10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended December 31, 2007

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: 1-32459

HEADWATERS INCORPORATED

(Exact name of registrant as specified in its charter)

Delaware	87-0547337
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
10653 South River Front Parkway, Suite 300 South Jordan, Utah	84095
(Address of principal executive offices)	(Zip Code)

(801) 984-9400

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

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 whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   ¨     No   x

The number of shares outstanding of the Registrant’s common stock as of January 28, 2008 was 41,996,678.

HEADWATERS INCORPORATED

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
		Page No.
ITEM 1.	FINANCIAL STATEMENTS (Unaudited):
	Condensed Consolidated Balance Sheets – As of September 30, 2007 and December 31, 2007	3
	Condensed Consolidated Statements of Income – For the three months ended December 31, 2006 and 2007	4
	Condensed Consolidated Statement of Changes in Stockholders’ Equity – For the three months ended December 31, 2007	5
	Condensed Consolidated Statements of Cash Flows – For the three months ended December 31, 2006 and 2007	6
	Notes to Condensed Consolidated Financial Statements	7
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	18
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	23
ITEM 4.	CONTROLS AND PROCEDURES	23
PART II – OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	24
ITEM 1A.	RISK FACTORS	24
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	24
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	25
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	25
ITEM 5.	OTHER INFORMATION	25
ITEM 6.	EXHIBITS	25
SIGNATURES		26

Forward-looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding future events and our future results that are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. Actual results may vary materially from such expectations. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “believes,” “seeks,” “estimates,” “plans,” or variations of such words and similar expressions, are intended to help identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances, are forward-looking. For a discussion of the factors that could cause actual results to differ from expectations, please see the risk factors described in Item 1A of our Annual Report on Form 10-K for the year ended September 30, 2007. There can be no assurance that our results of operations will not be adversely affected by such factors. Unless legally required, we undertake no obligation to revise or update any forward-looking statements for any reason. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.

Our internet address is www.headwaters.com. There we make available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC). Our reports can be accessed through the investor relations section of our web site. The information found on our web site is not part of this or any report we file with or furnish to the SEC.

2

ITEM 1. FINANCIAL STATEMENTS

HEADWATERS INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except per-share data)	September 30, 2007			December 31, 2007
ASSETS
Current assets:
Cash and cash equivalents	$	55,787		$	39,660
Trade receivables, net		188,334			129,103
Inventories		53,201			63,324
Deferred income taxes		30,171			30,757
Other		20,903			30,814
Total current assets		348,396			293,658
Property, plant and equipment, net		225,700			236,527
Other assets:
Intangible assets, net		238,144			234,032
Goodwill		787,161			784,161
Other		56,488			53,215
Total other assets		1,081,793			1,071,408
Total assets	$	1,655,889		$	1,601,593
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	39,379		$	26,729
Accrued personnel costs		37,539			25,841
Other accrued liabilities		108,084			79,656
Total current liabilities		185,002			132,226
Long-term liabilities:
Long-term debt		542,500			542,500
Deferred income taxes		91,721			96,585
Unrecognized income tax benefits		—			15,870
Other		6,416			7,423
Total long-term liabilities		640,637			662,378
Total liabilities		825,639			794,604
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.001 par value; authorized 100,000 shares; issued and outstanding: 42,365 shares at September 30, 2007 (including 138 shares held in treasury) and 41,998 shares at December 31, 2007 (including 659 shares held in treasury)		42			42
Capital in excess of par value		511,496			505,564
Retained earnings		319,920			309,987
Treasury stock and other		(1,208	)		(8,604	)
Total stockholders’ equity		830,250			806,989
Total liabilities and stockholders’ equity	$	1,655,889		$	1,601,593

See accompanying notes.

3

HEADWATERS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended December 31,
(in thousands, except per-share data)	2006			2007
Revenue:
Construction materials	$	122,755		$	114,766
Coal combustion products		69,172			77,426
Alternative energy		82,997			56,705
Total revenue		274,924			248,897
Cost of revenue:
Construction materials		90,562			81,836
Coal combustion products		49,447			55,908
Alternative energy		54,870			48,097
Total cost of revenue		194,879			185,841
Gross profit		80,045			63,056
Operating expenses:
Amortization		5,811			5,512
Research and development		3,784			4,141
Selling, general and administrative		36,561			35,029
Total operating expenses		46,156			44,682
Operating income		33,889			18,374
Other income (expense):
Net interest expense		(8,267	)		(5,844	)
Other, net		(2,561	)		3,983
Total other income (expense), net		(10,828	)		(1,861	)
Income before income taxes		23,061			16,513
Income tax provision		(6,070	)		(6,600	)
Net income	$	16,991		$	9,913
Basic earnings per share	$	0.40		$	0.24
Diluted earnings per share	$	0.37		$	0.23

See accompanying notes.

4

HEADWATERS INCORPORATED

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

For the Three Months Ended December 31, 2007

	Common stock				Capital in excess of par value			Retained earnings			Treasury stock, at cost			Other			Total stockholders’ equity
(in thousands)	Shares		Amount
Balances as of September 30, 2007	42,365		$	42	$	511,496		$	319,920		$	(1,223	)	$	15		$	830,250
Purchase of 1,205 shares of treasury stock, at cost												(14,841	)					(14,841	)
Cancellation of 623 shares of treasury stock	(623	)		—		(7,335	)					7,335						—
61 shares of treasury stock transferred to employee stock purchase plan, at cost						194						545						739
Issuance of restricted stock, net of cancellations	219			—														—
Exercise of stock options	37			—		1												1
Stock-based compensation						1,208												1,208
Other comprehensive income (loss) – net of taxes – cash flow hedge and foreign currency translation adjustments															(435	)		(435	)
Cumulative effect of change in accounting for uncertain tax positions—adoption of FIN 48									(19,846	)								(19,846	)
Net income for the three months ended December 31, 2007									9,913									9,913
Balances as of December 31, 2007	41,998		$	42	$	505,564		$	309,987		$	(8,184	)	$	(420	)	$	806,989

See accompanying notes.

5

HEADWATERS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three Months Ended December 31,
(in thousands)	2006			2007
Cash flows from operating activities:
Net income	$	16,991		$	9,913
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		17,678			16,953
Stock-based compensation expense		1,858			1,208
Interest expense related to amortization of debt issue costs		619			667
Equity in losses, net of gains, of joint ventures		826			3,509
Amortization of non-refundable license fees		(5,517	)		(5,517	)
Deferred income taxes		(149	)		(37	)
Net loss (gain) on disposition of property, plant and equipment		190			(4,421	)
Decrease in trade receivables		15,656			59,231
Increase in inventories		(1,568	)		(9,203	)
Decrease in accounts payable and accrued liabilities		(5,105	)		(12,748	)
Other changes in operating assets and liabilities, net		(6,825	)		(24,935	)
Net cash provided by operating activities		34,654			34,620
Cash flows from investing activities:
Purchase of property, plant and equipment		(10,127	)		(25,569	)
Proceeds from disposition of property, plant and equipment		171			7,693
Payments for acquisitions, net of cash acquired		(50,219	)		(19,000	)
Investments in joint ventures		—			(160	)
Net decrease in other assets		34			390
Net cash used in investing activities		(60,141	)		(36,646	)
Cash flows from financing activities:
Treasury stock purchases		—			(14,841	)
Employee stock purchases		970			739
Proceeds from exercise of stock options		325			1
Payments on long-term debt		(213	)		—
Net cash provided by (used in) financing activities		1,082			(14,101	)
Net decrease in cash and cash equivalents		(24,405	)		(16,127	)
Cash and cash equivalents, beginning of period		79,151			55,787
Cash and cash equivalents, end of period	$	54,746		$	39,660
Supplemental schedule of non-cash investing and financing activities:
Cancellation of treasury stock	$	—		$	7,335
Increase (decrease) in accrued liabilities for acquisition-related commitments		2,639			(3,000	)

See accompanying notes.

6

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Nature of Operations and Basis of Presentation

Description of Business and Organization – Headwaters Incorporated (Headwaters) is incorporated in Delaware and is a diversified company providing products, technologies and services in three industries: construction materials, coal combustion products (CCPs) and alternative energy. Headwaters uses technology to differentiate itself from competitors and to create value in its businesses.

In the construction materials segment, Headwaters designs, manufactures, and sells architectural stone and resin-based exterior siding accessories (such as shutters, mounting blocks, and vents) and other products. Headwaters believes that many of its branded products have a leading market position. Revenue from Headwaters’ construction materials businesses are diversified geographically and also by market, including the new construction, remodeling and home improvement markets.

In the CCP segment, Headwaters is a nationwide leader in the management and marketing of CCPs, including fly ash used as a substitute for portland cement. Headwaters’ CCP business is comprised of a nationwide storage and distribution network and revenue is diversified geographically and by market.

In the alternative energy segment, Headwaters is focused on reducing waste and increasing the value of energy feedstocks, primarily in the areas of low-value coal and oil. In coal, Headwaters owns and operates several coal cleaning facilities that remove rock, dirt, and other impurities from waste coal, resulting in higher-value, marketable coal. Headwaters also licensed technology and sold reagents to the coal-based solid alternative fuel industry through December 31, 2007. In oil, Headwaters believes that its heavy oil upgrading technology represents a substantial improvement over current refining technologies. Headwaters’ heavy oil upgrading process uses a liquid catalyst precursor to generate a highly active molecular catalyst to convert residual oil feedstocks into higher-value distillates that can be refined into gasoline, diesel and other products.

Basis of Presentation – Headwaters’ fiscal year ends on September 30 and unless otherwise noted, references to 2006 refer to Headwaters’ fiscal quarter ended December 31, 2006 and references to 2007 refer to Headwaters’ fiscal quarter ended December 31, 2007. Other references to years refer to Headwaters’ fiscal year rather than a calendar year. The consolidated financial statements include the accounts of Headwaters, all of its subsidiaries and other entities in which Headwaters has a controlling interest. All significant intercompany transactions and accounts are eliminated in consolidation. Due to the seasonality of most of Headwaters’ operations and other factors, the consolidated results of operations for the first fiscal quarter ended December 31, 2007 are not indicative of the results to be expected for the full fiscal 2008 year.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC) for quarterly reports on Form 10-Q. In the opinion of management, all adjustments considered necessary for a fair presentation have been included, and consist of normal recurring adjustments. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Headwaters’ Annual Report on Form 10-K for the year ended September 30, 2007 (Form 10-K).

Recent Accounting Pronouncements – In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, “Fair Value Measurements” which addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting principles. Headwaters must adopt SFAS No. 157 no later than in its fiscal year ending September 30, 2009. Headwaters uses fair value measurements to determine the reported amounts of assets acquired and liabilities assumed in purchase transactions, in testing for potential goodwill impairment, for disclosure of the fair value of financial instruments, and elsewhere. It is therefore possible that the implementation of SFAS No. 157 could have a material effect on the reported amounts or disclosures in Headwaters’ consolidated financial statements in future periods.

7

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007

(Unaudited)

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations,” and SFAS No. 160, “Accounting and Reporting of Noncontrolling Interest in Consolidated Financial Statements, an Amendment of ARB No. 51.” These new standards will significantly change the accounting for and reporting of business combination transactions and minority interests in consolidated financial statements. Headwaters must adopt these standards simultaneously as of October 1, 2009, the beginning of its fiscal 2010 year, which adoption will have a material effect on the accounting for any business combination consummated thereafter or any minority interest that exists at that time.

Headwaters has reviewed all other recently issued accounting standards which have not yet been adopted in order to determine their potential effect, if any, on the results of operations or financial position of Headwaters. Based on that review, Headwaters does not currently believe that any of these other recent accounting pronouncements will have a significant effect on its current or future financial position, results of operations, cash flows or disclosures.

Reclassifications – Certain prior period amounts have been reclassified to conform to the current period’s presentation. The reclassifications had no effect on net income or total assets.

2. Segment Reporting

Headwaters currently operates three business segments: construction materials, CCPs and alternative energy. These segments are managed and evaluated separately by management due to differences in their markets, operations, products and services. Revenues for the construction materials segment consist of product sales to wholesale and retail distributors, contractors and other users of building products. CCP revenues consist primarily of product sales with a small amount of service revenue. Revenues for the alternative energy segment consisted primarily of sales of chemical reagents and license fees for the periods presented.

The following segment information has been prepared in accordance with SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information.” Segment performance is evaluated primarily on revenue and operating income, although other factors are also used, such as income tax credits generated by activities of the alternative energy segment. Intersegment sales are immaterial.

Segment costs and expenses considered in deriving segment operating income include cost of revenue, amortization, research and development, and segment-specific selling, general and administrative expenses. Amounts included in the “Corporate” column represent expenses not specifically attributable to any segment and include administrative departmental costs and general corporate overhead. Segment assets reflect those specifically attributable to individual segments and primarily include accounts receivable, inventories, property, plant and equipment, intangible assets and goodwill. Cash and cash equivalents and certain other assets are included in the “Corporate” column.

	Three Months Ended December 31, 2006
(in thousands)	Construction Materials			CCPs			Alternative Energy			Corporate			Totals
Segment revenue	$	122,755		$	69,172		$	82,997		$	—		$	274,924
Depreciation and amortization	$	(12,083	)	$	(3,205	)	$	(2,279	)	$	(111	)	$	(17,678	)
Operating income (loss)	$	6,454		$	12,451		$	20,847		$	(5,863	)	$	33,889
Net interest expense														(8,267	)
Other income (expense), net														(2,561	)
Income tax provision														(6,070	)
Net income													$	16,991
Capital expenditures	$	6,906		$	1,187		$	1,999		$	35		$	10,127
Segment assets	$	1,164,744		$	295,685		$	110,513		$	102,061		$	1,673,003

8

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007

(Unaudited)

	Three Months Ended December 31, 2007
(in thousands)	Construction Materials			CCPs			Alternative Energy			Corporate			Totals
Segment revenue	$	114,766		$	77,426		$	56,705		$	—		$	248,897
Depreciation and amortization	$	(11,138	)	$	(3,005	)	$	(2,715	)	$	(95	)	$	(16,953	)
Operating income (loss)	$	8,715		$	14,229		$	(194	)	$	(4,376	)	$	18,374
Net interest expense														(5,844	)
Other income (expense), net														3,983
Income tax provision														(6,600	)
Net income													$	9,913
Capital expenditures	$	13,920		$	832		$	10,462		$	355		$	25,569
Segment assets	$	1,058,212		$	288,096		$	165,022		$	90,263		$	1,601,593

3. Stock-Based Compensation

During 2007, the Compensation Committee of Headwaters’ Board of Directors granted approximately 1.0 million stock-based awards to certain directors, officers and employees. All of the awards were granted under existing stock incentive plans, and all have an exercise price equal to the fair market value of Headwaters’ common stock on the dates of grant and a contractual term of 10 years.

Total stock-based compensation expense, none of which involved the expenditure of cash, was approximately $1.9 million and $1.2 million for the three months ended December 31, 2006 and 2007, respectively. As of December 31, 2007, there is approximately $9.1 million of total compensation cost related to nonvested awards not yet recognized, which will be recognized in the future over the awards’ applicable vesting terms.

4. Inventories

Inventories consisted of the following at:

(in thousands)	September 30, 2007		December 31, 2007
Raw materials	$	14,192	$	12,752
Finished goods		39,009		50,572
	$	53,201	$	63,324

9

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007

(Unaudited)

5. Intangible Assets

Intangible Assets – All of Headwaters’ identified intangible assets are being amortized. The following table summarizes the gross carrying amounts and the related accumulated amortization of intangible assets as of:

		September 30, 2007				December 31, 2007
(in thousands)	Estimated useful lives	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
CCP contracts	8 -20 years	$	117,690	$	31,718	$	117,690	$	33,401
Customer relationships	7  1/2 -15 years		71,503		15,580		71,503		16,892
Trade names	5 - 20 years		68,412		10,614		68,412		11,518
Patents and patented technologies	7  1/2 -19 years		53,469		18,152		53,469		19,424
Other	4 - 15 years		7,411		4,277		5,230		1,037
		$	318,485	$	80,341	$	316,304	$	82,272

Total amortization expense related to intangible assets was approximately $5.8 million and $5.5 million for 2006 and 2007, respectively. Total estimated annual amortization expense for fiscal years 2008 through 2013 is shown in the following table.

Year ending September 30:	(in thousands)
2008	$	21,722
2009		21,542
2010		21,167
2011		20,806
2012		19,039
2013		18,130

6. Long-term Debt

Long-term debt consisted of the following at:

(in thousands)	September 30, 2007		December 31, 2007
Senior secured debt	$	210,000	$	210,000
Convertible senior subordinated notes		332,500		332,500
Total long-term debt	$	542,500	$	542,500

Senior Secured Credit Agreements – Headwaters’ senior secured credit facility currently consists of a first lien term loan in the amount of $210.0 million. The credit facility also provides for up to $60.0 million of borrowings under a revolving credit arrangement, with the ability to increase this amount to $100.0 million, subject to obtaining additional revolving loan commitments. The first lien term loan is senior in priority to all other debt and is secured by all assets of Headwaters. The terms of the credit facility, as currently amended, are described in more detail in the following paragraphs. Headwaters is in compliance with all debt covenants as of December 31, 2007.

The first lien term loan bears interest, at Headwaters’ option, at either i) the London Interbank Offered Rate (LIBOR) plus 2.0%, 2.25%, or 2.5%, depending on the credit ratings that have been most recently announced for the loans by Standard & Poor’s Ratings Services (S&P) and Moody’s Investors Service, Inc. (Moody’s); or ii) the “Base Rate” plus 1.0%, 1.25%, or 1.5%, again depending on the credit ratings announced by S&P and Moody’s. Base rate is defined as the higher of the rate announced by Morgan Stanley Senior Funding and the overnight rate charged by the Federal Reserve Bank of New York plus 0.5%. Headwaters’ current rate is LIBOR plus 2.0%. Headwaters can lock in new LIBOR rates for the first lien loan for one, two, three or six months. The weighted-average interest rate on the first lien debt was approximately 6.9% at December 31, 2007. Interest on the first lien term loan is generally payable on a quarterly basis.

