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 March 31, 2003

                                       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              (I.R.S. Employer Identification No.)
of incorporation or organization)

    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 an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]


The number of shares outstanding of the Registrant's common stock as of April
30, 2003 was 27,656,282.

<PAGE>

                             HEADWATERS INCORPORATED

                                TABLE OF CONTENTS


PART I - FINANCIAL INFORMATION
                                                                            Page
                                                                             No.
     ITEM 1.  FINANCIAL STATEMENTS (Unaudited):
              Condensed Consolidated Balance Sheets - As of
                September 30, 2002 and March 31, 2003 ......................  3
              Condensed Consolidated Statements of Income - For the
                three and six months ended March 31, 2002 and 2003 .........  5
              Condensed Consolidated Statement of Changes in
                Stockholders' Equity - For the six months ended
                March 31, 2003..............................................  6
              Condensed Consolidated Statements of Cash Flows - For the
                six months ended March 31, 2002 and 2003....................  7
              Notes to Condensed Consolidated Financial Statements .........  8
     ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
              CONDITION AND RESULTS OF OPERATIONS........................... 17
     ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.... 22
     ITEM 4.  CONTROLS AND PROCEDURES....................................... 23

PART II - OTHER INFORMATION

     ITEM 1.  LEGAL PROCEEDINGS ............................................ 23
     ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS .................... 23
     ITEM 3.  DEFAULTS UPON SENIOR SECURITIES .............................. 23
     ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .......... 23
     ITEM 5.  OTHER INFORMATION............................................. 24
     ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K ............................. 24

SIGNATURES.................................................................. 25

CERTIFICATIONS.............................................................. 26



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. The 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.

Availability of SEC Filings

Headwaters makes available, free of charge, through its website
(www.hdwtrs.com), its Forms 10-K, 10-Q and 8-K, as well as its registration
statements, as soon as reasonably practicable after those reports are
electronically filed with the SEC.

                                       2
<PAGE>
<TABLE>
<CAPTION>
ITEM 1.  FINANCIAL STATEMENTS



                                                HEADWATERS INCORPORATED

                                         CONDENSED CONSOLIDATED BALANCE SHEETS
                                                      (Unaudited)

                                                                                           September 30,      March 31,
(thousands of dollars)                                                                              2002           2003
--------------------------------------------------------------------------------------- ----------------- --------------
<S>                                                                                        <C>             <C>
ASSETS

Current assets:
     Cash and cash equivalents                                                             $       7,284   $       7,882
     Short-term investments                                                                        5,907           2,786
     Trade receivables, net                                                                       50,331          49,838
     Inventories                                                                                   8,442          10,131
     Deferred income taxes                                                                         1,814           1,271
     Other current assets                                                                          4,155           5,253
                                                                                           -------------   -------------
            Total current assets                                                                  77,933          77,161
                                                                                           -------------   -------------

Property, plant and equipment, net                                                                50,549          50,460
                                                                                           -------------   -------------

Other assets:
     Notes and accrued interest receivable                                                         4,593           2,458
     Intangible assets, net                                                                      118,918         115,666
     Goodwill                                                                                    113,367         113,367
     Debt issue costs and other assets                                                             7,497           7,028
                                                                                           -------------   -------------
            Total other assets                                                                   244,375         238,519
                                                                                           -------------   -------------

            Total assets                                                                   $     372,857   $     366,140
                                                                                           =============   =============



                                                   See accompanying notes.

                                                              3
<PAGE>
<CAPTION>
                                                HEADWATERS INCORPORATED

                                    CONDENSED CONSOLIDATED BALANCE SHEETS, continued
                                                      (Unaudited)


                                                                                           September 30,      March 31,
(thousands of dollars and shares, except per-share data)                                            2002           2003
--------------------------------------------------------------------------------------- ----------------- --------------
<S>                                                                                        <C>             <C>
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Accounts payable                                                                      $      20,773   $      19,455
     Accrued personnel costs                                                                       7,293           4,359
     Accrued interest                                                                                394           2,857
     Income taxes                                                                                  1,244           1,367
     Other accrued liabilities                                                                    13,250           9,056
     Current portion of long-term debt                                                            15,578          22,151
     Current portion of unamortized non-refundable license fees                                    4,378           2,174
                                                                                           -------------   -------------
            Total current liabilities                                                             62,910          61,419
                                                                                           -------------   -------------

Long-term liabilities:
     Long-term debt                                                                              154,552         133,545
     Deferred income taxes                                                                        51,357          51,136
     Unamortized non-refundable license fees                                                       5,010           4,420
     Other long-term liabilities                                                                     432             399
                                                                                           -------------   -------------
            Total long-term liabilities                                                          211,351         189,500
                                                                                           -------------   -------------
            Total liabilities                                                                    274,261         250,919
                                                                                           -------------   -------------

Commitments and contingencies

Stockholders' equity:
     Common stock, $0.001 par value; authorized 50,000 shares, issued and
       outstanding 27,327 shares at September 30, 2002 (including 526 shares
       held in treasury) and 27,591 shares at March 31, 2003 (including 493
       shares held in treasury)                                                                       27              28
     Capital in excess of par value                                                              126,265         127,966
     Accumulated deficit                                                                         (24,418)         (9,577)
     Treasury stock, at cost                                                                      (3,013)         (2,883)
     Other                                                                                          (265)           (313)
                                                                                           -------------   -------------
            Total stockholders' equity                                                            98,596         115,221
                                                                                           -------------   -------------

            Total liabilities and stockholders' equity                                     $     372,857   $     366,140
                                                                                           =============   =============


                                                    See accompanying notes.

                                                               4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                   HEADWATERS INCORPORATED

                                         CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                                                         (Unaudited)



                                                             Three Months Ended March 31,       Six Months Ended March 31,
                                                          ----------------------------------  -------------------------------
(thousands of dollars, except per-share data)                         2002              2003             2002            2003
--------------------------------------------------------- ----------------  ----------------  ---------------  --------------
<S>                                                         <C>               <C>              <C>             <C>
Revenue:
     Chemical reagent sales                                 $       16,944    $       33,123   $       27,287  $       62,191
     License fees                                                    6,626             8,948           12,441          17,726
     Coal combustion products revenues                                  --            31,168               --          69,454
     Manufactured products sales                                        --            11,700               --          22,784
     Other revenues                                                  1,686             1,114            3,950           2,607
                                                            --------------    --------------   --------------  --------------
          Total revenue                                             25,256            86,053           43,678         174,762
                                                            --------------    --------------   --------------  --------------

Operating costs and expenses:
     Cost of chemical reagents                                      11,640            21,782           18,869          40,793
     Cost of coal combustion products revenues                          --            23,422               --          51,418
     Cost of manufactured products                                      --             8,872               --          17,477
     Cost of other revenues                                          2,026             1,135            2,922           2,132
     Depreciation and amortization                                     333             3,167              664           6,251
     Research and development                                          595             1,106            1,129           2,120
     Selling, general and administrative                             3,227             9,801            5,477          19,825
                                                            --------------    --------------   --------------  --------------
        Total operating costs and expenses                          17,821            69,285           29,061         140,016
                                                            --------------    --------------   --------------  --------------

Operating income                                                     7,435            16,768           14,617          34,746
                                                            --------------    --------------   --------------  --------------

Other income (expense):
     Interest and net investment income                                 30                81                2             171
     Interest expense                                                  (17)           (3,541)             (56)         (8,068)
     Other, net                                                      1,351            (2,119)           2,093          (2,058)
                                                            --------------    --------------   --------------  --------------
          Total other income (expense), net                          1,364           (5,579)            2,039         (9,955)
                                                            --------------    --------------   --------------  --------------

Income before income taxes                                           8,799            11,189           16,656          24,791

Income tax provision                                                (3,340)           (4,400)          (6,470)         (9,950)
                                                            --------------    --------------   --------------  --------------

Net income                                                  $        5,459    $        6,789   $       10,186  $       14,841
                                                            ==============    ==============   ==============  ==============


Basic net income per common share                           $         0.23    $         0.25   $         0.43  $         0.55
                                                            ==============    ==============   ==============  ==============

Diluted net income per common share                         $         0.21    $         0.24   $         0.40  $         0.53
                                                            ==============    ==============   ==============  ==============


                                                     See accompanying notes.

                                                                5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                     HEADWATERS INCORPORATED

                               CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                                      (Unaudited) For the Six Months Ended March 31, 2003



                                                     Common Stock            Capital                      Common stock
                                                 ----------------------     in excess      Accumulated       held in
  (thousands of dollars and shares)               Shares      Amount       of par value      deficit        treasury       Other
  -------------------------------------------    ---------   --------     --------------   ------------   -------------  ---------
<S>                                                 <C>       <C>           <C>              <C>              <C>         <C>
  Balances as of September 30, 2002                 27,327    $   27        $ 126,265        $ (24,418)      $ (3,013)    $  (265)

  Exercise of stock options                            264         1              691

  Tax benefit from exercise of stock options                                      750

  33 shares of treasury stock transferred to
    employee stock purchase plan, at cost                                                          260                        130

  Other                                                                                                                       (48)

  Net income                                                                                    14,841
                                                    ------    ------        ---------        ---------        -------     -------
  Balances as of March 31, 2003                     27,591    $   28        $ 127,966        $  (9,577)       $(2,883)    $  (313)
                                                    ======    ======        =========        =========        =======     =======


                                                       See accompanying notes.

