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, 2000

                                       or

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

                 For the transition period from ______ to ______

                         Commission file number 0-27808

                             HEADWATERS INCORPORATED
             (Exact name of registrant as specified in its charter)


             Delaware                                     87-0547337
  (State or other jurisdiction of                      (I.R.S. Employer
   incorporation or organization)                      Identification No.)

           11778 S. Election Drive, Suite 210
                      Draper, Utah                           84020
        (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 [ ]

The number of shares outstanding of the Registrant's common stock as of January
15, 2001 was 22,894,473.

<PAGE>

                             HEADWATERS INCORPORATED

                                TABLE OF CONTENTS

                                                                        Page No.

PART I - FINANCIAL INFORMATION

     ITEM 1.      FINANCIAL STATEMENTS (Unaudited):

                  Condensed Consolidated Balance Sheets - As of
                    September 30, 2000 and December 31, 2000................. 3

                  Condensed Consolidated Statements of Operations
                    - For the three months ended December 31,
                    1999 and 2000............................................ 5

                  Condensed Consolidated Statement of Changes in
                    Stockholders' Equity - For the three months
                    ended December 31, 2000.................................. 6

                  Condensed Consolidated Statements of Cash Flows
                    - For the three months ended December 31,
                    1999 and 2000............................................ 7

                  Notes to Condensed Consolidated Financial
                    Statements............................................... 8

     ITEM 2.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS..................................12


PART II - OTHER INFORMATION

     ITEM 1.      LEGAL PROCEEDINGS..........................................15

     ITEM 2.      CHANGES IN SECURITIES......................................15

     ITEM 3.      DEFAULTS UPON SENIOR SECURITIES............................15

     ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........15

     ITEM 5.      OTHER INFORMATION..........................................15

     ITEM 6.      EXHIBITS AND REPORTS ON FORM 8-K...........................15


SIGNATURES...................................................................16


Forward Looking Statements

Statements in this Form 10-Q, including those concerning the Registrant's
expectations regarding its business, and certain of the information presented in
this report, constitute forward looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. As such, actual results may
vary materially from such expectations. For a discussion of the factors that
could cause actual results to differ from expectations, please see the caption
entitled "Forward Looking Statements" in Part I. Item 2 hereof. There can be no
assurance that the Registrant's results of operations will not be adversely
affected by such factors. Registrant undertakes no obligation to revise or
publicly release the results of any revision to these forward looking
statements. Readers are cautioned not to place undue reliance on these forward
looking statements, which reflect management's opinion only as of the date
hereof.
                                       2
<PAGE>

ITEM 1.  FINANCIAL STATEMENTS (Unaudited)
<TABLE>
<CAPTION>

                                          HEADWATERS INCORPORATED AND SUBSIDIARIES

                                            CONDENSED CONSOLIDATED BALANCE SHEETS
                                                         (Unaudited)

                                                                                              September 30,      December 31,
(thousands of dollars)                                                                                 2000              2000
------------------------------------------------------------------------------------------- ---------------- -----------------
ASSETS
<S>                                                                                         <C>              <C>
Current assets:
     Cash and cash equivalents                                                              $           983  $            328
     Short-term investments                                                                           6,973             6,233
     Trade receivables, net                                                                           7,298             5,485
     Notes receivable                                                                                 2,530             2,108
     Other current assets                                                                               387               202
                                                                                            ---------------- -----------------
            Total current assets                                                                     18,171            14,356
                                                                                            ---------------- -----------------
Property, plant and equipment, net of accumulated depreciation                                          552               640
                                                                                            ---------------- -----------------

Other assets:
     Notes and accrued interest receivable                                                            6,598             8,113
     Equity investments, net                                                                          3,259             4,265
     Deferred income taxes                                                                            3,000             3,000
     Intangible assets, net of accumulated amortization                                               1,221             1,179
     Other assets                                                                                       640               674
                                                                                            ---------------- -----------------
            Total other assets                                                                       14,718            17,231
                                                                                            ---------------- -----------------
            Total assets                                                                    $        33,441  $         32,227
                                                                                            ================ =================

                                   (continued)

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

                                       3
<PAGE>
<CAPTION>

                                          HEADWATERS INCORPORATED AND SUBSIDIARIES

                                      CONDENSED CONSOLIDATED BALANCE SHEETS, continued
                                                        (Unaudited)

                                                                                              September 30,      December 31,
(thousands of dollars and shares)                                                                      2000              2000
------------------------------------------------------------------------------------------- ---------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S>                                                                                          <C>             <C>
Current liabilities:
     Accounts payable                                                                        $          698  $           909
     Accrued personnel costs                                                                          2,254              955
     Other accrued liabilities                                                                        3,786            3,880
     Notes payable, current and other short-term borrowings                                             208            2,694
                                                                                             --------------- ----------------
            Total current liabilities                                                                 6,946            8,438
                                                                                             --------------- ----------------
Long-term liabilities:
     Notes payable, non-current                                                                       5,055              183
     Other long-term liabilities                                                                        180              183
     Deferred revenue                                                                                10,513            8,652
                                                                                             --------------- ----------------
            Total long-term liabilities                                                              15,748            9,018
                                                                                             --------------- ----------------
            Total liabilities                                                                        22,694           17,456
                                                                                             --------------- ----------------
Commitments and contingencies

Stockholders' equity:

     Convertible preferred stock, $0.001 par value; authorized 10,000 shares,
       issued and outstanding 17 shares at September 30, 2000 and December 31,
       2000 (aggregate liquidation preference of $3,729 at December 31, 2000)                             1                1
     Common stock, $0.001 par value; authorized 50,000 shares, issued and
       outstanding 23,341 shares at September 30, 2000 (including 214 shares
       held in treasury) and 22,894 shares at December 31, 2000 (including 313
       shares held in treasury)                                                                          23               23
     Capital in excess of par value                                                                  82,659           81,449
     Accumulated deficit                                                                           (70,221)         (64,815)
     Other, including treasury stock                                                                (1,715)          (1,887)
                                                                                             --------------- ----------------
            Total stockholders' equity                                                               10,747           14,771
                                                                                             --------------- ----------------
            Total liabilities and stockholders' equity                                       $       33,441  $        32,227
                                                                                             =============== ================
</TABLE>

