##### Table of Contents





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, 2009

or



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

For the transition period from  to

Commission file number: 1-32459





HEADWATERS INCORPORATED

(Exact name of registrant as specified in its
charter)







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

(801) 984-9400

(Registrants telephone number, including area code)

Not applicable

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





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.    Yes  x    No   ̈

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ̈
    No   ̈

Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).



|                        |  |   |  |                           |  |  
|----------------------- |  | - |  | ------------------------- |  | -
|Large accelerated filer |  | x |  | Accelerated filer         |  |  ̈
|                        |  |   | 
|Non-accelerated filer   |  |  ̈ |  | Smaller reporting company |  |  ̈

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

The number of shares outstanding of the Registrants common stock as of April 30, 2009 was 42,332,178.









---

##### Table of Contents

HEADWATERS INCORPORATED

TABLE OF CONTENTS



|                               |  |                                                                                                              |  |         
|------------------------------ |  | ------------------------------------------------------------------------------------------------------------ |  | --------
|                               |  |                                                                                                              |  | Page No.
|PART I  FINANCIAL INFORMATION |  |                                                                                                             
|                               |  |                                                                                                             
|ITEM 1.                        |  | FINANCIAL STATEMENTS (Unaudited):                                                                            |  |         
|                               |  | Condensed Consolidated Balance Sheets  As of September 30, 2008 and March 31, 2009                          |  | 3       
|                               |  | Condensed Consolidated Statements of Operations  For the three and six months endedMarch 31, 2008 and
2009  |  | 4       
|                               |  | Condensed Consolidated Statement of Changes in Stockholders Equity  For the six months endedMarch 31, 2009 |  | 5       
|                               |  | Condensed Consolidated Statements of Cash Flows  For the six months ended March 31, 2008 and
2009           |  | 6       
|                               |  | Notes to Condensed Consolidated Financial Statements                                                         |  | 7       
|ITEM 2.                        |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                        |  | 22      
|ITEM 3.                        |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                   |  | 34      
|ITEM 4.                        |  | CONTROLS AND PROCEDURES                                                                                      |  | 35      
|                               | 
|PART II  OTHER INFORMATION    |  |                                                                                                             
|                               |  |                                                                                                             
|ITEM 1.                        |  | LEGAL PROCEEDINGS                                                                                            |  | 36      
|ITEM 1A.                       |  | RISK FACTORS                                                                                                 |  | 36      
|ITEM 2.                        |  | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                                  |  | 36      
|ITEM 3.                        |  | DEFAULTS UPON SENIOR SECURITIES                                                                              |  | 36      
|ITEM 4.                        |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                          |  | 36      
|ITEM 5.                        |  | OTHER INFORMATION                                                                                            |  | 36      
|ITEM 6.                        |  | EXHIBITS                                                                                                     |  | 37      
|                               |  |                                                                                                             
|SIGNATURES                     |  |                                                                                                              |  | 38      

Forward-looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding future events and our future results that are based on
current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. Actual results may vary materially from such expectations. In some cases, words such as
may, should, intends, plans, expects, anticipates, targets, goals, projects, believes, seeks, estimates,
or variations of such words and similar expressions, or the negative of such terms, may help to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated
growth and trends in our businesses, and other characterizations of future events or circumstances, are forward-looking. For a discussion of the factors that could cause actual results to differ from expectations, please see the risk factors
described in Item 1A of our Annual Report on Form 10-K for the year ended September 30, 2008. There can be no assurance that our results of operations will not be adversely affected by such factors. Unless legally required, we undertake no
obligation to revise or update any forward-looking statements for any reason. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.