                                                                   6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                     HEADWATERS INCORPORATED

                                         CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                           (Unaudited)



                                                                                                 Six Months Ended March 31,
                                                                                               ----------------------------
     (thousands of dollars)                                                                           2002             2003
---------------------------------------------------------------------------------------------- -----------      -----------
<S>                                                                                            <C>              <C>
Cash flows from operating activities:
Net income                                                                                     $    10,186      $    14,841
Adjustments to reconcile net income to net cash provided by operating activities:
      Depreciation and amortization                                                                    664            6,251
      Interest expense related to amortization of debt discount and debt issue costs                    30            1,604
      Deferred income taxes                                                                          5,114              322
      Income tax benefit from exercise of stock options                                              1,390              750
      Amortization of non-refundable license fees                                                     (553)            (589)
      Net gain on disposition of property, plant and equipment                                      (1,334)            (116)
      Write-down of note receivable                                                                     --            2,142
   Other changes in operating assets and liabilities                                               (13,732)          (7,397)
                                                                                               -----------      -----------
Net cash provided by operating activities                                                            1,765           17,808
                                                                                               -----------      -----------

Cash flows from investing activities:
     Purchase of property, plant and equipment                                                        (317)          (2,910)
     Proceeds from disposition of property, plant and equipment                                        115              162
     Collections on notes receivable                                                                 6,842               54
     Net increase in other assets                                                                   (2,515)            (461)
                                                                                               -----------      -----------
Net cash provided by (used in) investing activities                                                  4,125           (3,155)
                                                                                               -----------      -----------

Cash flows from financing activities:
     Payments on long-term debt and short-term borrowings                                           (6,364)         (15,137)
     Proceeds from exercise of options and warrants                                                  3,387              692
     Employee stock purchases                                                                          187              390
     Proceeds from issuance of short-term borrowings                                                 2,056               --
     Purchase of common stock for the treasury                                                      (1,056)              --
                                                                                               -----------      -----------
Net cash used in financing activities                                                               (1,790)         (14,055)
                                                                                               -----------      -----------

Net increase in cash and cash equivalents                                                            4,100              598

Cash and cash equivalents, beginning of period                                                         999            7,284
                                                                                               -----------      -----------

Cash and cash equivalents, end of period                                                       $     5,099      $     7,882
                                                                                               ===========      ===========



                                               See accompanying notes.

                                                         7
</TABLE>
<PAGE>

                             HEADWATERS INCORPORATED

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 2003
                                   (Unaudited)
                                 _______________

1.   Nature of Operations and Basis of Presentation

     Operations - Headwaters Incorporated provides technologies and services
     that maximize the value of fossil fuels. Headwaters is focused on providing
     services to energy companies, converting fossil fuels into alternative
     energy products, and generally adding value to energy. Headwaters generates
     revenue from managing coal combustion products ("CCPs") and from licensing
     its innovative chemical technologies to produce alternative fuel.
     Headwaters intends to expand its business through growth of existing
     operations, commercialization of technologies currently being developed,
     and strategic acquisitions of entities that operate in adjacent industries.

     Through its proprietary Covol Fuels process, Headwaters adds value to the
     production of coal-based solid alternative fuels primarily for use in
     electric power generation plants. Currently, Headwaters has licensed its
     technologies to the owners of 28 alternative fuel facilities that are
     operating at various levels of production in ten states.

     Headwaters owns 100% of Industrial Services Group, Inc. ("ISG"), a
     Utah-based company formed in 1997 and acquired by Headwaters in September
     2002 (see Note 2). ISG, through its wholly-owned subsidiary ISG Resources,
     Inc., is the nation's largest provider of CCP management and marketing
     services to the electric power industry, serving more than 100 coal-fired
     electric power generation plants nationwide. Through its distribution
     network of over 130 locations, ISG is the leading provider of high quality
     fly ash to the building products and ready mixed concrete industries in the
     United States. ISG's manufactured products division develops, manufactures
     and distributes value-added fly ash-based bagged concrete, stucco, mortar
     and block products. ISG also develops and deploys technologies for
     maintaining and improving fly ash quality.

     Headwaters also owns 100% of Hydrocarbon Technologies, Inc. ("HTI"), a New
     Jersey company formed in 1995 and acquired by Headwaters in August 2001.
     HTI's research and development activities are directed at catalyst and
     nano-catalyst technologies used to convert coal and heavy oils into
     environment-friendly, higher-value liquid fuels.

     Basis of Presentation - 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 (including the write-down in March
     2003 of a note receivable in the amount of approximately $2,142,000).
     Certain information and footnote disclosures normally included in financial
     statements prepared in accordance with accounting principles generally
     accepted in the United States 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, 2002 ("Form 10-K") and
     in Headwaters' Quarterly Report on Form 10-Q for the quarter ended December
     31, 2002. Certain prior period amounts have been reclassified to conform to
     the current periods' presentation. The reclassifications had no effect on
     net income or total assets.

     Headwaters' fiscal year ends on September 30 and unless otherwise noted,
     future references to 2002 refer to Headwaters' fiscal quarter and/or the
     six month period ended March 31, 2002, and references to 2003 refer to
     Headwaters' fiscal quarter and/or the six month period ended March 31,
     2003.

     ISG's results of operations for the three- and six-month periods ended
     March 31, 2003 are consolidated with Headwaters' 2003 results. ISG's
     results of operations for periods prior to the September 2002 acquisition
     date have not been consolidated with Headwaters' 2002 results. Due to the
     seasonality of ISG's business and other factors, Headwaters' consolidated
     results of operations for 2003 are not indicative of the results to be
     expected for the full fiscal 2003 year.

2.   ISG Acquisition

     On September 19, 2002, Headwaters acquired 100% of the common stock of ISG,
     assumed or paid off all of ISG's outstanding debt and redeemed all of ISG's
     outstanding preferred stock. As described in more detail in the notes to
     the consolidated financial statements included in the Form 10-K, the ISG
     acquisition was accounted for using the purchase method of accounting as

                                       8
<PAGE>

                             HEADWATERS INCORPORATED

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 2003
                                   (Unaudited)
                                 _______________


     required by Statement of Financial Accounting Standards ("SFAS") No. 141,
     "Business Combinations." Assets acquired and liabilities assumed were
     recorded at their estimated fair values as of September 19, 2002. The final
     allocation of the purchase price, including the estimated fair values for
     certain acquired property, will likely differ from the preliminary
     allocation reflected in the Form 10-K after final valuations and other
     procedures have been completed; however, management does not expect that
     the final allocation will differ materially.

3.   Segment Reporting

     Until Headwaters acquired ISG in September 2002, Headwaters operated in and
     reported as a single industry segment, alternative energy. With the
     acquisition of ISG, Headwaters now operates in three business segments:
     alternative energy, CCPs, and manufactured products.

     The following segment information for 2003 has been prepared in accordance
     with SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
     Information." Performance of the segments is evaluated based on (i)
     operating income, and (ii) earnings before interest, taxes, depreciation
     and amortization, and other income/expense items ("EBITDA"). Intersegment
     sales are immaterial. Amounts included in the "Corporate" column represent
     costs not specifically attributable to any segment and include general
     corporate overhead, research and development expenses and other
     administrative departmental costs. Segment assets reflect those
     specifically attributable to individual segments and primarily include
     accounts receivable, inventories, property, plant and equipment, intangible
     assets and goodwill. Other assets are included in the "Corporate" column.
<TABLE>
<CAPTION>
                                                   Alternative               Manufactured
       (thousands of dollars)                        Energy        CCPs        Products     Corporate      Totals
       ------------------------------------------ ------------- ------------ ------------- -----------  ------------
<S>                                                <C>          <C>           <C>           <C>          <C>
       Three Months ended March 31, 2003

       Segment revenue                             $    43,185  $    31,168   $    11,700   $       --   $    86,053
                                                   ===========  ===========   ===========   ==========   ===========

       EBITDA                                      $    19,255  $     6,640   $     1,269   $  (7,229)   $    19,935
       Depreciation and amortization                     (284)      (2,652)         (124)        (107)       (3,167)
                                                   -----------  -----------   -----------   ----------   -----------
       Operating income                            $    18,971  $     3,988   $     1,145   $  (7,336)        16,768
                                                   ===========  ===========   ===========   ==========
            Net interest expense                                                                             (3,460)
            Other income (expense), net                                                                      (2,119)
            Income tax provision                                                                             (4,400)
                                                                                                         -----------

       Net income                                                                                        $     6,789
                                                                                                         ===========

       Capital expenditures                        $        20  $     1,789   $       372   $       11   $     2,192
                                                   ===========  ===========   ===========   ==========   ===========

       Six Months ended March 31, 2003

       Segment revenue                             $    82,524  $    69,454   $    22,784   $       --   $   174,762
                                                   ===========  ===========   ===========   ==========   ===========

       EBITDA                                      $    37,414  $    14,004   $     2,232   $ (12,653)   $    40,997
       Depreciation and amortization                     (574)      (5,171)         (298)        (208)       (6,251)
                                                   -----------  -----------   -----------   ----------   -----------
       Operating income                            $    36,840  $     8,833   $     1,934   $ (12,861)        34,746
                                                   ===========  ===========   ===========   ==========
            Net interest expense                                                                             (7,897)
            Other income (expense), net                                                                      (2,058)
            Income tax provision                                                                             (9,950)
                                                                                                          ----------

       Net income                                                                                         $   14,841
                                                                                                          ==========


       Capital expenditures                        $       129  $     2,357   $       400   $       24   $     2,910
                                                   ===========  ===========   ===========   ==========   ===========


       Segment assets as of March 31, 2003         $    40,375  $   277,283   $    21,853   $   26,629   $   366,140
                                                   ===========  ===========   ===========   ==========   ===========
</TABLE>

                                       9
<PAGE>

                             HEADWATERS INCORPORATED

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 2003
                                   (Unaudited)
                                 _______________


4.   Inventories

     Inventories consisted of the following at:

                                               September 30,   March 31, 2003
          (thousands of dollars)                        2002
          ----------------------------------- --------------- ----------------
          Raw materials                        $       1,198   $          766
          Finished goods                               7,244            9,365
                                               -------------   --------------
                                               $       8,442   $       10,131
                                               =============   ==============

5.   Intangible Assets and Goodwill

     Intangible Assets - As more fully described in the notes to the
     consolidated financial statements in the Form 10-K, with the exception of
     certain disclosures which could not be early implemented, Headwaters
     implemented SFAS No. 142, "Accounting for Goodwill and Intangible Assets,"
     effective with the acquisitions of HTI in August 2001 and ISG in September
     2002. Effective October 1, 2002, Headwaters fully implemented SFAS No. 142,
     which mandates the following disclosures.

