998 Annual Meeting of
Stockholders are incorporated by reference into Items 10, 11, 12 and 13 of Part
III.

<PAGE>


                                     PART I

ITEM 1.  BUSINESS

GENERAL

         Eagle Pacific Industries, Inc., a Minnesota corporation (the "Company")
manufactures and distributes polyvinyl chloride ("PVC") pipe and polyethylene
("PE") pipe and tubing products used for turf and water irrigation, natural gas,
water wells, fiber optic lines, electronic and telephone lines, and commercial
and industrial plumbing. The Company distributes its products primarily in the
Upper Midwest and Plains states and the Mountain and Pacific Northwest regions
of the United States.

         The Company's principal offices are located in Minneapolis, Minnesota.
The Company has production facilities in Hastings, Nebraska, Hillsboro, Oregon,
and Midvale, Utah. The Company also has a distribution facility in Baker City,
Oregon.

         Effective December 31, 1997, the Company merged with its two
wholly-owned subsidiaries, Eagle Plastics, Inc. and Pacific Plastics, Inc.,
ending the separate existence of each subsidiary and consolidating the Company's
operations. In addition, Pacific Plastics, Inc. merged with its wholly-owned
subsidiary, Arrow Pacific Plastics, Inc.

PRODUCTS

         The Company's products consist of 1/2-inch to 15-inch PVC pipe and
1/2-inch to 6-inch PE pipe and tubing for applications in the building and
construction industry, turf and water irrigation, natural gas, water wells,
fiber optic lines, and electronic and telephone lines. Although the manufacture
and sale of PVC pipe and PE pipe and tubing is generally viewed as a commodity
business (i.e. price being the only purchasing consideration), the Company
believes it has created brand name recognition for its products while remaining
competitive on price. To help support the brand name recognition, the
cornerstone of the Company's success is to offer the highest quality PVC pipe
and PE pipe and tubing available. The Company also looks for niche markets to
enter, such as PE pipe and tubing for turf irrigation, where it can establish
itself as the market leader and command higher profit margins. The Company also
adds features such as quick connect gaskets and longer pipe lengths that allow
for easier installation, as well as proprietary marking for brand
identification. The Company believes that it has the most respected and
diversified product offering in the plastic pipe industry.

PVC PIPE

         PVC pipe is widely accepted in the building and construction industry.
A number of factors have caused its popularity including its low cost, easy
installation, and its lower weight and longer life than metal pipe. As a result,
PVC is replacing metal pipe in many construction situations. Below are
descriptions of the Company's primary PVC pipe products, broken down between
pressure and non-pressure rated products.

         A major use of PVC pipe is transporting water under pressure. The
Company manufacturers and distributes several PVC pressure pipe products for use
at various points in a water distribution system.

         PVC(R) WELL CASING. The Company offers a light-weight PVC pipe to be
used as casing in water wells. The well casing pipe is manufactured out of the
highest quality PVC and meets all American Society for Testing and Materials
("ASTM") and National Sanitation Foundation International ("NSFI") standards. As
a companion to its well casing pipe, the Company also offers a threaded drop
pipe for

<PAGE>


hanging submersible pumps. These heavy duty pipes are made from schedule 80 PVC
and weigh one-seventh of an equivalent metal pipe.

         PRESSURE PIPE. This versatile pipe is used extensively in water service
lines, turf irrigation, agricultural irrigation, water wells, and for
transporting crude oil and salt water. It comes in diameters from 1/2-inch to
15-inches and in lengths up to 40 feet.

         WHITE AND GREY SCHEDULE 80. The Company offers this extra strong PVC
pipe for demanding industrial applications. Its thick, strong walls stand up to
most chemicals, giving it distinct advantages over conventional metal pipe.

         GASKET JOINT PIPE. Gasket joint pipe has a Reiber gasket to assure
leak-proof water mains and sewer pipe. Steel reinforced Reiber gaskets are
pre-stressed and molded in place to offer a tight and dependable seal. The
Company was one of the first in the industry to develop the capability to mold
the Reiber gasket in place in its PVC pipe, which produces the distinctive bell
end on a Gasket Joint Pipe.

         The Company also manufactures a line of non-pressure rated PVC pipe
products. Although these products are considered lower grade than pressure pipe,
the Company applies the same high quality standards that it incorporates into
all its products.

         DRAIN, WASTE AND VENT PIPE. Drain, waste and vent pipe is used inside
the home in non-pressurized applications. It carries the NSFI approval, and
therefore, is a popular product for use as waste drains and vents in the home.

         SEWER DRAIN PIPE. Sewer drain pipe is used for the exterior
transportation and storage of waste water. When waste water leaves the home or
industrial building, it moves through Sewer drain pipe into a municipal sewer
system or other reclamation system. The thick-walled Sewer drain pipe is
building code approved. For rural and non-building code applications, a
thin-walled variety of Sewer drain pipe is available.

         COEX CELLULAR CORE. Coex cellular core is a lighter weight drain, waste
and vent pipe for non-pressure applications. Coex cellular core is a co-extruded
pipe, with air-injected PVC sandwiched between two thin layers of solid PVC. Its
lighter weight makes coex cellular core easier to handle and more affordable
than heavier, solid PVC drain, waste and vent pipe. Its insulating
characteristics make coex cellular core pipe particularly desirable for public
buildings.

         ELECTRIC AND TELEPHONE DUCT. Electric and telephone duct are used by
utility companies. Electric duct is used for power lines, as well as electrical
wiring, both inside buildings and underground. Telephone duct is used by
communications companies for insulating their telephone communication lines.

PE PIPE AND TUBING

         The applications and markets for PE pipe and tubing is expanding
because of its flexibility and strength. The Company offers a wide selection of
PE pipe and tubing products for home, farm, telecommunication, municipal and
industrial use. The Company backs its PE pipe and tubing with what it believes
are the best warranties in the industry. Below are descriptions of the Company's
primary PE product lines:

         PURE CORE(R). Pure Core(R) is the Company's highest quality PE pipe and
tubing. The walls of this premium pipe are 25 percent thicker than called for by
both ASTM and NSFI standards and comes with a 50-year warranty. Its primary
markets and uses include municipal and domestic water service for homes and
office, and transporting potable liquids for the chemical and food processing
industries.

<PAGE>


         EAGLE 3408 AND POLY FLO. Eagle 3408 and Poly Flo Pipe are all-black PE
pipe and tubing products which meet the high quality standards set by ASTM and
NSFI, yet are offered at a lower price than Pure Core(R) pipe. Eagle 3408 and
Poly Flo Pipe are made from high-density 3408 and medium-density 2406
polyethylene, respectively. The primary use for this product line is
transporting potable water, with limited applications for foods and chemicals.
The Eagle 3408 Pipe is also used for slab heating systems and closed-loop,
ground coupled heat pump systems.

         GREEN-STRIPED EAGLE-TOUGH TURF PIPE(R). Green-striped Eagle-Tough Turf
Pipe(R) is a popular PE pipe in the lawn irrigation industry. It is co-extruded
with two green stripes to permanently identify it as Tough Turf Pipe. This
distinct, recognizable marking is unique to Tough Turf Pipe. Part of its
popularity is the Tough Lifetime Guarantee against defects in materials and
workmanship covering the replacement cost of the pipe and the related labor
cost. The Company also serves its customers by providing pipe sizing other than
the traditional 1-inch diameter, all with the Tough Lifetime Guarantee, which is
valid as long as the original purchaser owns the property where Tough Turf Pipe
was originally installed.

         POLY-FLEX. Utility-grade Poly-Flex is an economically priced
utility-grade PE pipe and tubing. This product carries a one-year warranty and
is suitable for transporting potable water and for pressure installations.
Primary markets and uses of this product include farm water systems, including
transporting water to outlying areas for livestock, plumbing/waste water and
drainage applications, and irrigation, primarily in home and other low pressure
applications.

         NATURAL GAS PIPE. Eagle Tri-Stripe(R) Natural Gas Pipe is marked with
yellow stripes for quick identification and is available in diameters up to 4
inches. Eagle Tri-Stripe(R) is an excellent alternative to steel pipe for
natural gas distribution and propane service due to its light weight, ease of
installation, and maintenance-free nature. The Company has concentrated on
marketing Natural Gas Pipe to the after-market side of the business, serving
installers and contractors, instead of marketing directly to utility companies.

         FIBER OPTIC PIPE. Fiber optic pipe is used for protecting underground
fiber optic cables. The Company sells this product mainly to large
communications companies such as AT&T, Sprint and MCI, and to railroad companies
such as Southern Pacific, which lay the pipe alongside their railroad tracks and
then lease space on their own fiber optic lines to the communications companies.

MARKETING AND CUSTOMERS

         The Company markets its products through a combination of independent
sales representatives, factory salespersons, and inside sales/customer service
representatives. Independent sales representatives are primarily assigned to
geographic territories. Factory salespersons are primarily assigned to specific
product lines and customers. The Company's core geographic market areas are the
Upper Midwest and Plains states and the Mountain and Pacific Northwest regions
of the United States.

         The Company's marketing strategy focuses on the brand name recognition
that its high quality products have attained, particularly its PE pipe and
tubing. To complement its products, the Company provides high quality customer
service and short delivery times.

         The Company offers a wide variety of warranty programs on its products.
These warranties apply to failures in pipe or tubing due to defects in material
or workmanship. Generally, warranties are for one year. However, the Pure
Core(R) product has a fifty-year warranty and Eagle Tough Turf Pipe(R) has its
own unique lifetime warranty, which is valid as long as the original purchaser
owns the property where Eagle Tough Turf Pipe(R) was originally installed. These
warranties extend in scope from replacement of the defective pipe to payment of
all costs of replacing the defective pipe, including labor costs. The Company

<PAGE>


maintains product liability insurance to cover such warranty claims, and to
date, warranty reserves have been sufficient to cover warranty claims.

         In addition to the warranty programs, the Company offers many of the
industry-standard promotional sales programs, such as volume rebates and
discounts. The Company also offers a frequent- buyer program, which the Company
believes is unique to the industry. The frequent-buyer program allows customers
to select products from a catalogue based on points earned from pipe and tubing
purchases.

         The Company's customers consist primarily of wholesalers and
distributors. The Company has a broad and diverse group of customers. No
customer accounted for more than 10% of total net sales in 1997, 1996, or 1995.

COMPETITION

         The plastic pipe industry is highly competitive due to the large number
of producers and the commodity nature of the industry. According to Plastics
News, the plastic pipe market is approximately $3.8 billion in annual sales. The
Company is the 16th largest extruder of plastic pipe, according to Plastic News.
However, many of the pipe manufacturers that ranked higher than the Company
produce large diameter pipe (15-inch to 30-inch) which the Company does not
produce. Within its primary markets, the Company believes it is one of the
largest producers of PVC pipe and PE pipe and tubing. Because of shipping costs,
competition is usually regional, instead of national, in scope. Finally,
although the Company believes it has reduced the commodity nature of its
business through its high quality and brand names, pricing pressure will
continue and could affect the Company's margins in the future.