10

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007

(Unaudited)

The first lien term loan is repayable $84.8 million in February 2011 and $125.2 million in April 2011, the termination date. There are mandatory prepayments of the first lien term loan in the event of certain asset sales and debt and equity issuances and from “excess cash flow,” as defined in the agreement. Optional prepayments of the first lien term loan are permitted without penalty or premium. Once repaid in full or in part, no reborrowings can be made.

Borrowings under the revolving credit arrangement are generally subject to the terms of the first lien loan agreement and bear interest at either LIBOR plus 1.75% to 2.5% (depending on Headwaters’ “total leverage ratio,” as defined), or the Base Rate plus 0.75% to 1.5%. Borrowings and reborrowings of any available portion of the $60.0 million revolver can be made at any time through September 2009, when all loans must be repaid and the revolving credit arrangement terminates. The fees for the unused portion of the revolving credit arrangement range from 0.5% to 0.75% (depending on Headwaters’ “total leverage ratio,” as defined). There were no borrowings outstanding under the revolving credit arrangement as of December 31, 2007, or subsequent thereto. The credit agreement also allows for the issuance of letters of credit, provided there is capacity under the revolving credit arrangement. As of December 31, 2007, stand-by letters of credit totaling approximately $8.8 million were outstanding, with expiration dates ranging from March 2008 to September 2009.

The credit facility contains restrictions and covenants common to such agreements, including limitations on the incurrence of additional debt, investments, merger and acquisition activity, asset sales and liens, annual capital expenditures in excess of $100.0 million annually, and the payment of dividends, among others. In addition, Headwaters must maintain certain leverage and fixed charge coverage ratios, as those terms are defined in the agreements, as follows: i) a total leverage ratio of 3.75:1 or less, declining to 3.5:1 in 2010; ii) a maximum ratio of consolidated funded indebtedness minus subordinated indebtedness to EBITDA of 2.75:1, declining to 2.5:1 in 2010; and iii) a minimum ratio of EBITDA plus rent payments for the four preceding fiscal quarters to scheduled payments of principal and interest on all indebtedness for the next four fiscal quarters of 1.25:1.

2.875% Convertible Senior Subordinated Notes Due 2016 – Headwaters has outstanding $172.5 million of 2.875% convertible senior subordinated notes due June 2016, with interest payable semi-annually. These notes are subordinate to the senior secured debt described above and rank equally with the 2.50% convertible senior subordinated notes due 2014 described below, and any future senior subordinated debt. Holders of the notes may convert the notes into shares of Headwaters’ common stock at a conversion rate of 33.3333 shares per $1,000 principal amount ($30 conversion price), or 5.75 million aggregate shares of common stock, contingent upon certain events. The conversion rate adjusts for events related to Headwaters’ common stock, including common stock issued as a dividend, rights or warrants to purchase common stock issued to all holders of Headwaters’ common stock, and other similar rights or events that apply to all holders of common stock.

The notes are convertible if any of the following five criteria are met: 1) satisfaction of a market price condition which becomes operative if, prior to June 1, 2011, in any calendar quarter the closing price of Headwaters’ common stock exceeds $39 per share for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the calendar quarter, or, at any time on or after June 1, 2011 the closing price of Headwaters’ common stock exceeds $39 per share; 2) a credit rating, if any, assigned to the notes is three or more rating subcategories below the initial rating; 3) the notes trade at less than 98% of the product of the common stock trading price and the number of shares of common stock issuable upon conversion of $1,000 principal amount of the notes, except this provision is not available if the closing common stock price is between 100% and 130% of the current conversion price of the notes; 4) Headwaters calls the notes for redemption; or 5) upon the occurrence of specified corporate transactions.

Headwaters may call the notes for redemption at any time prior to June 4, 2011 if the closing common stock price exceeds 130% of the conversion price for 20 trading days in any consecutive 30-day trading period (in which case Headwaters must provide a “make whole” payment of the present value of all remaining interest payments on the redeemed notes through June 1, 2011). Headwaters may redeem any portion of the notes at any time on or after June 4, 2011. In addition, the holder of the notes has the right to require Headwaters to repurchase all or a portion of the notes on June 1, 2011 or if a fundamental change in common

11

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007

(Unaudited)

stock has occurred, including termination of trading. Subsequent to June 1, 2011, the notes require an additional interest payment equal to 0.40% of the average trading price of the notes if the trading price equals 120% or more of the principal amount of the notes.

Headwaters includes the additional shares of common stock contingently issuable under the convertible notes in its diluted EPS calculations on an if-converted basis (see Note 8). In January 2007, Headwaters announced that it was planning an exchange offer for the 2.875% convertible senior subordinated notes due 2016, whereby new notes with similar, but not identical, terms, along with an exchange fee, would be issued upon tender of the existing notes. In April 2007, Headwaters announced that the commencement of an exchange offer had been indefinitely postponed. Headwaters continues to evaluate the merits of an exchange offer.

2.50% Convertible Senior Subordinated Notes Due 2014 – In fiscal 2007, Headwaters issued $160.0 million of 2.50% convertible senior subordinated notes due February 2014, with interest payable semi-annually. These notes are subordinate to the senior secured debt and rank equally with the 2.875% convertible senior subordinated notes due 2016 described above, and any future senior subordinated debt. The conversion rate for the notes is 33.9236 shares per $1,000 principal amount ($29.48 conversion price), subject to adjustment. Upon conversion, Headwaters will pay cash up to the principal amount of the notes, and shares of common stock to the extent the price of Headwaters’ common stock exceeds the conversion price during a 20-trading-day observation period. The conversion rate is adjusted for certain corporate transactions referred to as “fundamental changes.”

The notes are convertible at the option of the holder prior to December 1, 2013 if any of the following criteria are met: 1) during any fiscal quarter the closing price of Headwaters’ common stock exceeds $38.32 per share for at least 20 trading days during a period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter; 2) during the five-business-day period after any ten-consecutive-trading-day period, the notes trade at less than 98% of the product of the common stock trading price and the number of shares of common stock issuable upon conversion of $1,000 principal amount of the notes; or 3) upon the occurrence of specified corporate transactions. The notes are convertible on or after December 1, 2013 regardless of the foregoing circumstances. Headwaters may not redeem the notes. If Headwaters has a “fundamental change,” holders may require Headwaters to repurchase the notes at a price equal to the principal amount plus any accrued interest.

In connection with the issuance of the notes, Headwaters entered into convertible note hedge and warrant transactions for the purpose of effectively increasing the common stock conversion price for the notes from $29.48 per share to $35.00 per share. The convertible note hedge terminates upon the maturity of the notes or when none of the notes remain outstanding due to conversion or otherwise.

Interest – During 2006 and 2007, Headwaters incurred total interest costs of approximately $9.4 million and $6.8 million, respectively, including approximately $0.6 million and $0.7 million, respectively, of non-cash interest expense and approximately $0.2 million in each period of interest costs that were capitalized.

Interest income was approximately $0.9 million and $0.8 million during 2006 and 2007, respectively. The weighted-average interest rate on the face amount of outstanding long-term debt, disregarding amortization of debt issue costs, was approximately 4.5% at September 30, 2007 and 4.3% at December 31, 2007.

7. Income Taxes

Headwaters’ estimated effective income tax rate for the fiscal year ending September 30, 2008, exclusive of discrete items, is 29.0%, which rate was applied to income before income taxes for 2007. Headwaters also recognized $1.8 million of net income tax expense in 2007 for discrete items that did not affect the calculation of the estimated effective income tax rate for the fiscal year. The discrete items consisted primarily of Section 45K-related adjustments pertaining to the nine-month period ended September 30, 2007, which in turn resulted from the phase-out of Section 45K tax credits for calendar 2007 being higher than previously estimated. In 2006, Headwaters recognized $1.0 million of discrete items. After consideration of the effect of the discrete items, income tax expense totaled approximately 40.0% of income before income taxes for 2007, compared to 26.3% for 2006.

12

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007

(Unaudited)

The estimated effective tax rate for 2007, exclusive of the discrete items, is lower than the statutory rate primarily due to Section 45 coal cleaning tax credits (which are different from the Section 45K tax credits discussed elsewhere) related to several facilities that Headwaters currently owns and operates as well as additional facilities that Headwaters expects to be operating later in fiscal 2008. Headwaters believes it is more likely than not the clean coal produced at many of these facilities qualifies for tax credits pursuant to Section 45 of the Internal Revenue Code, notwithstanding the uncertainties and risks associated with the tax credits, as more fully described in Note 9.

The tax rate for 2006 was lower than the statutory rate primarily due to Section 45K tax credits related to two coal-based solid alternative fuel facilities that Headwaters owns and operated, plus Headwaters’ 19% interest in an entity that owns and operated another alternative fuel facility (where Headwaters is not the primary beneficiary). The alternative fuel produced at these three facilities through December 2007 qualifies for tax credits pursuant to Section 45K (formerly Section 29) of the Internal Revenue Code, subject to the uncertainties of phase-out, IRS audit and other risks associated with the tax credits, all as more fully described in Note 9.

As a result of oil prices for calendar 2007 exceeding statutory limits, there will be a partial phase-out of Section 45K tax credits for the calendar year. In calculating the estimated effective tax rate for fiscal 2008, Headwaters used an estimated phase-out percentage for Section 45K tax credits of 72% for calendar 2007 (approximately 54% was calculated as of September 30, 2007). This estimated phase-out percentage was derived by estimating the calendar 2007 reference price for oil using actual oil prices for January through October 2007 and published NYMEX oil prices for November and December 2007. The monthly NYMEX oil prices were reduced by approximately 10%, which reduction represents Headwaters’ estimate of the relationship between NYMEX oil prices and the average U.S. wellhead oil prices actually used to calculate the annual reference price. The reference price for calendar 2007 was calculated by averaging the 12 months’ actual or estimated oil prices, which average was compared to the estimated phase-out range for calendar 2007 of $56.16 to $70.50 to derive an estimated phase-out percentage.

While the calendar 2007 phase-out percentage can not be finalized at the current time, as of December 31, 2007, the estimated phase-out percentage represents Headwaters’ best estimate of what the phase-out percentage would be, using available information as of that date. The effect on income taxes of any change in the calendar 2007 phase-out percentage from 72% to the actual percentage for the year will be recorded to income tax expense in subsequent periods, when the calendar 2007 actual oil prices and the phase-out range are known. Any such effect could be material to Headwaters’ 2008 income tax expense.

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109 (FIN 48). This interpretation prescribes a consistent financial reporting recognition threshold and measurement standard, as well as criteria for subsequently recognizing, derecognizing and measuring tax positions taken or expected to be taken in a tax return. FIN 48 also requires expanded disclosures with respect to the uncertainty in income taxes. Headwaters adopted FIN 48 effective as of October 1, 2007, the beginning of its 2008 fiscal year, with a cumulative adjustment to decrease retained earnings and increase income tax liabilities for unrecognized income tax benefits by $19.8 million, which included $2.9 million for interest and penalties. Certain reclassifications of deferred income taxes as of September 30, 2007 were also made to conform to the presentation requirements of FIN 48, but these were not material. Headwaters recognizes accrued interest and potential penalties related to all income tax liabilities, including unrecognized income tax benefits, in income tax expense. During 2007, Headwaters recognized approximately $0.4 million of interest and penalties and as of December 31, 2007, there was approximately $6.7 million accrued for the payment of interest and penalties.

As of December 31, 2007, Headwaters had approximately $21.4 million of net unrecognized tax benefits, most of which are classified as a long-term liability. Prior to the adoption of FIN 48, most unrecognized income tax benefits were classified as a current liability. Approximately $24.9 million of gross unrecognized income tax benefits would affect the 2008 effective tax rate if released into income.

13

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007

(Unaudited)

Headwaters is currently under audit by the IRS for fiscal years 2003 through 2006 and has open tax periods subject to examination by both federal and state taxing authorities for fiscal years 2003 through 2007. It is reasonably possible that the amount of Headwaters’ unrecognized income tax benefits will significantly change within the next 12 months. These changes could be the result of Headwaters’ ongoing tax audits or the settlement of outstanding audit issues. However, due to the number of years under audit and the matters being examined, at the current time, an estimate of the range of reasonably possible outcomes cannot be made.

8. Earnings per Share

The following table sets forth the computation of basic and diluted EPS for the periods indicated.

	Three Months Ended December 31,
(in thousands, except per-share data)	2006		2007
Numerator:
Numerator for basic earnings per share – net income	$	16,991	$	9,913
Interest expense related to convertible senior subordinated notes, net of taxes		1,133		1,044
Numerator for diluted earnings per share – net income plus interest expense related to convertible notes, net of taxes	$	18,124	$	10,957
Denominator:
Denominator for basic earnings per share – weighted-average shares outstanding		42,078		41,888
Effect of dilutive securities:
Shares issuable upon exercise of options and SARs		547		140
Shares issuable upon conversion of convertible notes		5,750		5,750
Total potential dilutive shares		6,297		5,890
Denominator for diluted earnings per share – weighted-average shares outstanding after assumed exercises and conversions		48,375		47,778
Basic earnings per share	$	0.40	$	0.24
Diluted earnings per share	$	0.37	$	0.23
Anti-dilutive securities not considered in diluted EPS calculation:
Stock options		828		1,989
SARs		3,137		1,188

9. Commitments and Contingencies

Significant new commitments and ongoing contingencies as of December 31, 2007 not disclosed previously, are as follows.

Acquisitions – During fiscal 2006 and 2007, Headwaters acquired certain assets and assumed certain liabilities of several privately-held companies in the construction materials industry. Pursuant to contractual terms for some of the acquisitions, additional amounts may be payable in the future, based on the achievement of stipulated revenue or earnings targets for periods ending no later than March 2010.

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HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007

(Unaudited)

For all acquisition transactions, assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition dates. If any future earn-out consideration is paid for any acquisition, goodwill will be increased accordingly.

Property, Plant and Equipment – As of December 31, 2007, Headwaters was committed to spend approximately $42.9 million on capital projects that were in various stages of completion.

Legal Matters – Headwaters has ongoing litigation and asserted claims which have been incurred during the normal course of business, including the specific matters discussed below. Headwaters intends to vigorously defend or resolve these matters by settlement, as appropriate. Management does not currently believe that the outcome of these matters will have a material adverse effect on Headwaters’ operations, cash flow or financial position.

Historically, costs paid to outside legal counsel for litigation have comprised a majority of Headwaters’ litigation-related costs. In 2007, Headwaters incurred approximately $0.4 million of expense for legal matters, which consisted primarily of costs for outside legal counsel. Headwaters currently believes the range of potential loss for all unresolved matters, excluding costs for outside counsel, is from $1.0 million up to the amounts sought by claimants and has recorded a total liability as of December 31, 2007 of $1.0 million. Claims and damages sought by claimants in excess of this amount are not deemed to be probable. Headwaters’ outside counsel currently believe that unfavorable outcomes of outstanding litigation are neither probable nor remote and declined to express opinions concerning the likely outcomes or liability to Headwaters. It is not possible to estimate what litigation-related costs will be in future periods.

The matters discussed below raise difficult and complex legal and factual issues, and the resolution of these issues is subject to many uncertainties, including the facts and circumstances of each case, the jurisdiction in which each case is brought, and the future decisions of juries, judges, and arbitrators. Therefore, although management believes that the claims asserted against Headwaters in the named cases lack merit, there is a possibility of material losses in excess of the amounts accrued if one or more of the cases were to be determined adversely against Headwaters for a substantial amount of the damages asserted. It is possible that a change in the estimates of probable liability could occur, and the changes could be material. Additionally, as with any litigation, these proceedings require that Headwaters incur substantial costs, including attorneys’ fees, managerial time and other personnel resources, in pursuing resolution.

Boynton. In October 1998, Headwaters entered into a technology purchase agreement with James G. Davidson and Adtech, Inc. The transaction transferred certain patent and royalty rights to Headwaters related to a synthetic fuel technology invented by Davidson. (This technology is distinct from the technology developed by Headwaters.) This action is factually related to an earlier action brought by certain purported officers and directors of Adtech, Inc. That action was dismissed by the United States District Court for the Western District of Tennessee and the District Court’s order of dismissal was affirmed on appeal. In the current action, the allegations arise from the same facts, but the claims are asserted by certain purported stockholders of Adtech. In June 2002, Headwaters received a summons and complaint from the United States District Court for the Western District of Tennessee alleging, among other things, fraud, conspiracy, constructive trust, conversion, patent infringement and interference with contract arising out of the 1998 technology purchase agreement entered into between Davidson and Adtech on the one hand, and Headwaters on the other. The plaintiffs seek declaratory relief and compensatory damages in the approximate amount of between $15.0 million and $25.0 million and punitive damages. In February 2006, the District Court dismissed all claims against Headwaters. Also in February 2006, plaintiffs filed an appeal. In July 2007, the United States Court of Appeals for the Federal Circuit vacated the dismissal in favor of Headwaters as to the civil conspiracy and constructive trust claims and remanded the case to the District Court for further proceedings. Because the resolution of the litigation is uncertain, legal counsel cannot express an opinion as to the ultimate amount, if any, of Headwaters’ liability.

Headwaters Construction Materials Matters. There are litigation and pending and threatened claims made against certain subsidiaries of Headwaters Construction Materials (HCM) with respect to several types of exterior finish systems manufactured and sold by its subsidiaries for application by contractors on residential and commercial buildings. Typically, litigation and these claims are defended by such subsidiaries’ insurance carriers. The plaintiffs or claimants in these matters have alleged that the structures have suffered damage from latent or progressive water penetration due to some alleged failure of the building product

15

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007

(Unaudited)

or wall system. Some claims involve alleged defects associated with components of an Exterior Insulating and Finish System (EIFS) which was produced for a limited time (through 1997) by Best Masonry & Tool Supply and Don’s Building Supply. There is a 10-year projected claim period following discontinuation of the product. Other claims involve alleged liabilities associated with certain stucco and architectural stone veneer products which are produced and sold by certain subsidiaries of HCM.