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



2



---

##### Table of Contents

|ITEM 1. | FINANCIAL STATEMENTS
|------- | --------------------

HEADWATERS INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



|                                                                                                                                                                                                                                           |  |                   |           |   |               |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------- | --------- | - | ------------- | - | -------- | -
|(in thousands, except par value)                                                                                                                                                                                                           |  | September 30,2008 |           |   | March 31,2009 |  
|ASSETS                                                                                                                                                                                                                                     |  |                   |           |   |               |   |          |  
|                                                                                                                                                                                                                                           |  |                  
|Current assets:                                                                                                                                                                                                                            |  |                   |           |   |               |   |          |  
|Cash and cash equivalents                                                                                                                                                                                                                  |  | $                 | 21,637    |   |               | $ | 8,607    |  
|Trade receivables, net                                                                                                                                                                                                                     |  |                   | 117,595   |   |               |   | 74,939   |  
|Inventories                                                                                                                                                                                                                                |  |                   | 53,068    |   |               |   | 56,274   |  
|Current and deferred income taxes                                                                                                                                                                                                          |  |                   | 37,518    |   |               |   | 24,513   |  
|Other                                                                                                                                                                                                                                      |  |                   | 10,568    |   |               |   | 12,842   |  
|                                                                                                                                                                                                                                           |  |                   |           |   |               |   |          |  
|Total current assets                                                                                                                                                                                                                       |  |                   | 240,386   |   |               |   | 177,175  |  
|                                                                                                                                                                                                                                           |  |                   |           |   |               |   |          |  
|                                                                                                                                                                                                                                           |  |                  
|Property, plant and equipment, net                                                                                                                                                                                                         |  |                   | 304,835   |   |               |   | 316,304  |  
|                                                                                                                                                                                                                                           |  |                   |           |   |               |   |          |  
|                                                                                                                                                                                                                                           |  |                  
|Other assets:                                                                                                                                                                                                                              |  |                   |           |   |               |   |          |  
|Intangible assets, net                                                                                                                                                                                                                     |  |                   | 226,168   |   |               |   | 214,745  |  
|Goodwill                                                                                                                                                                                                                                   |  |                   | 582,111   |   |               |   | 115,999  |  
|Other                                                                                                                                                                                                                                      |  |                   | 48,486    |   |               |   | 44,919   |  
|                                                                                                                                                                                                                                           |  |                   |           |   |               |   |          |  
|Total other assets                                                                                                                                                                                                                         |  |                   | 856,765   |   |               |   | 375,663  |  
|                                                                                                                                                                                                                                           |  |                   |           |   |               |   |          |  
|                                                                                                                                                                                                                                           |  |                  
|Total assets                                                                                                                                                                                                                               |  | $                 | 1,401,986 |   |               | $ | 869,142  |  
|                                                                                                                                                                                                                                           |  |                   |           |   |               |   |          |  
|                                                                                                                                                                                                                                           |  |                  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                                       |  |                   |           |   |               |   |          |  
|                                                                                                                                                                                                                                           |  |                  
|Current liabilities:                                                                                                                                                                                                                       |  |                   |           |   |               |   |          |  
|Accounts payable                                                                                                                                                                                                                           |  | $                 | 27,688    |   |               | $ | 19,147   |  
|Accrued personnel costs                                                                                                                                                                                                                    |  |                   | 29,873    |   |               |   | 18,697   |  
|Other accrued liabilities                                                                                                                                                                                                                  |  |                   | 58,168    |   |               |   | 39,706   |  
|Current portion of long-term debt                                                                                                                                                                                                          |  |                   |          |   |               |   | 15,000   |  
|                                                                                                                                                                                                                                           |  |                   |           |   |               |   |          |  
|Total current liabilities                                                                                                                                                                                                                  |  |                   | 115,729   |   |               |   | 92,550   |  
|                                                                                                                                                                                                                                           |  |                   |           |   |               |   |          |  
|                                                                                                                                                                                                                                           |  |                  
|Long-term liabilities:                                                                                                                                                                                                                     |  |                   |           |   |               |   |          |  
|Long-term debt                                                                                                                                                                                                                             |  |                   | 532,500   |   |               |   | 510,776  |  
|Deferred income taxes                                                                                                                                                                                                                      |  |                   | 87,026    |   |               |   | 12,270   |  
|Unrecognized income tax benefits                                                                                                                                                                                                           |  |                   | 18,441    |   |               |   | 10,405   |  
|Other                                                                                                                                                                                                                                      |  |                   | 16,738    |   |               |   | 14,833   |  
|                                                                                                                                                                                                                                           |  |                   |           |   |               |   |          |  
|Total long-term liabilities                                                                                                                                                                                                                |  |                   | 654,705   |   |               |   | 548,284  |  
|                                                                                                                                                                                                                                           |  |                   |           |   |               |   |          |  
|Total liabilities                                                                                                                                                                                                                          |  |                   | 770,434   |   |               |   | 640,834  |  
|                                                                                                                                                                                                                                           |  |                   |           |   |               |   |          |  
|                                                                                                                                                                                                                                           |  |                  
|Stockholders equity:                                                                                                                                                                                                                      |  |                   |           |   |               |   |          |  
|Common stock, $0.001 par value; authorized 100,000 shares; issued and outstanding: 42,035 shares at September 30, 2008 (including 564
shares held in treasury) and 42,333 shares at March 31, 2009 (including 291 shares held in treasury) |  |                   | 42        |   |               |   | 42       |  
|Capital in excess of par value                                                                                                                                                                                                             |  |                   | 509,977   |   |               |   | 510,721  |  
|Retained earnings (accumulated deficit)                                                                                                                                                                                                    |  |                   | 130,394   |   |               |   | (276,754 | )
|Treasury stock and other                                                                                                                                                                                                                   |  |                   | (8,861    | ) |               |   | (5,701   | )
|                                                                                                                                                                                                                                           |  |                   |           |   |               |   |          |  
|Total stockholders equity                                                                                                                                                                                                                 |  |                   | 631,552   |   |               |   | 228,308  |  
|                                                                                                                                                                                                                                           |  |                   |           |   |               |   |          |  
|                                                                                                                                                                                                                                           |  |                  
|Total liabilities and stockholders equity                                                                                                                                                                                                 |  | $                 | 1,401,986 |   |               | $ | 869,142  |  
|                                                                                                                                                                                                                                           |  |                   |           |   |               |   |          |  