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

                                       4
<PAGE>
<TABLE>
<CAPTION>
                                            HEADWATERS INCORPORATED AND SUBSIDIARIES

                                         CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                                           (Unaudited)

                                                                                                  Three Months Ended December 31,
(thousands of dollars, except per-share data)                                                             1999               2000
--------------------------------------------------------------------------------------------- ----------------- ------------------
<S>                                                                                           <C>               <C>
Revenue:
     License fees                                                                             $          4,036  $           6,267
     Chemical sales                                                                                      1,352              5,521
     Gain on sale of facility                                                                            5,341                 --
     Other                                                                                                 320                528
                                                                                              ----------------- ------------------
          Total revenue                                                                                 11,049             12,316
                                                                                              ----------------- ------------------
Operating costs and expenses:
     Cost of chemical                                                                                      860              3,625
     Cost of operations                                                                                  1,683              1,101
     Selling, general and administrative                                                                   864              1,470
     Asset write-offs and other non-recurring charges                                                   11,021                 --
                                                                                              ----------------- ------------------
        Total operating costs and expenses                                                              14,428              6,196
                                                                                              ----------------- ------------------
Operating income (loss)                                                                                 (3,379)             6,120
                                                                                              ----------------- ------------------
Other income (expense):
     Interest and investment income                                                                        800                222
     Interest expense                                                                                   (2,055)               (86)
     Other, net                                                                                           (292)              (750)
                                                                                              ----------------- ------------------
          Total other expense, net                                                                      (1,547)              (614)
                                                                                              ----------------- ------------------

Income (loss) before income taxes                                                                       (4,926)             5,506

Income tax benefit (expense)                                                                             3,000               (100)
                                                                                              ----------------- ------------------
Net income (loss)                                                                             $         (1,926) $           5,406
                                                                                              ================= ==================
Basic net income (loss) per common share                                                      $          (.16)  $             .23
                                                                                              ================= ==================
Diluted net income (loss) per common share                                                    $          (.16)  $             .22
                                                                                              ================= ==================
</TABLE>

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

                                       5
<PAGE>
<TABLE>
<CAPTION>
                    HEADWATERS INCORPORATED AND SUBSIDIARIES

       CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                  For the Three Months Ended December 31, 2000
                                   (Unaudited)
                                                                                                                 Other
                                                                                            ----------------------------------------
                                                                                              Related party
                           Convertible                                                            note          Deferred    Common
                         Preferred Stock       Common Stock       Capital in                   receivable     compensation   stock
(thousands of          ---------------------------------------      excess      Accumulated collateralized by  from stock   held in
dollars and shares)      Shares    Amount    Shares    Amount    of par value     deficit     common stock      options     treasury
------------------------------------------------------------------------------------------------------------------------------------
<S>                          <C>       <C>   <C>          <C>       <C>          <C>              <C>           <C>       <C>
Balances at
 September 30, 2000          17        $1    23,341       $23       $82,659      $(70,221)        $(466)        $(515)      $(734)

Exercise of stock options                        50        --            75

Write-down of related
 party note receivable                                                                               88

Amortization of deferred
 compensation from stock
 options                                                                                                           23

Purchase of treasury
 stock, at cost                                                                                                            (1,610)

Treasury stock transferred
 to employee stock purchase
 plan                                                                                                                          42

Cancellation of
 treasury stock                                (497)       --        (1,285)                                                1,285

Net income for the
 three months ended
 December 31, 2000                                                                  5,406
                       -------------------------------------------------------------------------------------------------------------
Balances at
 December 31, 2000           17        $1    22,894       $23       $81,449      $(64,815)        $(378)        $(492)    $(1,017)
                       =============================================================================================================
</TABLE>

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

                                        6
<PAGE>
<TABLE>
<CAPTION>
                    HEADWATERS INCORPORATED AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)


                                                                                                 Three Months Ended December 31,
(thousands of dollars)                                                                                     1999              2000
----------------------------------------------------------------------------------------------- ----------------  ----------------
<S>                                                                                             <C>               <C>
Cash flows from operating activities:
Net income (loss)                                                                               $        (1,926)  $         5,406
Adjustments to reconcile net income (loss) to net cash provided by
  (used in) operating activities:
    Recognition of deferred revenue                                                                        (230)             (274)
    Depreciation and amortization                                                                           583                63
    Deferred income tax benefit                                                                          (3,000)               --
    Equity in losses of investees, write-off's and provisions for
      unrealizable  investments                                                                              --               692
    Net gain on sale of facility and disposition of equipment                                            (5,341)              (15)
    Amortization of deferred compensation from stock options                                                 46                23
    Interest expense related to amortization of debt discount and debt issuance costs                     1,150                19
    Write-down of related party note receivable                                                             292                88
    Non-cash portion of asset write-offs and other non-recurring charges                                 10,412                --
    Other changes in operating assets and liabilities                                                    (4,193)             (158)
                                                                                                ----------------  ----------------
Net cash provided by (used in) operating activities                                                      (2,207)            5,844
                                                                                                ----------------  ----------------
Cash flows from investing activities:
  Proceeds from sale of facility and equipment                                                            9,497                15
  Purchase of equipment and facilities held for sale                                                       (144)             (109)
  Net proceeds from sale of short-term investments                                                           --               740
  Investments in and loans to non-affiliated companies                                                       --            (3,213)
  Decrease (increase) in other assets                                                                       153               (53)
                                                                                                ----------------  ----------------
Net cash provided by (used in) investing activities                                                       9,506            (2,620)
                                                                                                ----------------  ----------------