MANUFACTURING AND SOURCES OF SUPPLIES

         All of the Company's manufacturing is performed at its facilities in
Hastings, Nebraska, Hillsboro, Oregon and Midvale, Utah. To ensure the highest
quality products possible, the Company uses high quality raw materials and the
latest in extrusion technologies.

         All three of the Company's manufacturing facilities have compound
centers for PVC resin where the PVC resin is precisely mixed with various waxes,
colorants, UV protectants and lubricants to create the appropriate compound
resin for each extrusion application. By performing its own PVC compounding, the
Company has been able to reduce its raw material costs. PE material used by the
Company is purchased in compounded form, ready for direct use in the extruder.
Because of the different properties of PE plastic, it is not cost-effective to
acquire the technology to perform the Company's own PE compounding. Compounded
PVC resin and PE resin are automatically transported from storage silos to the
extrusion equipment by a vacuum feeding system.

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

         At each phase of the manufacturing process, the Company pays great
attention to quality and production of a consistent product. Every PVC and PE
product is thoroughly examined for compliance with ASTM standards. The Company
has a quality control department which has its own testing lab for both resin
and finished goods quality assurance. As a result of these steps, the Company
believes very few defective finished products reach its customers.

<PAGE>


         The Company acquires its PVC and PE resins in bulk, mainly by rail car.
The Company acquires raw materials from various sources. During the years ended
December 31, 1997, 1996 and 1995, purchases of raw materials from two vendors
totaled 61%, 61% and 72% of total material purchases, respectively. The Company
maintains strong relationships with its key raw material vendors to ensure the
quality and availability of raw material.

BUSINESS SEASONALITY

         Due to general weather constraints in the geographic markets in which
the Company operates, the demand for its products tends to be seasonal. In an
effort to reduce the fluctuations in operating results caused by the seasonality
of the Company's products, the Company offers extended terms to its customers
during the winter months in order to stabilize production. Notwithstanding
extended terms, the Company experiences fluctuations in sales, accounts
receivable and inventory levels during the year.

BACKLOG

         The Company strives to keep delivery lead times to a minimum in order
to meet customer needs. However, due to the seasonality of the business, lead
times can occasionally approach 30 days. The backlog on February 27, 1998, was
7,340,000 pounds of plastic pipe compared to 8,120,000 pounds on February 28,
1997.

EMPLOYEES

         The Company currently employs 337 employees, of which 23 are in
administration, 49 in sales and shipping and 265 in manufacturing. None of the
Company's employees are represented by a labor union and the Company has never
experienced any work stoppages.

ITEM 2.  PROPERTIES

         The Company's executive offices are located in leased office space in
Minneapolis, Minnesota, which is adequate for the operation of the Company's
business. The Company's manufacturing and warehouse facilities are located in
Hastings, Nebraska, Hillsboro, Oregon, Midvale, Utah, and Baker City, Oregon.
The Company both owns and leases portions of its facilities in Hastings,
Nebraska. The facility in Hillsboro, Oregon is owned, while the Midvale, Utah
and Baker City, Oregon facilities are leased. The Company has an option to
purchase the facility in Baker City, Oregon.

         With the exception of the Midvale, Utah facility, the Company believes
that the production capacity of its facilities is sufficient to meet its current
and future needs. The Midvale, Utah facility is not located on a rail spur and
its size is not adequate to meet current and future demands. The Company is
currently in the process of developing a new facility in West Jordan, Utah. The
manufacturing facilities, as currently equipped, are operating at approximately
85% of capacity.

ITEM 3.  LEGAL PROCEEDINGS

         The Company is not aware of any material legal proceedings against it
or any of its subsidiaries.

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

         No matters were submitted to a vote of security holders during the
fourth quarter of fiscal year 1997.

<PAGE>


                                     PART II

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

         The Company's Common Stock is currently traded on the Nasdaq Small Cap
Market under the symbol "EPII." The Company's Series A Preferred Stock and
Redeemable Preferred Stock do not trade on any exchange or Nasdaq. The following
table sets forth the high and low bid prices of a share of Common Stock for each
fiscal quarter in 1997 and 1996.

                                                High             Low
Year ended December 31, 1997:
   First quarter                              $4               $2-5/8
   Second quarter                              3-13/16          2-5/8
   Third quarter                               3                2-1/2
   Fourth quarter                              3-1/32           2-1/4

Year ended December 31, 1996:
   First quarter                              $2-3/8           $1-1/4
   Second quarter                              4                1-1/2
   Third quarter                               3-7/8            3-1/8
   Fourth quarter                              3-1/2            2-5/16

         The bid quotations represent inter-dealer prices and do not include
retail mark-ups, mark-downs, or commissions and may not necessarily represent
actual transactions. At February 27, 1998, the Company had approximately 1,950
shareholders of record and approximately 1,600 shareholders in street name.

         The Company has never paid a cash dividend on its Common Stock. Payment
of Common Stock dividends is at the discretion of the board of directors,
subject to the Company's lending arrangements. The board of directors plans to
retain earnings, if any, for operations and does not intend to pay Common Stock
dividends in the near future. However, dividends are paid by the Company on its
Series A 7% Convertible Preferred Stock and 8% Redeemable Preferred Stock. On
May 9, 1997, the Company issued 10,000 shares of redeemable 8% convertible
preferred stock at $1,000 per share. The stock is convertible at the holders
option at $4.26 per share and has a mandatory redemption at the liquidation
preference of $1,000 per share on May 9, 2004. After two years from issuance,
the Company can cause a mandatory conversion if the common stock trades above
$7.45 per share for 30 consecutive days. The Company relied on Section 4(2) of
the Securities Act of 1933, as amended.

<PAGE>


ITEM 6.  SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>

YEARS ENDED DECEMBER 31,                        1997           1996            1995            1994             1993
--------------------------------------------------------------------------------------------------------------------------
<S>                                           <C>            <C>             <C>             <C>             <C>         
SUMMARY OF OPERATIONS:
  Net sales                                   $ 71,685,080   $ 65,280,138    $ 51,330,127    $ 34,076,224    $    602,466
  Gross profit                                  14,233,460     15,173,356       9,391,883       9,608,859         112,361
  Operating expenses                            10,877,964     10,044,450       7,680,038       5,702,515         798,622
  Operating income (loss)                        3,355,496      5,128,906       1,711,845       3,906,344        (686,261)
  Interest expense                               2,636,862      2,637,341       2,932,563       2,242,757          73,483
  Other income                                      40,810         46,533         136,597          22,504          18,138
  Income (loss) before
    extraordinary loss                            759,444      2,469,628      (1,028,824)      1,400,434        (682,839)
  Extraordinary loss                                  --       (1,728,353)           --              --          (205,000)
  Net income (loss)                                930,765      1,750,960        (864,824)      1,400,434        (887,839)
  Net income (loss) applicable                     410,362      1,660,169      (1,058,513)      1,207,145        (893,414)
     to common stock

  Basic earnings (loss) per common share:
    Income (loss) from
      continuing operations                   $        .06   $        .62    $       (.27)   $        .34    $       (.21)
    Extraordinary loss                                --             (.31)           --              --              (.06)
                                              ------------   ------------    ------------    ------------    ------------
                                              $        .06   $        .31    $       (.27)   $        .34    $       (.27)
                                              ============   ============    ============    ============    ============

  Diluted earnings (loss) per common share:
    Income (loss) from
      continuing operations                   $        .06   $        .49    $       (.27)   $        .24    $       (.21)
    Extraordinary loss                                --             (.24)           --              --              (.06)
                                              ------------   ------------    ------------    ------------    ------------
                                              $        .06   $        .25    $       (.27)   $        .24    $       (.27)
                                              ============   ============    ============    ============    ============

  Weighted average number of
    common shares outstanding                    6,503,426      5,444,683       3,899,587       3,570,233       3,349,693

DECEMBER 31,                                    1997           1996            1995            1994            1993
FINANCIAL POSITION:
  Working capital                             $  4,080,324   $  1,126,244    $    450,932    $  3,975,553    $  2,326,948
  Total assets                                  43,828,971     35,426,564      31,917,782      19,181,172      17,827,025
  Long-term and subordinated
    debt                                         9,672,470     11,008,012      11,743,512       9,426,460      10,094,231
  Deferred liabilities                                --           72,384         263,595         806,705         135,677
  Redeemable preferred stock                    10,000,000           --              --              --              --
  Stockholders' equity                           7,699,147      8,024,004       4,575,075       4,030,373       2,646,112

</TABLE>

See "Financial Highlights" elsewhere is the annual report for information
regarding comparability of the selected financial information.

<PAGE>


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

RESULTS OF OPERATIONS. The following table sets forth items from the Company's
Statements of Operations as percentages of net sales:

                                              1997          1996          1995
                                              ----          ----          ----
Net sales                                    100.0%        100.0%        100.0%
Cost of goods sold                            80.1          76.8          81.7
Gross Profit                                  19.9          23.2          18.3
Operating expenses                            15.2          15.4          15.0
Operating income                               4.7           7.9           3.3
Other expense                                 (3.6)         (4.1)         (5.3)
Income (loss) before income taxes and
  extraordinary loss                           1.1           3.8          (2.0)
Income tax benefit                            (0.2)         (1.5)         (0.3)
Income (loss) before extraordinary loss        1.3           5.3          (1.7)
Extraordinary loss on debt prepayments          -            2.6            -
Net income (loss)                              1.3%          2.7%         (1.7)%

         On July 10, 1995, the Company acquired all of the outstanding common
stock of Pacific Plastics, Inc. and its wholly owned subsidiary, Arrow Pacific
Plastics, Inc. ("Pacific"). Since Pacific was not acquired by the Company until
July, 1995, operating results may not be comparable with prior years. Pro forma
results, reflecting operations as if the acquisition had occurred at the
beginning of 1995 are provided in Note 2 of the financial statements. A
discussion of the pro forma results are made whenever it is deemed to enhance
the reader's understanding of the Company's operating results.

       The Company posted record net sales in 1997, rising 10% from 1996 to 1997
and by 27% from 1995 to 1996. Higher sales volumes, primarily due to an increase
in production capacities, were responsible for the 1997 growth in revenues.
Higher sales volumes, primarily due to the acquisition of Pacific, were
responsible for the 1996 growth in revenues. Pounds sold rose by 13% from 1996
to 1997 and by 40% from 1995 to 1996. These higher volumes were partially offset
by lower selling prices, which decreased 3% from 1996 to 1997 and 9% from 1995
to 1996. The lower selling prices in 1997 were caused by increased competition
due to over-capacity in the industry, while the lower selling prices in 1996
were primarily due to lower PVC resin prices. On a pro forma basis, sales in
dollars decreased 6% from 1995 to 1996, while sales in pounds increased 5%. The
small pro forma sales increase in pounds is due to capacity constraints at the
Company's three manufacturing facilities.