Typically, the claims cite damages for alleged personal injuries and punitive damages for alleged unfair business practices in addition to asserting more conventional damage claims for alleged economic loss and damage to property. To date, claims made against such subsidiaries have been paid by their insurers, with the exception of minor deductibles or self-insured retentions, although such insurance carriers typically have issued “reservation of rights” letters. None of the cases has gone to trial. While, to date, none of these proceedings have required that HCM incur substantial costs, there is no guarantee of insurance coverage or continuing coverage. These and future proceedings may result in substantial costs to HCM, including attorneys’ fees, managerial time and other personnel resources and costs. Adverse resolution of these proceedings could have a materially negative effect on HCM’s business, financial condition, and results of operation, and its ability to meet its financial obligations. Although HCM carries general and product liability insurance, HCM cannot assure that such insurance coverage will remain available, that HCM’s insurance carrier will remain viable, or that the insured amounts will cover all future claims in excess of HCM’s uninsured retention. Future rate increases may also make such insurance uneconomical for HCM to maintain. In addition, the insurance policies maintained by HCM exclude claims for damages resulting from exterior insulating finish systems, or EIFS, that have manifested after March 2003. Because resolution of the litigation and claims is uncertain, legal counsel cannot express an opinion as to the ultimate amount, if any, of HCM’s liability.

Other. Headwaters and its subsidiaries are also involved in other legal proceedings that have arisen in the normal course of business.

Section 45K Matters – A material amount of Headwaters’ consolidated revenue and net income has historically been derived from license fees and sales of chemical reagents, both of which were dependent on the ability of licensees and other customers to manufacture and sell qualified synthetic fuel that generated tax credits under Section 45K (formerly Section 29) of the Internal Revenue Code. Headwaters has also claimed Section 45K tax credits for synthetic fuel sales from facilities in which it owns an interest (see Note 7). The following issues exist related to Section 45K tax credits.

Termination of Section 45K. By law, Section 45K tax credits for synthetic fuel produced from coal have expired for synthetic fuel sold after December 31, 2007. With the expiration of Section 45K at the end of calendar 2007, Headwaters licensees’ synthetic fuel facilities and the facilities owned by Headwaters have closed because production of synthetic fuel is not profitable absent the tax credits. The closure of these synfuel facilities will have a material adverse effect on the future revenue, net income and cash flow of Headwaters, in addition to the current material adverse effect caused by phase-out concerns, discussed below.

Phase-Out. Section 45K tax credits are subject to phase-out after the average annual U.S. wellhead oil price (reference price) reaches a beginning phase-out threshold price, and are eliminated entirely if the reference price reaches the full phase-out price. In recent periods, the reference price has been approximately 90% of the published market prices for oil. For calendar 2007, Headwaters estimates that the phase-out range (computed by increasing the 2006 inflation adjustment factor by 2%) begins at $56.16 and completes phase-out at $70.50 per barrel. As described in more detail in Note 7, Headwaters estimated a phase-out percentage for Section 45K tax credits for calendar 2007 of 72%, using available information as of December 31, 2007. Headwaters has recognized revenue and tax credits in its financial statements for 2007 based on this 72% estimate, which resulted in a revision of approximately $6.9 million to the license fee revenue that was recognized in the nine-month period ended September 30, 2007, when the phase-out estimate was much lower. When finalized later in calendar 2008, it is likely that the phase-out percentage for calendar 2007 will be different from this 72% estimate.

16

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007

(Unaudited)

The unpredictability of phase-out has materially adversely affected both the amount and timing of recognition of Headwaters’ revenue, net income and cash flow during most of fiscal 2006 and 2007, and could also have a material adverse effect in fiscal 2008, until the uncertainties related to phase-out of Section 45K are resolved. In particular, the amount of license fee revenue recognized by Headwaters during 2006 and 2007 was negatively affected by reduced revenues being recognized for certain licensees whose license agreements call for Headwaters to be paid a portion of the tax credits earned by the licensee. The final determination of revenue to be collected and tax credits to be earned pertaining to calendar year 2007 will not occur until the calendar 2007 reference price and phase-out range are published in the quarter ending June 30, 2008. In the period when the actual oil prices and phase-out range for calendar 2007 are known, Headwaters will adjust the revenue and tax credits recorded in 2007 and prior periods as necessary.

IRS Audits. Licensees are subject to audit by the IRS. The IRS may challenge whether Headwaters’ licensees have satisfied the requirements of Section 45K or applicable Private Letter Rulings, including placed-in-service requirements, or may attempt to disallow Section 45K tax credits for some other reason. The IRS has initiated audits of certain licensee-taxpayers who claimed Section 45K tax credits and will continue the audit process in the future. To the extent not already paid to Headwaters, the inability of a licensee to claim Section 45K tax credits could reduce amounts to be received by Headwaters from licensees for license fee revenue recognized prior to December 31, 2007. In addition, the IRS is currently auditing Headwaters’ tax credits claimed for synthetic fuel sold from the facilities in which it owns an interest. The tax credits which are under audit that Headwaters believes are more likely than not to be sustained and are therefore not included in unrecognized income tax benefits in the balance sheet total approximately $30.0 million.

Section 45 Matters – As explained in Note 7, Headwaters’ estimated effective tax rate for fiscal 2008 is lower than the statutory rate due to coal cleaning tax credits related to several facilities that Headwaters currently owns and operates as well as additional facilities that Headwaters expects to be operating later in fiscal 2008. Headwaters believes the clean coal produced or to be produced at many of these facilities and sold to qualified buyers will qualify for tax credits under Section 45 (which is different from the Section 45K tax credit discussed in preceding paragraphs) of the Internal Revenue Code. To date, the IRS has issued limited public guidance about how this tax credit program will be administered and the restrictions on the availability of such credits. Based on the language of Section 45, Headwaters believes that many of its coal cleaning facilities will be eligible for Section 45 refined coal tax credits, and as a result, has recognized a benefit for such credits in its 2007 tax provision. However, the ability to claim tax credits is dependent upon a number of conditions, including, but not limited to:

• Placing facilities in service on or before December 31, 2008;

• Producing a fuel from coal that is lower in NOx and either SOx or mercury emissions by the specified amount as compared to the emissions of the feedstock;

• Producing a fuel at least 50% more valuable than the feedstock; and

• Sale of the fuel to a third party for the purpose of producing steam.

The IRS may challenge Section 45 tax credits claimed by Headwaters on any one of these or other conditions. In addition, Congress may modify or repeal Section 45 so that these tax credits may not be available in the future. If Headwaters is not able to claim Section 45 tax credits for fiscal 2008, this will materially adversely affect income tax expense and income taxes paid in future periods.

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

The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included in this Form 10-Q. Our fiscal year ends on September 30 and unless otherwise noted, references to 2006 refer to our fiscal quarter ended December 31, 2006 and references to 2007 refer to our fiscal quarter ended December 31, 2007. Other references to years refer to our fiscal year rather than a calendar year.

Overview

Consolidation and Segments. The consolidated financial statements include the accounts of Headwaters, all of our subsidiaries, and other entities in which we have a controlling interest. All significant intercompany transactions and accounts are eliminated in consolidation. We made one acquisition in 2006. This entity’s results of operations for the period from the acquisition date through December 31, 2007 have been consolidated with our results; its operations up to the date of acquisition have not been included in the consolidated results for any period.

We currently operate in three industries: construction materials, coal combustion products (CCPs) and alternative energy. In the construction materials segment, we design, manufacture, and sell architectural stone and resin-based exterior siding accessories (such as shutters, mounting blocks, and vents) and other products. Revenues consist of product sales to wholesale and retail distributors, contractors and other users of building products. We are a nationwide leader in the management and marketing of CCPs. Revenues in the CCP segment consist primarily of fly ash and other product sales. In the alternative energy segment, we are focused on reducing waste and increasing the value of energy feedstocks, primarily in the areas of low-value coal and oil. Revenues for the alternative energy segment through December 31, 2007 consisted primarily of sales of chemical reagents and license fees.

Operations and Strategy. During the past several years, we have executed our two-fold plan of maximizing cash flow from our existing operating business units and diversifying from significant reliance on the legacy alternative energy segment Section 45K (formerly Section 29) business. With the addition and expansion of our CCP management and marketing business through acquisitions in 2002 and in 2004, and the growth of our construction materials business, through several acquisitions in fiscal 2004, 2006 and 2007, we have achieved revenue growth and diversification in three business segments. Because we also incurred increased indebtedness to make strategic acquisitions, one of our ongoing financial objectives is to continue to focus on increased cash flows and reduced debt levels.

A material amount of our 2007 and prior period consolidated revenue and net income has been derived from license fees and sales of chemical reagents, both of which were dependent on the ability of licensees and other customers to manufacture and sell qualified synthetic fuel that generated tax credits under Section 45K of the Internal Revenue Code. We have also claimed Section 45K tax credits for synthetic fuel sales from facilities in which we own an interest. The following issues exist related to Section 45K tax credits.

By law, Section 45K tax credits for synthetic fuel produced from coal have expired for synthetic fuel sold after December 31, 2007. With the expiration of Section 45K at the end of calendar 2007, our licensees’ synthetic fuel facilities and the facilities we own have closed because production of synthetic fuel is not profitable absent the tax credits. The closure of these synfuel facilities will have a material adverse effect on our future revenue, net income and cash flow, in addition to the current material adverse effect caused by phase-out concerns, discussed below.

Section 45K tax credits are subject to phase-out after the average annual U.S. wellhead oil price (reference price) reaches a beginning phase-out threshold price, and are eliminated entirely if the reference price reaches the full phase-out price. We have recognized revenue and tax credits for 2007 based on our estimate of phase-out calculated as of December 31, 2007, using information available at that time. The unpredictability of phase-out has materially adversely affected both the amount and timing of recognition of our revenue, net income and cash flow during most of fiscal 2006 and 2007, and could also have a material adverse effect in 2008, until the uncertainties related to phase-out of Section 45K are resolved. The final determination of revenue to be collected and tax credits to be earned pertaining to calendar year 2007 will not occur until the calendar 2007 reference price and phase-out range are published in the quarter ending June 30, 2008. Reference is made to Notes 7 and 9 to the consolidated financial statements where there is more information on phase-out and other uncertainties related to Section 45K tax credits that have affected our business historically and that will continue to affect our business in 2008.

Our acquisition strategy targets businesses that are leading companies in their respective industries and that enjoy healthy operating margins, thus providing additional cash flow that complements the financial performance of our existing businesses. In addition, in fiscal 2006, we began to acquire small companies with innovative products that can be marketed using our existing distribution channels. We are also committed to continuing to invest in research and development activities

18

that are focused on energy-related technologies and nanotechnology. We participate in joint ventures which operate an ethanol plant located in North Dakota and a hydrogen peroxide plant in South Korea. We are also investing in other alternative energy projects such as coal cleaning and the use of nanocatalysts to engineer coal for emissions reduction and to enhance the refining of heavy crude oils into lighter transportation fuels.

Our CCPs and construction materials businesses are affected by seasonality, with the highest revenue and profitability produced in the June and September quarters. With CCPs, our strategy is to continue to negotiate long-term contracts so that we can invest in transportation and storage infrastructure for the marketing and sale of CCPs. We also intend to continue our efforts to expand usage of high-value CCPs, develop more uses for lower-value CCPs, such as blending, and expand the use of CCPs in our construction materials businesses.

In fiscal years 2005 and 2006, we focused on the integration of our large 2004 acquisitions, including the marketing of diverse construction materials products through our national distribution network. We became highly leveraged as a result of those acquisitions, but have reduced our outstanding debt significantly since that time through cash generated from operations, from an underwritten public offering of common stock and from proceeds from settlement of litigation. We intend to continue to focus on repaying long-term debt while continuing to look for diversification opportunities.

Three Months Ended December 31, 2007 Compared to Three Months Ended December 31, 2006

The information set forth below compares our operating results for the quarter ended December 31, 2007 (2007) with operating results for the quarter ended December 31, 2006 (2006).

Summary. Our total revenue for 2007 was $248.9 million, down 9% from $274.9 million for 2006. Gross profit decreased 21%, from $80.0 million in 2006 to $63.1 million in 2007. Operating income decreased 46% from $33.9 million to $18.4 million. Net income was $9.9 million and diluted earnings per share was $0.23, compared to net income of $17.0 million, or $0.37 per diluted share, in 2006.

Excluding our Section 45K business, total revenue for 2007 was $194.5 million, up 1% from $193.2 million for 2006. Gross profit excluding Section 45K was $51.1 million in 2007, the same gross profit as in 2006. Operating income increased 18% from $5.5 million to $6.5 million. Net income was $3.5 million and diluted earnings per share was $0.08, compared to a net loss of $(1.5) million, or $(0.03) per diluted share, in 2006.

Revenue and gross margins. The major components of revenue, along with gross margins, are discussed in the sections below.

Construction Materials Segment. Sales of construction materials during 2007 were $114.8 million with a corresponding direct cost of $81.8 million. Sales of construction materials during 2006 were $122.8 million with a corresponding direct cost of $90.6 million. The decrease in sales of construction materials during 2007 was due primarily to the effects of a depressed residential housing and remodeling market which impacted sales across most of our product lines. We believe our niche strategy and our focus on productivity improvements has tempered the impact of the severe slow down in new residential construction on our revenue and helped improve the gross margin percentage from 2006 to 2007. Because a substantial amount of our revenues in this segment are dependent on the housing market, we anticipate continuing impact in 2008 from the current slowdown in the housing industry.

CCP Segment. CCP revenues for 2007 were $77.4 million with a corresponding direct cost of $55.9 million. CCP revenues for 2006 were $69.2 million with a corresponding direct cost of $49.4 million. The increase in CCP revenues was due primarily to upward pricing trends in several markets, despite some challenging weather conditions in certain markets during the quarter. The gross margin percentage decreased from 2006 to 2007 primarily due to increased costs for material and higher transportation costs.

Alternative Energy Segment. Our alternative energy segment revenue consisted primarily of chemical reagent sales, license fee revenue related to our solid alternative fuel technologies, and to a lesser extent, sales of synthetic fuel from two solid alternative fuel production facilities that we own, and coal cleaning. The major components of revenue for the alternative energy segment are discussed in the sections below.

As described previously and in Note 9 to the consolidated financial statements, a material amount of our 2007 and prior period consolidated revenue has been derived from license fees and sales of chemical reagents, both of which were dependent on the ability of licensees and other customers to manufacture and sell qualified synthetic fuel that generated tax credits under Section 45K of the Internal Revenue Code. By law, Section 45K tax credits for synthetic fuel produced from coal have expired for synthetic fuel sold after December 31, 2007. With the expiration of Section 45K at the end of calendar 2007, our licensees’ synthetic fuel facilities have closed because production of synthetic fuel is not profitable absent the tax credits. The closure of these synfuel facilities will have a material adverse effect on our future revenue, in addition to the current material adverse effect caused by phase-out concerns.

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Sales of Chemical Reagents. Chemical reagent sales during 2007 were $38.0 million with a corresponding direct cost of $30.9 million. Chemical reagent sales during 2006 were $44.5 million with a corresponding direct cost of $35.5 million. Chemical reagent sales in 2007 were lower than in 2006 primarily due to decreased synthetic fuel production by most of our licensees (resulting in decreased sales of $5.7 million) and other customers with whom we do not have a license agreement (resulting in decreased sales of $0.8 million). The gross margin percentage for 2007 of 18.5% was lower than the 2006 gross margin percentage of 20.3% due primarily to increases in the cost of product, which in turn was related to increases in the costs of petroleum-based materials.

License Fees. During 2007, we recognized license fee revenue totaling $7.5 million, a decrease of $14.9 million from $22.4 million of license fee revenue recognized during 2006. The amount of license fee revenue recognized during both 2006 and 2007 was negatively affected by reduced revenues being recognized for certain licensees whose license agreements call for us to be paid a portion of the tax credits earned by the licensee. In addition, we recognized revenue and tax credits in 2007 based on our estimate of phase-out calculated as of December 31, 2007 (72%), which resulted in a revision of approximately $6.9 million to the license fee revenue that was recognized in the nine-month period ended September 30, 2007, when the phase-out estimate was much lower. When finalized later in calendar 2008, it is likely that the phase-out percentage for calendar 2007 will be different from this 72% estimate. The final determination of revenue to be collected pertaining to calendar year 2007 will not occur until the calendar 2007 reference price and phase-out range are published in the quarter ending June 30, 2008. In the period when the actual oil prices and phase-out range for calendar 2007 are known, we will adjust the revenue and tax credits recorded in 2007 and prior periods as necessary.

Other Alternative Energy Segment Revenues. The majority of other alternative energy segment revenue is comprised of sales of synthetic fuel, which during 2007 were $8.3 million, with a corresponding direct cost of $11.5 million. Sales of synthetic fuel during 2006 were $14.8 million, with a corresponding direct cost of $17.3 million. Revenue from the sale of synthetic fuel has a negative gross margin, which is more than compensated for by the income tax credits expected to be earned from the sales of the synthetic fuel. Coal cleaning revenue was $1.4 million in 2007, compared to $0.1 million in 2006.

Amortization and Research and Development Expenses. The decrease in amortization expense of $0.3 million from 2006 to 2007 was due primarily to intangible assets that have been fully amortized. Research and development expense increased by $0.4 million from 2006 to 2007 primarily because of increased spending in our joint research efforts with Evonik Industries AG related to hydrogen peroxide and in developmental efforts related to our nanotechnologies.

Selling, General and Administrative Expenses. These expenses decreased $1.6 million, or 4%, to $35.0 million for 2007 from $36.6 million for 2006. The decrease in 2007 was due primarily to lower personnel-related costs (principally bonus expense, stock-based compensation expense and commission expense), due in turn to lower revenue and operating results.

Other Income and Expense. During 2007, we reported net other expense of $1.9 million compared to net other expense of $10.8 million during 2006. The change of $8.9 million was comprised of a decrease in net interest expense of approximately $2.5 million and a net change in other income/expense of approximately $6.4 million.

Net interest expense decreased from $8.3 million in 2006 to $5.8 million in 2007, due primarily to the lower interest rate (2.50%) on the $160.0 million of convertible senior subordinated notes issued in January 2007, the net proceeds of which were used to repay higher-rate senior debt. In addition, there were lower average levels of long-term debt in 2007 as compared to 2006. We currently expect interest expense in fiscal 2008 to be less than the fiscal 2007 levels.