Cash flows from financing activities:
  Net proceeds from issuance of notes payable and warrants and other borrowings                           2,758             7,448
  Payments on notes payable and other borrowings                                                         (2,954)           (9,834)
  Purchase of common stock for the treasury                                                                  --            (1,568)
  Proceeds from exercise of options                                                                          --                75
  Preferred stock dividends                                                                                (107)               --
                                                                                                ----------------  ----------------
Net cash used in financing activities                                                                      (303)           (3,879)
                                                                                                ----------------  ----------------

Net increase (decrease) in cash and cash equivalents                                                      6,996              (655)

Cash and cash equivalents, beginning of period                                                              461               983
                                                                                                ----------------  ----------------
Cash and cash equivalents, end of period                                                        $         7,457   $           328
                                                                                                ================  ================

Supplemental schedule of non-cash investing and financing activities:
  Cancellation of treasury stock                                                                $            --   $        (1,285)
  Common stock issued on conversion of convertible preferred stock and in payment
    of dividends                                                                                          1,227                --
  Common stock issued on conversion of convertible debt and related accrued interest                      1,116                --
</TABLE>

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

                                       7
<PAGE>

                    HEADWATERS INCORPORATED AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)
                                   ----------


1.   Nature of Operations and Basis of Presentation

     Headwaters  Incorporated  and  its  Subsidiaries'  primary  business  is to
     commercialize its chemical  technologies  used to produce  alternative fuel
     from coal  derivatives  and to recycle  otherwise  unusable  materials from
     other  industries  into  marketable  resources.  Currently,  Headwaters has
     licensed its  technology to the owners of 28  alternative  fuel  facilities
     which are operating at various  levels of production in  approximately  ten
     states.  During the fiscal year ended September 30, 2000,  Headwaters began
     evaluating and pursuing investment alternatives for the cash generated from
     operations.  Headwaters  has  invested  some  of  this  available  cash  in
     high-grade  government  backed  securities  and  has  made  several  equity
     investments in and loans to unrelated entities.

     The accompanying unaudited condensed consolidated financial statements have
     been  prepared  in  accordance  with  the  rules  and  regulations  of  the
     Securities and Exchange  Commission for quarterly  reports on Form 10-Q. In
     the opinion of management,  all adjustments considered necessary for a fair
     presentation have been included. All adjustments except the items described
     in  Note  5  consist  of  normal  recurring  adjustments.  The  results  of
     operations  for the  three-month  period  ended  December  31, 2000 are not
     necessarily  indicative  of the results to be  expected  for the full year.
     Certain information and footnote disclosures normally included in financial
     statements  prepared  in  accordance  with  generally  accepted  accounting
     principles  have been  condensed  or omitted.  It is  suggested  that these
     financial statements 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, 2000.  Certain prior period  amounts
     have been  reclassified to conform with the current period's  presentation.
     The reclassifications had no effect on net loss or total assets.

2.   Financing and Equity Transactions

     During and  subsequent to the quarter ended  December 31, 2000,  Headwaters
     completed several transactions, including the following.

     Note  Payable  to a Bank / Bank  Line of  Credit  - In  October  2000,  the
     remaining  balance of  $3,000,000  due under a note  payable to a bank (see
     Note 3) was repaid with proceeds  from a revolving  line of credit with the
     same bank,  which line of credit has an  expiration  date in January  2002.
     Funds  from  this  line of  credit,  which  are  limited  to the  lesser of
     $8,000,000 or the "borrowing base," as defined, were also used to repay the
     $1,838,000 note payable  described in Note 3. Borrowings  under the line of
     credit bear interest at prime plus 1% (10.5% at December 31, 2000), and are
     collateralized  by receivables  and by a $6,500,000  note receivable due to
     Headwaters.  Maximum  borrowings under the line of credit during the period
     ended December 31, 2000 were approximately  $4,896,000.  The borrowing base
     was in  excess  of  $8,000,000  at  December  31,  2000 and  there  were no
     borrowings  under  the  line at  December  31,  2000.  The  line of  credit
     agreement contains certain operating  covenants and restrictions common for
     such loans,  including  minimum  monthly  royalty  revenue of $850,000  and
     quarterly earnings, as defined, of $2,000,000.

     Short-term  Borrowings  with an  Investment  Company  -  Headwaters  has an
     arrangement with an investment company under which Headwaters can borrow up
     to 90% of the  value  of the  total  portfolio  of  Headwaters'  short-term
     investments with that investment company,  which investments  collateralize
     any  outstanding   borrowings.   Those  investments  consist  primarily  of
     government backed securities.  Under this arrangement,  Headwaters borrowed
     approximately  $2,552,000 during the quarter ended December 31, 2000, which
     amount was  outstanding  at December 31, 2000 (see Note 3). The  borrowings
     were used  primarily  for stock  repurchases.  As of January 15, 2001,  the
     outstanding balance under this arrangement was approximately $3,061,000.

     Treasury Stock - Headwaters  continued acquiring shares of its common stock
     during the quarter ended  December 31, 2000,  in connection  with the stock
     purchase program announced in May 2000. The program  authorizes  Headwaters
     to  purchase  stock  in  the  open  market  or  through   negotiated  block
     transactions.  During the  quarter  ended  December  31,  2000,  Headwaters
     purchased approximately 615,000 shares for approximately  $1,610,000.  Also
     during the quarter,  approximately  497,000  shares of treasury  stock were
     cancelled.

                                       8
<PAGE>

                    HEADWATERS INCORPORATED AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)
                                   ----------


     Common Stock Options - During the quarter ended December 31, 2000,  options
     for the purchase of 50,000  shares of common stock were  exercised for cash
     proceeds of approximately $75,000.