     Headwaters has no intangible assets that are not being amortized. The
     following table summarizes the gross carrying amounts and the related
     accumulated amortization of all amortizable intangible assets as of:

<TABLE>
<CAPTION>
                                                           September 30, 2002                 March 31, 2003
                                                     -------------------------------- --------------------------------
                                                         Gross                            Gross
                                        Estimated       Carrying       Accumulated       Carrying       Accumulated
        (thousands of dollars)        useful lives       Amount       Amortization        Amount       Amortization
        ----------------------------- -------------- --------------- ---------------- --------------- ----------------
        <S>                           <C>             <C>               <C>            <C>               <C>
        ISG contracts                   20 years      $  106,400        $     179      $  106,400        $   2,839
        HTI patented technology         15 years           9,700              647           9,700              970
        ISG patents                    7 1/2 years         2,764                4           2,764              189
        Other                         9 - 10 years         1,522              638           1,522              722
                                                      ----------        ---------      ----------        ---------
                                                      $  120,386        $   1,468      $  120,386        $   4,720
                                                      ==========        =========      ==========        =========
</TABLE>

     Total amortization expense related to intangible assets was approximately
     $204,000 and $1,626,000 for the three months ended March 31, 2002 and 2003,
     respectively, and $408,000 and $3,252,000 for the six months ended March
     31, 2002 and 2003, respectively. Total estimated annual amortization
     expense for fiscal years 2003 through 2007 is approximately $6,500,000 per
     year.

     Goodwill - In accordance with the requirements of SFAS No. 142, Headwaters
     does not amortize goodwill, all of which relates to the acquisitions of ISG
     and HTI. There were no changes in the carrying amount of goodwill during
     2003. SFAS No. 142 requires Headwaters to periodically perform tests for
     goodwill impairment. Step 1 of the initial impairment test was required to
     be performed no later than March 31, 2003; thereafter impairment testing is
     required to be performed no less often than annually, or sooner if evidence
     of possible impairment arises. Impairment testing is performed at the
     reporting unit level and Headwaters has identified four reporting units: i)
     the Covol Fuels division and ii) HTI (which together comprise the
     alternative energy segment), iii) CCPs and iv) manufactured products.
     Currently, goodwill exists only in the CCPs and HTI reporting units.

     Step 1 of impairment testing consists of determining and comparing the fair
     values of the reporting units to the carrying values of those reporting
     units. If step 1 is failed for either the CCPs or HTI reporting units,
     indicating a potential impairment, Headwaters would be required to complete
     step 2, which is a more detailed test to calculate the implied fair value
     of goodwill, and compare that value to the carrying value of the goodwill.

     During 2003, Headwaters performed step 1 impairment tests of the recorded
     goodwill in the CCPs and HTI reporting units. These tests indicated that
     the fair values of the reporting units exceeded their carrying values.
     Currently, Headwaters anticipates performing its annual, recurring tests
     for potential impairment in the third fiscal quarter ending June 30.

                                       10
<PAGE>

                             HEADWATERS INCORPORATED

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 2003
                                   (Unaudited)
                                 _______________


6.   Long-term Debt
<TABLE>
<CAPTION>
     Long-term debt consisted of the following at:
                                                                                 September 30,      March  31,
              (thousands of dollars)                                                      2002            2003
              --------------------------------------------------------------- ----------------- ---------------
              <S>                                                                <C>               <C>
              Senior secured debt with a face amount totaling $155,000 at
                   September 30, 2002 and $139,904 at March 31, 2003             $     150,378     $   135,947

              Senior subordinated debentures with a face amount totaling                19,603          19,642
              $20,000

              Other                                                                        149             107
                                                                                 -------------     -----------
                                                                                       170,130         155,696
              Less: current portion                                                   (15,578)        (22,151)
                                                                                 -------------     -----------
              Total long-term debt                                               $     154,552     $   133,545
                                                                                 =============     ===========
</TABLE>

     Senior Secured Credit Agreement - In connection with the ISG acquisition,
     Headwaters entered into a $175,000,000 senior secured credit agreement with
     a syndication of lenders, under which a total of $155,000,000 was borrowed
     on the acquisition date. The credit agreement also allows up to $20,000,000
     to be borrowed under a revolving credit arrangement. The debt was issued at
     a 3% discount and Headwaters received net cash proceeds of $150,350,000.
     The original issue discount is being accreted using the effective interest
     method and the accretion is recorded as interest expense. The debt is
     secured by all assets of Headwaters, bears interest at a variable rate
     (approximately 5.9% at March 31, 2003), and is repayable in quarterly
     installments through August 2007.

     In December 2002, principal repayments totaling $9,875,000 were made, which
     included a $6,000,000 optional early repayment. In February 2003, principal
     repayments totaling $5,221,000 were made, which included a $1,500,000
     optional early repayment. When optional prepayments are made, required
     principal repayments for all future periods are reduced and as of March 31,
     2003 totaled approximately $7,363,000 for the remainder of fiscal 2003,
     approximately $29,454,000 in fiscal years 2004, 2005 and 2006, and
     approximately $44,179,000 in fiscal 2007. In May 2003, principal repayments
     totaling $10,182,000 were made, which included a $6,500,000 optional early
     repayment. As a result of these repayments, future required principal
     repayments currently total approximately $3,506,000 for the remainder of
     fiscal 2003, approximately $28,048,000 in fiscal years 2004, 2005, and
     2006, and approximately $42,072,000 in fiscal 2007. In certain situations,
     for example when Headwaters receives "excess cash flow," as defined,
     mandatory prepayments, in excess of the scheduled payments, are required.
     Mandatory prepayments are calculated as a percentage of "excess cash flow,"
     ranging up to 100%, which percentage is based on Headwaters' "leverage
     ratio."

     The credit agreement contains restrictions and covenants common to such
     agreements, including limitations on the incurrence of additional debt,
     investments, merger and acquisition activity, asset liens, capital
     expenditures in excess of $15,000,000 in any fiscal year, and the payment
     of dividends, among others. In addition, Headwaters must maintain certain
     financial ratios, including leverage ratios and interest coverage, as those
     terms are defined in the credit agreement. As of March 31, 2003, Headwaters
     must maintain a total leverage ratio of 2.75:1.0 or less. The maximum ratio
     declines over time until June 2004, at which time the ratio must remain at
     2.0:1.0 or less. There is a similar leverage ratio requirement for the
     senior debt alone, which at March 31, 2003 must be 2.25:1.0 or less,
     declining over time through June 2004, at which time it must be maintained
     at 1.5:1.0 or less. The interest coverage requirement at March 31, 2003 was
     4.0:1.0 or more and does not change until December 2003, at which time the
     ratio must be maintained at a level of 5.0:1.0 or more. Headwaters was in
     compliance with all debt covenants as of March 31, 2003.

     Under the terms of the senior secured credit agreement, Headwaters may
     borrow up to a total of $175,000,000; provided, however, that, except for
     the initial $20,000,000 of available revolving credit, the maximum
     borrowing limit is permanently reduced by the amount of any repayments of
     the initial $155,000,000 borrowed in September 2002. Terms of any
     additional borrowings under the credit agreement are generally the same as
     those described in the preceding paragraphs. Finally, the credit agreement
     allows for the issuance of letters of credit, provided there is capacity
     under the available revolving credit arrangement. Currently two letters of
     credit totaling $2,970,000 are outstanding, with expiration dates in
     November 2003 and March 2004. No other borrowings have been drawn or
     letters of credit issued. Headwaters pays a fee of 5/8% on the unused
     portion of the revolving credit arrangement.

                                       11
<PAGE>

                             HEADWATERS INCORPORATED

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 2003
                                   (Unaudited)
                                 _______________


     Senior Subordinated Debentures - In connection with the ISG acquisition,
     Headwaters also entered into a $20,000,000 subordinated loan agreement,
     under which senior subordinated debentures were issued at a 2% discount,
     with Headwaters receiving net cash proceeds of $19,600,000. The original
     issue discount is being accreted using the effective interest method and
     the accretion is recorded as interest expense. ISG management participated
     in one-half, or $10,000,000, of the $20,000,000 of debt issued. The other
     half was issued to a corporation. The debt is not secured, bears interest
     at an 18% rate payable quarterly, and is repayable in September 2007. It is
     senior to all other debt except the senior secured debt described above.
     The debt agreement allows for optional prepayments. Any prepayments paid to
     the corporation are subject to a prepayment charge which ranges from 5% of
     the principal prepaid in the first year to 1% of the principal prepaid in
     the last year of the five-year term of the debt agreement.

     The loan agreement contains restrictions and covenants common to such
     agreements, and these are generally consistent with those described above
     for the senior secured debt. As of March 31, 2003, Headwaters must maintain
     a total leverage ratio of 3.0:1.0 or less. The maximum ratio declines over
     time until June 2004, at which time the ratio must remain at 2.25:1.0 or
     less. The interest coverage requirement at March 31, 2003 was 3.75:1.0 or
     more and does not change until December 2003, at which time the ratio must
     be maintained at a level of 4.75:1.0 or more. Headwaters was in compliance
     with all debt covenants as of March 31, 2003.