The change in other income/expense of $6.4 million consisted primarily of a $4.4 million gain on the sale of property, plant and equipment in 2007 compared to a loss of $0.2 million in 2006, plus a $2.3 million decrease in costs related to our investment in the coal-based solid alternative fuel production facility described in Note 7 to the consolidated financial statements. The majority of the property, plant and equipment sold in 2007 represented non-strategic assets in our construction materials segment. Most of the proceeds from this sale were used to acquire assets that will increase the capacity of our Texas-based concrete block business, enabling us to meet current and projected demand.

Income Tax Provision. We recorded income tax provisions with an effective tax rate of approximately 26% in 2006 and 40% in 2007 (22% and 29%, respectively, excluding discrete items of $1.0 million and $1.8 million, respectively). The 2007 discrete items consisted primarily of Section 45K-related adjustments pertaining to the nine-month period ended September 30, 2007, which in turn resulted from the phase-out of Section 45K tax credits for calendar 2007 being higher than previously estimated. The 2006 discrete items primarily related to changes in estimated tax liabilities and in reserves related to an IRS examination.

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The estimated effective tax rate for 2007, exclusive of the discrete items, is lower than the statutory rate primarily due to Section 45 coal cleaning tax credits (which are different from the Section 45K tax credits discussed elsewhere) related to several facilities that we currently own and operate as well as additional facilities that we expect to be operating later in fiscal 2008. We believe it is more likely than not the clean coal produced at many of these facilities qualifies for tax credits pursuant to Section 45 of the Internal Revenue Code, notwithstanding the uncertainties and risks associated with the tax credits, as more fully described in Note 9 to the consolidated financial statements.

The effective tax rate for 2006 was lower than the statutory rate primarily due to Section 45K tax credits related to two coal-based solid alternative fuel facilities that we own and operated, plus our 19% interest in an entity that owns and operated another alternative fuel facility (see Note 7 to the consolidated financial statements). The alternative fuel produced at these three facilities through December 2007 qualifies for tax credits pursuant to Section 45K (formerly Section 29) of the Internal Revenue Code, subject to the uncertainties of phase-out, IRS audit and other risks associated with the tax credits, all as more fully described in Note 9 to the consolidated financial statements. Excluding the effect of Section 45K and Section 45 tax credits, our effective tax rate for both 2006 and 2007 would have been approximately 39%.

As discussed in Note 7 to the consolidated financial statements, the Section 45K and Section 45 tax credits used in calculating the fiscal 2008 estimated effective income tax rate and the 2007 income tax provision are estimated as of December 31, 2007. While the calendar 2007 phase-out percentage can not be finalized at the current time, as of December 31, 2007, the estimated phase-out percentage of 72% represents our best estimate of what the phase-out percentage would be, using available information as of that date. The effect on income taxes of any change in the calendar 2007 phase-out percentage from 72% to the actual percentage for the year will be recorded to income tax expense in the period when the calendar 2007 actual oil prices and the phase-out range are known. Any such effect could be material to our 2008 income tax expense. Similarly, future changes to our estimates of fiscal 2008 Section 45 coal cleaning tax credits could also be material to our 2008 income tax expense.

Impact of Inflation and Related Matters

In addition to the effects of rising oil prices as discussed elsewhere, our operations have been impacted by i) increased cement, polypropylene and poly-vinyl chloride costs in the construction materials segment; ii) rising costs for chemical reagents in the alternative energy segment; iii) increased fuel costs that have affected transportation costs in most of our business units; and iv) certain regional shortages of cement and aggregate materials. The increased costs of polypropylene, poly-vinyl chloride, chemical reagents and fuel are directly related to the increase in prices of oil and other petroleum-based materials. The increased costs of cement appear to be caused by a lack of adequate supplies in some regions of the U.S. and international supply, demand and transportation costs.

We have been successful in passing on some, but not all, of the increased material and transportation costs to customers. It is not possible to predict the future trend of material and transportation costs, nor our ability to pass on any future price increases to customers. It is also not possible to predict the impact of potential future cement supply shortages on our ability to procure needed supplies in our construction materials business.

Liquidity and Capital Resources

Summary of Cash Flow Activities. Net cash provided by operating activities for the three months ended December 31, 2007 was $34.6 million compared to $34.7 million for the three months ended December 31, 2006. In both 2006 and 2007, the primary investing activities consisted of the purchase of property, plant and equipment and payments for acquisitions. In 2007, financing activities consisted primarily of treasury stock purchases. None of our financing activities in 2006 were material. More details about our investing and financing activities are provided in the following paragraphs.

Investing Activities. Total expenditures for property, plant and equipment in 2007 were $25.6 million, an increase of $15.4 million over 2006. Most of the capital expenditures in both periods were incurred by the construction materials segment; however, in 2007, a higher proportion of total capital expenditures were incurred by the alternative energy segment as compared to 2006. A significant portion of our 2007 and planned future capital expenditures, which in 2008 are currently expected to exceed the fiscal 2007 year amount, represent expansion of operations, rather than maintenance of operating capacity, primarily due to growth initiatives in the alternative energy segment, particularly coal cleaning. Capital expenditures are limited by our senior debt covenants to $100.0 million annually; however, the cumulative unused amounts of annual capital expenditures limits can be carried forward and used in subsequent years. As of December 31, 2007, we had approximately $70.4 million of unused amounts of capital expenditures from prior years and we were committed to spend approximately $42.9 million on capital projects that were in various stages of completion, primarily in the alternative energy segment.

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In 2006, we acquired 100% of the ownership interests of a privately-held company in the construction materials business. Total consideration paid at the date of acquisition of approximately $53.0 million consisted primarily of cash. An additional amount, $19.0 million, was paid in 2007, based on earnings of the acquired entity for the 12 month period ended September 30, 2007 that exceeded an agreed-upon threshold. Pursuant to contractual terms for some of the acquisitions made in prior years, additional amounts may be payable in the future, based on the achievement of stipulated revenue or earnings targets for periods ending no later than March 2010. If future earn-out consideration is paid in excess of amounts accrued for any acquisition, goodwill will be increased accordingly.

We intend to continue to expand our business through growth of existing operations, commercialization of technologies currently being developed, and strategic acquisitions of products or entities that expand our current operating platform. Acquisitions are an important part of our long-term business strategy and to that end, we routinely review potential complementary acquisitions, including those in the areas of construction materials, CCP marketing, and coal and catalyst technologies. It is possible that some portion of future cash and cash equivalents and/or proceeds from the issuance of stock or debt could be used to fund acquisitions of complementary businesses in the chemical, energy, building products and related industries. Our senior secured credit agreement limits acquisitions in the aggregate to $50.0 million of cash consideration and $20.0 million of non-cash consideration annually, with no more than $30.0 million of cash consideration for any one acquisition, unless our “total leverage ratio,” as defined, is less than or equal to 3.50:1.0, after giving effect to an acquisition, in which case the foregoing limitations do not apply. The senior secured credit agreement also limits the amount we can invest in joint ventures and other less than 100%-owned entities.

We have invested in several joint ventures which are accounted for using the equity method of accounting, but do not currently have plans to significantly increase our investments in those entities.

Financing Activities. In 2007, we made treasury stock purchases totaling $14.8 million, near the limit established by our senior secured credit agreement. Accordingly, we do not currently have plans for any future treasury stock purchases. As of December 31, 2007, we have no long-term debt repayments that are due prior to 2011. We may, in the future, make optional prepayments of senior debt depending on actual cash flows, our current and expected cash requirements and other applicable factors we deem to be significant. None of our financing activities in 2006 were material.

Due to covenants associated with our senior debt, we currently have restrictions on our ability to obtain significant additional amounts of long-term debt. However, we have historically experienced strong positive cash flow from operations which has enabled us to repay a substantial amount of our long-term debt prior to scheduled maturities. While we expect our positive cash flow to continue in the future, our positive cash flow from operations is expected to be lower in fiscal 2008 and subsequent years due to the termination of our Section 45K business, as described previously and in Note 9 to the consolidated financial statements. Also, while we have periodically accessed the debt and equity markets in prior years, affordable and available additional debt and equity may be more difficult for us to obtain in future periods than in the past, due to less favorable market conditions as well as changes in our business model.

In January 2007, we announced that we were planning an exchange offer for our 2.875% convertible senior subordinated notes due 2016, whereby new notes with similar, but not identical, terms, along with an exchange fee, would be issued upon tender of the existing notes. In April 2007, we announced that the commencement of an exchange offer had been indefinitely postponed. We continue to evaluate the merits of an exchange offer.

Reference is made to Note 6 to the consolidated financial statements for detailed information about our outstanding long-term debt and compliance with debt covenants, as well as the available $60.0 million revolving credit arrangement. Subject to obtaining additional revolving loan commitments, we can increase the revolving credit limit to $100.0 million. The senior credit facility contains restrictions and covenants common to such agreements, including limitations on the incurrence of additional debt, investments, merger and acquisition activity, asset sales and liens, annual capital expenditures in excess of $100.0 million annually, and the payment of dividends, among others. In addition, we must maintain certain leverage and fixed charge coverage ratios. We are in compliance with all debt covenants as of December 31, 2007 and expect to be in compliance throughout fiscal 2008.

In both 2006 and 2007, cash proceeds from the exercise of options and employee stock purchases were not material. Option exercise activity is primarily dependent on our stock price and is not predictable. To the extent non-qualified stock options are exercised, or there are disqualifying dispositions of shares obtained upon the exercise of incentive stock options, we receive an income tax deduction generally equal to the income recognized by the optionee. Such amounts were not material in either 2006 or 2007.

Working Capital. As of December 31, 2007, our working capital was $161.4 million. Notwithstanding the expiration of Section 45K tax credits as of December 31, 2007 and the resulting impact on cash flow, we expect operations to produce positive cash flow in future periods and believe working capital, along with available borrowings under the revolving credit arrangement, will be sufficient for operating needs for the next 12 months.

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Income Taxes. Historically, our cash requirements for income taxes generally approximated the income tax provision; however, there is usually some lag in paying estimated taxes during a fiscal year due to the seasonality of our operations and because estimated income tax payments are typically based on annualizing the fiscal year’s income based on year-to-date results. There is also some lag in realizing cash benefits from the utilization of tax credits due to the interaction of our September 30 fiscal year end and the different fiscal year ends of the entities through which we receive the tax credits. Beginning in fiscal 2006, there has been more variability in the relationship between the income tax provision and income tax payments because the tax provision calculation is materially dependent upon the estimated phase-out percentage of Section 45K tax credits (see Notes 7 and 9 to the consolidated financial statements).

As discussed previously, cash payments for income taxes are reduced for tax deductions resulting from disqualifying dispositions of incentive stock options and from the exercise of non-qualified stock options, which amount was not material in 2006 or 2007. Option exercise activity is primarily dependent on our stock price which is not predictable, and likewise, it is not possible to estimate what tax benefits may be realized from future option exercises.

Summary of Future Cash Requirements. Significant future cash uses, in addition to operational working capital requirements, including income tax payments and interest payments on long-term debt, are currently expected to consist primarily of capital expenditures.

Legal Matters

We have ongoing litigation and asserted claims which have been incurred during the normal course of business. Reference is made to Note 9 to the consolidated financial statements for a description of our accounting for legal costs and for other information about legal matters.

Recent Accounting Pronouncements

Reference is made to Note 1 to the consolidated financial statements for a discussion of accounting pronouncements that have been recently issued which we have not yet adopted.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to financial market risks, primarily related to changes in interest rates and certain foreign currencies. We do not use derivative financial instruments for speculative or trading purposes. We have entered into certain hedge transactions in the past, primarily to limit our variable interest rate exposure, but there are no such hedges outstanding as of December 31, 2007. The Blue Flint joint venture also has hedges in place related to variable interest rates and commodities.

As described in more detail in Note 6 to the consolidated financial statements, our senior debt, totaling $210.0 million as of December 31, 2007, bears interest at a variable-rate. Accordingly, a change in the interest rate of 1% would change our interest expense by approximately $2.1 million during the 12 months ending December 31, 2008.

We have limited operations in foreign jurisdictions. However, one of our joint ventures with Evonik Industries AG owns a hydrogen peroxide business located in South Korea. This joint venture has € 25.0 million of long-term debt denominated in Euros. Because that debt is payable in a currency different from the Korean Won, the joint venture’s functional currency, it must be translated into Korean Won at the end of each reporting period based on current exchange rates. As a result of this requirement, the joint venture is subject to foreign currency exchange rate movements and in 2007 the joint venture recorded a foreign currency exchange loss, of which $2.1 million was reflected in our results of operations in 2007. A change in the relationship between the Euro and Korean Won of 10% would result in a gain or loss of approximately $1.9 million for us.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures – We maintain disclosure controls and procedures that are designed to ensure that information we are required to disclose in the reports that we file or submit under the Securities Exchange Act of 1934 (the Exchange Act), such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified by SEC rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), to allow timely decisions regarding required disclosure.

Our management evaluated, with the participation of our CEO and CFO, the effectiveness of our disclosure controls and procedures as of December 31, 2007, pursuant to paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act. This evaluation included a review of the controls’ objectives and design, the operation of the controls, and the effect of the controls on the information

23

presented in this Quarterly Report. Our management, including the CEO and CFO, do not expect that disclosure controls can or will prevent or detect all errors and all fraud, if any. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Our disclosure controls and procedures are designed to provide such reasonable assurance of achieving their objectives. Also, the projection of any evaluation of the disclosure controls and procedures to future periods is subject to the risk that the disclosure controls and procedures may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Based on their review and evaluation, and subject to the inherent limitations described above, our CEO and CFO have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective as of December 31, 2007 at the above-described reasonable assurance level.

Internal Control over Financial Reporting – Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even internal controls determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. The effectiveness of our internal control over financial reporting is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the possibility of human error, and the risk of fraud. The projection of any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies may deteriorate. Because of these limitations, there can be no assurance that any system of internal control over financial reporting will be successful in preventing all errors or fraud or in making all material information known in a timely manner to the appropriate levels of management.

There has been no change in our internal control over financial reporting during the quarter ended December 31, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See “Legal Matters” in Note 9 to the consolidated financial statements for a description of current legal proceedings.

ITEM 1A. RISK FACTORS

Risks relating to our business and our common stock are described in Item 1A of our Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

We did not have any sales of unregistered equity securities, but did purchase treasury stock during the three-month period ended December 31, 2007, in accordance with the program announced in our October 19, 2007 press release. Our Board of Directors approved a stock repurchase program for up to $15.0 million of our common stock. The program did not have an expiration date, but as of December 31, 2007, we do not expect to make additional purchases under that program. The following table provides details about the stock repurchases, all of which were made in the open market and funded from available working capital.

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(in thousands, except per-share data)
Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
October 1, 2007 – October 31, 2007	0		n/a	0	$	15,000
November 1, 2007 – November 30, 2007	955	$	12.53	955		3,034
December 1, 2007 – December 31, 2007	250		11.50	250		159
Total	1,205	$	12.32	1,205	$	159

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

The following exhibits are included herein:

12	Computation of ratio of earnings to combined fixed charges and preferred stock dividends	*
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer	*
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer	*
32	Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer	*
99.1	2000 Employee Stock Purchase Plan, As Amended and Restated Effective 20 November 2007	*
99.20	Stock Appreciation Right Agreement (November 2007)	*
99.20.1	Form of Notice of Stock Appreciation Right Grant (November 2007)	*
99.21	Restricted Stock Award Agreement (November 2007)	*
99.21.1	Form of Restricted Stock Award Grant Notice (November 2007)	*
99.22	Short-Term Incentive Bonus Plan, As Amended and Restated Effective 1 October 2007	*
99.23	Broad-Based Management Bonus Plan, As Amended and Restated Effective 1 October 2007	*

* Filed herewith.

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SIGNATURES

Pursuant to the requirements 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.

	HEADWATERS INCORPORATED
Date: February 1, 2008	By:	/s/ Kirk A. Benson
		Kirk A. Benson, Chief Executive Officer
		(Principal Executive Officer)
Date: February 1, 2008	By:	/s/ Steven G. Stewart
		Steven G. Stewart, Chief Financial Officer
		(Principal Financial Officer)

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EX-12

Exhibit 12

Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends

(in thousands)	Year Ended September 30,										Quarter Ended December 31, 2007
	2003		2004		2005		2006		2007
Fixed Charges Computation
Interest expensed and capitalized (1)	$	12,060	$	13,857	$	49,043	$	35,119	$	29,671	$	6,114
Amortized premiums, discounts, and capitalized expenses related to indebtedness		3,857		6,031		10,634		2,843		5,318		666
Reasonable approximation of interest within rental expense		1,139		1,462		2,433		3,092		3,440		860
Total Fixed Charges and Preferred Equity Dividends	$	17,056	$	21,350	$	62,110	$	41,054	$	38,429	$	7,640
Earnings Computation
Pre-tax income from continuing operations before adjustment for minority interests in consolidated subsidiaries or income or loss from equity investees	$	60,081	$	105,107	$	163,808	$	137,816	$	59,236	$	20,022
Plus
Fixed charges		17,056		21,350		62,110		41,054		38,429		7,640
Minus
Interest capitalized		230		435		464		1,027		784		178
Total Earnings	$	76,907	$	126,022	$	225,454	$	177,843	$	96,881	$	27,484
Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends		4.51		5.90		3.63		4.33		2.52		3.60

(1) Interest expense associated with unrecognized tax benefits is included in income tax expense, not with interest expense.

EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Kirk A. Benson, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of the registrant;

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

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

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

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

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 1, 2008

/s/ Kirk A. Benson

Kirk A. Benson

Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Steven G. Stewart, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of the registrant;

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

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

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

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

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 1, 2008

/s/ Steven G. Stewart

Steven G. Stewart

Chief Financial Officer

EX-32

Exhibit 32

CERTIFICATIONS PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the filing of the Quarterly Report of Headwaters Incorporated (the “Company”) on Form 10-Q for the quarter ended December 31, 2007 (the “Report”), we, Kirk A. Benson, Chief Executive Officer of the Company, and Steven G. Stewart, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(i) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and

(ii) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Kirk A. Benson

Kirk A. Benson

Chief Executive Officer

February 1, 2008

/s/ Steven G. Stewart

Steven G. Stewart

Chief Financial Officer

February 1, 2008

EX-99.1

Exhibit 99.1

HEADWATERS INCORPORATED

2000 EMPLOYEE STOCK PURCHASE PLAN

As Amended and Restated Effective 20 November 2007

(Subject to Stockholder Approval)

Table of Contents

		Page
SECTION 1	Purpose Of The Plan	1
SECTION 2	Definitions	1
(a)	“Board”	1
(b)	“Code”	1
(c)	“Committee”	1
(d)	“Company”	1
(e)	“Compensation”	1
(f)	“Corporate Reorganization”	1
(g)	“Eligible Employee”	1
(h)	“Employee”	2
(i)	“Exchange Act”	2
(j)	“Fair Market Value”	2
(k)	“Offering Period”	3
(l)	“Participant”	3
(m)	“Participating Company”	3
(n)	“Plan”	3
(o)	“Plan Account”	3
(p)	“Purchase Price”	3
(q)	“Stock”	3
(r)	“Subsidiary”	3
SECTION 3	Administration Of The Plan	3
(a)	Committee Composition	3
(b)	Committee Responsibilities	3
SECTION 4	Enrollment And Participation	3
(a)	Offering Periods	3
(b)	Enrollment	4
(c)	Duration of Participation	4
SECTION 5	Employee Contributions	4
(a)	Frequency of Payroll Deductions	4
(b)	Amount of Payroll Deductions	4
(c)	Changing Withholding Rate	4
(d)	Discontinuing Payroll Deductions	4
SECTION 6	Withdrawal From The Plan	5
(a)	Withdrawal	5
(b)	Re-enrollment After Withdrawal	5

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SECTION 7	Change In Employment Status	5
(a)	Termination of Employment	5
(b)	Leave of Absence	5
(c)	Death	5
SECTION 8	Plan Accounts And Purchase Of Shares	5
(a)	Plan Accounts	5
(b)	Purchase Price	5
(c)	Number of Shares Purchased	6
(d)	Available Shares Insufficient	6
(e)	Issuance of Stock	6
(f)	Unused Cash Balances	6
(g)	Stockholder Approval	6
SECTION 9	Limitations On Stock Ownership	6
(a)	Five Percent Limit	6
(b)	Dollar Limit	7
SECTION 10	Rights Not Transferable	7
SECTION 11	No Rights As An Employee	7
SECTION 12	No Rights As A Stockholder	8
SECTION 13	Securities Law Requirements	8
SECTION 14	Stock Offered Under The Plan	8
(a)	Authorized Shares	8
(b)	Antidilution Adjustments	8
(c)	Reorganizations	8
SECTION 15	Amendment Or Discontinuance	8
SECTION 16	Execution	9

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HEADWATERS INCORPORATED

2000 EMPLOYEE STOCK PURCHASE PLAN

SECTION 1     Purpose Of The Plan.

The Plan was adopted by the Board on May 25, 2000, effective as of June 1, 2000. The purpose of the Plan is to provide Eligible Employees with an opportunity to increase their proprietary interest in the success of the Company by purchasing Stock in the Company on favorable terms and to pay for such purchases through payroll deductions. The Plan is intended to qualify under section 423 of the Code.

SECTION 2     Definitions.

(a) “Board” means the Board of Directors of the Company, as constituted from time to time.

(b) “Code” means the Internal Revenue Code of 1986, as amended.

(c) “Committee” means a committee of the Board, as described in Section 3.

(d) “Company” means Headwaters Incorporated, a Delaware Corporation.

(e) “Compensation” means (i) the total compensation paid in cash to a Participant by a Participating Company, including salaries, wages, bonuses, incentive compensation, commissions, overtime pay and shift premiums, plus (ii) any pre-tax contributions made by the Participant under section 401(k) or 125 of the Code. “Compensation” shall exclude all non-cash items, moving or relocation allowances, cost-of-living equalization payments, car allowances, tuition reimbursements, imputed income attributable to cars or life insurance, severance pay, fringe benefits, contributions or benefits received under employee benefit plans, income attributable to the exercise of stock options, and similar items. The Committee shall determine whether a particular item is included in Compensation.

(f) “Corporate Reorganization” means:

(i) The consummation of a merger or consolidation of the Company with or into another entity, or any other corporate reorganization; or

(ii) The sale, transfer or other disposition of all or substantially all of the Company’s assets or the complete liquidation or dissolution of the Company.

(g) “Eligible Employee” means any Employee of a Participating Company who meets both of the following requirements:

(i) His or her customary employment is for more than five months per calendar year and for more than 20 hours per week; and

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(ii) He or she has been an Employee of a Participating Company for not less than three consecutive months.

The foregoing notwithstanding, Employees employed on the Plan’s effective date do not have to satisfy the service requirements specified above.

The foregoing notwithstanding, an individual shall not be considered an Eligible Employee if his or her participation in the Plan is prohibited by the law of any country which has jurisdiction over him or her or if he or she is subject to a collective bargaining agreement that does not provide for participation in the Plan.

(h) “Employee” means an individual paid from W-2 Payroll of the Company or a Subsidiary. If, during any period, the Company (or Subsidiary, as applicable) has not treated an individual as an Employee and, for that reason, has not paid such individual in a manner which results in the issuance of a Form W-2 and withheld taxes with respect to him or her, then that individual shall not be eligible to participate in the Plan for that period, even if any person, court of law or government agency determines, retroactively, that such individual is or was a common-law employee during all or any portion of that period. “W-2 Payroll” means whatever mechanism or procedure that the Company or a Subsidiary uses to pay any individual which results in the issuance of Form W-2 to the individual. “W-2 Payroll” does not include any mechanism or procedure which results in the issuance of any form other than a Form W-2 to an individual, including, but not limited to, any Form 1099 which may be issued to an independent contractor, an agency employee or a consultant. Whether a mechanism or procedure qualifies as a “W-2 Payroll” shall be determined in the absolute discretion of the Company (or Subsidiary, as applicable), and the Company’s or Subsidiary’s determination shall be conclusive and binding on all persons.

(i) “Exchange Act” means the Securities Exchange Act of 1934, as amended.

(j) “Fair Market Value” with respect to a Share, shall mean the market price of one Share of Stock, determined by the Committee as follows:

(i) If the Stock was traded over-the-counter on the date in question but was not traded on The Nasdaq Stock Market, then the Fair Market Value shall be equal to the last transaction price quoted for such date by the OTC Bulletin Board or, if not so quoted, shall be equal to the mean between the last reported representative bid and asked prices quoted for such date by the principal automated inter-dealer quotation system on which the Stock is quoted or, if the Stock is not quoted on any such system, by the “Pink Sheets” published by the National Quotation Bureau, Inc.;

(ii) If the Stock was traded on The Nasdaq Stock Market, then the Fair Market Value shall be equal to the last reported sale price quoted for such date by The Nasdaq Stock Market;

(iii) If the Stock was traded on a United States stock exchange on the date in question, then the Fair Market Value shall be equal to the closing price reported for such date by the applicable composite-transactions report; and

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(iv) If none of the foregoing provisions is applicable, then the Fair Market Value shall be determined by the Committee in good faith on such basis as it deems appropriate.

In all cases, the determination of Fair Market Value by the Committee shall be conclusive and binding on all persons.

(k) “Offering Period” means a three month period beginning December 1, March 1, June 1, and September 1 with respect to which the right to purchase Stock may be granted under the Plan, as determined pursuant to Section 4(a).

(l) “Participant” means an Eligible Employee who elects to participate in the Plan, as provided in Section 4(b).

(m) “Participating Company” means (i) the Company and (ii) each present or future Subsidiary designated by the Committee as a Participating Company.

(n) “Plan” means this Headwaters Incorporated 2000 Employee Stock Purchase Plan, as it may be amended from time to time.

(o) “Plan Account” means the account established for each Participant pursuant to Section 8(a).

(p) “Purchase Price” means the price at which Participants may purchase Stock under the Plan, as determined pursuant to Section 8(b).

(q) “Stock” means the Common Stock of the Company.

(r) “Subsidiary” means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

SECTION 3     Administration Of The Plan.

(a) Committee Composition. The Plan shall be administered by the Committee. The Committee shall consist exclusively of one or more directors of the Company, who shall be appointed by the Board.

(b) Committee Responsibilities. The Committee shall interpret the Plan and make all other policy decisions relating to the operation of the Plan. The Committee may adopt such rules, guidelines and forms as it deems appropriate to implement the Plan. The Committee’s determinations under the Plan shall be final and binding on all persons.

SECTION 4     Enrollment And Participation.

(a) Offering Periods. While the Plan is in effect, one Offering Period shall commence in each of the three month periods of December 1^st through the last day of February, March 1^st

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through May 31^st, June 1^st through August 31^st, and September 1^st through November 30^th; provided, that there shall be a transitional Offering Period between October 1 and November 30, 2004. The Offering Periods shall consist of the three month periods commencing on the first day of each such three month period and ending on the last day of each three month period.

(b) Enrollment. Any individual who, on the day preceding the first day of an Offering Period, qualifies as an Eligible Employee may elect to become a Participant in the Plan for such Offering Period by executing the enrollment form prescribed for this purpose by the Committee. The enrollment form shall be filed with the Company at the prescribed location not later than 15 days prior to the commencement of such Offering Period.

(c) Duration of Participation. Once enrolled in the Plan, a Participant shall continue to participate in the Plan until he or she ceases to be an Eligible Employee, withdraws from the Plan under Section 6(a) or reaches the end of the Offering Period in which his or her employee contributions were discontinued under Section 5(d) or 9(b). A Participant who discontinued employee contributions under Section 5(d) or withdrew from the Plan under Section 6(a) may again become a Participant, if he or she then is an Eligible Employee, by following the procedure described in Subsection (b) above. A Participant whose employee contributions were discontinued automatically under Section 9(b) shall automatically resume participation at the beginning of the first Offering Period beginning in the next calendar year, if he or she then is an Eligible Employee.

SECTION 5     Employee Contributions.

(a) Frequency of Payroll Deductions. A Participant may purchase shares of Stock under the Plan solely by means of payroll deductions. Payroll deductions, as designated by the Participant pursuant to Subsection (b) below, shall occur on each payday during participation in the Plan.

(b) Amount of Payroll Deductions. An Eligible Employee shall designate on the enrollment form the portion of his or her Compensation that he or she elects to have withheld for the purchase of Stock. Such portion shall be a whole percentage of the Eligible Employee’s Compensation, but not less than 1% and not more than 10%.

(c) Changing Withholding Rate. A Participant may change the rate of withholding once every six months. If a Participant wishes to change the rate of payroll withholding, he or she may do so by filing the prescribed form with the Company at the time specified. The new withholding rate shall be effective as of the first day of the December or June next following the date such form has been timely received by the Company. The new withholding rate shall be a whole percentage of the Eligible Employee’s Compensation, but not less than 1% and not more than 10%.

(d) Discontinuing Payroll Deductions. If a Participant wishes to discontinue employee contributions entirely, he or she may do so by filing the prescribed form with the Company at the prescribed location at any time. Payroll withholding shall cease as soon as reasonably practicable after such form has been received by the Company. (In addition, employee contributions may be discontinued automatically pursuant to Section 9(b).) A Participant who has discontinued

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employee contributions may resume such contributions by filing a new enrollment form with the Company at the prescribed location. Payroll withholding shall resume effective as of the first day of the December or June next following the date such form has been timely received by the Company.

SECTION 6     Withdrawal From The Plan.

(a) Withdrawal. A Participant may elect to withdraw from the Plan by filing the prescribed form with the Company at the prescribed location at any time before the last day of an Offering Period. As soon as reasonably practicable thereafter, payroll deductions shall cease and the entire amount credited to the Participant’s Plan Account shall be refunded to him or her in cash, without interest. No partial withdrawals shall be permitted.

(b) Re-enrollment After Withdrawal. A former Participant who has withdrawn from the Plan shall not be a Participant until he or she re-enrolls in the Plan under Section 4(c). Re-enrollment shall be effective as of the first day of the December or June next following the date the enrollment form has been timely received by the Company.

SECTION 7     Change In Employment Status.

(a) Termination of Employment. Termination of employment as an Eligible Employee for any reason, including death, shall be treated as an automatic withdrawal from the Plan under Section 6(a). (A transfer from one Participating Company to another shall not be treated as a termination of employment.)

(b) Leave of Absence. For purposes of the Plan, employment shall not be deemed to terminate when the Participant goes on a military leave, a sick leave or another bona fide leave of absence, if the leave was approved by the Company in writing. Employment, however, shall be deemed to terminate 90 days after the Participant goes on a leave, unless a contract or statute guarantees his or her right to return to work. Employment shall be deemed to terminate in any event when the approved leave ends, unless the Participant immediately returns to work.

(c) Death. In the event of the Participant’s death, the amount credited to his or her Plan Account shall be paid to a beneficiary designated by him or her for this purpose on the prescribed form or, if none, to the Participant’s estate. Such form shall be valid only if it was filed with the Company at the prescribed location before the Participant’s death.

SECTION 8     Plan Accounts And Purchase Of Shares.

(a) Plan Accounts. The Company shall maintain a Plan Account on its books in the name of each Participant. Whenever an amount is deducted from the Participant’s Compensation under the Plan, such amount shall be credited to the Participant’s Plan Account. Amounts credited to Plan Accounts shall not be trust funds and may be commingled with the Company’s general assets and applied to general corporate purposes. No interest shall be credited to Plan Accounts.

(b) Purchase Price. The Purchase Price for each share of Stock purchased at the close of an Offering Period shall be 85% of the Fair Market Value of such share on the last trading day in such Offering Period.

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(c) Number of Shares Purchased. As of the last day of each Offering Period, each Participant shall be deemed to have elected to purchase the number of shares of Stock calculated in accordance with this Subsection (c), unless the Participant has previously elected to withdraw from the Plan in accordance with Section 6(a). The amount then in the Participant’s Plan Account shall be divided by the Purchase Price, and the number of shares that results shall be purchased from the Company with the funds in the Participant’s Plan Account. The foregoing notwithstanding, no Participant shall purchase more than 3,600 shares of Stock with respect to any Offering Period nor more than the amounts of Stock set forth in Sections 9(b) and 14(a). The Committee may determine with respect to all Participants that any fractional share, as calculated under this Subsection (c), shall be (i) rounded down to the next lower whole share or (ii) credited as a fractional share.

(d) Available Shares Insufficient. In the event that the aggregate number of shares that all Participants elect to purchase during an Offering Period exceeds the maximum number of shares remaining available for issuance under Section 14(a), then the number of shares to which each Participant is entitled shall be determined by multiplying the number of shares available for issuance by a fraction, the numerator of which is the number of shares that such Participant has elected to purchase and the denominator of which is the number of shares that all Participants have elected to purchase.

(e) Issuance of Stock. Certificates representing the shares of Stock purchased by a Participant under the Plan shall be issued to him or her as soon as reasonably practicable after the close of the applicable Offering Period, except that the Committee may determine that such shares shall be held for each Participant’s benefit by a broker designated by the Committee (unless the Participant has elected that certificates be issued to him or her). Shares may be registered in the name of the Participant or jointly in the name of the Participant and his or her spouse as joint tenants with right of survivorship or as community property.

(f) Unused Cash Balances. Any amount remaining in the Participant’s Plan Account that represents the Purchase Price for a fractional share shall be carried over in the Participant’s Plan Account to the next Offering Period. Any amount remaining in the Participant’s Plan Account that represents the Purchase Price for whole shares that could not be purchased by reason of Subsection (c) above, Section 9(b) or Section 14(a) shall be refunded to the Participant in cash, without interest.

(g) Stockholder Approval. The Company’s stockholders must approve the adoption of the Plan within twelve months after the Plan is adopted by the Board of Directors of the Company.

SECTION 9     Limitations On Stock Ownership.

(a) Five Percent Limit. Any other provision of the Plan notwithstanding, no Participant shall be granted a right to purchase Stock under the Plan if such Participant, immediately after his or her election to purchase such Stock, would own stock possessing more than 5% of the total combined voting power or value of all classes of stock of the Company or Subsidiary of the Company. For purposes of this Subsection (a), the following rules shall apply:

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(i) Ownership of stock shall be determined after applying the attribution rules of section 424(d) of the Code;

(ii) Each Participant shall be deemed to own any stock that he or she has a right or option to purchase under this or any other plan;

(iii) Each Participant shall be deemed to have the right to purchase 3,600 shares of Stock under this Plan with respect to each Offering Period.

(b) Dollar Limit. Any other provision of the Plan notwithstanding, no Participant shall purchase Stock with a Fair Market Value in excess of the following limit:

(i) In the case of Stock purchased during an Offering Period that commenced in the current calendar year, the limit shall be equal to (A) $25,000 minus (B) the Fair Market Value of the Stock that the Participant previously purchased in the current calendar year (under this Plan and all other employee stock purchase plans of the Company or Subsidiary of the Company).

(ii) Any other provision of the Plan notwithstanding, no Participant shall purchase Stock with a Fair Market Value in excess of $25,000 per calendar year (under this Plan and all other employee stock purchase plans of the Company or any Subsidiary of the Company).

For purposes of this Subsection (b), the Fair Market Value of Stock shall be determined in each case as of the beginning of the Offering Period in which such Stock is purchased. Employee stock purchase plans not described in section 423 of the Code shall be disregarded. If a Participant is precluded by this Subsection (b) from purchasing additional Stock under the Plan, then his or her employee contributions shall automatically be discontinued and shall resume at the beginning of the earliest Offering Period ending in the next calendar year (if he or she then is an Eligible Employee).

SECTION 10     Rights Not Transferable.

The rights of any Participant under the Plan, or any Participant’s interest in any Stock or moneys to which he or she may be entitled under the Plan, shall not be transferable by voluntary or involuntary assignment or by operation of law, or in any other manner other than by beneficiary designation or the laws of descent and distribution. If a Participant in any manner attempts to transfer, assign or otherwise encumber his or her rights or interest under the Plan, other than by beneficiary designation or the laws of descent and distribution, then such act shall be treated as an election by the Participant to withdraw from the Plan under Section 6(a).