3.   Notes Payable and Other Borrowings

     Notes payable consist of the following:
<TABLE>
<CAPTION>
                                                                                                 September 30,    December 31,
    (thousands of dollars)                                                                                2000            2000
    -------------------------------------------------------------------------------------------- -------------- ---------------
     <S>                                                                                         <C>            <C>
     Short-term borrowings from an investment company, bearing interest at a
       floating rate (8.25% average during the quarter), collateralized by
       investments with the investment company with a carrying value of
       approximately $6,233,000.                                                                 $          --  $        2,552

     Note payable to a bank, bearing interest at prime plus 2%, repaid with
       proceeds from a long-term line of credit with this bank obtained in
       October 2000 (see Note 2).                                                                        3,000              --

     Note payable to a corporation bearing interest at 6%, repaid in October
       2000 with funds obtained from a long-term bank line of credit obtained in
       October 2000 (see Note 2).                                                                        1,838              --

     Other                                                                                                 425             325
                                                                                                 -------------- ---------------
                                                                                                         5,263           2,877
       Less: current portion                                                                              (208)         (2,694)
                                                                                                 -------------- ---------------
       Total non-current                                                                         $        5,055 $          183
                                                                                                 ============== ===============
</TABLE>

     The weighted  average  interest rate on notes payable was 9.7% at September
     30, 2000 and 8.8% at December 31, 2000.

4.   Basic and Diluted Earnings per Share
<TABLE>
<CAPTION>
                                                                                           Three  Months Ended December 31,
     (thousands of dollars and shares, except per-share data)                                        1999              2000
     ------------------------------------------------------------------------------------ ----------------  ----------------
     Numerator:
     <S>                                                                                  <C>               <C>
       Net income (loss)                                                                  $        (1,926)  $         5,406
       Preferred stock dividends (undeclared)                                                        (146)              (47)
       Imputed preferred stock dividends                                                              (58)               --
                                                                                          ----------------  ----------------
     Numerator for basic earnings per share -- net income
       (loss) attributable to common stockholders                                                  (2,130)            5,359

     Effect of dilutive securities - preferred stock dividends                                         --                47
                                                                                          ----------------  ----------------
     Numerator for diluted earnings per share -- net income
       (loss) attributable to common stockholders after assumed conversions               $        (2,130)  $         5,406
                                                                                          ================  ================
     Denominator:
     Denominator for basic earnings per share --  weighted-average
      shares outstanding                                                                           13,610            22,979

     Effect of dilutive securities:
       Shares issuable upon exercise of options and warrants                                           --               700

       Shares issuable upon conversion of preferred stock                                              --               443
                                                                                          ----------------- ---------------
       Total dilutive potential shares                                                                 --             1,143
                                                                                          ----------------- ---------------
     Denominator for diluted earnings per share -- weighted- average shares
       outstanding after assumed exercises and conversions                                         13,610            24,122
                                                                                          ================  ================
     Basic net income (loss) per share                                                    $          (.16)  $           .23
                                                                                          ================  ================
     Diluted net income (loss) per share                                                  $          (.16)  $           .22
                                                                                          ================  ================
</TABLE>
                                       9
<PAGE>

                    HEADWATERS INCORPORATED AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)
                                   ----------


     During  the  quarter  ended  December  31,  1999,  Headwaters'  potentially
     dilutive  securities  consisted of options and warrants for the purchase of
     common stock,  convertible  debt and convertible  preferred  stock,  all of
     which were  anti-dilutive  and were not  considered in the  calculation  of
     diluted earnings per share.

5.   Non-recurring Items

     In December 1999, Headwaters sold one of the three remaining synthetic fuel
     facilities it owned at that time. This facility was located in Price, Utah.
     Headwaters reported a gain on this transaction of approximately $5,341,000.
     There were no such gains in the December 31, 2000 quarter.

     In the December 1999 quarter,  Headwaters  recorded an impairment charge of
     approximately  $10,271,000  related to assets  located  at the Price,  Utah
     site.  This  impairment  charge  consisted  of  an  approximate  $8,082,000
     write-down to net  realizable  value of certain  plant and equipment  which
     remained on the site and became idle when the  facility  was sold,  plus an
     approximate $2,189,000 write-off of an intangible asset which was no longer
     considered  recoverable  due  to the  relocation  of a  licensee  facility.
     Headwaters recorded other asset write-offs and non-recurring charges in the
     quarter  ended  December  31,  1999  which,  when  added to the  impairment
     charges, totaled approximately $11,021,000.  Of this amount,  approximately
     $10,412,000 did not involve the use of cash.

6.   Income Taxes

     In the quarter ended  December 31, 2000,  Headwaters  reported  $100,000 of
     alternative  minimum tax expense.  In the quarter ended  December 31, 1999,
     Headwaters reported an income tax benefit of $3,000,000,  consisting of the
     recognition of a portion of its deferred tax asset.  Headwaters believes it
     is more likely than not that this  portion of the total  deferred tax asset
     will  be  realized  as a  result  of  income  to  be  recognized  from  the
     amortization of deferred revenue in subsequent  periods. As of December 31,
     2000,  Headwaters has net operating  loss  carryforwards  of  approximately
     $35,700,000 which can be used to offset future taxable income.

7.   Commitments and Contingencies

     Commitments and contingencies, consisting of legal and contractual matters,
     as of December 31, 2000 not disclosed elsewhere, are as follows:

     NEICO/Earthco.  In November  1999,  Headwaters  was served with a complaint
     from the Seventh  Judicial  District  Court of Carbon  County,  Utah styled
     Nevada Electric Investment Company ("NEICO") v. Earthco, et. al. Headwaters
     received Earthco's answer,  counterclaims and cross-claim in December 1999.
     Headwaters filed its reply and cross-claim against Earthco in January 2000.
     NEICO, Earthco and Headwaters have settled their disputes.  On November 30,
     2000 the District  Court entered an order of dismissal with prejudice as to
     all parties.