         The decrease in gross profit as a percentage of net sales from 1996 to
1997 is primarily due to a combination of higher resin prices during the first
half of 1997 and lower selling prices during 1997. PVC resin prices were
approximately 3% higher from 1996 to 1997. Much of the PVC resin price increases
were driven by a tight supply of resin during the first quarter of 1997, caused
by various operational problems within many of the resin producers, not by an
increase in demand. Therefore, the Company was unable to pass all of the raw
material price increases on to its customers during the first half of 1997. The
lower selling prices were due to PVC resin prices peaking earlier than usual in
1997. Resin prices peaked in May 1997, compared to the more traditional
fall/winter price descent in September of 1996. To maintain its market share,
the Company was required to lower its prices at the same rate that raw material
prices declined. As higher priced inventory was sold at lower market prices,
gross profits decreased significantly. The increase in the gross profit as a
percentage of net sales from 1995 to 1996 is primarily due to the stabilization
of PVC and PE raw material costs and selling prices during 1996.

         Operating expenses as a percentage of net sales decreased from 1996 to
1997 primarily due to administrative efficiencies within the Company which were
partially offset by higher freight costs resulting from expanded geographic
markets. Operating expenses as a percentage of net sales increased from 1995 to
1996 primarily due to lower selling prices in 1996 which were partially offset
by administrative efficiencies gained from the acquisition

<PAGE>


of Pacific. Operating expenses as a percentage of sales on a pro forma basis
were 14.4% for 1995. The increase in operating expenses from 1995 pro forma
results to 1996 is due to lower selling prices in 1996 compared to 1995.

         The decrease in non-operating expenses, which consists mainly of
interest expense, as a percentage of net sales from 1996 to 1997 is the result
of paying down the revolving credit loan with the proceeds from the sale of
redeemable preferred stock in May 1997. Interest expense decreased in 1996
compared to 1995 as a result of the Company's refinancing of debt along with the
issuance of new common equity in May 1996, which allowed the Company to
eliminate 40% of its higher interest rate subordinated debt and related non-cash
interest amortization.

         The income tax provisions for 1997, 1996 and 1995, were calculated
based upon management's estimate of the annual effective rates, reduced by
federal net operating loss ("NOL") and state tax credit carryforwards utilized
as well as NOL carryforwards expected to be used in future periods. Due to
future expected profits, income tax benefits of $250,000 and $1,000,000 were
recorded in 1997 and 1996, respectively, representing NOL carryforwards expected
to be utilized in the future.

FINANCIAL CONDITION. The Company's financial condition improved significantly in
1997 due to the issuance of $10 million of redeemable preferred stock during the
second quarter. The proceeds were used to pay down debt as well as provide
capital for the Company's growth strategy. At December 31, 1997, the Company had
$4.1 million of working capital.

         Cash generated from operating activities was $820,000 in 1997, compared
to $5.8 million and $6.2 million in 1996 and 1995, respectively. Profits and
depreciation and amortization were the primary sources of net cash provided by
operating activities in 1997 and 1996. Net cash provided by operating activities
in 1995 benefited from a $4.9 million reduction of inventory.

         The Company used $7.9 million, $3.5 million, and $6.0 million for
investing activities in 1997, 1996, and 1995, respectively. The primary uses of
cash were capital expenditures in 1997 and 1996 and the purchase of Pacific in
1995. Capital expenditures increased substantially in 1997 and 1996 due to the
addition and replacement of manufacturing equipment at all three of the
Company's manufacturing facilities.

         Cash provided by financing activities of $7.1 million in 1997 primarily
consists of cash from the issuance of redeemable preferred stock during the
second quarter of 1997, partially offset by payments under the note payable and
long-term debt. Cash used for financing activities of $2.6 million in 1996 was
primarily from repayments of long-term debt and the revolving credit loan. The
Company generated $106,000 from financing activities in 1995.

         The Company had commitments for capital expenditures of $2,040,000 at
December 31, 1997, which will be funded from borrowings under the revolving
credit loan. Additional sources of liquidity, if needed, include the Company's
revolving credit line, additional long-term debt financing, and the sale of
Company equity securities under either a private or public offering. The Company
believes that it has the financial resources needed to meet its current and
future business requirements, including capital expenditures for expanding
manufacturing capacity and working capital requirements.

OUTLOOK. The statements contained in this Outlook are based on current
expectations. These statements are forward-looking, and actual results may
differ materially from those anticipated by some of the statements made herein.

         The Company expects the demand for plastic pipe to grow as acceptance
of plastic pipe over metal pipe continues and the overall economy continues to
grow. Industry growth projections call for annual sales growth rates for plastic
pipe of three percent or greater per year through 2003. The Company has
historically been able, and expects in the future to be able, to grow at rates
substantially in excess of the industry averages due to its emphasis on customer
satisfaction, product quality and differentiation and innovative promotional
programs. The Company's strategy has been, and continues to be, to concentrate
growth initiatives in higher profit products and geographic regions.

The Company's gross margin percentage is a sensitive function of PVC and PE raw
material resin prices and capacity levels in the industry. In a rising or stable
resin market, margins and sales volume have historically been higher and
conversely, in falling resin markets, sales volumes and margins have
historically been lower. Gross margins

<PAGE>


also suffer when capacity increases outpace demand due to increased competition
to utilize capacity. The Company believes that there currently is over-capacity
in the plastic pipe industry. Due to the commodity nature of PVC and PE resin
and the dynamic supply and demand factors worldwide, it is very difficult to
predict gross margin percentages or assume that historical trends will continue.

         The Company does not anticipate any events in the foreseeable future
that would hinder the availability of the federal NOLs. The NOLs are available
through the year 2010; however, the majority expire by the year 2000. The amount
of available NOLs actually used will be dependent on future profits. The Company
does not expect to utilize all of its NOLs before they expire.

         The Company believes that it has the product offerings, facilities,
personnel, and competitive and financial resources for continued business
success. However future sales, costs, margins, and profits are all influenced by
a number of factors, as discussed above.

         As with other organizations, the Company's computer programs were
originally designed to recognize calendar years by their last two digits.
Calculations performed using these truncated fields would not work properly with
dates from the year 2000 and beyond. The Company has initiated efforts to remedy
this situation and expects all programs to be corrected and tested prior to the
year 2000. The incremental costs of this project will not have a material effect
on the Company's financial statements. In addition, the Company has communicated
with others with whom it does significant business to determine their year 2000
compliance readiness and the extent to which the Company is vulnerable to any
third party year 2000 issues. However, there can be no guarantee that the
systems of other companies on which the Company's systems rely will be timely
converted, or that a failure to convert by another company, or a conversion that
is incompatible with the Company's systems, would not have a material adverse
effect on the Company.


         Statements relating to the Company's expectation of the plastic pipe
and tubing market, and the Company's performance in relation to such growth, the
Company's ability to utilize NOLs in the future and its belief that it has the
necessary resources for future success are all forward looking statements that
involve a number of risks and uncertainties. Some of the factors that could
cause actual results to differ materially include, but are not limited to, raw
material cost fluctuations, general economic conditions, competition,
availability of working capital and weather conditions.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
         Index to Financial Statements and Schedules.

FINANCIAL STATEMENTS

Independent Auditors' Report
Balance Sheets
Statements of Operations
Statements of Stockholders' Equity
Statements of Cash Flow
Notes to Financial Statements

<PAGE>


INDEPENDENT AUDITORS' REPORT


Board of Directors and Stockholders of Eagle Pacific Industries, Inc.


We have audited the accompanying balance sheets of Eagle Pacific Industries,
Inc. as of December 31, 1997 and 1996 , and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1997. Our audits also included the financial
statement schedule listed in the index at Item 14. These financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.

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

In our opinion, such financial statements present fairly, in all material
respects, the financial position of Eagle Pacific Industries, Inc. at December
31, 1997 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.



  /s/  Deloitte & Touche LLP
----------------------------
       Deloitte & Touche LLP



Minneapolis, Minnesota
February 24, 1998

<PAGE>


<TABLE>
<CAPTION>

EAGLE PACIFIC INDUSTRIES, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
--------------------------------------------------------------------------------------------
                                                    1997            1996            1995
<S>                                             <C>             <C>             <C>         
NET SALES                                       $ 71,685,080    $ 65,280,138    $ 51,330,127

COST OF GOODS SOLD                                57,451,620      50,106,782      41,938,244
                                                ------------    ------------    ------------
  Gross profit                                    14,233,460      15,173,356       9,391,883
                                                ------------    ------------    ------------

OPERATING EXPENSES:
  Selling expenses                                 8,157,000       7,113,184       5,335,754
  General and administrative expenses              2,720,964       2,931,266       2,344,284
                                                ------------    ------------    ------------
                                                  10,877,964      10,044,450       7,680,038
                                                ------------    ------------    ------------

OPERATING INCOME                                   3,355,496       5,128,906       1,711,845
                                                ------------    ------------    ------------

OTHER INCOME (EXPENSE):
  Interest expense                                (2,636,862)     (2,637,341)     (2,932,563)
  Minority interest                                     --           (68,470)         55,297
  Other income                                        40,810          46,533         136,597
                                                ------------    ------------    ------------
                                                  (2,596,052)     (2,659,278)     (2,740,669)
                                                ------------    ------------    ------------
INCOME (LOSS) BEFORE INCOME TAXES
  AND EXTRAORDINARY LOSS                             759,444       2,469,628      (1,028,824)

INCOME TAX BENEFIT (NOTE 10)                        (171,321)     (1,009,685)       (164,000)
                                                ------------    ------------    ------------

INCOME (LOSS) BEFORE EXTRAORDINARY LOSS              930,765       3,479,313        (864,824)

EXTRAORDINARY LOSS ON DEBT PREPAYMENTS,
  LESS INCOME TAX BENEFIT OF $80,500 (NOTE 5)           --         1,728,353            --
                                                ------------    ------------    ------------

NET INCOME (LOSS)                                    930,765       1,750,960        (864,824)

PREFERRED STOCK DIVIDENDS                           (520,403)        (90,791)       (193,689)
                                                ------------    ------------    ------------

NET INCOME (LOSS) APPLICABLE TO COMMON STOCK    $    410,362    $  1,660,169    $ (1,058,513)
                                                ============    ============    ============

BASIC EARNINGS (LOSS) PER COMMON SHARE:
  Income (loss) before extraordinary loss       $        .06    $        .62    $       (.27)
  Extraordinary loss on debt prepayments                --              (.31)           --
                                                ------------    ------------    ------------
  Net income (loss)                             $        .06    $        .31    $       (.27)
                                                ============    ============    ============

DILUTED EARNINGS (LOSS) PER COMMON SHARE:
  Income (loss) before extraordinary loss       $        .06    $        .49    $       (.27)
  Extraordinary loss on debt prepayments                --              (.24)           --
                                                ------------    ------------    ------------
  Net income (loss)                             $        .06    $        .25    $       (.27)
                                                ============    ============    ============

AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
  Basic                                            6,503,426       5,444,683       3,899,587
  Diluted                                          7,426,521       7,120,112       3,899,587

</TABLE>

See notes to financial statements.