SECTION 11     No Rights As An Employee.

Nothing in the Plan or in any right granted under the Plan shall confer upon the Participant any right to continue in the employ of a Participating Company for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Participating Companies or of the Participant, which rights are hereby expressly reserved by each, to terminate his or her employment at any time and for any reason, with or without cause.

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SECTION 12     No Rights As A Stockholder.

A Participant shall have no rights as a stockholder with respect to any shares of Stock that he or she may have a right to purchase under the Plan until such shares have been purchased on the last day of the applicable Offering Period.

SECTION 13     Securities Law Requirements.

Shares of Stock shall not be issued under the Plan unless the issuance and delivery of such shares comply with (or are exempt from) all applicable requirements of law, including (without limitation) the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder, state securities laws and regulations, and the regulations of any stock exchange or other securities market on which the Company’s securities may then be traded.

SECTION 14     Stock Offered Under The Plan.

(a) Authorized Shares. The aggregate number of shares of Stock available for purchase under the Plan shall be 1,250,000, subject to adjustment pursuant to this Section 14. The Company may either use authorized but unissued stock, treasury stock, or stock purchased on the open market in order to fulfill its obligations under the Plan.

(b) Antidilution Adjustments. The aggregate number of shares of Stock offered under the Plan, the 3,600 share limitation described in Section 8(c), and the price of shares that any Participant has elected to purchase shall be adjusted proportionately by the Committee for any increase or decrease in the number of outstanding shares of Stock resulting from a subdivision or consolidation of shares or the payment of a stock dividend, any other increase or decrease in such shares effected without receipt or payment of consideration by the Company, the distribution of the shares of a Subsidiary to the Company’s stockholders or a similar event.

(c) Reorganizations. Any other provision of the Plan notwithstanding, immediately prior to the effective time of a Corporate Reorganization, the Offering Period then in progress shall terminate and shares shall be purchased pursuant to Section 8, unless the Plan is assumed by the surviving corporation or its parent corporation pursuant to the plan of merger or consolidation. The Plan shall in no event be construed to restrict in any way the Company’s right to undertake a dissolution, liquidation, merger, consolidation or other reorganization.

SECTION 15     Amendment Or Discontinuance.

The Board shall have the right to amend, suspend or terminate the Plan at any time and without notice. Except as provided in Section 14, any increase in the aggregate number of shares of Stock to be issued under the Plan shall be subject to approval by a vote of the stockholders of the Company, provided, that if the Board approves an increase in the number of shares to be issued under the Plan, Participants may purchase Stock from the increased shares during an Offering Period completed pending a vote of the stockholders of the Company. In addition, any other amendment of the Plan shall be subject to approval by a vote of the stockholders of the Company to the extent required by an applicable law or regulation.

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SECTION 16     Execution.

To record the adoption of the Plan by the Board as of the date first above written, as amended, the Company has caused its authorized officer to execute the same.

Headwaters Incorporated

/s/ Steven G. Stewart

Steven G. Stewart, CFO

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EX-99.20

Exhibit 99.20

EXHIBIT A

HEADWATERS INCORPORATED

2005 LONG TERM INCENTIVE COMPENSATION PLAN

AS A CONSERVATION EFFORT, THE PLAN DOCUMENT IS BEING SENT VIA EMAIL. IF YOU DO NOT RECEIVE A COPY, PLEASE CONTACT THE CORPORATE SECRETARY.

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EXHIBIT B

HEADWATERS INCORPORATED

2005 LONG TERM INCENTIVE COMPENSATION PLAN

STOCK APPRECIATION RIGHT AGREEMENT

1. Grant of SAR. The Compensation Committee of the Board of Directors of Headwaters Incorporated, a Delaware corporation (the “Company”), hereby grants to the individual (“you”) named in the Notice of Stock Appreciation Right Grant (the “Notice of Grant”) to which this Stock Appreciation Right Agreement (this “Agreement”) is attached, a Stock Appreciation Right (the “SAR”), subject to the terms, definitions and provisions of the Headwaters Incorporated 2005 Long Term Incentive Compensation Plan (the “Plan”) adopted by the Company, which is incorporated herein by reference, and pursuant to this Agreement. Unless otherwise defined herein, the terms defined in the Plan or Notice of Grant shall have the same defined meanings in this Agreement. In the event of a conflict between the terms of the Plan and this Agreement, the Plan shall prevail.

2. Value of the SAR. The SAR shall entitle you, upon exercise of the SAR, to receive from the Company the Distributable Amount in shares of Common Stock of the Company, as determined by the Administrator in its sole discretion.

3. Nonassignability of SAR. The SAR is not assignable or transferable by you except by will or by the laws of descent and distribution and as otherwise consistent with the terms of the Plan and this Agreement. During your lifetime, only you shall be entitled to exercise the SAR.

4. Exercise of SAR.

(a) Exercise Period. The SAR may be exercised only within the term set forth in the Notice of Grant and may be exercised during such term only in accordance with the terms of the Plan and this Agreement.

(b) Definitions. Solely for purposes of the SAR, the following terms shall have the meanings given them below.

(i) Cause. The term “Cause” shall mean any one of the following:

(1) the commission by you of a felony or a misdemeanor involving moral turpitude,

(2) any intentional act of fraud, embezzlement or misappropriation of property of the Company by you which has a materially adverse impact on the business or affairs of the Company,

(3) any intentional unauthorized use or disclosure by you of confidential information or trade secrets of the Company (or any affiliated corporation or entity of the Company (“Affiliate”)),

(4) any other intentional misconduct by you which has a materially adverse impact on the business or affairs of the Company (or any Affiliate), or

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(5) the failure or refusal by you to perform the duties of your position with the Company, provided that solely for the purpose of this item (5), you shall be given thirty (30) days written notice (and the opportunity to correct such conduct if such conduct can be corrected during that notice period) of the Company’s intention to terminate your employment and to deem the termination of your employment to be for the foregoing reason.

(ii) Disability. The term “Disability” shall mean a physical or mental condition that prevents you from performing the duties of your position with the Company or its subsidiary and is likely to last at least twelve months or result in death, as determined by the Committee in its sole discretion.

5. Method of Exercise. The SAR shall be exercisable by written notice (in the form attached as Exhibit C to the Notice of Grant) which shall state the number of SAR units to be exercised. Such written notice shall be signed by you and shall be delivered in person or by certified mail to the Company. The SAR shall be deemed to be exercised upon receipt by the Company of such written notice.

6. Form of Payment. The Company shall satisfy its obligation upon exercise of the SAR in shares of the common stock of the Company, as determined by the Administrator in its sole discretion.

7. Termination of Status as an Employee. In the event you cease to serve as an Employee of the Company or a subsidiary of the Company for any reason, except due to death or Disability, you may exercise the SAR during the Term of Exercise Period set out in the Notice of Grant, but only to the extent it was exercisable at the date of such termination (but in no event later than the Expiration Date of the SAR as set forth in the Notice of Grant). To the extent that you were not entitled to exercise this SAR at the date of such termination, and to the extent that you do not exercise this SAR (to the extent otherwise so entitled) within the time specified herein, this SAR shall terminate.

8. Tax Consequences. By accepting the SAR, you acknowledge that (i) you understand that upon either the grant or the exercise of the SAR, you may recognize adverse tax consequences, and (ii) you understand that the Company will be required to withhold any income and employment taxes required by any governmental authority. You are encouraged to consult with a tax advisor concerning the tax consequences of exercising this SAR. You agree that the SAR shall be administered and settled as required for the SAR to be deemed not to be deferred compensation subject to the provisions of Section 409A of the Internal Revenue Code of 1986, as amended, and the regulations thereunder.

9. Other Acknowledgements and Agreements. The parties acknowledge the following:

(a) Nothing in this Agreement, the Notice of Grant, or the Plan, the terms of which are incorporated herein by this reference, shall confer upon you any right to continuation of employment by the Company or its affiliates, nor shall this Agreement interfere in any way with your right or the Company’s right to terminate your employment at any time.

(b) Nothing in this Agreement, the Notice of Grant, the Plan, nor in the grant of a SAR shall confer upon you any rights as a stockholder of the Company.

(c) You have received a copy of the Plan and certain information related thereto and you represent that you are familiar with the terms and provisions thereof, and hereby accept this Agreement subject to all of the terms and provisions of the Plan. You have reviewed the Plan and this SAR Agreement in their entirety and fully understand all provisions relating to this Agreement. You hereby agree to accept as binding, conclusive, and final all decisions or interpretations of the Administrator upon any questions arising under the Plan or this Agreement.

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10. Compliance with Applicable Laws, Regulations and Rules and the Company’s Policies. In accepting the SAR, you agree to comply with all applicable laws, regulations and rules of governing state and federal governmental agencies as well as the applicable regulations and rules of any stock exchange on which the securities of the Company are traded, and any policies as now or hereafter established by the Company (including but not limited to any insider trading policies of the Company), with regard to the SAR and the shares of the common stock of the Company received upon an exercise of the SAR. You acknowledge and agree that you may be required to disgorge any gains and payments under the SAR to the extent required by applicable laws, stock exchange regulations and rules, and the policies of the Company.

11. Governing Law. The interpretation and administration of the SAR (including the Notice of the Stock Appreciation Right Grant, the Stock Appreciation Right Agreement and Stock Appreciation Right Exercise Notice) shall be governed by the laws of the state of Delaware other than the choice of law principles of that state.

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EXHIBIT C

HEADWATERS INCORPORATED

2005 LONG TERM INCENTIVE COMPENSATION PLAN

STOCK APPRECIATION RIGHT EXERCISE NOTICE

Headwaters Incorporated

10653 S River Front Parkway, Suite 300

South Jordan, UT 84095

Attention:    Corporate Secretary

1. Exercise of SAR. Effective as of today,                     ,             , the undersigned (“Grantee”) hereby elects to exercise the following stock appreciation right with respect to the number of SAR Units listed below:

Date of Notice of Stock Appreciation Right Grant (“Notice of Grant”) and Stock Appreciation Right Agreement (“SAR Agreement”)	1 November 2007
Name of Headwaters Incorporated Plan Under Which SAR Granted (the “Plan”)	2005 Long Term Incentive Compensation Plan
Number of SAR Units to Be Exercised

2. Representations of Employee. Grantee acknowledges that Grantee has received, read and understood the Plan, the SAR Agreement, and the Notice of Grant and agrees to abide by and be bound by their terms and conditions.

3. Tax Treatment of SAR. Grantee represents that Grantee has had the opportunity to consult with his or her own independent tax advisor in connection with the exercise of Grantee’s rights under the SAR and that Grantee is not relying on the Company for any tax advice.

4. Entire Agreement. The terms of the Plan, Notice of Grant and the SAR Agreement are incorporated herein by reference and constitute the entire agreement of the parties and supersede in their entirety all prior undertakings and agreements of the Company and Grantee with respect to the subject matter hereof, and are governed by Delaware law except for that body of law pertaining to conflict of laws.

Submitted By:	Accepted By:
GRANTEE	HEADWATERS INCORPORATED
Signature	Signature
Name Printed	Name
	Title

5

EX-99.20.1

Exhibit 99.20.1

HEADWATERS INCORPORATED

2005 LONG TERM INCENTIVE COMPENSATION PLAN

NOTICE OF STOCK APPRECIATION RIGHT GRANT

«FIRST» «LAST»

Headwaters Incorporated (the “Company”) has granted to you a Stock Appreciation Right (“SAR”) based on the Fair Market Value of the common stock of the Company under the Headwaters Incorporated 2005 Long Term Incentive Compensation Plan (the “Plan”) as follows. The SAR is granted subject and pursuant to the terms of this Notice of Grant, the Plan (Exhibit A), the Stock Appreciation Right Agreement (Exhibit B), and the Stock Appreciation Right Exercise Notice (Exhibit C). Each of the capitalized terms herein shall have the meaning given it by The Plan, except if the context of such term clearly assumes a different meaning.

Date of Grant	1 November 2007
Total Number of Shares Covered By this SAR (Number of SAR Units)	«IND_SARS»
Exercise Base Price Per Share of Common Stock	$13.57
Service Vesting Commencement Date	30 September 2008
Expiration Date	30 September 2017

1. Exercise of the SAR. Subject to the provisions of the Plan, you shall have the right to exercise the SAR in whole or in part and to receive payment with respect to each SAR Unit in the form of shares of the common stock of the Company with a Fair Market Value equal to the difference between (i) the Fair Market Value per share of the common stock of the Company on the date of exercise, less (ii) the Exercise Base Price per share of the common stock of the Company (“Distributable Amount”). The exercise of the SAR shall be made solely by execution of the Stock Appreciation Right Exercise Notice attached hereto. Notwithstanding the foregoing, no fractional share shall be distributed in settlement of the SAR, and any exercised portion of the SAR which would be settled in a fractional share shall be rounded down to a whole share with no additional payment to be made in cash except as otherwise permitted by the Internal Revenue Service under an exemption from the application of Section 409A of the Internal Revenue Code.

2. Exercise Base Price. The Exercise Base Price per share of common stock shall not be less than the Fair Market Value of the common stock of the Company on the Date of Grant.

3. Vesting. The SAR shall become vested based on the following service vesting schedule beginning on the Service Vesting Commencement Date:

Completed Period of Service	Vested Portion of the SAR
30 September 2008	1/3
30 September 2009	1/3
30 September 2010	1/3

1

Upon the termination of your employment with the Company or its subsidiary due to your retirement at age 60 or more with at least five (5) years of Service, any unvested portion of the SAR shall immediately vest. Otherwise, your retirement shall be a termination of employment subject to the first sentence of section 4(b), below.

4. Exercise Period.

(a) Commencement of Exercise Period. The SAR shall become exercisable subject to the following terms and conditions. The portion of the SAR vested pursuant to section 3 above shall become exercisable.

(b) Term of Exercise Period. The vested and exercisable portion of the SAR may be exercised by you for the period of your employment with the Company or its subsidiary and three (3) months after the termination of your employment with the Company (but in no event later than the Expiration Date), provided, that your employment is not terminated for “Cause.” The SAR shall terminate immediately with or without notice to you upon the termination of your employment for “Cause” (as defined in the Stock Appreciation Right Agreement a copy of which is attached hereto), as determined by the Board of Directors of the Company or its Compensation Committee. Upon the termination of your employment with the Company or its subsidiary due to your Disability (as defined in the Stock Appreciation Right Agreement a copy of which is attached hereto) or death, this SAR may be exercised by you or your probate estate (if applicable) for the period of twelve (12) months after your termination of employment with the Company.

By your signature and the signature of the Company’s representative below, you and the Company agree that this SAR is granted under and governed by the terms and conditions of the Plan, this Notice of Stock Appreciation Right Grant, the Stock Appreciation Right Agreement, and the Stock Appreciation Right Exercise Notice, copies of all of which are made a part of this instrument.

GRANTEE	HEADWATERS INCORPORATED
	/s/ Kirk A. Benson
Signature	Signature
	Name: Kirk A. Benson
	Title: Chief Executive Officer
«FIRST» «LAST»

2

EX-99.21

Exhibit 99.21

Attachment I

Restricted Stock Award Agreement

HEADWATERS INCORPORATED

2005 LONG TERM INCENTIVE COMPENSATION PLAN

RESTRICTED STOCK AWARD AGREEMENT

Pursuant to the Restricted Stock Award Grant Notice (“Grant Notice”) and this Restricted Stock Agreement (collectively, the “Award”) and in consideration of your services, Headwaters Incorporated (the “Company”) has awarded you Restricted Stock under its 2005 Long Term Incentive Compensation Plan (the “Plan”) for the number of shares of the Company’s Common Stock subject to the Award as indicated in the Grant Notice. Defined terms not explicitly defined in this Restricted Stock Agreement but defined in the Plan shall have the same definitions as in the Plan.

The details of your Award are as follows:

1. VESTING. Subject to the limitations contained herein, your Award shall vest as provided in the Grant Notice. Additionally, upon the termination of your employment with the Company or its subsidiary due to your retirement at age 60 or more with at least five (5) years of Service, any unvested shares shall immediately vest. Except as provided herein, vesting shall cease upon the termination of your continuous Service.

2. NUMBER OF SHARES. The number of shares subject to your Award may be adjusted from time to time for Capitalization Adjustments, as provided in the Plan.

3. SECURITIES LAW COMPLIANCE. You may not be issued any shares under your Award unless the shares are either (i) then registered under the Securities Act of 1933, as amended (the “Securities Act”), or (ii) the Company has determined that such issuance would be exempt from the registration requirements of the Securities Act. Your Award must also comply with other applicable laws and regulations governing the Award, and you shall not receive such shares if the Company determines that such receipt would not be in material compliance with such laws and regulations.

4. RIGHT OF REACQUISITION.

(a) To the extent provided in the Company’s bylaws, as amended from time to time, the Company shall have the right to reacquire all or any part of the shares received pursuant to your Award (a “Reacquisition Right”).

(b) To the extent a Reacquisition Right is not provided in the Company’s bylaws, as amended from time to time, the Company shall have a Reacquisition Right as to the shares you received pursuant to your Award that have not as yet vested in accordance with the Vesting Schedule on the Grant Notice or section 1 above (“Unvested Shares”) on the following terms and conditions:

(i) The Company, shall simultaneously with termination of your Service (as defined in the Plan) automatically reacquire for no consideration all of the Unvested Shares, unless the Company agrees to waive its reacquisition right as to some or all of the Unvested Shares. Any such waiver shall be exercised by the Company by written notice to you or your representative (with a copy to the Escrow Holder as defined below) within ninety

(90) days after the termination of your Service, and the Escrow Holder may then release to you the number of Unvested Shares not being reacquired by the Company. If the Company does not waive its reacquisition right as to all of the Unvested Shares, then upon such termination of your Service, the Escrow Holder shall transfer to the Company the number of shares the Company is reacquiring.