     Adtech.  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 an
     alternative  fuel  technology  invented by  Davidson.  In  September  2000,
     Headwaters received a summons and complaint from the United States District
     Court for the Western  District of Tennessee filed by Adtech,  Inc. against
     Davidson  and  Headwaters.  In the action  certain  purported  officers and
     directors of Adtech allege that the technology purchase  transaction was an
     unauthorized  corporate  action and that Davidson and Headwaters  conspired
     together to effect the transfer.  The complaint  asserts  related causes of
     action in fraud,  conversion,  patent  infringement,  conspiracy and unfair
     competition  seeking  unspecified  money  damages  to be  proven  at trial,
     accounting,  disgorgement,  recission of contracts,  punitive damages,  and
     other relief.  Headwaters  denies these allegations and is asking the court
     to dismiss the  action.  Because  the  litigation  is at an early stage and
     resolution is uncertain,  legal counsel cannot express an opinion as to the
     ultimate amount, if any, of Headwaters' liability.

     Levy. In March 1999, Headwaters sold convertible preferred stock, warrants,
     and a  convertible  promissory  note to OZ Master  Fund,  Ltd. In September
     2000,  Headwaters  received a summons and complaint  from the United States
     District

                                       10
<PAGE>

                    HEADWATERS INCORPORATED AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)
                                   ----------


     Court for the  Southern  District of New York filed by Mark Levy against OZ
     Master Fund and related  entities ("OZ") and Headwaters.  In the action,  a
     purported  shareholder of Headwaters alleges that OZ violated section 16(b)
     of the Securities  Exchange Act of 1934 by converting  preferred stock into
     Headwaters  common  stock  and then  selling  the same  within a six  month
     period, and further, that Headwaters' redemption of the preferred stock and
     the note  constituted  a sale of common  stock for which OZ is liable under
     section  16(b).  The  complaint  seeks  on  behalf  of  Headwaters  from OZ
     unspecified  money damages to be proven at trial,  attorney fees, and other
     relief.  Because  the  litigation  is at an early stage and  resolution  is
     uncertain,  legal  counsel  cannot  express an  opinion as to the  ultimate
     amount, if any, that might be recovered.

     AJG. In December  1996,  Headwaters  entered into a technology  license and
     proprietary  chemical sale agreement with AJG Financial Services,  Inc. The
     agreement  called  for AJG to pay  royalties  and to  purchase  proprietary
     chemical  material from  Headwaters.  In October 2000,  Headwaters  filed a
     complaint  in the Fourth  District  Court for the State of Utah against AJG
     alleging  that  it  has  failed  to  make  payments  and to  perform  other
     obligations under the agreement. Headwaters asserts claims including breach
     of contract,  declaratory judgment,  unjust enrichment,  and accounting and
     seeks  money  damages in the amount of  $750,000  plus other  damages to be
     proven at trial,  as well as other  relief.  AJG has answered the complaint
     denying  Headwaters'  claims  and  asserting   counter-claims   based  upon
     allegations  of   misrepresentation   and  breach.  AJG  seeks  unspecified
     compensatory  damages as well as punitive  damages.  Headwaters  denies the
     allegations of AJG's counter-claims.  Because the litigation is at an early
     stage and resolution is uncertain,  legal counsel cannot express an opinion
     as to the ultimate amount of recovery or liability.

     Nalco. In October 2000,  Headwaters  filed a complaint in the United States
     District  Court for the District of Utah  against  Nalco  Chemical  Company
     ("Nalco").  Headwaters  alleges  that Nalco,  by its sale and  marketing of
     materials for use in creating  alternative fuel,  breached a non-disclosure
     agreement,  misappropriated  trade secrets,  and violated  patent rights of
     Headwaters. Headwaters seeks by its complaint injunctive relief and damages
     to be proven at trial. Nalco filed an answer denying the allegations in the
     complaint  and  asserting   counter-claims   alleging  patent   invalidity.
     Headwaters  denies the  counter-claims;  however,  if Nalco prevails on its
     counter-claims,  the  result  could  have  a  material  adverse  effect  on
     Headwaters'  business.  Because  the  litigation  is at an early  stage and
     resolution is uncertain,  legal counsel cannot express an opinion as to the
     ultimate amount, if any, that might be recovered by Headwaters.

     Headwaters is also involved in other legal  proceedings that have arisen in
     the normal course of business. Management believes that many of these other
     claims are without merit and in all cases intends to vigorously  defend its
     position.  Management does not believe that the outcome of these activities
     will  have a  significant  effect  upon  the  operations  or the  financial
     position  of  Headwaters;   however,  it  is  possible  that  a  change  in
     management's  estimates  of probable  liability  could occur and the change
     could be significant.

8.   Events Subsequent to December 31, 2000

     In addition to events subsequent to December 31, 2000 disclosed  elsewhere,
     Headwaters made  additional  strategic  investments  and loans  aggregating
     $550,000 from January 1 through January 15, 2001.

                                       11
<PAGE>

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
accompanying unaudited consolidated financial statements and notes thereto.

Three Months Ended December 31, 2000 Compared to Three Months Ended December 31,
1999

The information set forth below compares  Headwaters'  operating results for the
three months ended  December 31, 2000  ("2000") with  operating  results for the
three months ended December 31, 1999 ("1999").

Revenues.  Total  revenue for 2000  increased by $1,267,000  to  $12,316,000  as
compared to  $11,049,000  for 1999.  The major  components  of this  revenue are
discussed in the sections below.