<PAGE>

<TABLE>
<CAPTION>

EAGLE PACIFIC INDUSTRIES, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
-------------------------------------------------------------------------------------------------------------
ASSETS                                                                              1997           1996
<S>                                                                              <C>             <C>       
CURRENT ASSETS:
  Cash and cash equivalents                                                      $       --      $       --
  Accounts receivable, less allowance for doubtful accounts and
    sale discounts of $203,500 and $195,100, respectively                           6,528,296       5,600,843
  Inventories (Note 3)                                                             13,269,560      10,279,169
  Deferred income taxes (Note 10)                                                     425,000         340,000
  Other                                                                               314,822         969,633
                                                                                 ------------    ------------
          Total current assets                                                     20,537,678      17,189,645

PROPERTY AND EQUIPMENT, NET (Note 4)                                               16,854,447      11,486,019
OTHER ASSETS:
  Prepaid interest (Note 5)                                                           836,998       1,388,688
  Goodwill, less accumulated amortization of $370,000 and $262,500, respectively    4,097,652       3,650,298
  Deferred financing costs, less accumulated amortization of
    $580,900 and $239,200, respectively                                               544,704         866,418
  Deferred income taxes (Note 10)                                                     825,000         660,000
  Non-compete agreement, less accumulated amortization
    of $132,500 and $79,500, respectively (Note 2)                                    132,492         185,496
                                                                                 ------------    ------------
                                                                                    6,436,846       6,750,900
                                                                                 ------------    ------------
                                                                                 $ 43,828,971    $ 35,426,564
                                                                                 ============    ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Note payable (Note 5)                                                          $  4,405,976    $  4,649,102
  Accounts payable                                                                  8,892,015       8,020,368
  Accrued liabilities                                                               1,276,481       1,442,180
  Current maturities of long-term debt (Note 5)                                     1,882,882       1,951,751
                                                                                 ------------    ------------
          Total current liabilities                                                16,457,354      16,063,401

LONG-TERM DEBT, less current maturities (Note 5)                                    5,489,900       7,035,562
SUBORDINATED DEBT (Note 5)                                                          4,182,570       3,972,450
DEFERRED COMPENSATION (Note 6)                                                           --            72,384
MINORITY INTEREST                                                                        --           258,763
COMMITMENTS AND CONTINGENCIES (Note 7)                                                   --              --
REDEEMABLE PREFERRED STOCK, 8% cumulative dividend; convertible;                   10,000,000            --
     $1,000 liquidation preference; $.01 par value; authorized,
     issued and outstanding 10,000 shares (Note 8)
STOCKHOLDERS' EQUITY (Note 9):
  Series A preferred stock, 7% cumulative dividend; convertible;
    $2 liquidation preference; no par value; authorized 2,000,000 shares;
    issued and outstanding 18,750 shares                                               37,500          37,500
  Undesignated stock, $.01 per share; authorized 18,000,000 shares;
    none issued and outstanding                                                          --              --
  Common stock, par value $.01 per share; authorized 30,000,000 shares;
    issued and outstanding 6,506,174 and 6,443,237 shares, respectively                65,062          64,432
  Class B Common stock, par  value $.01 per share; authorized 3,500,000 shares;
    none issued and outstanding                                                          --              --
  Additional paid-in capital                                                       36,707,200      37,211,090
  Unearned compensation on stock options                                                 --           (96,241)
  Notes receivable from officers and employees on common stock purchases             (434,206)        (66,343)
  Accumulated deficit                                                             (28,676,409)    (29,126,434)
                                                                                 ------------    ------------
          Total stockholders' equity                                                7,699,147       8,024,004
                                                                                 ------------    ------------
                                                                                 $ 43,828,971    $ 35,426,564
                                                                                 ============    ============

</TABLE>

See notes to financial statements.

<PAGE>

<TABLE>
<CAPTION>

EAGLE PACIFIC INDUSTRIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
-----------------------------------------------------------------------------------------------------------------
                                                 Series A                                             Additional  
                                              Preferred Stock                 Common Stock             Paid-in     
                                          Shares          Amount          Shares         Amount         Capital    
                                      --------------------------------------------------------------------------- 
<S>                                       <C>          <C>                <C>         <C>            <C>           
BALANCE AT 12/31/1994                     1,383,500    $  2,767,000       3,583,230   $     35,832   $ 31,261,979  

Net loss                                       --              --              --             --             --    

Dividends on preferred stock                   --              --              --             --             --    

Issuance of common stock (Note 9)              --              --           569,710          5,697      1,495,402  

Common stock options vested (Note 9)           --              --              --             --             --    
                                       ------------    ------------    ------------   ------------   ------------  

BALANCE AT 12/31/1995                     1,383,500       2,767,000       4,152,940         41,529     32,757,381  

Net income                                     --              --              --             --             --    

Dividends on preferred stock                   --              --              --             --             --    

Issuance of common stock (Note 9)              --              --           730,547          7,305      1,604,807  

Conversion of preferred stock            (1,364,750)     (2,729,500)      1,559,750         15,598      2,713,902  

Common stock options vested (Note 9)           --              --              --             --             --    

Warrant issued in debt refinancing             --              --              --             --          135,000  

Common stock purchases (Note 9)                --              --              --             --             --    
                                       ------------    ------------    ------------   ------------   ------------  

BALANCE AT 12/31/1996                        18,750          37,500       6,443,237         64,432     37,211,090  

Net income                                     --              --              --             --             --    

Dividends on preferred stock                   --              --              --             --             --    

Issuance of common stock (Note 9)              --              --            62,937            630         37,603  

Common stock options vested (Note 9)           --              --              --             --             --    

Preferred stock issuance costs                 --              --              --             --         (583,029) 

Purchase of minority interest                  --              --              --             --           41,536  

Common stock purchases (Note 9)                --              --              --             --             --    
                                       ------------    ------------    ------------   ------------   ------------  

BALANCE AT 12/31/1997                  $     18,750    $     37,500    $  6,506,174   $     65,062   $ 36,707,200  
                                       ============    ============    ============   ============   ============  

</TABLE>

                    [WIDE TABLE CONTINUED FROM PREVIOUS PAGE]

<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------------------- 
                                                           Notes Receivable                               
                                                          from Officers and                               
                                              Unearned       Employees on                                 
                                           Compensation on      Common        Accumulated                 
                                            Stock Options   Stock purchases     Deficit          Total    
                                             ------------    ------------    ------------    ------------ 
<S>                                          <C>             <C>             <C>             <C>          
BALANCE AT 12/31/1994                        $   (306,348)   $       --      $(29,728,090)   $  4,030,373 
                                                                                                          
Net loss                                             --              --          (864,824)       (864,824)
                                                                                                          
Dividends on preferred stock                         --              --          (193,689)       (193,689)
                                                                                                          
Issuance of common stock (Note 9)                    --              --              --         1,501,099 
                                                                                                          
Common stock options vested (Note 9)              102,116            --              --           102,116 
                                             ------------    ------------    ------------    ------------ 
                                                                                                          
BALANCE AT 12/31/1995                            (204,232)           --       (30,786,603)      4,575,075 
                                                                                                          
Net income                                           --              --         1,750,960       1,750,960 
                                                                                                          
Dividends on preferred stock                         --              --           (90,791)        (90,791)
                                                                                                          
Issuance of common stock (Note 9)                    --              --              --         1,612,112 
                                                                                                          
Conversion of preferred stock                        --              --              --              --   
                                                                                                          
Common stock options vested (Note 9)              107,991            --              --           107,991 
                                                                                                          
Warrant issued in debt refinancing                   --              --              --           135,000 
                                                                                                          
Common stock purchases (Note 9)                      --           (66,343)           --           (66,343)
                                             ------------    ------------    ------------    ------------ 
                                                                                                          
BALANCE AT 12/31/1996                             (96,241)        (66,343)    (29,126,434)      8,024,004 
                                                                                                          
Net income                                           --              --           930,765         930,765 
                                                                                                          
Dividends on preferred stock                         --              --          (520,403)       (520,403)
                                                                                                          
Issuance of common stock (Note 9)                    --              --              --            38,233 
                                                                                                          
Common stock options vested (Note 9)               96,241            --              --            96,241 
                                                                                                          
Preferred stock issuance costs                       --              --              --          (583,029)
                                                                                                          
Purchase of minority interest                        --              --            39,663          81,199 
                                                                                                          
Common stock purchases (Note 9)                      --          (367,863)           --          (367,863)
                                             ------------    ------------    ------------    ------------ 
                                                                                                          
BALANCE AT 12/31/1997                        $       --      $   (434,206)   $(28,676,409)   $  7,699,147 
                                             ============    ============    ============    ============ 

</TABLE>

See notes to financial statements.

<PAGE>

<TABLE>
<CAPTION>

EAGLE PACIFIC INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>             <C>             <C>          
CASH FLOWS FROM OPERATING ACTIVITIES:                                         1997            1996             1995
  Net income (loss)                                                        $    930,765    $  1,750,960    $   (864,824)
  Adjustments to reconcile net income (loss) to net cash
    provided by operating activities:
    Extraordinary loss on debt prepayments                                         --         1,728,353            --
    Minority interest                                                              --            68,470         (55,297)
    Gain on disposal of fixed assets                                             (4,000)        (10,401)           (544)
    Depreciation and amortization                                             1,679,278       1,564,684       1,336,410
    Loan discount amortization                                                  551,834         329,724         345,170
    Prepaid interest amortization                                               551,690         435,160         735,619
    Deferred income taxes                                                      (250,000)     (1,000,000)           --
  Change in assets and liabilities, net of acquisition:
    Accounts receivable                                                        (927,453)        (51,607)      2,040,037
    Inventories                                                              (2,990,391)     (2,104,212)      4,883,583
    Other current assets                                                        654,811         (43,364)        129,341
    Accounts payable                                                            871,647       2,767,685      (2,227,281)
    Accrued liabilities                                                        (165,699)        313,359        (111,644)
    Other                                                                       (82,599)          8,622         (11,125)
                                                                           ------------    ------------    ------------
          Net cash provided by operating activities                             819,883       5,757,433       6,199,445
                                                                           ------------    ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of Pacific Plastics, Inc., net of cash acquired                         --              --        (4,195,035)
  Purchases of property and equipment                                        (6,764,430)     (3,451,076)     (1,171,689)
  Purchases of minority interest                                               (748,734)       (519,749)           --
  Payment under noncompete agreement                                               --              --          (750,000)
  Proceeds from restricted cash                                                    --           500,000            --
  Proceeds from property and equipment disposals                                  4,000          40,150          13,425
  Decrease in other assets                                                         --              --           100,000
  Notes receivable from officers and employees on common stock purchases       (367,863)        (66,343)           --
                                                                           ------------    ------------    ------------
          Net cash used in investing activities                              (7,877,027)     (3,497,018)     (6,003,299)
                                                                           ------------    ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  (Payments) borrowings under note payable, net                                (243,126)       (872,403)      1,194,284
  Proceeds from long-term debt                                                  260,000       8,029,950       1,961,624
  Payment for prepaid interest                                                     --              --        (1,500,000)
  Repayment of long-term debt                                                (1,874,531)    (10,478,521)     (1,399,072)
  Payment of debt issuance costs                                                (20,000)       (598,256)           --
  Issuance of common stock                                                       38,233       1,446,563          43,750
  Issuance of preferred stock, net of offering costs                          9,416,971            --              --
  Payment of preferred stock dividend                                          (520,403)        (90,791)       (193,689)
                                                                           ------------    ------------    ------------
  Net cash provided by  (used in) financing activities                        7,057,144      (2,563,458)        106,897
                                                                           ------------    ------------    ------------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                               --          (303,043)        303,043

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                     --           303,043            --
                                                                           ------------    ------------    ------------

CASH AND CASH EQUIVALENTS AT END OF YEAR                                   $       --      $       --      $    303,043
                                                                           ============    ============    ============

</TABLE>

See notes to financial statements.