(ii) The Company initially shall have the right to reacquire Unvested shares for no monetary consideration (that is, for $0.00); provided, however, that the Company’s right to reacquire Unvested shares for no monetary consideration shall lapse at the vesting rate set forth in the Grant Notice or, if no vesting rate is set forth in the Grant Notice, at the rate of one third (1/3) of the total number of shares subject to your Award per year of Service over three (3) years beginning with the Vesting Commencement Date.

(iii) The shares issued under your Award shall be held in escrow pursuant to the terms of the Joint Escrow Instructions attached to the Grant Notice as Attachment IV. You agree to execute two (2) Assignment Separate From Certificate forms (with date and number of shares blank) substantially in the form attached to the Grant Notice as Attachment II and deliver the same, along with the certificate or certificates evidencing the shares, for use by the escrow agent pursuant to the terms of the Joint Escrow Instructions.

(iv) Subject to the provisions of your Award, you shall, during the term of your Award, exercise all rights and privileges of a stockholder of the Company with respect to the shares deposited in escrow. You shall be deemed to be the holder of the shares for purposes of receiving any dividends which may be paid with respect to such shares and for purposes of exercising any voting rights relating to such shares, even if some or all of such shares have not yet vested and been released from the Company’s Reacquisition Right.

(v) If, from time to time, there is any stock dividend, stock split or other change in the character or amount of any of the outstanding stock of the corporation the stock of which is subject to the provisions of your Award, then in such event any and all new, substituted or additional securities to which you are entitled by reason of your ownership of the shares acquired under your Award shall be immediately subject to the Reacquisition Right with the same force and effect as the shares subject to this Reacquisition Right immediately before such event.

5. RESTRICTIVE LEGENDS. The shares issued under your Award shall be endorsed with appropriate legends determined by the Company.

6. AWARD NOT A SERVICE CONTRACT. Your Award is not an employment or service contract, and nothing in your Award shall be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company or an Affiliate, or on the part of the Company or an Affiliate to continue your employment. In addition, nothing in your Award shall obligate the Company or an Affiliate, their respective stockholders, boards of directors, Officers or Employees to continue any relationship that you might have as a Director or Consultant for the Company or an Affiliate.

7. WITHHOLDING OBLIGATIONS.

(a) At the time your Award is made, or at any time thereafter as requested by the Company, you hereby authorize withholding from payroll and any other amounts payable to

you, and otherwise agree to make adequate provision for any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company or an Affiliate, if any, which arise in connection with your Award.

(b) Unless the tax withholding obligations of the Company and/or any Affiliate are satisfied, the Company shall have no obligation to issue a certificate for such shares or release such shares from any escrow provided for herein.

8. TAX CONSEQUENCES. The acquisition and vesting of the shares may have adverse tax consequences to you that may be avoided or mitigated by filing an election under Section 83(b) of the Internal Revenue Code, as amended (the “Code”). Such election must be filed within thirty (30) days after the date of your Award. YOU ACKNOWLEDGE THAT IT IS YOUR OWN RESPONSIBILITY, AND NOT THE COMPANY’S, TO OBTAIN APPROPRIATE TAX ADVICE FOR YOUR SITUATION, INCLUDING A TIMELY ELECTION UNDER CODE SECTION 83(B), EVEN IF YOU REQUEST THE COMPANY TO MAKE THE FILING ON YOUR BEHALF.

9. NOTICES. Any notices provided for in your Award or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company.

10. MISCELLANEOUS.

(a) The rights and obligations of the Company under your Award shall be transferable to any one or more persons or entities, and all covenants and agreements hereunder shall inure to the benefit of, and be enforceable by the Company’s successors and assigns. Your rights and obligations under your Award are not assignable.

(b) You agree upon request to execute any further documents or instruments necessary or desirable in the sole determination of the Company to carry out the purposes or intent of your Award.

(c) You acknowledge and agree that you have reviewed your Award in its entirety, have had an opportunity to obtain the advice of counsel prior to executing and accepting your Award and fully understand all provisions of your Award.

(d) You agree that you will abide with and comply with all insider trading restrictions and policies of the Company as now or hereafter provided with respect to the shares you receive under your Award.

11. GOVERNING PLAN DOCUMENT. Your Award is subject to all the provisions of the Plan, the provisions of which are hereby made a part of your Award, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of your Award and those of the Plan, the provisions of the Plan shall control.

Attachment II

Form of Assignment Separate from Certificate

ASSIGNMENT SEPARATE FROM CERTIFICATE

FOR VALUE RECEIVED and pursuant to that certain Restricted Stock Award Grant Notice and Restricted Stock Agreement (jointly referred to herein as the “Award”), the undersigned hereby sells, assigns and transfers unto Headwaters Incorporated, a Delaware corporation (“Assignee”)              (            ) shares of the common stock of the Assignee, standing in the undersigned’s name on the books of said corporation represented by the following Certificate Numbers:              herewith and do hereby irrevocably constitute and appoint                      as attorney-in-fact to transfer the said stock on the books of the within named Company with full power of substitution in the premises. This Assignment may be used only in accordance with and subject to the terms and conditions of the Award, in connection with the reacquisition of shares of Common Stock of the Assignee issued to the undersigned pursuant to the Award, and only to the extent that such shares remain subject to the Assignee’s reacquisition right under the Award.

Dated:
	Signature:
		Name:	,
		Recipient

[INSTRUCTION: Please execute this form in duplicate but do not fill in any blanks other than the signature line. The purpose of this Assignment is to enable the Headwaters Incorporated to exercise its reacquisition right set forth in the Award without requiring additional signatures on your part.]

ASSIGNMENT SEPARATE FROM CERTIFICATE

FOR VALUE RECEIVED and pursuant to that certain Restricted Stock Award Grant Notice and Restricted Stock Agreement (jointly referred to herein as the “Award”), the undersigned hereby sells, assigns and transfers unto Headwaters Incorporated, a Delaware corporation (“Assignee”)              (            ) shares of the common stock of the Assignee, standing in the undersigned’s name on the books of said corporation represented by the following Certificate Numbers:                      herewith and do hereby irrevocably constitute and appoint              as attorney-in-fact to transfer the said stock on the books of the within named Company with full power of substitution in the premises. This Assignment may be used only in accordance with and subject to the terms and conditions of the Award, in connection with the reacquisition of shares of Common Stock of the Assignee issued to the undersigned pursuant to the Award, and only to the extent that such shares remain subject to the Assignee’s reacquisition right under the Award.

Dated:
	Signature:
		Name:	,
		Recipient

[INSTRUCTION: Please execute this form in duplicate but do not fill in any blanks other than the signature line. The purpose of this Assignment is to enable the Headwaters Incorporated to exercise its reacquisition right set forth in the Award without requiring additional signatures on your part.]

Attachment III

Form of Joint Escrow Instructions

JOINT ESCROW INSTRUCTIONS

Corporate Secretary

Headwaters Incorporated

10653 South Riverfront Parkway, Suite 300

South Jordan, UT 84095

Dear Sir/Madam:

As Escrow Agent for both Headwaters Incorporated, a Delaware corporation (the “Company”), and the undersigned recipient of stock of the Company (“Recipient”), and effective as of the date last below stated herein, you are hereby authorized and directed to hold the documents delivered to you pursuant to the terms of that certain Restricted Stock Award Grant Notice described at the end of these Joint Escrow Instructions (the “Grant Notice”), to which a copy of these Joint Escrow Instructions is attached as Attachment III, and pursuant to the terms of that certain Restricted Stock Agreement (“Agreement”), which is Attachment I to the Grant Notice, in accordance with the following instructions:

1. In the event Recipient ceases to render services to the Company or an affiliate of the Company during the vesting period set forth in the Grant Notice, the Company or its assignee shall give to Recipient and you a written notice specifying that the shares of stock shall be transferred to the Company. Recipient and the Company hereby irrevocably authorize and direct you to close the transaction contemplated by such notice in accordance with the terms of said notice.

2. At the closing you are directed (a) to date any stock assignments necessary for the transfer in question, (b) to fill in the number of shares being transferred, and (c) to deliver same, together with the certificate evidencing the shares of stock to be transferred, to the Company.

3. Recipient irrevocably authorizes the Company to deposit with you any certificates evidencing shares of stock to be held by you hereunder and any additions and substitutions to said shares as specified in the Grant Notice. Recipient does hereby irrevocably constitute and appoint you as Recipient’s attorney-in-fact and agent for the term of this escrow to execute with respect to such securities and other property all documents of assignment and/or transfer and all stock certificates necessary or appropriate to make all securities negotiable and complete any transaction herein contemplated.

4. This escrow shall terminate upon vesting of the shares or upon the earlier return of the shares to the Company.

5. If at the time of termination of this escrow you should have in your possession any documents, securities, or other property belonging to Recipient, you shall deliver all of same to any pledgee entitled thereto or, if none, to Recipient and shall be discharged of all further obligations hereunder.

6. Your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto.

7. You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed by you to be genuine and to have been signed or presented by the proper party or parties or their assignees. You shall not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as attorney-in-fact for Recipient while acting in good faith and any act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith.

8. You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law, and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case you obey or comply with any such order, judgment or decree of any court, you shall not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction.

9. You shall not be liable in any respect on account of the identity, authority or rights of the parties executing or delivering or purporting to execute or deliver the Grant Notice or any documents or papers deposited or called for hereunder.

10. You shall not be liable for the outlawing of any rights under any statute of limitations with respect to these Joint Escrow Instructions or any documents deposited with you.

11. You shall be entitled to employ such legal counsel, including but not limited to Pillsbury Winthrop Shaw Pittman LLP, and other experts as you may deem necessary properly to advise you in connection with your obligations hereunder, may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor.

12. Your responsibilities as Escrow Agent hereunder shall terminate if you shall cease to be Secretary of the Company or if you shall resign by written notice to each party. In the event of any such termination, the Company may appoint any officer or assistant officer of the Company as successor Escrow Agent and Recipient hereby confirms the appointment of such successor or successors as his attorney-in-fact and agent to the full extent of your appointment.

13. If you reasonably require other or further instruments in connection with these Joint Escrow Instructions or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments.

14. It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the securities, you may (but are not obligated to) retain in your possession without liability to anyone all or any part of said securities until such dispute shall have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of a court of competent jurisdiction after the time for

appeal has expired and no appeal has been perfected, but you shall be under no duty whatsoever to institute or defend any such proceedings.

15. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in any United States Post Box, by registered or certified mail with postage and fees prepaid, addressed to each of the other parties hereunto entitled at the following addresses, or at such other addresses as a party may designate by ten (10) days’ written notice to each of the other parties hereto:

COMPANY:	Headwaters Incorporated
	10653 South Riverfront Parkway, Suite 300
	South Jordan UT 84095 Attn: General Counsel
RECIPIENT:	Address and name listed below.
ESCROW AGENT:	Headwaters Incorporated
	10653 South Riverfront Parkway, Suite 300
	South Jordan UT 84095
	Attn: Corporate Secretary

16. By signing these Joint Escrow Instructions you become a party hereto only for the purpose of said Joint Escrow Instructions; you do not become a party to the Grant Notice.

17. This instrument shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and permitted assigns. It is understood and agreed that references to “you” or “your” herein refer to the original Escrow Agent and to any and all successor Escrow Agents. It is understood and agreed that the Company may at any time or from time to time assign its rights under the Grant Notice and these Joint Escrow Instructions in whole or in part.

18. The Grant Notice referred to herein is dated 1 November 2007.

Signed this 1^st day of November, 2007.

Very truly yours,

HEADWATERS INCORPORATED		RECIPIENT
	/s/ Kirk A. Benson
By	Kirk A. Benson	Signature
Title	C.E.O	Name Printed
		Address

Appointment Accepted:

ESCROW AGENT

Harlan M. Hatfield, Corporate Secretary

EX-99.21.1

Exhibit 99.21.1

HEADWATERS INCORPORATED

2005 LONG TERM INCENTIVE COMPENSATION PLAN

RESTRICTED STOCK AWARD

GRANT NOTICE

Headwaters Incorporated (the “Company”), pursuant to its 2005 Long Term Incentive Compensation Plan (the “Plan”), hereby awards to Participant the number of shares of the Company’s Common Stock set forth below (“Award”). This Award is subject to all of the terms and conditions as set forth herein and in the Restricted Stock Agreement, the Plan, the form of Assignment Separate from Certificate and the form of Joint Escrow Instructions, all of which are attached hereto except the Plan, which is being delivered by electronic mail and all of which are incorporated herein in their entirety. Capitalized terms herein shall have the meaning given them by the Plan or the Restricted Stock Agreement unless the context requires a different meaning.

Participant:	«FIRST» «LAST»
Date of Grant:	1 November 2007
Vesting Commencement Date:	30 September 2008
Number of Shares Subject to Award (“Shares”):	«IND_RESTRICTED_STOCK»
Consideration:	Participant’s Services

Vesting Schedule: One-third (1/3^rd) of the Shares shall vest with the completion of each complete year of Service beginning with the Vesting Commencement Date.

Additional Terms/Acknowledgements: The undersigned Participant acknowledges receipt of, and understands and agrees to, this Grant Notice, the Restricted Stock Agreement and the Plan. Participant further acknowledges that as of the Date of Grant, this Grant Notice, the Restricted Stock Agreement and the Plan set forth the entire understanding between Participant and the Company regarding this Award and supersede all prior oral and written agreements on that subject with the exception of awards previously granted and delivered to Participant under the Plan.

HEADWATERS INCORPORATED		PARTICIPANT:
By:	/s/ Kirk A. Benson
	Signature
		Signature
Title:	C.E.O
		Date:

Attachments:

Restricted Stock Agreement,

2005 Long Term Incentive Compensation Plan via email,

form of Assignment Separate from Certificate, and

form of Joint Escrow Instructions

EX-99.22

Exhibit 99.22

HEADWATERS INCORPORATED

SHORT-TERM INCENTIVE BONUS PLAN

As Amended and Restated Effective 1 October 2007

(Subject to Stockholder Approval)

1. PURPOSE

The purpose of this Short-Term Incentive Bonus Plan is to promote the success of Headwaters Incorporated and Headwaters’ subsidiaries, by providing financial incentive for employees to strive for more effective operation of the business through ongoing development and use of their knowledge, skill, ingenuity, resourcefulness and industry. The Plan provides that annual Awards may be made to employees who are responsible for successful operation and management of the Company.

2. DEFINITIONS

The following definitions shall be applicable throughout the Plan:

(a) “Award” means the total dollar amount that may be paid to a Participant following a given Performance Year.

(b) “Board” means the Board of Directors of Headwaters Incorporated.

(c) “Chief Executive Officer” means the Chief Executive Officer of Headwaters Incorporated.

(d) “Code” means the Internal Revenue Code of 1986, as amended.

(e) “Committee” means the Compensation Committee of the Board unless another committee comprised of members of the Board is designated by the Board to oversee and administer the Plan, provided, that the Committee shall consist of two or more members of the Board as the Board may designate from time to time, each of whom shall satisfy such requirements as:

(i) a stock exchange on which the securities of the Company are traded may establish pursuant to its rule-making authority for independent directors; and

(ii) the Internal Revenue Service may establish for outside directors acting under plans intended to qualify for exemption under Section 162(m) of the Code.

(f) “Company” means Headwaters Incorporated, a Delaware corporation.

(g) “Completion Factor” means the percentage completion of IBO commitments of the Participants.

(h) “Covered Employee” means a person within the meaning of such term under Section 162(m) of the Code and Treasury regulations promulgated thereunder.

(i) “Division” means a subset of the Company, as defined by the Committee at the time it sets the proposed Awards under Section 6, for which Operating Income can be calculated.

(j) “Division Bonus Pool” means a fraction of the Division Operating Income determined by a formula for each Division approved by the Committee at the time it sets the proposed Awards under Section 6.

(k) “Disability” means a physical or mental medical condition that prevents the Participant from performing the duties of his or her position with the Company and is likely to last at least twelve months or result in death, as determined by the Committee in its sole discretion.

(l) “Individual Business Objective” or “IBO” means the goal or goals established by the Committee for each Participant (other than the Chief Executive Officer) used to determine his or her Performance Adjustment Factor.

(m) “Individual Bonus Factor” means a percentage assigned to each Plan Participant by the Committee at the time it sets the proposed Awards under Section 6.

(n) “Operating Income” means sales revenue less cost of goods sold and operating expenses as determined in accordance with generally accepted accounting principles. Division Operating Income means Operating Income as determined for a Division in accordance with generally accepted accounting principles.

(o) “Participant” means a full-time employee of the Company, employed by the Company on the last day of a Performance Year (subject to Section 9) and who otherwise meets the eligibility requirements for participation set forth in Section 4.

(p) “Performance Adjustment Factor” or “PAF” means the multiplier obtained by combining the completion factors from the IBOs of a Participant as determined by the Committee in its sole discretion. The Performance Adjustment Factor can vary from 0% to 100% depending upon the attainment of the Participant’s IBOs.

(q) “Performance Year” means a designated fiscal year of the Company during which Company and individual performance will be measured and Participant services will be rendered for which an Award may be granted.

(r) “Plan” means this Headwaters Incorporated Short-Term Incentive Bonus Plan.

(s) “Retirement” means a separation from service on or after the attainment of age 60 with five years of service.

2

(t) “Threshold Operating Income” means the minimum Division Operating Income that must be achieved before an Award can be paid, as determined by the Committee at the time it sets the proposed Awards under Section 6.

3. POWERS AND ADMINISTRATION

The Plan shall be administered by the Committee. The Committee shall have the authority to construe and interpret the Plan and any Awards granted thereunder, to establish and amend rules for Plan administration, to change the terms and conditions of Awards at or after grant, and to make all other determinations which it deems necessary or advisable for the administration of the Plan. The determinations of the Committee shall be made in accordance with its judgment as to the best interests of the Company and its stockholders and in accordance with the purposes of the Plan, and shall be final and binding on all persons. The Committee may take action by a meeting in which a quorum of the Committee is present. The meeting may be in person, by telephone or in such other manner in which the members of the Committee participating in the meeting may communicate directly with each other. A majority of the members of the Committee shall constitute a quorum, and all determinations of the Committee shall be made by a majority of its members. Any determination of the Committee under the Plan may be made without notice or meeting of the Committee, in writing signed by all the Committee members.