License  Fees.  During  2000,   Headwaters   recognized  license  fees  totaling
$6,267,000  while  $4,036,000 of license fees were  recognized  during 1999. The
license fees in 2000  consisted of the  straight-line  amortization  of one-time
non-refundable  initial and prepaid  license  fees of  $274,000,  and  recurring
earned  license  fees or royalty  payments of  $5,993,000.  License fees in 1999
consisted of the straight-line  amortization of one-time  non-refundable initial
license  fees of $230,000  and  recurring  license  fees or royalty  payments of
$3,806,000. Initial license fees were normally received when construction of the
related  alternative fuel facility began,  when  construction was completed,  or
when certain construction milestones or other conditions were met. These license
fees are  recognized  on a  straight-line  basis  over  the  period  covered  by
Headwaters' license agreements with licensees.

Recurring  earned license fees or royalty  payments are due quarterly based upon
alternative  fuel sold as reported to Headwaters by its licensees.  The increase
in earned license fees in 2000 over 1999 was due to increased  alternative  fuel
sales by Headwaters'  licensees.  In 1999,  over 75% of earned license fees were
from a single  licensee  (which owns four  facilities),  whereas the 2000 earned
license fees were from several licensees, with less than 50% attributable to the
single  licensee.   Headwaters  expects   fluctuations  in  individual  licensee
alternative fuel sales with  corresponding  fluctuations in Headwaters'  license
fees  in  future  periods  due to  feedstock  availability  and  other  licensee
operational  issues,  marketing issues,  the ability of licensees to utilize the
income tax credits earned from the sale of  alternative  fuel and other factors,
many of which are beyond  the direct  control  of  Headwaters.  Headwaters  also
expects  fluctuations  in  aggregate  license fee revenue.  However,  Headwaters
expects its license  fee  revenue in the fiscal year ending  September  30, 2001
from all  licensees to be higher than total license fees reported for the fiscal
year ended September 30, 2000.

Chemical Sales.  Headwaters provides chemical reagent to its licensees either at
a fixed  price or at  Headwaters'  cost  plus a  contracted  markup.  Headwaters
purchases  the  chemical  materials  under  a  long-term  contract  with a large
chemical   company.   Chemical  sales  during  2000  were   $5,521,000   with  a
corresponding  direct  cost of  $3,625,000.  Chemical  sales  during  1999  were
$1,352,000  with a  corresponding  direct  cost of  $860,000.  The  increase  in
chemical  sales  in  2000  over  1999  was  due to  increased  alternative  fuel
production by Headwaters' licensees.  Currently, Headwaters expects its chemical
sales revenue and gross profit in the fiscal year ending September 30, 2001 from
all  licensees  to be  significantly  higher than the amounts  reported  for the
fiscal year ended September 30, 2000.

Gain on Sale of Facility.  In December  1999,  Headwaters  sold one of the three
remaining  synthetic  fuel  facilities it owned at that time.  This facility was
located  in Price,  Utah.  Headwaters  reported  a gain on this  transaction  of
approximately $5,341,000. There were no such gains in 2000.

Cost of  Operations  decreased  by  $582,000  to  $1,101,000  during  2000  from
$1,683,000 during 1999. During 2000,  Headwaters  incurred  significantly  lower
operating   expenses  in   connection   with  the   continued   refinement   and
implementation  of the alternative fuel process  associated with  licensee-owned
facilities,  and in particular  the operating  costs  associated  with the three
facilities  owned by  Headwaters  which were sold in December 1999 through April
2000. In 1999, cost of operations  included labor and operating  expenses at the
owned alternative fuel facilities and the wash plant located in Utah. There were
no such costs in 2000.

Selling,  General and  Administrative  Expenses increased $606,000 to $1,470,000
during 2000 from  $864,000 for 1999.  The increase in expenses in 2000 is due to
an  increase in payroll and other  compensation-related  costs of  approximately
$280,000  and an increase in  professional  services  expenses of  approximately
$380,000,  with a net  decrease in all other cost  categories  of  approximately
$54,000.  The increase in  professional  services  expenses is due  primarily to
legal costs  associated  with legal  actions that  Headwaters  has  initiated in
recent months.

                                       12
<PAGE>

Asset Write-offs and Other Non-recurring  Charges. In the December 1999 quarter,
Headwaters recorded an impairment charge of approximately $10,271,000 related to
assets located at the Price,  Utah site. This impairment  charge consisted of an
approximate  $8,082,000  write-down to net realizable value of certain plant and
equipment which remained on the site and became idle when the facility was sold,
plus an  approximate  $2,189,000  write-off of an intangible  asset which was no
longer  considered  recoverable  due to the  relocation of a licensee  facility.
Headwaters  recorded  other asset  write-offs and  non-recurring  charges in the
quarter ended  December 31, 1999 which,  when added to the  impairment  charges,
totaled approximately $11,021,000.

Other Income and Expense. During 2000, Headwaters reported net other expenses of
$614,000  compared to $1,547,000  for 1999.  This  decrease of $933,000  relates
primarily  to a decrease of  $1,969,000  in  interest  expense and a decrease of
$204,000 in the  mark-to-market  adjustment  of the carrying  value of a related
party   note   receivable,   offset   by   a   $692,000   increase   in   equity
investment-related losses and a decrease of $578,000 in interest income.

Interest  expense  decreased in 2000  primarily due to the  substantially  lower
average  levels of outstanding  borrowings  which existed in 2000 as compared to
1999,  as a result of debt  repayments  during the period  January  2000 through
October 2000. There has also been a benefit from a substantial  reduction in the
weighted average effective interest rate on outstanding  borrowings between 1999
and 2000.