     Interest Costs - As a result of the $6,000,000 early repayment of principal
     in December 2002 and the $1,500,000 early repayment of principal in
     February 2003, additional non-cash interest expense of approximately
     $365,000 and $90,000, respectively, was incurred, representing accelerated
     amortization of debt discount and debt issue costs associated with those
     principal amounts.

     During the three months ended March 31, 2003, Headwaters incurred total
     interest costs of approximately $3,577,000, including approximately
     $653,000 of non-cash interest expense and approximately $36,000 of interest
     costs that were capitalized. During the six months ended March 31, 2003,
     Headwaters incurred total interest costs of approximately $8,114,000,
     including approximately $1,604,000 of non-cash interest expense and
     approximately $46,000 of interest costs that were capitalized. During the
     three- and six-month periods ended March 31, 2002, Headwaters incurred
     total interest costs of approximately $17,000 and $56,000, respectively,
     including approximately $15,000 and $30,000, respectively, of non-cash
     interest expense. No interest costs were capitalized in the 2002 periods.
     The weighted-average interest rate on outstanding long-term debt,
     disregarding amortization of debt issue costs and debt discount, was
     approximately 7.3% at September 30, 2002 and 7.4% at March 31, 2003.

7.   Stock Options

     Headwaters has elected to continue to apply the intrinsic value method as
     prescribed by APB 25 in accounting for options granted to employees,
     officers and directors and does not currently plan to change to the fair
     value method. The alternative fair value method of accounting prescribed by
     SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), as
     amended by SFAS No. 148, requires the use of option valuation models that
     were not developed for use in valuing employee stock options, as discussed
     below. Under APB 25, no compensation expense is recognized for stock option
     grants to employees, officers and directors when the exercise price of
     stock options equals or exceeds the market price of Headwaters' common
     stock on the date of grant.

     In years prior to 1998, certain options were granted with terms considered
     compensatory. In such instances, the related compensation cost is amortized
     to expense over the applicable vesting period on a straight-line basis.
     Amortized compensation expense related to compensatory options granted in
     prior years was approximately $23,000 for each of the three-month periods
     ended March 31, 2002 and 2003 and approximately $46,000 for each of the
     six-month periods ended March 31, 2002 and 2003. If the fair value
     provisions of SFAS No. 123 would have been applied to all options granted,
     compensation expense would have been approximately $608,000 and $932,000,
     respectively, for the three-month periods ended March 31, 2002 and 2003,
     and approximately $1,166,000 and $1,765,000, respectively, for the
     six-month periods ended March 31, 2002 and 2003.

                                       12
<PAGE>

                             HEADWATERS INCORPORATED

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 2003
                                   (Unaudited)
                                 _______________


     If Headwaters had elected to account for options granted based on their
     fair values, as prescribed by SFAS 123, net income and income per share for
     2002 and 2003 would have been changed to the pro forma amounts shown in the
     table below.
<TABLE>
<CAPTION>

                                                                 Three Months Ended March 31,     Six Months Ended March 31,
                                                              -------------------------------- ------------------------------
         (thousands of dollars, except per-share data)                    2002           2003           2002            2003
         -------------------------------------------          ----------------- -------------- -------------- ---------------
         <S>                                                        <C>            <C>            <C>             <C>
         Net income - as reported                                   $    5,459     $    6,789     $   10,186      $   14,841

         Pro forma additional compensation expense                       (585)          (909)        (1,119)         (1,719)
                                                                    ----------     ----------     ----------      ----------
         Net income - pro forma                                     $    4,874     $    5,880     $    9,067      $   13,122
                                                                    ==========     ==========     ==========      ==========


         Basic income per share - as reported                       $     0.23     $     0.25     $     0.43      $     0.55
                                - pro forma                         $     0.20     $     0.22     $     0.38      $     0.49

         Diluted income per share - as reported                     $     0.21     $     0.24     $     0.40      $     0.53
                                  - pro forma                       $     0.19     $     0.21     $     0.36      $     0.47

</TABLE>

     The fair values of the 2002 and 2003 option grants were determined using
     the Black-Scholes option pricing model and the following assumptions:
     expected stock price volatility of 40% to 60%, risk-free interest rates
     ranging from 1.7% to 4.0%, weighted average expected option lives of five
     years, and no dividend yield. The Black-Scholes option valuation model was
     developed for use in estimating the fair value of traded options that have
     no vesting restrictions and that are fully transferable. In addition,
     option valuation models require the input of highly subjective assumptions
     including expected stock price volatility. Because Headwaters' stock
     options have characteristics significantly different from those of traded
     options, and because changes in the subjective input assumptions can
     materially affect the fair value, in management's opinion, the existing
     models do not necessarily provide a reliable measure of the fair value of
     stock options.

     During the three months ended March 31, 2003, Headwaters granted to
     non-employee directors options to purchase 108,000 shares of common stock.
     These options have exercise prices ranging from $14.05 to $14.38 per share,
     the fair market value of Headwaters' common stock on the dates of grant. In
     January 2003 Headwaters' Board of Directors adopted and in March 2003
     Headwaters' stockholders approved, a new stock option plan, the 2003 Stock
     Incentive Plan, which is described in more detail in Headwaters' Proxy
     Statement filed with the SEC on January 28, 2003. The 2003 Stock Incentive
     Plan reserves for issuance 1,000,000 shares of common stock. Stock options,
     restricted stock and stock appreciation rights may be granted under the
     2003 Plan. Subsequent to March 31, 2003, Headwaters granted to employees
     and officers options to purchase approximately 390,000 shares of common
     stock. These options have an exercise price of $16.89 per share, the fair
     market value of Headwaters' common stock on the date of grant.

8.   Income Taxes

     The income tax provision consisted of the following:
<TABLE>
<CAPTION>
                                                        Three Months Ended March 31,     Six Months Ended March 31,
                                                     -------------------------------- ------------------------------
         (thousands of dollars)                                  2002           2003           2002            2003
         ------------------------------------------- ----------------- -------------- -------------- ---------------
         <S>                                               <C>            <C>            <C>             <C>
         Current tax provision:
              Federal                                      $      470     $    5,060     $      870      $    8,510
              State                                               390            518            486           1,118
                                                           ----------     ----------     ----------      ----------
         Total current tax provision                              860          5,578          1,356           9,628

         Deferred tax provision (benefit):
              Federal                                           2,270        (1,050)          4,680             300
              State                                               210          (128)            434              22
                                                           ----------     ----------     ----------      ----------
         Total deferred tax provision (benefit)                 2,480        (1,178)          5,114             322
                                                           ----------     ----------     ----------      ----------
         Total income tax provision                        $    3,340     $    4,400     $    6,470      $    9,950
                                                           ==========     ==========     ==========      ==========

                                       13
<PAGE>

                             HEADWATERS INCORPORATED

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 2003
                                   (Unaudited)
                                 _______________


9.   Earnings per Share
<CAPTION>

         (thousands of dollars and shares,              Three Months Ended March 31,     Six Months Ended March 31,
                                                     -------------------------------- ------------------------------
         except per-share data)                                  2002           2003           2002            2003
         ------------------------------------------- ----------------- -------------- -------------- ---------------
         <S>                                               <C>            <C>            <C>             <C>
         Numerator - Net income                            $    5,459     $    6,789     $   10,186      $   14,841
                                                           ==========     ==========     ==========      ==========
         Denominator:
         Denominator for basic earnings per share
           - weighted-average shares outstanding               23,924         26,983         23,758          26,909

         Effect of dilutive securities - shares
           issuable upon exercise of options
           and warrants                                         1,532          1,118          1,576           1,224
                                                           ----------     ----------     ----------      ----------
         Denominator for diluted earnings per
           share - weighted-average shares
           outstanding after assumed exercises                 25,456         28,101         25,334          28,133
                                                           ==========     ==========     ==========      ==========

         Basic net income per share                        $     0.23     $     0.25     $     0.43      $     0.55
                                                           ==========     ==========     ==========      ==========

         Diluted net income per share                      $     0.21     $     0.24     $     0.40      $     0.53
                                                           ==========     ==========     ==========      ==========
</TABLE>

     Anti-dilutive securities not considered in the diluted earnings per share
     calculations, consisting of out-of-the money options, totaled approximately
     110,000 and 510,000 shares for the three months ended March 31, 2002 and
     2003, respectively, and 400,000 shares for each of the six month periods
     ended March 31, 2002 and 2003.

10.  Commitments and Contingencies

     Commitments and contingencies as of March 31, 2003 not disclosed elsewhere,
     are as follows:

     Medical Insurance - For calendar 2002, ISG established a self-insured
     medical insurance plan for its employees. This plan has stop-loss coverage
     for amounts in excess of $75,000 per individual and approximately
     $5,100,000 in the aggregate for the plan year ended December 31, 2002. ISG
     contracted with a third-party administrator to assist in the payment and
     administration of claims. Insurance claims are recognized as expenses when
     incurred, including an estimate of costs for claims incurred but not
     reported at the balance sheet date. As of March 31, 2003, approximately
     $265,000 is accrued for this calendar 2002 liability. Effective January 1,
     2003, Headwaters adopted a self-insured medical insurance plan for
     employees of all of its subsidiaries. This plan has stop-loss coverage for
     amounts in excess of $75,000 per individual and approximately $6,000,000 in
     the aggregate for the plan year ending December 31, 2003 and approximately
     $615,000 is accrued as of March 31, 2003 for the 2003 calendar year.