<PAGE>


EAGLE PACIFIC INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
--------------------------------------------------------------------------------

1.   SIGNIFICANT ACCOUNTING POLICIES

     BASIS OF FINANCIAL STATEMENT PRESENTATION - Prior to December 31, 1997, the
financial statements include the accounts of Eagle Pacific Industries, Inc. and
its wholly-owned subsidiaries (the Company), Pacific Plastics, Inc. and its
wholly-owned subsidiary, Arrow Pacific Plastics, Inc. (Pacific), and Eagle
Plastics, Inc. (Eagle). All significant inter-company accounts and transactions
have been eliminated. Effective December 31, 1997, the subsidiaries were merged
into the Company.

     CASH EQUIVALENTS - Cash equivalents consist principally of money market and
short-term commercial paper investments with initial maturities of three months
or less.

     INVENTORIES - Inventories are stated at the lower of cost, determined by
the first-in, first-out (FIFO) method, or market.

     PROPERTY AND EQUIPMENT - Property and equipment are stated at cost and are
depreciated over the estimated useful life of each asset using the straight-line
method. Leasehold improvements are depreciated over the shorter of the lease
term or the estimated useful lives of the improvements. The carrying value is
evaluated for impairment on a regular basis. Capitalized interest was $101,027
for 1997.

     GOODWILL - Goodwill has been recorded for the excess of the purchase price
over the fair value of the net assets acquired in acquisitions and is being
amortized using the straight-line method over 40 years. The carrying value is
evaluated for impairment based on historical and projected undiscounted cash
flows.

     DEFERRED FINANCING COSTS - Deferred financing costs are amortized over the
term of the related indebtedness using the effective interest method.

     FAIR VALUE OF FINANCIAL INSTRUMENTS - In accordance with the requirements
of Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments", management estimates that the carrying value of
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 approximate fair value
because of the short-term nature of these instruments.

     PRODUCT WARRANTY - The Company's products are generally under warranty
against defects in material and workmanship for a period of one year; however,
one of the Company's products has a 50-year warranty and another has a lifetime
warranty for as long as the original purchaser owns the property where this
product was originally installed. The Company has established an accrual for
these anticipated future warranty costs.

     SALES - Sales are recorded at the time of shipment of the product.

     INCOME TAXES - The Company utilizes the asset and liability method of
accounting for income taxes as set forth in Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes". Deferred income tax
assets and liabilities are computed annually for differences between the
financial statement and income tax basis of assets and liabilities that will
result in taxable or deductible amounts in the future based on enacted tax laws
and rates applicable to the periods in which the differences are expected to
affect taxable income. 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.

<PAGE>


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

     SIGNIFICANT VENDORS - The Company acquires raw materials from various
sources. During the years ended December 31, 1997, 1996 and 1995, purchases of
such raw materials from two vendors totaled 61%, 61% and 72%, respectively, of
total material purchases.

     RECLASSIFICATIONS - Certain reclassifications have been made to the 1996
consolidated financial statements to conform to the 1997 presentation. Such
reclassifications had no effect on net income (loss) or stockholders' equity as
previously reported.

2.   ACQUISITION OF PACIFIC PLASTICS, INC.

     On July 10, 1995, the Company acquired all of the outstanding common stock
of Pacific. Pacific extrudes polyvinyl chloride pipe and polyethylene pipe and
tubing products which are marketed primarily in the northwestern United States.
The purchase price of Pacific was $6,750,000, consisting of $4,350,000 in cash,
$1,700,000 in the form of a note to the previous owners of Pacific (Sellers),
and 262,210 shares of the Company's common stock valued at $700,000. Because
84,210 shares of the 262,210 shares issued were not registered for public sale
by March 1, 1996, the holders have the right to require the Company to
repurchase up to 84,210 shares at 80% of market price at the time of the
repurchase request. In addition, the Company paid $750,000 in cash to two of the
Sellers in exchange for their agreement not to compete with the Company for five
years.

     The Company financed the cash portion of the purchase and non-competition
agreements from borrowings on a new revolving credit line (Revolver) and term
loan (Term Loan) of $3,184,000 and $1,916,000, respectively. Additional proceeds
from the Revolver were used to repay Pacific's existing line of credit. Both the
Revolver and the Term Loan were paid off in May 1996 (Note 5).

     The $1,700,000 note payable to the Sellers requires the Company to make 36
monthly payments of principal and interest at a fixed rate of 9% per annum or
aggregate payments of $54,059 per month. The Sellers' note is guaranteed by the
Company.

     The Company also entered into a three-year and a two-year employment
contract with two of the Sellers with whom the Company entered into non-compete
agreements. Such contracts provide for base salary and standard benefits. In
consideration for entering into such employment contracts, the Company granted
each seller options to purchase 100,000 shares of the Company's common stock at
$3.125 per share.

     This acquisition was accounted for under the purchase method of accounting.
The Company included the results of operations of Pacific subsequent to the
acquisition. The fair value of the assets acquired less the liabilities assumed
exceeded the purchase price by $5,316,000. This excess has been recorded as a
reduction to property and equipment and noncompete agreements of $4,831,000 and
$485,000, respectively.

     The following unaudited pro forma condensed combined statement of
operations reflect the combined operations of the Company and Pacific during the
year ended December 31, 1995, as if the acquisition had occurred at the
beginning of 1995. The unaudited pro forma condensed combined statement of
operations may not necessarily reflect the actual results of operations of the
Company which would have resulted had the acquisition occurred as of the dates
presented. The unaudited pro forma information is not necessarily indicative of
future results of operations for the combined companies.

<PAGE>


YEAR ENDED DECEMBER 31,                                           1995

Revenues                                                      $ 69,495,000
Gross profit                                                    12,302,000
Net loss                                                          (505,000)
Net loss applicable to common stock                               (699,000)
Basic and Diluted loss per common share                               (.18)


3.   INVENTORIES                                1997              1996

Raw materials                              $   5,033,398      $  3,151,146
Finished goods                                 8,236,162         7,128,023
                                           -------------      ------------
                                           $  13,269,560      $ 10,279,169
                                           =============      ============

4.   PROPERTY AND EQUIPMENT                     1997              1996

Land                                       $   2,105,664      $    523,678
Buildings and leasehold improvements           2,874,347         2,687,673
Machinery and equipment                       14,738,163        10,586,322
Transportation equipment                         443,254           327,613
Furniture and fixtures                           449,742           399,622
Construction-in-progress                         424,346                 -
                                           -------------      ------------
                                              21,035,516        14,524,908
Less accumulated depreciation                  4,181,069         3,038,889
                                           -------------      ------------
                                           $  16,854,447      $ 11,486,019
                                           =============      ============

5.   DEBT

     At December 31, 1997, the Company had outstanding borrowings of $3,345,645
under the revolving credit loan agreement of $16,500,000, subject to borrowing
base restrictions. The Company may borrow up to 85% of "eligible" accounts
receivable and 55% of "eligible" inventory. At December 31, 1997, the Company
had additional borrowings available of approximately $7,500,000, which is based
on available collateral. The revolving credit loan expires May 9, 1999. Interest
is payable monthly at the bank's national base rate, plus .25% (8.75% at
December 31, 1997). The agreement also includes a commitment fee of .5% of the
unused portion of the credit loan, payable monthly. At December 31, 1996, the
Company had outstanding borrowings of $4,649,102. The revolving credit loan is
secured by substantially all assets of the Company. Until all obligations of the
revolving credit loan and term note are paid in full, the Company must comply
with certain covenants outlined in the loan agreement, including tangible net
worth, net cash flow and senior interest coverage ratio. At December 31, 1997,
the Company did not comply with the net cash flow covenant and accordingly,
received a waiver from its lenders. The weighted average interest rate on all
short-term borrowings at December 31, 1997 and 1996, was 8.7% and 8.5%,
respectively.

     In May 1996, the Company repaid $3.0 million of its subordinated debt,
which generated an extraordinary loss of $1,728,353, net of income taxes. This
loss consisted of unamortized prepaid interest of $1.5 million and deferred
finance costs of $228,000. The Company issued a 22-month warrant to purchase
215,000 shares of the Company's Common Stock in connection with the subordinated
debt repayment. The $135,000 value assigned to the warrant is being amortized to
interest expense over the term of the refinanced debt. In conjunction with the
repurchase, the Company obtained $1.5 million of new common equity and an
additional $3.4 million of term notes, and the Company repurchased approximately
one-half of the remaining Eagle minority interest. The additional term notes
were obtained through a bank refinancing that consolidated previously
outstanding term notes and revolving credit loans into a $8.0 million term note
and a $16.5 million revolving credit loan.

LONG-TERM DEBT AT DECEMBER 31 CONSISTED OF THE FOLLOWING:

<PAGE>


                                              1997              1996

Term promissory note (A)                 $   6,189,300     $   7,332,900
Subordinated promissory note (B)             4,182,570         3,972,450
Term promissory note (C)                       464,513           950,013
Various installment notes payable (D)          718,969           704,400
                                         -------------     -------------
                                            11,555,352        12,959,763
Less current maturities                      1,882,882         1,951,751
                                         -------------     -------------
                                         $   9,672,470     $  11,008,012
                                         =============     =============

     (A) Payable $95,300 monthly, plus interest at LIBOR plus 2.75% (8.5% at
     December 31, 1997), with remaining principal due May 9, 1999. Secured by
     substantially all assets of the Company and subject to the terms and
     covenants of the revolving credit loan agreement outlined above.