During 1996,  Headwaters  sold certain  construction  companies  and received as
consideration  a $5,000,000  note  receivable  ("Note").  The Note is "marked to
market" each quarter  based upon the market  value of  Headwaters'  common stock
held as  collateral  and is reflected in the  consolidated  balance sheet at the
underlying  value of this  collateral,  $378,000  at  December  31,  2000.  This
adjustment  resulted  in a  write-down  of $88,000  during  2000,  compared to a
write-down  of $292,000  during 1999 for a net  decrease  in the  write-down  of
$204,000.  In 1999, interest income of approximately  $515,000 was recognized on
this note, while no interest income was recognized in 2000.

Beginning  in June  2000,  Headwaters  made  investments  in  several  less than
50%-owned  affiliates.  Allowances are provided,  on a  case-by-case  basis when
management  first  determines  that the  investment or equity in earnings is not
realizable.  Gains  on  these  same  investments  can  not be  recognized  until
realized,  which would  normally  occur at a much later date.  During 2000,  the
provision for allowances and related write-offs totaled approximately  $592,000.
In addition,  Headwaters recognized  approximately $100,000 of losses related to
its equity in investments accounted for using the equity method.

Income Taxes. In 2000,  Headwaters  reported $100,000 of alternative minimum tax
expense.  In 1999,  Headwaters  reported  an income tax  benefit of  $3,000,000,
consisting of the recognition of a portion of its deferred tax asset. Headwaters
believes it is more likely than not that this portion of the total  deferred tax
asset  will be  realized  as a  result  of  income  to be  recognized  from  the
amortization of deferred revenue in subsequent periods. As of December 31, 2000,
Headwaters has net operating loss  carryforwards  of  approximately  $35,700,000
which can be used to offset future taxable income.

Net Income.  For 2000,  net income of $5,406,000  represents an  improvement  of
$7,332,000  from the net loss of  $1,926,000  in 1999.  This is primarily due to
substantially  reduced expenses,  offset in part by a decrease in the income tax
benefit recognized in 1999.

Liquidity and Capital Resources

Liquidity.  Net cash provided by operating activities during 2000 was $5,844,000
compared to  $2,207,000  of cash used during  1999.  Most of this change in cash
flow  from  operating  activities  is  attributable  to the 2000 net  income  of
$5,406,000 as compared to the 1999 net loss of $1,926,000. During 2000, proceeds
from notes payable and other  borrowings  totaled  approximately  $7,448,000 and
approximately  $740,000 was realized  upon the sale of  short-term  investments.
Approximately  $9,834,000  of notes  payable  and other  borrowings  were repaid
during 2000,  approximately  $3,212,000  of cash was invested in  non-affiliated
companies and approximately $1,568,000 was used to purchase treasury stock.

Capital Resources. In 2000, Headwaters' investing activities consisted primarily
of  investments  in  non-affiliated  companies  and the net  sale of  short-term
investments.  As of December  31,  2000,  Headwaters  owns from 1% to 30% of the
voting securities of five non-public high-risk investee companies.  The carrying
value of  current  investments  ranges  from $0 to  $1,810,000.  From  January 1
through  January 15,  2001,  Headwaters  increased  its  investment  in investee
companies by $350,000.  Headwaters has no future commitments and does not expect
to make  additional  investments  in these  entities.  As of December  31, 2000,
Headwaters  also had notes  receivable  representing  short-term  loans to eight
private,  emerging growth  companies made in order for these companies to bridge
the period  between  seed  funding  and the close of first and second

                                       13
<PAGE>

rounds of equity  financing.  Notes  receivable  from these companies range from
$200,000  to  $350,000  each  with  one loan at  $1,500,000.  In  January  2001,
Headwaters  made an additional  loan of  approximately  $200,000  under the same
general  terms as previous  loans.  Headwaters  does not intend to increase  the
funds committed to these investment types in the future,  but could incur losses
if  the  loans  are  not  repaid  or if the  investments  are  not  recoverable.
Headwaters  has  no  current  plans  to  construct   additional  synthetic  fuel
facilities  or to  incur  significant  costs  to  acquire  property,  plant  and
equipment,  but may increase its strategic investments and lending activities as
opportunities arise.

As  described in Note 2 to the  consolidated  financial  statements,  Headwaters
continued acquiring shares of its common stock during the quarter ended December
31, 2000, in connection with the stock purchase  program  announced in May 2000.
The  program  authorizes  Headwaters  to  purchase  stock in the open  market or
through  negotiated  block  transactions.  Purchases  under  the plan are at the
discretion of  Headwaters'  management.  During the quarter  ended  December 31,
2000,  Headwaters  purchased  approximately  615,000  shares  for  approximately
$1,610,000. Headwaters continually evaluates financial alternatives to the stock
repurchase  program but currently expects the program to continue through fiscal
2001 subject to market conditions and available cash.

Headwaters'   working  capital  decreased  from  approximately   $11,225,000  at
September 30, 2000 to approximately  $5,918,000 as of December 31, 2000. Several
factors  caused  this  change,  most  notably  the  repayment  of  approximately
$4,938,000  of  long-term  debt,  a decrease  in  receivables  of  approximately
$2,235,000 and an increase in short-term borrowings of approximately  $2,486,000
used for stock repurchases and working capital needs.

Headwaters  expects  its  operations  to produce  positive  cash flows in future
periods. In addition to cash provided by operating activities, Headwaters has an
arrangement  with an investment  company under which Headwaters can borrow up to
90% of the value of the total  portfolio of Headwaters'  short-term  investments
with that investment  company,  which investments  collateralize any outstanding
borrowings. Under this arrangement, Headwaters borrowed approximately $2,552,000
during the quarter  ended  December 31, 2000,  which amount was  outstanding  at
December 31, 2000. As of January 15, 2001,  the  outstanding  balance under this
arrangement was approximately $3,061,000.