     Legal or Contractual Matters - 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.
     (This technology is distinct from the technology developed by Headwaters.)
     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 alleged that the technology
     purchase transaction was an unauthorized corporate action and that Davidson
     and Headwaters conspired together to affect the transfer. The complaint
     asserted related causes of action and sought unspecified money damages and
     other relief. In August 2001, the trial court granted Headwaters' motion to
     dismiss the complaint. Plaintiffs appealed the case to the Sixth Circuit
     Court of Appeals. In June 2002, the Sixth Circuit Court of Appeals issued
     an order i) affirming the District Court's judgment and order of dismissal,
     and ii) transferring to the Federal Circuit Court of Appeals plaintiff's
     appeal of the District Court's order denying the motion for relief from
     judgment. Because resolution of the appeal is uncertain, legal counsel
     cannot express an opinion as to the ultimate amount, if any, of Headwaters'
     liability.

                                       14
<PAGE>

                             HEADWATERS INCORPORATED

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 2003
                                   (Unaudited)
                                 _______________


     Boynton. This action is factually related to the Adtech matter. In the
     Adtech case, the alleged claims are asserted by certain purported officers
     and directors of Adtech, Inc. In the Boynton 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, inter alia, 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 complaint seeks
     declaratory relief and compensatory and punitive damages. 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.

     AGTC. In March 1996, Headwaters entered into an agreement with AGTC and its
     associates for certain services related to the identification and selection
     of alternative fuel projects. In March 2002, AGTC filed an arbitration
     demand claiming that it is owed a commission under the 1996 agreement for
     eight percent of the monetized price of the Port Hodder project. Headwaters
     asserts that AGTC did not perform under the agreement and that the
     agreement was terminated and the disputes were settled in July 1996.
     Headwaters has filed an answer in the arbitration, denying AGTC's claims
     and has asserted counterclaims against AGTC. Because the arbitration is at
     an early stage and resolution is uncertain, legal counsel cannot express an
     opinion as to the ultimate amount of recovery or liability.

     AJG. In December 1996, Headwaters entered into a technology license and
     proprietary chemical reagent sale agreement with AJG Financial Services,
     Inc. The agreement called for AJG to pay royalties and to purchase
     proprietary chemical reagent 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 had 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 as well as other relief. AJG's answer to
     the complaint denied Headwaters' claims and asserted counter-claims based
     upon allegations of misrepresentation and breach of contract. AJG seeks
     unspecified compensatory damages as well as punitive damages. Headwaters
     has denied 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,
     antitrust violations, and interference with economic relations. 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.

     License Fees. Pursuant to the contractual terms of an agreement with a
     certain licensee, the cumulative net license fees owed to Headwaters,
     totaling over $10,000,000 as of March 31, 2003, have been placed in escrow
     for the benefit of Headwaters. Headwaters currently expects the escrowed
     amounts to increase as additional license fees are generated and that most,
     if not all, of such amounts will be recognized as revenue at some future
     date. Certain accounting rules governing revenue recognition require that
     the seller's price to the buyer be "fixed or determinable" as well as
     reasonably certain of collection. In this situation, those rules appear to
     currently preclude revenue recognition. Accordingly, none of the escrowed
     amounts have been recognized as revenue in the consolidated statements of
     income.

     Other. Headwaters and its subsidiaries are also involved in other legal
     proceedings that have arisen in the normal course of business. For example,
     certain subsidiaries of ISG are involved in legal proceedings involving
     allegations of breach of warranty and sales of defective building products
     applied by third parties to building exteriors. Many claims are covered by
     insurance. Generally, ISG denies and defends such allegations or resolves
     such matters as appropriate. Management does not believe that the outcome
     of these matters will have a significant adverse 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.

                                       15
<PAGE>

                             HEADWATERS INCORPORATED

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 2003
                                   (Unaudited)
                                 _______________


     Incentive Agreements with ISG Principals. In January 2003, Headwaters
     executed incentive agreements, with an effective date of November 2002,
     with three of the former stockholders and officers of ISG, all of whom are
     current officers of either Headwaters or ISG. The agreements call for
     contingent payments totaling up to $5,000,000 in the event of (i) a change
     in control, as defined, or (ii) continuing employment through September
     2004 and an increase in the average stock price for Headwaters' common
     stock for any calendar quarter exceeding $20 per share. The maximum
     payments would be required if there were a change in control prior to
     October 2004, or if the officers remain employed through September 2004 and
     the average stock price for any calendar quarter reaches $25 per share or
     more.

11.  SEC Registration Statement

     In July 2002, Headwaters filed a $250,000,000 universal shelf registration
     statement with the SEC that can be used for the sale of common stock,
     preferred stock, convertible debt and other securities, should Headwaters
     so choose. The SEC declared this registration statement effective in August
     2002; however, a prospectus supplement describing the terms of any
     securities to be issued is required to be filed before any offering would
     commence under the registration statement. The most likely use of proceeds
     from securities offered under the shelf registration would be to reduce
     long-term debt; however, proceeds could also be used for working capital
     and other general corporate purposes.

12.  Recent Accounting Pronouncements

     In December 2002, SFAS No. 148, "Accounting for Stock-Based Compensation -
     Transition and Disclosure," was issued. This statement amends SFAS No. 123
     to provide alternative methods of transition for a voluntary change to the
     fair value method of accounting for stock-based employee compensation. It
     also requires disclosures in interim financial statements about the method
     of accounting for stock-based employee compensation and the effect of the
     method used on reported results. Headwaters does not currently intend to
     voluntarily change to the fair value method of accounting for stock-based
     compensation, but has implemented the interim financial statement
     disclosure requirements (see Note 7).

     In July 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
     Disposal Activities," was issued. This pronouncement was required to be
     implemented by Headwaters as of January 1, 2003. Headwaters has reviewed
     this standard as well as all other recently issued accounting standards
     which have not yet been adopted in order to determine their potential
     effect, if any, on the future results of operations or financial position
     of Headwaters. Based on that review, Headwaters does not currently believe
     that any of these recent accounting pronouncements will have a significant
     effect on its current or future financial position or results of
     operations.

                                       16
<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.

Acquisition of ISG and Segments

         The consolidated financial statements include the accounts of
Headwaters and all of its subsidiaries, only two of which have significant
operations, ISG and HTI. As more fully described in Note 2 to the consolidated
financial statements, Headwaters acquired ISG on September 19, 2002.
Accordingly, ISG's results of operations for the three- and six-month periods
ended March 31, 2003 are consolidated with Headwaters' 2003 results. ISG's
results of operations for periods prior to the September 2002 acquisition date
have not been consolidated with Headwaters' 2002 results. ISG's business is
seasonal; its strongest quarter is typically the September quarter, followed by
the June quarter and then the December quarter. The slowest quarter for ISG is
the March quarter. Due to the seasonality of ISG's business and other factors,
Headwaters' consolidated results of operations for 2003 are not indicative of
the results to be expected for the full fiscal 2003 year.

         Until Headwaters acquired ISG in September 2002, Headwaters operated in
and reported as a single industry segment, alternative energy. With the
acquisition of ISG in September 2002, Headwaters now operates in three business
segments: alternative energy, CCPs, and manufactured products. These segments
are managed and evaluated separately by management based on fundamental
differences in their operations, products and services.

         The alternative energy segment includes Headwaters' traditional
coal-based solid alternative fuel business and HTI's research and development
activities directed at catalyst and nano-catalyst technologies used to convert
coal and heavy oils into environment-friendly, higher-value liquid fuels.
Revenues for this segment include primarily sales of chemical reagents and
license fees.

         The CCP segment includes ISG's business of supplying post-combustion
services and technologies to the coal-fired electric utility industry. This
segment markets and manages coal combustion products such as fly ash and bottom
ash, known as CCPs. ISG has long-term contracts, primarily with coal-fired
electric generating utilities, pursuant to which it manages the post-combustion
operations for the utilities. ISG markets these CCPs to replace manufactured or
mined materials, such as portland cement, lime, agricultural gypsum, fired
lightweight aggregate, granite aggregate and limestone. CCP revenues consist
primarily of the sale of products, along with a small percentage of service
revenue.

         The manufactured products segment produces and sells standard masonry
and stucco construction materials and supplies, packaged products and blocks, as
well as some of ISG's value-added technology products. ISG continually seeks to
increase the volumes of CCPs used as ingredients in the mortars, stuccos and
blocks that the manufactured products segment produces.

Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002

         The information set forth below compares Headwaters' operating results
for the three months ended March 31, 2003 ("2003") with operating results for
the three months ended March 31, 2002 ("2002").

         Revenue. Total revenue for 2003 increased by $60.8 million or 240% to
$86.1 million as compared to $25.3 million for 2002. The major components of
revenue are discussed in the sections below.

         Chemical Reagent Sales. Chemical reagent sales during 2003 were $33.1
million with a corresponding direct cost of $21.8 million. Chemical reagent
sales during 2002 were $16.9 million with a corresponding direct cost of $11.6
million. The increase in chemical reagent sales during 2003 was due to increased
alternative fuel production by Headwaters' licensees, as well as sales of
chemical reagents to new customers. Currently, Headwaters expects its future
chemical reagent sales revenue from all licensees and other customers to be
higher than the amounts reported for fiscal 2002 due to anticipated increases in
alternative fuel production by licensees and increased sales of chemical
reagents to new customers. However, Headwaters does not expect the rate of
growth in fiscal 2003 to be as high as it was for fiscal 2002. The gross profit
margin increased in 2003 from 2002 due primarily to the reduction or elimination
of certain temporary pricing discounts and differing chemical reagent formula
requirements of certain licensees and new customers. Headwaters currently
expects gross profit margins for the remainder of fiscal 2003 will be a few
percentage points lower than the 2003 reported gross profit margin due to higher
chemical reagent costs, pricing discounts, and differing chemical reagent
formula margins.