     (B)Due in full on May 10, 1999, including interest at 10.4%. During 1996,
     $3.0 million of this debt was prepaid. This promissory note is subordinated
     in payment to the Company's revolving line of credit and term promissory
     note. This agreement requires the Company to maintain the same covenants as
     the revolving credit loan. The original issue discount (OID) of $1,590,000
     ($954,000 after the $3,000,000 prepayment in 1996) has been netted against
     the debt and is being accreted over the term of the debt using the
     effective interest method. This accretion is included in interest expense.
     At December 31, 1997 and 1996, unaccreted OID was $317,430 and $527,550,
     respectively. Pursuant to the terms of the Subordinated Note, after January
     1, 1999, the lender was entitled to receive one or more contingent interest
     payments based upon profitability. The maximum aggregate amount of the
     contingent interest payments was to be 87.5% of certain earnings before
     interest, taxes, depreciation and amortization ("EBITDA") for any four
     consecutive quarters after January 1, 1998. The contingent interest was
     being accrued over the period the debt was to be outstanding under the
     interest method, using an estimate of the EBITDA calculation for the year
     ended December 31, 1998, based upon the current year's EBITDA. On March 16,
     1995, the Company executed an agreement with the lender whereby the
     contingent interest requirement was fixed in exchange for: (i) $1,500,000
     in cash, which came from a draw on the revolving credit line; (ii)
     $1,200,000 paid on September 1, 1995; (iii) $970,000 paid on September 1,
     1996; (iv) 210,000 shares of the Company's Common Stock; and (v) a three-
     year warrant to purchase 100,000 shares of the Company's Common Stock at
     $3.00 per share. The present value of the total consideration provided was
     recorded as prepaid interest and is being amortized over the period the
     Subordinated Note is outstanding using the interest method. The estimate of
     the total contingent interest payable used to accrue the contingent
     interest payable at December 31, 1994, approximated the present value of
     the total consideration provided pursuant to the March 16, 1995, agreement
     described above.

     (C) Due August 1, 1998; payable $54,059 monthly, including interest at 9%.
     Guaranteed by the Company.

     (D) Due dates ranging from April 1999 through March 2004, initially payable
     $26,467 monthly, including interest at 4.25% to 9.38%. Secured by land and
     equipment.

These amounts are shown in the consolidated balance sheets under the following
captions at December 31:

                                                1997            1996
Current maturities of
long-term debt                             $   1,882,882   $   1,951,751

Long-term debt,
less current maturities                        5,489,900       7,035,562

Subordinated debt                              4,182,570       3,972,450
                                           -------------   -------------
                                           $  11,555,352   $  12,959,763
                                           =============   =============

<PAGE>


Aggregate annual maturities of long-term debt at December 31, 1997, are:

1998                                                       $   1,882,882
1999                                                           9,787,216
2000                                                              58,618
2001                                                              51,939
2002                                                              39,862
Thereafter                                                        52,265
                                                           -------------
                                                              11,872,782
Less unamortized original issue discount                         317,430
                                                           -------------
                                                           $  11,555,352
                                                           =============

6.   DEFERRED COMPENSATION

     The Company previously adopted a plan of deferred compensation for a former
officer of the Company. Under this plan, the officer will receive $50,000 per
year for three years, commencing when the Company's annual net income per share
equals or exceeds $1.00.

     The Company also has an unfunded deferred compensation agreement which
provides approximately $75,000 upon retirement. During the year ended December
31, 1997, the officer retired and the compensation will be paid in 1998.

7.   COMMITMENTS AND CONTINGENCIES

     LITIGATION - The Company is periodically involved in various legal actions
arising in the normal course of business. At December 31, 1997, the Company was
not aware of any material legal proceedings against it or its subsidiaries.

     LEASES - The Company has non-cancelable operating leases for certain
operating facilities which expire in the years 1998 and 2010. The operating
facility leases contain provisions for increasing the monthly rent for changes
in the Consumer Price Index.

     Future minimum lease payments at December 31, 1997 were:

1998                                       $    136,000
1999                                            121,000
2000                                            121,000
2001                                            121,000
2002                                            121,000
Thereafter                                      911,000
                                           ------------
                                           $  1,531,000
                                           ============

     Rent expense under all operating leases was $363,000, $285,000 and $234,000
for the years ended December 31, 1997, 1996 and 1995, respectively.

8.   REDEEMABLE PREFERRED STOCK

     During 1997, the Company issued 10,000 shares of redeemable 8% convertible
preferred stock at $1,000 per share. The stock is convertible at the holders
option at $4.26 per share and has a mandatory redemption at the liquidation
preference of $1,000 per share on May 9, 2004. After two years from issuance,
the Company can cause a mandatory conversion if the common stock trades above
$7.45 per share for 30 consecutive days.

9.   STOCKHOLDERS' EQUITY

<PAGE>


     The Company issued 1,383,500 shares of Series A convertible preferred stock
at $2.00 per share during the year ended December 31, 1994. During 1996,
1,364,750 shares of preferred stock were converted to common stock. The
preferred stock is convertible, at the option of the holder, to common stock at
a current conversion ratio of one share of common stock for each share of
preferred stock. The Company may force conversion of the preferred stock at any
time after the Company's common stock trades in the public market for 20
consecutive days at an average bid and asked price greater than $4.00 per share.
The preferred stock has voting rights based on the number of shares of common
stock into which the preferred stock is then convertible and has a liquidation
preference to common stock.

     During 1997, the Company issued 80,237 shares of common stock for the
exercise of stock options and purchased and retired 17,300 shares of common
stock. During 1996, the Company issued 600,000, 60,547, 1,559,750, and 70,000
shares of common stock for a new private equity offering, the acquisition of
additional shares of minority ownership of Eagle, the conversion of 1,364,750
shares of preferred stock, and the exercise of stock options, respectively.
During 1995, the Company issued 262,210, 210,000, 72,500, and 25,000 shares of
common stock in connection with the purchase of Pacific, to fix the Blair
contingent interest, the acquisition of minority ownership of Eagle and the
exercise of stock warrants, respectively.

     The Company has previously granted options to purchase 600,000 shares of
its common stock at $.75 per share, which was $.75 below market value at grant
time. The difference between the exercise price and the market value is being
amortized as compensation expense over the vesting period of the options, which
was December 1994 through December 1997.

     In 1996, the Company established a leverage equity purchase program (LEPP).
The LEPP provides loans to board members and various members of management to
purchase common stock of the Company. The loans are represented by five-year
promissory notes, bear interest at a rate equal to the rate on the Company's
revolver loan (8.75% at December 31, 1997), and are collateralized by the pledge
of the purchased shares of common stock of the Company.

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 comprised of reserves 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. The
Company annually estimates the amount of deferred tax assets which it expects to
realize based on historical averages of taxable income and estimates of future
taxable income. The Company has recorded a valuation allowance to reduce
recorded deferred tax assets to the amount of deferred tax benefit expected to
be realized.

     Deferred taxes as of December 31, 1997 and 1996, are summarized as follows:

                                                     1997              1996
Current deferred taxes:
Warranty reserve                               $      13,000     $      13,000
Allowance for doubtful accounts                       79,000            76,000
Accrued expenses                                     207,800           175,400
Prepaid expenses                                      14,000            10,000
Federal net operating loss carryforwards             425,000           340,000
Less valuation allowance                            (313,800)         (274,400)
                                               -------------     -------------
Total                                          $     425,000     $     340,000
                                               =============     =============

Long-term deferred taxes:
LIFO inventory recapture                       $    (396,000)    $    (535,000)

<PAGE>


Deferred compensation                                205,000           160,000
Excess of tax over book depreciation                (729,000)         (892,000)
Non-compete agreement                                190,000           192,000
Federal net operating loss carryforwards          13,606,000        14,313,000
Tax credit carryforwards                             634,000           684,000
AMT credit carryforwards                              78,000            86,000
Contribution carryforwards                            22,000            15,000
Less valuation allowance                         (12,785,000)      (13,363,000)
                                               -------------     -------------
Total                                          $     825,000     $     660,000
                                               =============     =============


Income tax expense for the years ended December 31, 1997, 1996 and 1995,
consists of the following:

<TABLE>
<CAPTION>
                                                                    1997             1996            1995
<S>                                                             <C>             <C>              <C>         
Current state                                                   $    78,679     $     68,315     $  (164,000)
Deferred - primarily federal                                       (250,000)      (1,078,000)              -
                                                                -----------     ------------     -----------
Income tax (benefit) expense before                                (171,321)      (1,009,685)       (164,000)
  extraordinary loss
Income tax benefit from extraordinary loss on debt prepayments            -          (80,500)              -
                                                                -----------     ------------     -----------
Income tax benefit                                              $  (171,321)    $ (1,090,185)    $  (164,000)
                                                                ===========     ============     ===========
</TABLE>

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

<TABLE>
<CAPTION>
                                                        1997            1996            1995
<S>                                                <C>             <C>             <C>          
Expected federal expense (benefit)                 $    266,000    $    864,000    $   (362,000)
State taxes, net of federal benefit and tax credit       56,000          46,000        (222,000)
Expiration of capital loss carry forward                      -         366,000               -
Change in valuation allowance                          (538,600)     (2,413,000)        407,000
AMT                                                      36,000          69,000               -
Other                                                     9,279          58,315          13,000
                                                   ------------    ------------    ------------
                                                   $   (171,321)   $ (1,009,685)   $   (164,000)
                                                   ============    ============    ============
</TABLE>

     As of December 31, 1997, the Company had net operating loss carryforwards
for federal tax purposes of approximately $34,600,000. Under the Tax Reform Act
of 1986, certain future changes in ownership resulting from the sale or issuance
of stock may limit the amount of net operating loss carryforwards which can be
utilized on an annual basis. These carryforwards expire if not utilized to
reduce future taxable income as follows:

                             1998                    $      6,100,000
                             1999                          11,600,000
                             2000                          11,400,000
                             2001                             300,000
                             2002                             500,000
                             2003                             500,000
                             2004                             700,000
                             2005                           1,600,000
                             2007                             300,000
                             2008                             900,000
                             2010                             700,000

11.  EARNINGS (LOSS) PER COMMON SHARE

<PAGE>


     Effective December 31, 1997 the Company adopted SFAS No. 128, "Earnings per
Share". Earnings (loss) per share amounts presented for 1996 and 1995 have been
restated for the adoption of SFAS No. 128. Basic earnings (loss) per share are
computed by dividing net income (loss) by the weighted average number of common
shares outstanding. Diluted earnings per share assumes conversion of convertible
preferred stock as of the beginning of the year and the exercise of stock
options and warrants using the treasury stock method, if dilutive. Diluted loss
per share is the same as basic loss per share due to the antidilutive effect of
the assumed conversion of convertible preferred stock and the exercise of stock
options and warrants. The following table reflects the calculation of basic and
diluted earnings (loss) per share:

<TABLE>
<CAPTION>
                                                 YEAR ENDED DECEMBER 31, 1997
                                                 ----------------------------
                                                                           PER SHARE
                                              INCOME         SHARES          AMOUNT
                                              ------         ------          ------
<S>                                        <C>             <C>             <C>       
Net income                                 $  930,765
Preferred stock dividends                    (520,403)
                                           ----------

BASIC EPS
Income available to common stockholders       410,362      6,503,426       $      .06
                                                                           ==========

EFFECT OF DILUTIVE SECURITIES
Warrants and options                                         923,095
                                                           ---------

DILUTED EPS
Income available to common stockholders    $  410,362      7,426,521       $      .06
                                           ==========      =========       ==========
</TABLE>

     Options to purchase 30,411 shares of common stock were outstanding at
December 31, 1997, but were not included in the computation of diluted EPS
because the options exercise prices were greater than the average market price
of the common shares. Conversion of the 7% convertible preferred stock and the
8% redeemable convertible preferred stock was not assumed since the conversion
would have an antidilutive effect on the diluted EPS calculation.