Headwaters also has borrowing capability under a revolving line of credit with a
bank which  expires in January  2002.  Borrowings  under the line of credit bear
interest  at prime plus 1% (10.5% at December  31,  2000) and are limited to the
lesser of $8,000,000 or the  "borrowing  base," as defined.  Maximum  borrowings
under  the line of  credit  during  the  period  ended  December  31,  2000 were
approximately  $4,896,000.  The  borrowing  base was in excess of  $8,000,000 at
December  31, 2000 and there were no  borrowings  under the line at December 31,
2000. Headwaters is currently negotiating to increase the amount available under
the line of credit and to extend the  expiration  date.  Headwaters  believes it
will  have  sufficient  cash  reserves  to  meet  its  obligations   during  the
foreseeable  future,  and also  believes it has the ability to raise  additional
debt and equity capital from other sources if necessary.

Forward Looking Statements

Statements in this Management's  Discussion and Analysis  regarding  Headwaters'
expectations   as  to  the   operation  of  facilities   utilizing   Headwaters'
technologies,  the  marketing  of  products,  the  receipt  of  licensing  fees,
royalties,  and product sales revenues,  the development,  commercialization and
financing of  non-alternative  fuel  technologies  and other strategic  business
opportunities  and acquisitions and other  information  about Headwaters that is
not  purely   historical  by  nature,   including  those  statements   regarding
Headwaters' future business plans, the operation of facilities, the availability
of  feedstocks,  the  marketability  of the  alternative  fuel and the financial
viability of the facilities,  constitute  forward looking  statements within the
meaning  of the  Private  Securities  Litigation  Reform  Act of 1995.  Although
Headwaters  believes that its expectations  are based on reasonable  assumptions
within the bounds of its knowledge of its business and operations,  there can be
no  assurance  that  actual  results  will  not  differ   materially   from  its
expectations.  In addition to matters affecting the alternative fuel industry or
the economy  generally,  factors which could cause actual results to differ from
expectations stated in these forward looking statements  include,  among others,
the following:

(1)  The commercial success of Headwaters' technologies.
(2)  Operating issues for licensed facilities including feedstock  availability,
     moisture  content,  Btu content,  correct  application of chemical reagent,
     achieving significant chemical change, operability of equipment, production
     capacity,  product  durability,  resistance to water absorption and overall
     costs of operations.
(3)  Marketing  issues  relating to market  acceptance of products  manufactured
     using  Headwaters'  technologies,  including  control of moisture  content,
     hardness,  special handling  requirements and other  characteristics of the
     alternative  fuel  product  which  affect its  marketability  and its sales
     price.

                                       14
<PAGE>

(4)  Securing of suitable  facility sites,  including permits and raw materials,
     for relocation and operation of facilities and product sales.
(5)  The  market   acceptance   of  products   manufactured   with   Headwaters'
     technologies in the face of competition from traditional products.
(6)  Dependence  on licensees to  successfully  implement  Headwaters'  chemical
     technologies and making license and other payments to Headwaters.
(7)  Maintenance of  placed-in-service  requirements under Section 29 of the tax
     code by alternative fuel manufacturing facilities.
(8)  Changes in  governmental  regulations  or failure to comply  with  existing
     regulations   that  may  result  in   operational   shutdowns  of  licensee
     facilities.
(9)  The continued  availability  of tax credits to licensees under the tax code
     and each licensee's ability to use tax credits.
(10) The commercial  feasibility of Headwaters'  alternative  fuel  technologies
     upon the expiration of tax credits.
(11) Ability  to  meet  financial   commitments   under   existing   contractual
     arrangements.
(12) Ability  to  meet  non-financial  commitments  under  existing  contractual
     arrangements.
(13) Ability to commercialize  the  non-alternative  fuel chemical  technologies
     which  have  only  been  tested  in the  laboratory  and not in  full-scale
     operations.
(14) Ability  to  commercialize  the  technology  of  others  and  to  implement
     non-technology  based  business  plans  which  are  at an  early  stage  of
     investigation  and  investment  and which will  require  significant  time,
     management, and capital investment.
(15) Success in the face of competition by others producing alternative fuel and
     other products.
(16) Sufficiency of intellectual property protections.

                          PART II -- OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

See "ITEM 3: LEGAL  PROCEEDINGS"  in Headwaters'  Annual Report on Form 10-K for
the year ended September 30, 2000 for descriptions of current legal proceedings.
With respect to all of those matters  except  NEICO/Earthco,  there have been no
material  changes  since that report was filed.  An updated  description  of the
NEICO/Earthco  matter  is  included  in  Note  7 to the  consolidated  financial
statements, which description is hereby incorporated by reference.

ITEM 2.  CHANGES IN SECURITIES

Recent Sales of Unregistered Securities

There  have been no  securities  issued by  Headwaters  within  the past  fiscal
quarter  without  registration  under the  Securities  Act of 1933,  as amended.
Headwaters  has five  effective  registration  statements  filed on Form S-3 and
three effective registration  statements filed on Form S-8. One or more of these
registration  statements have registered all of the securities issued during the
quarter, which consisted solely of the issuance of common stock upon exercise of
options, as described in Note 2 to the consolidated financial statements.

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 AND REPORTS ON FORM 8-K

(a)  There are no exhibits filed herewith.
(b)  The  following  report  on Form 8-K was  filed  during  the  quarter  ended
     December 31, 2000:
     o    Form 8-K filed on December 22, 2000,  for an event dated  December 22,
          2000 (Risk Factors update for effective Forms S-3 and Forms S-8)

                                       15
<PAGE>

                                   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:  January 19, 2001               By: /s/  Kirk A. Benson
                                         ---------------------------------------
                                         Kirk A. Benson, Chief Executive Officer
                                         and Principal Executive Officer

Date:  January 19, 2001               By: /s/ Steven G. Stewart
                                         ---------------------------------------
                                         Steven G. Stewart, Chief Financial
                                         Officer and Principal Financial Officer

                                       16