                                       17
<PAGE>

         License Fees. As more fully described in Headwaters Form 10-K, "ITEM 1:
BUSINESS, Covol Fuels," Headwaters earns license fees from the owners of
facilities which use Headwaters' proprietary technology to produce solid
alternative fuel. This alternative fuel, when sold, is eligible for federal tax
credits under Section 29 of the Internal Revenue Code, currently through
December 31, 2007, subject to changes in laws or regulations. During 2003,
Headwaters recognized license fee revenue totaling $8.9 million, an increase of
$2.3 million or 35% over $6.6 million of license fee revenue recognized during
2002. License fees in 2003 consisted of recurring license fees or royalty
payments of $8.6 million and deferred revenue amortization of $0.3 million.
License fees in 2002 consisted of recurring license fees of $6.0 million and
deferred revenue amortization of $0.6 million.

         A major licensee which purchased four facilities from a former licensee
in October 2001 did not begin operating those facilities until early calendar
2002. Headwaters earned approximately $2.6 million in license fees from this
licensee in 2003 and $1.0 million in 2002. This factor was the primary cause of
the increase in license fee revenue for 2003 over 2002. Headwaters currently
expects license fee revenue in fiscal 2003 to exceed the amounts reported for
the respective fiscal 2002 periods. However, these increases are expected to
decline in the future as this business segment continues to mature.

         Pursuant to the contractual terms of an agreement with a certain
licensee, the cumulative net license fees owed to Headwaters, totaling over
$10.0 million as of March 31, 2003, have been placed in escrow for the benefit
of Headwaters. Headwaters currently expects the escrowed amounts to increase as
additional license fees are generated and that most, if not all, of such amounts
will be recognized as revenue at some future date. Certain accounting rules
governing revenue recognition require that the seller's price to the buyer be
"fixed or determinable" as well as reasonably certain of collection. In this
situation, those rules appear to currently preclude revenue recognition.
Accordingly, none of the escrowed amounts have been recognized as revenue in the
consolidated statements of income.

         ISG Revenues and Cost of Revenues. Coal combustion products revenues
and manufactured products sales and the related cost of revenue captions
represent ISG's revenues and cost of revenues for 2003. There were no comparable
revenues and cost of revenues for ISG included in the 2002 results.

         Depreciation and Amortization. These costs increased by $2.9 million to
$3.2 million in 2003 from $0.3 million in 2002. The increase was primarily
attributable to the depreciation and amortization of the tangible and intangible
assets related to the ISG acquisition. Depreciation and amortization expense in
subsequent quarters should be comparable to 2003, but will increase
substantially in fiscal 2003 over the respective 2002 periods as a result of the
ISG acquisition.

         Research and Development. Research and development expenses increased
by $0.5 million to $1.1 million in 2003 from $0.6 million in 2002. The increase
was primarily attributable to the inclusion of additional costs relating to
ISG's research and development activities. In 2002, research and development
expenses primarily represent costs related to HTI's activities.

         Selling, General and Administrative Expenses. These expenses increased
$6.6 million or 206% to $9.8 million for 2003 from $3.2 million for 2002. The
increase in 2003 was due primarily to the inclusion of ISG's costs.

         Other Income and Expense. During 2003, Headwaters reported net other
expense of $5.6 million compared to net other income of $1.4 million during
2002. The change of $7.0 million is primarily attributable to an increase in
interest expense of $3.5 million, a gain in 2002 for $1.3 million related to the
sale of an interest in an alternative fuel facility, and a $2.1 million
write-down of a note receivable in 2003.

         Interest expense increased in 2003 due to the substantial increase in
debt incurred in September 2002 to finance the acquisition of ISG. Interest
expense will be significantly higher in fiscal 2003 compared to the respective
fiscal 2002 periods as a result of this debt. In addition, any future early
repayments of debt principal will accelerate the amortization of debt discount
and debt issue costs.

         Income Tax Provision. In 2003, Headwaters recorded an income tax
provision at an effective tax rate of approximately 39%. In 2002, the effective
tax rate was approximately 38%.

Six Months Ended March 31, 2003 Compared to Six Months Ended March 31, 2002

         The information set forth below compares Headwaters' operating results
for the six months ended March 31, 2003 ("2003") with operating results for the
six months ended March 31, 2002 ("2002").

         Revenue. Total revenue for 2003 increased by $131.1 million or 300% to
$174.8 million as compared to $43.7 million for 2002. The major components of
revenue are discussed in the sections below.

         Chemical Reagent Sales. Chemical reagent sales during 2003 were $62.2
million with a corresponding direct cost of $40.8 million. Chemical reagent
sales during 2002 were $27.3 million with a corresponding direct cost of $18.9
million. The increase in chemical reagent sales during 2003 was due to increased
alternative fuel production by Headwaters' licensees, as well as sales of
chemical reagents to new customers.

                                       18
<PAGE>

         License Fees. During 2003, Headwaters recognized license fee revenue
totaling $17.7 million, an increase of $5.3 million or 43% over $12.4 million of
license fee revenue recognized during 2002. License fees in 2003 consisted of
recurring license fees or royalty payments of $17.1 million and deferred revenue
amortization of $0.6 million. License fees in 2002 consisted of recurring
license fees of $11.5 million and deferred revenue amortization of $0.9 million.

         A major licensee which purchased four facilities from a former licensee
in October 2001 did not begin operating those facilities until early calendar
2002. Headwaters earned approximately $5.8 million in license fees from this
licensee in 2003 and $1.0 million in 2002. This factor was the primary cause of
the increase in license fee revenue for 2003 over 2002.

         ISG Revenues and Cost of Revenues. Coal combustion products revenues
and manufactured products sales and the related cost of revenue captions
represent ISG's revenues and cost of revenues for 2003. There were no comparable
revenues and cost of revenues for ISG included in the 2002 results.

         Depreciation and Amortization. These costs increased by $5.6 million to
$6.3 million in 2003 from $0.7 million in 2002. The increase was primarily
attributable to the depreciation and amortization of the tangible and intangible
assets related to the ISG acquisition.

         Research and Development. Research and development expenses increased
by $1.0 million to $2.1 million in 2003 from $1.1 million in 2002. The increase
was primarily attributable to the inclusion of additional costs relating to
ISG's research and development activities. In 2002, research and development
expenses primarily represent costs related to HTI's activities.

         Selling, General and Administrative Expenses. These expenses increased
$14.3 million or 260% to $19.8 million for 2003 from $5.5 million for 2002. The
increase in 2003 was due primarily to the inclusion of ISG's costs, and to a
lesser extent, an increase in compensation-related costs of approximately $0.8
million and an increase in professional services expenses of approximately $0.7
million. The increase in compensation-related costs related to several factors,
including an increase in the number of employees, salary adjustments, and
incentive-based pay accruals, among others. The increase in professional
services expenses was due primarily to increased legal activity during the
period associated with legal actions Headwaters is currently pursuing.

         Other Income and Expense. During 2003, Headwaters reported net other
expense of $10.0 million compared to net other income of $2.0 million during
2002. The change of $12.0 million is primarily attributable to an increase in
interest expense of $8.0 million, gains in 2002 for $1.3 million related to the
sale of an interest in an alternative fuel facility and $0.8 million related to
the collection of a note receivable that had previously been written off, and a
$2.1 million write-down of a note receivable in 2003.

         Interest expense increased in 2003 due to the substantial increase in
debt incurred in September 2002 to finance the acquisition of ISG. Interest
expense in 2003 also includes $0.5 million related to accelerated amortization
of debt discount and debt issue costs associated with $7.5 million of early
repayments of senior debt principal.

         Income Tax Provision. In 2003, Headwaters recorded an income tax
provision at an effective tax rate of approximately 40%. In 2002, the effective
tax rate was approximately 39%.

Liquidity and Capital Resources

         Net cash provided by operations during the six months ended March 31,
2003 ("2003") was $17.8 million compared to $1.8 million of net cash provided by
operations during the six months ended March 31, 2002 ("2002"). Most of the
positive cash flow from operating activities in both periods was attributable to
net income; however in 2002, due to the significant growth in Headwaters'
business and the corresponding cash requirements, operating activities resulted
in a low amount of net cash inflow. During 2003, investing activities consisted
primarily of payments for the purchase of property, plant and equipment.
Investing activities in 2002 consisted primarily of the collection of a $6.5
million note receivable and an increase in other assets, primarily costs
associated with potential acquisitions and related projects. Financing
activities in both 2003 and 2002 consisted primarily of repayments of long-term
debt and short-term borrowings and proceeds from exercise of options and
warrants and employee stock purchases. More details about these activities are
provided in the following paragraphs.

         Operating Activities. Cash provided from operations in 2003 of $17.8
million primarily resulted from net income of $14.8 million plus depreciation
and amortization.

         Investing Activities. In 2003, payments for the purchase of property,
plant and equipment totaled $2.9 million. These capital expenditures primarily
related to ISG's business, in particular the CCP segment. Capital expenditures
are currently expected to total approximately $10.0 million in fiscal 2003.

                                       19
<PAGE>

         In September 2001, Headwaters sold all of its remaining high-risk
investments in exchange for a $4.0 million note receivable from a limited
liability corporation. This note is due no later than September 2004, is
collateralized by the bridge loans and equity investments sold and is being
accounted for on the cost recovery method. During 2003, Headwaters recorded a
$2.1 million write-down of this note and as of March 31, 2003, this note has a
carrying value of $0.5 million. Headwaters could incur additional losses if the
remaining balance on the note is not repaid. At September 30, 2001, Headwaters
had outstanding one other note receivable in the amount of $6.5 million. This
note and the related accrued interest were collected in October 2001. Also in
2002, Headwaters capitalized over $2.0 million of costs associated with
potential acquisitions and related projects.