The Committee shall have the authority to reduce but not increase the payouts on Awards and the Committee shall have the authority to limit but not waive the performance-based vesting of such Awards, in both cases in its sole discretion. The Committee may prescribe rules and procedures for the administration of the Plan and shall have the authority to delegate ministerial duties to agents for the Committee (and allocate responsibilities among the agents appointed by the Committee for the performance of the ministerial duties) in the administration of the Plan.

4. ELIGIBILITY FOR PARTICIPATION

(a) Those key employees of the Company and its subsidiaries, including but not limited to the Covered Employees of the Company, who are employed by the Company on the last day of the Performance Year (subject to Section 9) who are designated to participate in the Plan by the Committee and have achieved pre-determined Plan performance criteria shall be eligible to participate in the Plan.

(b) Participation in a Performance Year does not entitle participation in any subsequent Performance Year.

5. CALCULATION OF AWARDS

The potential Award for a Participant for a Performance Year shall be computed as follows:

Participant’s Division Bonus Pool x Participant’s Individual Bonus Factor x the Participant’s PAF.

3

For purposes of the computation, the Chief Executive Officer shall have a PAF of 1. The potential Awards payable under the Plan to a Participant may be reduced (but not increased) by the Committee in its sole discretion to determine the actual Award to be paid to the Participant; provided that the reduction in the amount payable to a Participant shall not result in an increase in the amount payable to any other Participant.

6. PARTICIPANT SELECTION AND AWARD DETERMINATION

Within 90 days after the beginning of each Performance Year:

(a) The Chief Executive Officer shall present to the Committee the list of recommended Participants, their respective PAFs, the computation of their proposed Awards, and the Award amounts recommended for each Participant.

(b) The Committee shall consider the Chief Executive Officer’s report referred to in Section 6(a) and shall, in its sole discretion, determine in writing the employees of the Company or its subsidiaries to be designated as Participants in the Plan, the potential Awards to be granted to such Participants for the Performance Year, and the terms and conditions for such Awards.

7. INDIVIDUAL AWARDS

(a) A Participant’s Award shall be prorated based upon number of months of service in a given Performance Year or if the Participant is changed to a different employment category or different employment categories during a Performance Year, provided, that Awards for a Covered Employee shall be based solely on his or her employment category as of the start of the Performance Year.

(b) The actual Award, if any, to be paid to any individual Participant hereunder shall be based upon the Participant’s Divisional performance and individual performance considerations, and shall be determined by the Committee in its sole discretion, provided, that in all events the Committee shall have the authority to decrease the actual Award payout below the potential Award as computed in Section 5 but not to increase the actual Award payout in excess of the Award payable under the Award as computed in Section 5 above, and provided further that the reduction in the amount payable to a Participant shall not result in an increase in the amount payable to any other Participant.

(c) No Award will be granted if the Participant’s Divisional performance is below the Threshold Operating Income established by the Committee for the Performance Year, or if a Participant’s individual performance is unsatisfactory, as determined by the Committee in its sole discretion.

(d) Under the Plan, the maximum cash payment that may be made to a single Participant under a single Award shall not exceed $3,000,000.

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8. FORM AND TIME OF PAYMENT

An Award shall be paid to the Participant in cash, less applicable federal, state and local income and employment taxes, as soon as practicable after the date on which the Committee shall have certified in writing that the performance criteria for the Performance Year have been met and shall have approved the Awards for payment, but not later than 90 days after the Committee makes such determinations.

9. RETIREMENT, DISABILITY, DEATH AND TERMINATION

(a) In the event of the termination of a Participant’s employment due to his or her Retirement, Disability, or death, such Participant (or the Participant’s probate or intestate estate, in the event of death) may receive an Award that would be otherwise payable to the Participant, prorated to the effective date of such event, at the sole discretion of the Committee, provided, that in the event of the Retirement, Disability or death of a Covered Employee, such individual shall be entitled to the pro-rated portion of the Award he or she (or the Participant’s probate or intestate estate, in the event of death) would otherwise have been entitled to receive had he or she not terminated his or her employment. Any such prorated Award shall be determined and paid in accordance with the regular procedures of the Plan.

(b) Should a post-termination Award be approved under Section 9(a), such Award shall be paid in cash, less applicable federal, state, and local income and employment taxes, on the normal Award payout date to the Participant (or to the Participant’s probate estate, in the event of death) or to the person or persons who have acquired, by will or by the laws of descent and distribution or by other legal proceedings, the right to such Award, in the sole discretion of the Committee.

(c) If the employment of a Participant is terminated for reasons other than due to his or her Retirement, Disability or death, then the Participant shall cease to have any rights to the payment of or under any Award.

10. NO RESERVE OR TRUST

Nothing contained in the Plan shall require the Company to segregate any monies from its general funds, or to create any trust or make any special deposit in respect of any amounts payable under the Plan to or for any Participant or group of Participants. All amounts payable under the Plan shall be paid out of the general funds of the Company.

11. NO RIGHT TO ASSIGN

No right or interest of any Participant in the Plan or in any unpaid Award shall be assignable or transferable in whole or in part, either voluntarily or by operation of law or otherwise, or be subject to payment of debts of any Participant by execution, levy, garnishment, attachment, pledge, bankruptcy or in any other manner.

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12. NO EMPLOYMENT RIGHTS CONFERRED

Nothing contained in the Plan or any Award shall (i) confer upon any employee any right with respect to continuation of employment with the Company or its subsidiaries in any capacity, (ii) interfere in any way with the right of the Company and its subsidiaries to terminate an employee’s employment at any time, or (iii) interfere with the Company’s right to determine the terms and conditions of any other employee benefit plan of the Company.

13. SUCCESSORS AND MERGERS, CONSOLIDATIONS OR CHANGE IN CONTROL

The terms and conditions of this Plan shall inure to the benefit of and bind the Company, the Participants, their successors, assignees, and personal representatives. If substantially all of the stock or assets of the Company are acquired by another corporation or entity or if the Company is merged into, or consolidated with another corporation or entity, then upon such event all obligations created hereunder shall be obligations of the acquirer or successor corporation or entity without the requirement of further action by the acquirer or successor corporation or entity.

14. SECTION 409A

In the event that any Award or portion thereof constitutes nonqualified deferred compensation that is subject to section 409A of the Code, this Plan is intended to comply with the applicable requirements of section 409A of the Code with respect to such Award or portion thereof and shall be interpreted and administered to the extent possible in a manner consistent with the foregoing statement of intent.

15. GOVERNING STATE LAW

The provisions of this Plan shall be construed and administered in accordance with the laws of the State of Utah.

16. AMENDMENT AND TERMINATION OF THE PLAN

The Board and the Committee may from time to time amend, suspend, terminate or reinstate any or all of the provisions of the Plan. However, the Board and the Committee may not adopt any amendment which changes the eligibility requirements under the Plan, the performance business criteria used to compute the Awards under the Plan, or the maximum payment under the Plan, without stockholder approval, and the Board and the Committee may not cancel Awards payable on account of a completed Performance Year, except as otherwise provided in the Plan.

17. EFFECTIVE DATE AND TERM OF THE PLAN

The Plan, as amended and restated, shall become effective for the Performance Year commencing on or after October 1, 2007, upon adoption by the Board and subject to the

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approval of the stockholders of the Company, and thereafter shall remain in effect until such time as the Board or the Committee may terminate it.

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EX-99.23

Exhibit 99.23

HEADWATERS INCORPORATED

BROAD-BASED MANAGEMENT BONUS PLAN

As Amended and Restated Effective 1 October 2007

1. PURPOSE

The purpose of this Broad-Based Management Bonus Plan is to promote the success of Headwaters Incorporated and Headwaters’ subsidiaries, by providing financial incentive for employees to strive for more effective operation of the business through ongoing development and use of their knowledge, skill, ingenuity, resourcefulness and industry. The Plan provides that annual Awards may be made to employees who are responsible for successful operation and management of the Company.

2. DEFINITIONS

The following definitions shall be applicable throughout the Plan:

(a) “Award” means the total dollar amount that may be paid to a Participant following a given Performance Year.

(b) “Board” means the Board of Directors of Headwaters Incorporated.

(c) “Chief Executive Officer” means the Chief Executive Officer of Headwaters Incorporated.

(d) “Code” means the Internal Revenue Code of 1986, as amended.

(e) “Committee” means the Compensation Committee of the Board unless another committee comprised of members of the Board is designated by the Board to oversee and administer the Plan, provided, that the Committee shall consist of two or more members of the Board as the Board may designate from time to time, each of whom shall satisfy such requirements as a stock exchange on which the securities of the Company are traded may establish pursuant its rule-making authority for independent directors.

(f) “Company” means Headwaters Incorporated, a Delaware corporation.

(g) “Completion Factor” means the percentage completion of IBO commitments of the Participants.

(h) “Covered Employee” means a person within the meaning of such term under Section 162(m) of the Code and Treasury regulations promulgated thereunder.

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(i) “Division” means a subset of the Company, as defined by the Committee at the time it sets the proposed Awards under Section 6, for which Operating Income can be calculated.

(j) “Division Bonus Pool” means a portion of the Division Operating Income determined by a formula for each Division approved by the Committee at the time it sets the proposed Awards under Section 6.

(k) “Disability” means a physical or mental medical condition that prevents the Participant from performing the duties of his or her position with the Company and is likely to last at least twelve months or result in death, as determined by the Committee in its sole discretion.

(l) “Individual Business Objective” or “IBO” means the goal or goals established by the Committee for each Participant used to determine his or her Performance Adjustment Factor.

(m) “Individual Bonus Factor” means a percentage assigned to each Plan Participant by the Committee at the time it sets the proposed Awards under Section 6.

(n) “Operating Income” means sales revenue less cost of goods sold and operating expenses as determined in accordance with generally accepted accounting principles. Division Operating Income means Operating Income as determined for a Division in accordance with generally accepted accounting principles.

(o) “Participant” means a full-time employee of the Company, employed by the Company on the last day of a Performance Year (subject to Section 9) and who otherwise meets the eligibility requirements for participation set forth in Section 4.

(p) “Performance Adjustment Factor” or “PAF” means the multiplier obtained by combining the completion factors from the IBOs of a Participant as determined by the Committee in its sole discretion. The Performance Adjustment Factor can vary from 0% to 100% depending upon the attainment of the Participant’s IBOs.

(q) “Performance Year” means a designated fiscal year of the Company during which Company and individual performance will be measured and Participant services will be rendered for which an Award may be granted.

(r) “Plan” means this Headwaters Incorporated Broad-Based Management Bonus Plan.

(s) “Retirement” means a separation from service on or after the attainment of age 60 with five years of service.

(t) “Threshold Operating Income” means the minimum Division Operating Income that must be achieved before an Award can be paid, as determined by the Committee at the time it sets the proposed Awards under Section 6.

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3. POWERS AND ADMINISTRATION

The Plan shall be administered by the Committee. The Committee shall have the authority to construe and interpret the Plan and any Awards granted thereunder, to establish and amend rules for Plan administration, to change the terms and conditions of Awards at or after grant, and to make all other determinations which it deems necessary or advisable for the administration of the Plan. The determinations of the Committee shall be made in accordance with its judgment as to the best interests of the Company and its stockholders and in accordance with the purposes of the Plan, and shall be final and binding on all persons. The Committee may take action by a meeting in which a quorum of the Committee is present. The meeting may be in person, by telephone or in such other manner in which the members of the Committee participating in the meeting may communicate directly with each other. A majority of the members of the Committee shall constitute a quorum, and all determinations of the Committee shall be made by a majority of its members. Any determination of the Committee under the Plan may be made without notice or meeting of the Committee, in writing signed by all the Committee members.

The Committee shall have the authority to reduce but not increase the payouts on Awards and the Committee shall have the authority to limit but not waive the performance-based vesting of such Awards, in both cases in its sole discretion. The Committee may prescribe rules and procedures for the administration of the Plan and shall have the authority to delegate ministerial duties to agents for the Committee (and allocate responsibilities among the agents appointed by the Committee for the performance of the ministerial duties) in the administration of the Plan.

4. ELIGIBILITY FOR PARTICIPATION

(a) Those key employees of the Company and its subsidiaries, excluding Covered Employees of the Company, who are employed by the Company on the last day of the Performance Year (subject to Section 9) who are designated to participate in the Plan by the Committee and have achieved pre-determined Plan performance criteria shall be eligible to participate in the Plan.

(b) Participation in a Performance Year does not entitle participation in any subsequent Performance Year.

5. CALCULATION OF AWARDS

The potential Award for a Participant for a Performance Year shall be computed as follows:

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Participant’s Division Bonus Pool x Participant’s Individual Bonus Factor x the Participant’s PAF.

The potential Awards payable under the Plan to a Participant may be reduced (but not increased) by the Committee in its sole discretion to determine the actual Award to be paid to the Participant; provided that the reduction in the amount payable to a Participant shall not result in an increase in the amount payable to any other Participant.

6. PARTICIPANT SELECTION AND AWARD DETERMINATION

Within 90 days after the beginning of each Performance Year:

(a) The Chief Executive Officer shall present to the Committee the list of recommended Participants, their respective PAFs, the computation of their proposed Awards, and the Award amounts recommended for each Participant.

(b) The Committee shall consider the Chief Executive Officer’s report referred to in Section 6(a) and shall, in its sole discretion, determine in writing the employees of the Company or its subsidiaries to be designated as Participants in the Plan, the potential Awards to be granted to such Participants for the Performance Year, and the terms and conditions for such Awards.

7. INDIVIDUAL AWARDS

(a) A Participant’s Award shall be prorated based upon number of months of service in a given Performance Year or if the Participant is changed to a different employment category or different employment categories during a Performance Year.

(b) The actual Award, if any, to be paid to any individual Participant hereunder shall be based upon the Participant’s Divisional performance and individual performance considerations, and shall be determined by the Committee in its sole discretion, provided, that in all events the Committee shall have the authority to decrease the actual Award payout below the potential Award as computed in Section 5 but not to increase the actual Award payout in excess of the Award payable under the Award as computed in Section 5 above, and provided further that the reduction in the amount payable to a Participant shall not result in an increase in the amount payable to any other Participant.

(c) No Award will be granted if the Participant’s Divisional performance is below the Threshold Operating Income established by the Committee for the Performance Year, or if a Participant’s individual performance is unsatisfactory, as determined by the Committee in its sole discretion.

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(d) Under the Plan, the maximum cash payment that may be made to a single Participant under a single Award shall not exceed $3,000,000.

8. FORM AND TIME OF PAYMENT

An Award shall be paid to the Participant in cash, less applicable federal, state and local income and employment taxes, as soon as practicable after the date on which the Committee shall have certified in writing that the performance criteria for the Performance Year have been met and shall have approved the Awards for payment, but not later than 90 days after the Committee makes such determinations.

9. RETIREMENT, DISABILITY, DEATH AND TERMINATION

(a) In the event of the termination of a Participant’s employment due to his or her Retirement, Disability, or death, such Participant (or the Participant’s probate estate, in the event of death) may receive an Award that would be otherwise payable to the Participant, prorated to the effective date of such event, at the sole discretion of the Committee. Any such prorated Award shall be determined and paid in accordance with the regular procedures of the Plan.

(b) Should a post-termination Award be approved under Section 9(a), such Award shall be paid in cash, less applicable federal, state, and local income and employment taxes, on the normal Award payout date to the Participant (or to the Participant’s probate estate, in the event of death) or to the person or persons who have acquired, by will or by the laws of descent and distribution or by other legal proceedings, the right to such Award, in the sole discretion of the Committee.

(c) If the employment of a Participant is terminated for reasons other than due to his or her Retirement, Disability or death, then the Participant shall cease to have any rights to the payment of or under any Award.

10. NO RESERVE OR TRUST

Nothing contained in the Plan shall require the Company to segregate any monies from its general funds, or to create any trust or make any special deposit in respect of any amounts payable under the Plan to or for any Participant or group of Participants. All amounts payable under the Plan shall be paid out of the general funds of the Company.

11. NO RIGHT TO ASSIGN

No right or interest of any Participant in the Plan or in any unpaid Award shall be assignable or transferable in whole or in part, either voluntarily or by operation of law or otherwise, or

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be subject to payment of debts of any Participant by execution, levy, garnishment, attachment, pledge, bankruptcy or in any other manner.

12. NO EMPLOYMENT RIGHTS CONFERRED

Nothing contained in the Plan or any Award shall (i) confer upon any employee any right with respect to continuation of employment with the Company or its subsidiaries in any capacity, (ii) interfere in any way with the right of the Company and its subsidiaries to terminate an employee’s employment at any time, or (iii) interfere with the Company’s right to determine the terms and conditions of any other employee benefit plan of the Company.

13. SUCCESSORS AND MERGERS, CONSOLIDATIONS OR CHANGE IN CONTROL

The terms and conditions of this Plan shall inure to the benefit of and bind the Company, the Participants, their successors, assignees, and personal representatives. If substantially all of the stock or assets of the Company are acquired by another corporation or entity or if the Company is merged into, or consolidated with another corporation or entity, then upon such event all obligations created hereunder shall be obligations of the acquirer or successor corporation or entity without the requirement of further action by the acquirer or successor corporation or entity.

14. SECTION 409A

In the event that any Award or portion thereof constitutes nonqualified deferred compensation that is subject to section 409A of the Code, this Plan is intended to comply with the applicable requirements of section 409A of the Code with respect to such Award or portion thereof and shall be interpreted and administered to the extent possible in a manner consistent with the foregoing statement of intent.

15. GOVERNING STATE LAW

The provisions of this Plan shall be construed and administered in accordance with the laws of the State of Utah.

16. AMENDMENT AND TERMINATION OF THE PLAN

The Board and the Committee may from time to time amend, suspend, terminate or reinstate any or all of the provisions of the Plan. However, the Board and the Committee may not cancel Awards payable on account of a completed Performance Year, except as otherwise provided in the Plan.

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17. EFFECTIVE DATE AND TERM OF THE PLAN

The Plan, as amended and restated, shall become effective for the Performance Year commencing on or after October 1, 2007, upon adoption by the Board, and thereafter shall remain in effect until such time as the Board or the Committee may terminate it.

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