<TABLE>
<CAPTION>
                                                 YEAR ENDED DECEMBER 31, 1996
                                                 ----------------------------
                                                                           PER SHARE
                                              INCOME         SHARES          AMOUNT
                                              ------         ------          ------
<S>                                        <C>             <C>             <C>       
Income before extraordinary item           $3,479,313                                
Preferred stock dividends                     (90,791)                               
                                           ----------                                
                                                                                   
BASIC EPS BEFORE EXTRAORDINARY ITEM                                                
Income available to common stockholders     3,388,522      5,444,683       $      .62
                                                                           ==========
                                                                                   
EFFECT OF DILUTIVE SECURITIES                                                      
Warrants and options                                         950,503                 
7% convertible preferred stock                 90,791        724,926
                                           ----------      ---------                 
                                                                                   
DILUTED EPS BEFORE EXTRAORDINARY ITEM                                              
Income available to common stockholders    $3,479,313      7,120,112       $      .49
                                           ==========      =========       ==========
</TABLE>

     Options to purchase 61,848 shares of common stock were outstanding at
December 31, 1996, but were not included in the computation of diluted EPS
because the options exercise prices were greater than the average market price
of the common shares.

<PAGE>


     Because of the net loss in 1995, all potentially dilutive securities have
an antidilutive effect on the dilutive EPS calculation. Both basic and dilutive
EPS were computed by dividing the net loss applicable to common stock by the
weighted average common shares outstanding.

12.  RETIREMENT PLAN

     The Company has a 401(k) plan covering substantially all employees. The
Company's discretionary contributions to the plan are determined annually by the
board of directors. The Company is also committed to matching a portion of
employees' voluntary contributions. Participants are 100% vested in their own
contributions and the Company's matching contribution immediately and in the
Company's discretionary contribution at the end of three years. Total amounts
contributed by the Company were $235,251, $243,191 and $58,999 for the years
ended December 31, 1997, 1996 and 1995, respectively.

13.  STOCK-BASED COMPENSATION PLANS

     The Company's 1991 and 1997 stock option plans (the Plans) provide for the
granting of incentive or non-qualified stock options to key employees.
Generally, options outstanding under the Company's Plans: (i) are granted at
prices equal to the market value of the stock on the date of grant, (ii) vest
ratably over a three- or four-year vesting period, and (iii) expire over a
period not greater than ten years from the date of grant. In addition, the
Company has outstanding stock options issued outside the Company's Plans. The
options issued outside of the Company's Plans contain terms and conditions
similar to those described above. Effective December 31, 1997, all outstanding
stock options issued under a subsidiary's stock option plan have been converted
into options under the Company's 1997 stock option plan.

     A summary of the status of the Company's stock options as of December 31,
1997, 1996 and 1995, and changes during the year ended on those dates is
presented below (shares in thousands):

<TABLE>
<CAPTION>
                                            1997                        1996                       1995
                                                 Wgtd Avg                    Wgtd Avg                   Wgtd Avg
                                     Shares     Exer Price      Shares      Exer Price      Shares     Exer Price
                                     ------     ----------      ------      ----------      ------     ----------
<S>                                   <C>        <C>              <C>        <C>             <C>        <C>     
Outstanding at beginning of year      2,126      $  1.41          2,169      $   1.57        1,668      $   1.13
Granted                                   -            -             30          2.75          512          2.99
Exercised                               (80)         .82            (70)          .34            -             -
Canceled                                 (6)         .99             (3)         1.75          (11)         1.69
                                      -----                       -----                      -----
Outstanding at end of year            2,040         1.66          2,126          1.41        2,169          1.57
                                      =====                       =====                      =====

Options exercisable at year end       1,881         1.60          1,773          1.62        1,575          1.72
                                      =====                       =====                      =====

Options available for future grant      970                         970                          -
                                      =====                       =====                      =====

Weighted average fair value of
options granted during the year                  $     -                     $   1.49                   $   1.53
                                                 =======                     ========                   ========
</TABLE>

     The Company applies Accounting Principles Board ("APB") Opinion No. 25 and
related Interpretations in accounting for the plans. No compensation cost has
been recognized for options issued under the plans when the exercise price of
the options granted are at least equal to the fair value of this common stock on
the date of grant. Had compensation cost for the Company's stock option plans
been determined based on the fair value at the grant date for awards in 1996 and
1995, consistent with the provisions of SFAS No. 123, the Company's net income
(loss) would have changed to the pro forma amounts indicated below:


<PAGE>


<TABLE>
<CAPTION>
                                                                  1997             1996             1995
<S>                                                           <C>            <C>             <C>          
Net income (loss) applicable to Common Stock, as reported     $   410,362    $  1,660,169    $ (1,058,513)
Net income (loss) applicable to Common Stock, pro forma           361,362       1,633,169      (1,756,513)

Basic earnings (loss) per common share
  As reported                                                 $       .06    $        .31    $       (.27)
  Pro forma                                                   $       .06    $        .30    $       (.45)
Diluted earnings (loss) per common share
  As reported                                                 $       .06    $        .25    $       (.27)
  Pro forma                                                   $       .05    $        .24    $       (.45)

</TABLE>

     The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions and
results:

                                                     1996                1995
Dividend yield                                         -                   -
Expected volatility                                   25%                 50%
Expected life of option                            120 months          60 months
Risk free interest rate                              6.66%               6.38%
Fair value of options on grant date                 $45,000             $785,000

     The following table summarizes information about stock options outstanding
at December 31, 1997 (shares in thousands):

<TABLE>
<CAPTION>
                            Options Outstanding                  Options Exercisable
               -------------------------------------------     ------------------------
  Range of                       Wgtd Avg         Wgtd Avg                     Wgtd Avg
  Exercise        Number         Remaining        Exercise        Number       Exercise
   Prices      Outstanding    Contractual Life     Price       Exercisable      Price
   ------      -----------    ----------------     -----       -----------      -----
 <S>              <C>              <C>            <C>            <C>           <C> 
    $.34            250             1.0            $0.34            250         $0.34
 .64 to .75         620             2.9             0.75            620          0.75
1.75 to 2.50        689             2.5             1.98            570          1.97
2.75 to 3.25        481             2.7             3.04            441          3.05
                  -----                                           -----
 .34 to 3.25       2,040             2.5             1.66          1,881          1.60
                  =====                                           =====

</TABLE>

14.  ADDITIONAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                                1997           1996            1995
<S>                                                         <C>            <C>             <C>        
Non-cash  Investing and Financing Activities:

Issuance of notes payable in connection with
  the agreement extinguishing the contingent
  interest                                                  $        -     $         -     $ 1,985,325
Issuance of common stock in connection with
  the agreement extinguishing the contingent
  interest                                                           -               -         642,600
Value of warrants issued in connection with
  the agreement extinguishing the contingent
  interest                                                           -               -           6,000
Issuance of common stock in connection with
  the acquisition of Pacific                                         -               -         700,000
Issuance of notes payable in connection with
  the acquisition of Pacific                                         -               -       1,700,000
Issuance of common stock in exchange for
  Eagle stock                                                        -         165,549         108,750
Issuance of common stock in exchange for
  preferred stock                                                    -       2,729,500               -

Additional Cash Flow Information:

Interest paid, including capitalized interest and prepaid
  interest to extinguish contingent interest                   816,308       1,839,443       3,311,987
Income taxes paid (refunded)                                    29,538          38,656        (121,400)

</TABLE>

<PAGE>


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

     Not Applicable.


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by Item 10 relating to directors is incorporated by
reference to the section labeled "Election of Directors" and the information
relating to section 16(a) of the Exchange Act is incorporated by reference to
the section labeled "Compliance with section 16(a) of the Securities Exchange
Act," which sections appear in the Registrant's definitive Proxy Statement for
its 1998 Annual Meeting of Shareholders.

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

      Name               Age                   Position
      ----               ---                   --------
Harry W. Spell           74       Chairman of the Board
William H. Spell         41       Chief Executive Officer and Director
Bruce A. Richard         67       Vice Chairman of the Board and Secretary
G. Peter Konen           48       President and Director
Patrick M. Mertens       34       Chief Financial Officer and Treasurer

         HARRY W. SPELL has been chairman of the board since January 1992. He
also served as chief executive officer of the Company from January 1992 to
February 1996. In addition, Mr. Spell is the chairman of the board of Spell
Capital Partners, LLC, a private investment equity fund which focuses on
leveraged acquisitions of established businesses in the Upper Midwest. Mr. Spell
has been involved in private equity investing since 1988. He was employed by
Northern States Power, a Fortune 500 company, from 1949 until August 1988, when
he reached the mandatory retirement age of 65. Mr. Spell was senior vice
president, finance and chief financial officer of Northern States Power Company
from May 1983 until April 1988. Mr. Spell currently serves as a director of
Appliance Recycling Centers of America, Inc., as well as several private
organizations.

         WILLIAM H. SPELL has been president and a director of the Company since
January 1992 and chief executive officer since February 1996. In addition, Mr.
Spell is the president of Spell Capital Partners, LLC, a private investment
equity fund which focuses on leveraged acquisitions of established businesses in
the Upper Midwest. Mr. Spell has been involved in private equity investing since
1988. From 1981 through 1988, Mr. Spell was vice president and director of
corporate finance at John G. Kinnard & Co., a regional investment banking firm
located in Minneapolis, Minnesota. Mr. Spell has a B.S. and an M.B.A. degree
from the University of Minnesota.

         BRUCE A. RICHARD has been a director of the Company since March of
1992, secretary since the summer of 1993 and vice chairman since February 1996.
He also served as chief financial officer of the Company from mid-1993 to
February 1996 and treasurer of the Company from mid-1993 to March 1998. In
addition, Mr. Richard is a managing director of Spell Capital Partners, LLC, a
private investment equity fund which focuses on leveraged acquisitions of
established businesses in the Upper Midwest. Mr. Richard has been involved in
private equity investing since 1988. As a member of the Spell Capital Partners,
Mr. Richard has been involved in numerous acquisitions and investment
activities. He retired as president and chief operating officer of Northern
States Power Company, a Fortune 500 company, in July of 1986. He is a former
member of the Board of Regents of St. John's University, and is actively
involved in other philanthropic organizations.

<PAGE>


         G. PETER KONEN, has been a director of the Company since December 1993.
He has been executive vice president and chief operating officer of Eagle since
its inception in 1984 and was named president of the Company in February 1996.
Prior to founding Eagle Plastics, he was plant manager with Western Plastics, a
PVC pipe and PE pipe and tubing manufacturer. Mr. Konen has more than 28 years
of experience in the business of manufacturing and sales of plastic pipe.

         PATRICK M. MERTENS, who joined the Company in May 1995 as controller of
Eagle Plastics, was promoted to chief financial officer in February 1996 and
treasurer in March 1998. From 1986 to May of 1991, he was a senior auditor,
specializing in manufacturing clients, for Baird, Kurtz & Dobson, CPA's. During
his tenure at Baird, Kurtz & Dobson, Mr. Mertens was in charge of the annual
audit for Eagle Plastics, Inc. for three years. From 1991 to May of 1995 he was
assistant controller of ISCO, Inc., a public company that manufactures
scientific and environmental instruments. Mr. Mertens has a B.S. degree from
Peru, Nebraska State College and an M.B.A. degree from the University of
Nebraska.