         Financing Activities. Headwaters acquired ISG in September 2002. In
order to obtain the cash necessary to acquire ISG and retire ISG's debt,
Headwaters issued $175.0 million of new debt consisting of $155.0 million of
senior secured debt and $20.0 million of subordinated debt (see Note 6 to the
consolidated financial statements). During 2003, principal repayments of the
senior debt totaling $15.1 million were made, which included $7.5 million of
optional early repayments. When optional prepayments are made, required
principal repayments for all future periods are reduced. Currently, the
remaining required fiscal 2003 principal repayments total $7.4 million.
Headwaters may, in the future, make additional optional early repayments of the
senior debt depending on actual cash flows, Headwaters' current and expected
cash requirements and other factors deemed significant by management.

         In 2003, cash proceeds from employee stock purchases and from the
exercise of options and warrants totaled $1.1 million, compared to $3.6 million
in 2002. Option and warrant exercise activity is largely dependent on
Headwaters' 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, Headwaters receives a tax
benefit generally equal to the income recognized by the optionee. Such amounts,
reflected in cash flows from operations in the consolidated statements of cash
flows, were $1.4 million in 2002 and $0.8 million in 2003.

         Headwaters intends to expand its business through growth of existing
operations, commercialization of technologies currently being developed, and
strategic acquisitions of entities that operate in adjacent industries.
Acquisitions over a certain size require the approval of the senior debt
holders.

         In July 2002, Headwaters filed a $250.0 million universal shelf
registration statement with the SEC that can be used for the sale of common
stock, preferred stock, convertible debt and other securities, should Headwaters
so choose. The SEC declared this registration statement effective in August
2002; however, a prospectus supplement describing the terms of any securities to
be issued is required to be filed before any offering would commence under the
registration statement. The most likely use of proceeds from securities offered
under the shelf registration would be to reduce long-term debt; however,
proceeds could also be used for working capital and other general corporate
purposes.

         Working Capital. Headwaters' working capital remained essentially
unchanged from September 30, 2002, to March 31, 2003. The most significant
changes in working capital components were an increase of $6.6 million in the
current portion of long-term debt, reflecting senior debt repayment obligations,
which was more than offset by decreases in accrued personnel costs and other
current liabilities totaling approximately $8.1 million. Headwaters expects
operations to produce positive cash flows in future periods, which, combined
with current working capital and the $20.0 million revolving line of credit
described below, is expected to be sufficient for operating needs for the next
12 months.

         Long-term Debt. In connection with the ISG acquisition, Headwaters
entered into a $175.0 million senior secured credit agreement with a syndication
of lenders, under which a total of $155.0 million was borrowed on the
acquisition date. The credit agreement also allows up to $20.0 million to be
borrowed under a revolving credit arrangement. The debt is secured by all assets
of Headwaters, bears interest at a variable rate (approximately 5.9% at March
31, 2003), and is repayable in quarterly installments through August 2007.
Following principal repayments made in May 2003 totaling approximately $10.2
million, future required principal repayments for all future periods currently
total approximately $3.5 million for the remainder of fiscal 2003, approximately
$28.0 million in fiscal years 2004, 2005, and 2006, and approximately $42.1
million in fiscal 2007. In certain situations, for example when Headwaters
receives "excess cash flow," as defined, mandatory prepayments, in excess of the
scheduled payments, are required. Mandatory prepayments are calculated as a
percentage of "excess cash flow," ranging up to 100%, which percentage is based
on Headwaters' "leverage ratio."

         The credit agreement contains restrictions and covenants common to such
agreements, including limitations on the incurrence of additional debt,
investments, merger and acquisition activity, asset liens, capital expenditures
in excess of $15.0 million in any fiscal year, and the payment of dividends,
among others. In addition, Headwaters must maintain certain financial ratios,
including leverage ratios and interest coverage, as those terms are defined in
the credit agreement. As of March 31, 2003, Headwaters must maintain a total
leverage ratio of 2.75:1.0 or less. The maximum ratio declines over time until
June 2004, at which time the ratio must remain at 2.0:1.0 or less. There is a
similar leverage ratio requirement for the senior debt alone, which at March 31,
2003 must be 2.25:1.0 or less, declining over time through June 2004, at which
time it must be maintained at 1.5:1.0 or less. The interest coverage requirement
at March 31, 2003 was 4.0:1.0 or more and does not change until December 2003,
at which time the ratio must be maintained at a level of 5.0:1.0 or more.
Headwaters was in compliance with all debt covenants as of March 31, 2003.

                                       20
<PAGE>

         Under the terms of the senior secured credit agreement, Headwaters may
borrow up to a total of $175.0 million; provided, however, that, except for the
initial $20.0 million of available revolving credit, the maximum borrowing limit
is permanently reduced by the amount of any repayments of the initial $155.0
million borrowed in September 2002. Terms of any additional borrowings under the
credit agreement are generally the same as described in the preceding
paragraphs. Finally, the credit agreement allows for the issuance of letters of
credit, provided there is capacity under the available revolving credit
arrangement. Currently two letters of credit totaling $3.0 million are
outstanding, with expiration dates in November 2003 and March 2004. No other
borrowings have been drawn or letters of credit issued. Headwaters pays a fee of
5/8% on the unused portion of the revolving credit arrangement.

         In connection with the ISG acquisition, Headwaters also entered into a
$20.0 million subordinated loan agreement. ISG management participated in
one-half, or $10.0 million, of the $20.0 million of debt issued. The other half
was issued to a corporation. The debt is not secured, bears interest at an 18%
rate payable quarterly, and is repayable in September 2007. It is senior to all
other debt except the senior secured debt described above. The debt agreement
allows for optional prepayments. Any prepayments paid to the corporation are
subject to a prepayment charge which ranges from 5% of the principal prepaid in
the first year to 1% of the principal prepaid in the last year of the five-year
term of the debt agreement.

         The loan agreement contains restrictions and covenants common to such
agreements, and these are generally consistent with those described above for
the senior secured debt. As of March 31, 2003, Headwaters must maintain a total
leverage ratio of 3.0:1.0 or less. The maximum ratio declines over time until
June 2004, at which time the ratio must remain at 2.25:1.0 or less. The interest
coverage requirement at March 31, 2003 was 3.75:1.0 or more and does not change
until December 2003, at which time the ratio must be maintained at a level of
4.75:1.0 or more. Headwaters was in compliance with all debt covenants as of
March 31, 2003.

         Income Taxes. In fiscal 2002, Headwaters' cash requirements for income
taxes were not significant due to the availability and utilization of net
operating loss carryforwards ("NOLs"). Although Headwaters currently has some
NOLs in certain states, remaining NOLs for federal tax purposes are not
material. Accordingly, Headwaters' cash requirements for income taxes in fiscal
2003 are expected to approximate the income tax provision. In 2003, payments
totaling approximately $8.7 million have been made. Income tax payments for the
remainder of fiscal 2003 are expected to be much higher proportionately than for
the corresponding fiscal 2002 period.

         Summary of Future Cash Requirements. Significant future cash needs, in
addition to operational working capital requirements, are currently expected to
consist primarily of debt service payments on outstanding long-term debt, income
taxes, and capital expenditures.

Recent Accounting Pronouncements

         In December 2002, SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," was issued. This statement amends
SFAS No. 123 to provide alternative methods of transition for a voluntary change
to the fair value method of accounting for stock-based employee compensation. It
also requires disclosures in interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. Headwaters does not currently intend to voluntarily
change to the fair value method of accounting for stock-based compensation, but
has implemented the interim financial statement disclosure requirements (see
Note 7).

         In July 2002, SFAS No. 146, "Accounting for Costs Associated with Exit
or Disposal Activities," was issued. This pronouncement was required to be
implemented by Headwaters as of January 1, 2003. Headwaters has reviewed this
standard as well as all other recently issued accounting standards which have
not yet been adopted in order to determine their potential effect, if any, on
the future results of operations or financial position of Headwaters. Based on
that review, Headwaters does not currently believe that any of these recent
accounting pronouncements will have a significant effect on its current or
future financial position or results of operations.


Forward-looking Statements

         Statements in this Quarterly Report on Form 10-Q regarding Headwaters'
expectations as to the managing and marketing of coal combustion products,
operation of facilities utilizing alternative fuel technologies, the marketing
of alternative fuels, the receipt of licensing fees, royalties, and product
sales revenues, the development, commercialization and financing of new
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 tax credits, the availability of
feedstocks, and the marketability of the coal combustion products and
alternative fuel, 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 coal combustion products and alternative
fuel industries 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:

                                       21
<PAGE>

(1)  Ability to repay our substantial debt obligations, including significant
     interest payments, under our senior secured credit facility and senior
     subordinated debentures.
(2)  Restrictions on our ability to operate the businesses because of covenants
     in the senior secured credit facility and senior subordinated debentures.
(3)  Satisfactory resolution of several significant disputes in litigation.
(4)  Increased use and market acceptance of fly ash.
(5)  Fluctuations in the price and sales of cement and concrete products markets
     in which ISG competes.
(6)  Clean Air Act Amendments and regulations that could adversely impact coal
     consumption or the quality and quantity of coal combustion products.
(7)  Potential property damage claims and the availability of insurance coverage
     for claims related to ISG's stucco and other building products.
(8)  Liabilities in excess of Headwaters' insurance limits, not covered by
     insurance, or for which insurance is not available.
(9)  Operating issues for licensed alternative fuel 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, overall costs of operations and other commercial factors
     surrounding the use of Covol Fuels' technologies.
(10) Marketing issues relating to acceptance and regulatory permitting of
     alternative fuels manufactured using Covol Fuels' technologies.
(11) Securing of suitable alternative fuel facility sites, including permits and
     raw materials, for relocation and operation of alternative fuel facilities
     and product sales.
(12) The market acceptance of products manufactured with Headwaters'
     technologies in the face of competition from traditional products.
(13) Dependence on licensees to successfully implement Covol Fuels' technologies
     and to make license and other payments to Covol Fuels.
(14) Maintenance of placed-in-service and other requirements under Section 29 of
     the tax code by alternative fuel manufacturing facilities.
(15) Changes in governmental regulations or failure to comply with existing
     regulations that could result in reduction or shutdown of operations of
     licensee alternative fuel facilities.
(16) The continued availability of tax credits to licensees under the tax code
     and each licensee's ability to use tax credits.
(17) The commercial feasibility of Covol Fuels' alternative fuel technologies
     upon the expiration of tax credits.
(18) Ability to commercialize new technologies which have only been tested in
     the laboratory and not in full-scale operations.
(19) Ability to commercialize the technology of HTI and to implement new
     business plans which are at an early stage of investigation and investment
     and which will require significant time, management, and capital
     investment.
(20) Success of HTI in conducting business in China.
(21) Success in the face of competition by others producing coal combustion
     products or alternative chemical reagent products.
(22) Sufficiency of intellectual property protections.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Headwaters is exposed to financial market risks, primarily related to
changes in interest rates. Headwaters does not use derivative financial
instruments for speculative or trading purposes, and no significant derivative
financial instruments were outstanding as of March 31, 2003 or subsequent
thereto.

         The majority of Headwaters' short-term investments, all of which are
classified as trading securities, consist of fixed-rate U.S. government
securities or securities backed by the U.S. government. Changes in interest
rates can affect the market value of these investments, which are carried at
market value in the consolidated balance sheets. The periodic adjustments to
reflect changes in market value are included in interest and net investment
income in the consolidated statements of income. Based on the current amount of
short-term investments and expected near-term changes in the amount of
short-term investments, Headwaters does not expect any material near-term
investment losses to result from changes in interest rates.

                                       22
<PAGE>

         As described in more detail in Note 6 to the unaudited consolidated
financial statements, Headwaters has outstanding $139.9 million of variable-rate
long-term debt as of March 31, 2003, which is repayable through August 2007. The
interest rate on this debt as of March 31, 2003 was approximately 5.9%, which
rate changed in April 2003 to approximately 5.8%. At that time, Headwaters
locked in a rate for three months. In July 2003, Headwaters can lock in a new
rate for one, three, or six months. A change in the interest rate of 1% would
change interest expense by approximately $1.3 million during the next 12 months,
considering required principal repayments.

ITEM 4.  CONTROLS AND PROCEDURES

         Disclosure controls are procedures that are designed with an objective
of ensuring that information required to be disclosed in Headwaters' periodic
reports filed with the SEC, such as this Quarterly Report on Form 10-Q, is
recorded, processed, summarized and reported within the time periods specified
by the SEC. Disclosure controls are also designed with an objective of ensuring
that such information is accumulated and communicated to Headwaters' management,
including the Chief Executive Officer ("CEO") and the Chief Financial Officer
("CFO"), in order to allow timely consideration regarding required disclosures.

         The evaluation of Headwaters' disclosure controls by the CEO and CFO
included a review of the controls' objectives and design, the operation of the
controls, and the effect of the controls on the information presented in this
Quarterly Report. Headwaters' management, including the CEO and CFO, does 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. Also, projections of any evaluation of the disclosure
controls and procedures to future periods are 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 as of a date within 90 days of the
filing of this Form 10-Q, and subject to the inherent limitations as described
above, Headwaters' CEO and CFO have concluded that Headwaters' disclosure
controls and procedures (as defined in Rules 13a-14 and 15d-14 under the
Securities Exchange Act of 1934) are effective. They are not aware of any
significant changes in Headwaters' disclosure controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.


                          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, 2002 for descriptions of current legal
proceedings. There have been no material changes with respect to legal
proceedings as they are described in the Form 10-K.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

Recent Sales of Unregistered Securities

         During the quarter ended March 31, 2003, pursuant to the exercise of
options, approximately 71,000 shares of Headwaters restricted common stock were
issued. Headwaters has several outstanding effective registration statements
filed on Forms S-3 and Forms S-8. All of the shares of restricted common stock
issued during the quarter have been registered under one of these registration
statements.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

         None.

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

         An annual meeting of stockholders of Headwaters was held on March 14,
2003 for the following purposes:

         1.       To elect two Class III directors of Headwaters to serve until
                  the 2006 annual meeting of stockholders, or until their
                  successors are duly elected and qualified;

                                       23
<PAGE>

         2.       To ratify the selection by the Board of Directors of Ernst &
                  Young LLP as independent auditors of Headwaters for the fiscal
                  year ending September 30, 2003; and
         3.       To approve a new stock incentive plan which was approved by
                  Headwaters' Board of Directors in January 2003 and which
                  authorizes 1,000,000 shares available for grant thereunder.

         A total of 25,551,273 shares were voted on proposal no. 1. A total of
25,469,673 shares were voted on proposals no. 2 and 3. The results of voting on
these proposals were as follows:

         1.       To elect Mr. R Steve Creamer as a Class III director: for -
                  21,858,199; withheld authority - 3,693,074.
                  To elect Mr. James A. Herickhoff as a Class III director: for
                  - 24,696,460; withheld authority - 854,813.
         2.       To ratify the selection of Ernst & Young LLP as auditors for
                  fiscal 2003: for - 25,273,477; against - 164,842; abstain -
                  31,354.
         3.       To approve a new stock incentive plan: for - 20,222,716;
                  against - 5,163,704; abstain - 83,253.

ITEM 5.  OTHER INFORMATION

         None.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a) The following exhibits are included herein:

          99.5   Certification of Chief Executive Officer          *
          99.6   Certification of Chief Financial Officer          *
          _______________________

          *      Filed herewith.

         (b) Headwaters filed no Forms 8-K during the quarter ended March 31,
2003.

                                       24
<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:  May 7, 2003                        By: /s/ Kirk A. Benson
                                             -----------------------------------
                                              Kirk A. Benson, Chief Executive
                                              Officer and Principal Executive
                                              Officer

Date: May 7, 2003                         By: /s/ Steven G. Stewart
                                             -----------------------------------
                                              Steven G. Stewart, Chief Financial
                                              Officer and Principal Financial
                                              Officer

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<PAGE>

                                 CERTIFICATIONS


         I, Kirk A. Benson, certify that:

         1. I have reviewed this Quarterly Report on Form 10-Q of Headwaters
Incorporated;

         2. Based on my knowledge, this Quarterly 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
Quarterly Report;

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

         4. Headwaters' other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for Headwaters and we have:

         a)       designed such disclosure controls and procedures to ensure
                  that material information relating to Headwaters, including
                  its consolidated subsidiaries, is made known to us by others
                  within those entities, particularly during the period in which
                  this Quarterly Report is being prepared;

         b)       evaluated the effectiveness of Headwaters' disclosure controls
                  and procedures as of a date within 90 days prior to the filing
                  date of this Quarterly Report (the "Evaluation Date"); and

         c)       presented in this Quarterly Report our conclusions about the
                  effectiveness of the disclosure controls and procedures based
                  on our evaluation as of the Evaluation Date;

         5. Headwaters' other certifying officer and I have disclosed, based on
our most recent evaluation, to Headwaters' auditors and the audit committee of
Headwaters' board of directors:

         a)       all significant deficiencies in the design or operation of
                  internal controls which could adversely affect Headwaters'
                  ability to record, process, summarize and report financial
                  data and have identified for Headwaters' auditors any material
                  weaknesses in internal controls; and

         b)       any fraud, whether or not material, that involves management
                  or other employees who have a significant role in Headwaters'
                  internal controls; and

         6. Headwaters' other certifying officer and I have indicated in this
Quarterly Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.


Date: May 7, 2003

/s/ Kirk A. Benson
------------------------
Kirk A. Benson
Chief Executive Officer

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<PAGE>

         I, Steven G. Stewart, certify that:

         1. I have reviewed this Quarterly Report on Form 10-Q of Headwaters
Incorporated;

         2. Based on my knowledge, this Quarterly 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
Quarterly Report;

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

         4. Headwaters' other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for Headwaters and we have:

         (a)      designed such disclosure controls and procedures to ensure
                  that material information relating to Headwaters, including
                  its consolidated subsidiaries, is made known to us by others
                  within those entities, particularly during the period in which
                  this Quarterly Report is being prepared;

         (b)      evaluated the effectiveness of Headwaters' disclosure controls
                  and procedures as of a date within 90 days prior to the filing
                  date of this Quarterly Report (the "Evaluation Date"); and

         (c)      presented in this Quarterly Report our conclusions about the
                  effectiveness of the disclosure controls and procedures based
                  on our evaluation as of the Evaluation Date;

         5. Headwaters' other certifying officer and I have disclosed, based on
our most recent evaluation, to Headwaters' auditors and the audit committee of
Headwaters' board of directors:

         (a)      all significant deficiencies in the design or operation of
                  internal controls which could adversely affect Headwaters'
                  ability to record, process, summarize and report financial
                  data and have identified for Headwaters' auditors any material
                  weaknesses in internal controls; and

         (b)      any fraud, whether or not material, that involves management
                  or other employees who have a significant role in Headwaters'
                  internal controls; and

         6. Headwaters' other certifying officer and I have indicated in this
Quarterly Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.


Date: May 7, 2003

/s/ Steven G. Stewart
--------------------------
Steven G. Stewart
Chief Financial Officer

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