         Harry W. Spell is William H. Spell's father.

ITEM 11. EXECUTIVE COMPENSATION

     The information required by this Item is incorporated by reference to the
section labeled "Executive Compensation" which appears in the Company's
definitive Proxy Statement for its 1998 Annual Meeting of Shareholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
         MANAGEMENT

     The information required by this Item is incorporated by reference to the
section labeled "Principal Shareholders and Management Shareholders" which
appears in the Company's definitive Proxy Statement for its 1998 Annual Meeting
of Shareholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this Item is incorporated by reference to the
section labeled "Certain Transactions" which appear in the Company's definitive
Proxy Statement for its 1998 Annual Meeting of Shareholders.


                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

     (a) 1.   Financial Statements

              See Part II, Item 8 hereof.

         2.   Financial Statement Schedule

              Title                                Schedule
              -----                                --------

              Valuation and Qualifying Account ................. II

         All schedules omitted are inapplicable or the information required is
shown in the Financial Statements or notes thereto.

<PAGE>


         3.   Exhibits

    Exhibit            Description
    Number             -----------
    ------

     3.1        Articles of Incorporation of the Registrant, as amended to date
                (Incorporated by reference to Exhibit 3 to the Registrant's
                Quarterly Report on Form 10-Q for the quarter ended June 30,
                1995 - File No. 0-18050)

     3.2        Bylaws of the Registrant (Incorporated by reference to Exhibit
                3.2 to the Registrant's Registration Statement on Form S-4 -
                File No. 33-29511)

     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 - File No. 0-18050)

     10.1       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 - File No. 0-18050)*

     10.2       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 - File No. 0-18050)*

     10.3       Form of Agreement by and among the Registrant, Pacific Plastics,
                Inc., Pacific Acquisition Corp., Loyal Sorensen and Jarred
                Thompson. (Incorporated by reference to Exhibit 10.2 to
                Registrant's Form 8-K dated July 10, 1995 - File No. 0-18050)

     10.4       Form of Acknowledgment of Closing by and among the Registrant,
                Pacific Plastics, Inc., Loyal Sorensen and Jarred Thompson
                (Incorporated by reference to Exhibit 10.3 to Registrant's Form
                8-K dated July 10, 1995 File No. 0-18050)

     10.5       Promissory Note and Stock Pledge Agreement dated July 10, 1995
                between Arrow Pacific Plastics, Inc., former shareholders,
                Registrant and Pacific Plastics, Inc. (Incorporated by reference
                to Exhibit 10.14 to Registrant's Form 8-K dated July 10, 1995 -
                File No. 0-18050)

     10.6       Registration Rights Agreement dated July 10, 1995 between the
                Registrant and Loyal Sorensen, Zelda Sorensen, Jarred Thompson
                and Sharon Thompson (Incorporated by reference to Exhibit 10.15
                to Registrant's Form 8-K dated July 10, 1995 - File No. 0-18050)

     10.7       Plan of Recapitalization dated March 16, 1995 among Registrant,
                William Blair Mezzanine Capital Fund, L.P. ("Blair") and Eagle
                Plastics, Inc. ("Eagle") (Incorporated by reference to Exhibit
                10.29 to the Registrant's Form 10-KSB for the year ended
                December 31, 1994 - File No. 0-18050)

     10.8       Debenture Acquisition Agreement dated March 16, 1995 among
                Registrant, Blair and Eagle (Incorporated by reference to
                Exhibit 10.28 to the Registrant's Form 10-KSB for the year ended
                December 31, 1994 - File No. 0-18050)

     10.9       Senior Subordinated Debenture of the Registrant dated March 16,
                1995, in the principal amount of $7,500.00 in favor of Blair
                (Incorporated by reference to Exhibit 10.17 to the Registrant's
                Form 10-KSB for the year ended December 31, 1994 - File No.
                0-18050)

    10.10       Registration Agreement dated March 16, 1995 between Registrant
                and Blair (Incorporated by reference to Exhibit 10.15 to the
                Registrant's Form 10-KSB for the year ended December 31, 1994 -
                File No. 0-18050)

    10.11       Amended and Restated Loan and Security Agreement dated December
                31, 1997 between Registrant and Fleet Capital Corporation

    10.12       Amended and Restated Secured Promissory Note dated December 31,
                1997 of the Registrant payable to Fleet Capital Corporation

    10.13       Amendment Agreement dated May 10, 1996 between Registrant, its
                subsidiaries and Blair (Incorporated by reference to Exhibit
                10.17 to the Registrant's Form 10-K for the year ended December
                31, 1996 - File No. 0-18050)

<PAGE>


    10.14       Consent and Second Amendment by and between Blair, Eagle
                Plastics, Inc., Pacific Plastics, Inc., Arrow Pacific Plastics,
                Inc. and Registrant dated February 14, 1997 (Incorporated by
                reference to Exhibit 10.1 to the Registrant's Form 10-Q for the
                quarter ended March 31, 1997 - File No. 0-18050)

    10.15       Consent and Third Amendment by and between Blair, Eagle
                Plastics, Inc., Pacific Plastics, Inc., Arrow Pacific Plastics,
                Inc. and Registrant entered into as of May 1, 1997

    10.16       Consent and Fourth Amendment, dated and entered into as of
                December 31, 1997, among Registrant, Eagle Plastics, Inc.,
                Pacific Plastics, Inc., Arrow Pacific Plastics, Inc. and Blair

    10.17       Warrant to purchase 215,000 shares of Common Stock of Registrant
                granted to Blair (Incorporated by reference to Exhibit 10.18 to
                the Registrant's Form 10-K for the year ended December 31, 1996
                - File No. 0-18050)

    10.18       Co-Sale Agreement dated May 10, 1996 between Registrant and
                Blair (Incorporated by reference to Exhibit 10.19 to the
                Registrant's Form 10-K for the year ended December 31, 1996 -
                File No. 0-18050)

    10.19       Irrevocable Proxy agreement dated May 10, 1996 between
                Registrant and Blair (Incorporated by reference to Exhibit 10.20
                to the Registrant's Form 10-K for the year ended December 31,
                1996 - File No. 0-18050)

    10.20       Amendment Agreement regarding registration rights dated May 10,
                1996 between Registrant and Loyal Sorensen, Zelda Sorensen,
                Jarred Thompson and Sharon Thompson (Incorporated by reference
                to Exhibit 10.21 to the Registrant's Form 10-K for the year
                ended December 31, 1996 - File No. 0-18050)

    10.21       Preferred Stock Purchase Agreement by and between Registrant and
                Massachusetts Mutual Life Insurance Company (LTP), Massachusetts
                Mutual Life Insurance Company (IFM), MassMutual Corporate
                Investors, MassMutual Participation Investors and MassMutual
                Corporate Value Partners Limited dated May 1, 1997 (Incorporated
                by reference to Exhibit 10.1 to Registrant's Form 8-K dated May
                19,1997 - File No. 0-18050)

    10.22       Rights Agreement by and between Registrant, Massachusetts Mutual
                Life Insurance Company, MassMutual Corporate Investors,
                MassMutual Participation Investors, MassMutual Corporate Value
                Partners Limited and Spell Group dated May 1, 1997 (Incorporated
                by reference to Exhibit 10.1 to Registrant's Form 8-K dated May
                19,1997 - File No. 0-18050)

    10.23       Employment Agreement between William H. Spell and Registrant
                dated January 1, 1997 (Incorporated by reference to Exhibit
                10.22 to the Registrant's Form 10-K for the year ended December
                31, 1996 - File No. 0-18050) *

    10.24       Employment Agreement between G. Peter Konen and Registrant dated
                January 1, 1997 (Incorporated by reference to Exhibit 10.23 to
                the Registrant's Form 10-K for the year ended December 31, 1996
                - File No. 0-18050) *

    10.25       Consulting Agreement and Release between Larry D. Schnase and
                Registrant dated January 1, 1997 (Incorporated by reference to
                Exhibit 10.24 to the Registrant's Form 10-K for the year ended
                December 31, 1996 - File No. 0-18050) *

    10.26       Employment Agreement between Patrick Mertens and Registrant
                dated January 1, 1997 (Incorporated by reference to Exhibit
                10.16 to the Registrant's Form 10-K for the year ended December
                31, 1996 - File No. 0-18050) *

    10.27       Employment Agreement between David Schnase and Registrant dated
                January 1, 1997*

    10.28       EBITDA Bonus Plan of Registrant (Incorporated by reference to
                Exhibit 10.25 to the Registrant's Form 10-K for the year ended
                December 31, 1996 - File No. 0-18050) *

    10.29       Leveraged Equity Purchase Plan of Registrant (Incorporated by
                reference to Exhibit 10.26 to the Registrant's Form 10-K for the
                year ended December 31, 1996 - File No. 0-18050) *

      23        Consent of Independent Auditors

<PAGE>


      24        Power of Attorney from certain directors and officers - see
                "Signatures" on signature page of this Form 10-K

      27.1      Financial Data Schedule

      27.2      Financial Data Schedule

      27.3      Financial Data Schedule

* compensatory plan or arrangement

     (b)  Reports on Form 8-K

          The Company filed no reports on Form 8-K during the last quarter of
          1997.

     (c)  Exhibits

          See Item 14(a)3 above.

<PAGE>


                                   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.


                          EAGLE PACIFIC INDUSTRIES, INC.

Dated: March 23, 1998        By:    /s/ Harry W. Spell
                                -------------------------------
                          Harry W. Spell, Chairman of the Board


         POWER OF ATTORNEY

         Each person whose signature appears below constitutes and appoints
Harry W. Spell and Patrick M. Mertens 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/ Harry W. Spell            Chairman of the Board           March 23, 1998
-------------------------------   (Principal Executive Officer)


    /s/ Patrick M. Mertens        Chief Financial Officer         March 23, 1998
-------------------------------   (Principal Financial and 
                                  Accounting Officer)

    /s/ G. Peter Konen            Director                        March 23, 1998
-------------------------------

    /s/ George R. Long            Director                        March 23, 1998
-------------------------------

    /s/ Richard W. Perkins        Director                        March 23, 1998
-------------------------------

    /s/ Larry D. Schnase          Director                        March 23, 1998
-------------------------------

    /s/ William H. Spell          Director                        March 23, 1998
-------------------------------

<PAGE>


SCHEDULE II

                        VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                                       Balance at                                  Balance at
                                                       Beginning     Additions-     Deductions-       End
                       Description                      of Year      Provisions     Write-offs      of Year
                       -----------                      -------      ----------     ----------      -------
<S>                                                    <C>             <C>            <C>          <C>     
Allowance for doubtful accounts and sales discounts

 Fiscal year ended December 31, 1997                   $195,100        43,688         35,288       $203,500
 Fiscal year ended December 31, 1996                   $157,900        67,846         30,647       $195,100
 Fiscal year ended December 31, 1995                   $105,000       177,076        124,176       $157,900

</TABLE>