See accompanying notes.



3



---

##### Table of Contents

HEADWATERS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



|                                      |  |                             |         |   |                           |   |          |      |  |   |         |   |  |   |          |  
|------------------------------------- |  | --------------------------- | ------- | - | ------------------------- | - | -------- | ---- |  | - | ------- | - |  | - | -------- | -
|                                      |  | Three Months EndedMarch 31, |         |   | Six Months EndedMarch 31, |  
|(in thousands, except per-share data) |  | 2008                        |         |   | 2009                      |   |          | 2008 |  |   | 2009    |  
|Revenue:                              |  |                             |         |   |                           |   |          |      |  |   |         |   |  |   |          |  
|Building products                     |  | $                           | 93,560  |   |                           | $ | 68,401   |      |  | $ | 208,326 |   |  | $ | 156,628  |  
|Coal combustion products              |  |                             | 60,982  |   |                           |   | 48,083   |      |  |   | 138,408 |   |  |   | 115,309  |  
|Energy                                |  |                             | 17,437  |   |                           |   | 21,184   |      |  |   | 74,142  |   |  |   | 31,897   |  
|                                      |  |                             |         |   |                           |   |          |      |  |   |         |   |  |   |          |  
|Total revenue                         |  |                             | 171,979 |   |                           |   | 137,668  |      |  |   | 420,876 |   |  |   | 303,834  |  
|                                      |  |                             |         |  
|Cost of revenue:                      |  |                             |         |   |                           |   |          |      |  |   |         |   |  |   |          |  
|Building products                     |  |                             | 72,843  |   |                           |   | 56,082   |      |  |   | 154,679 |   |  |   | 126,346  |  
|Coal combustion products              |  |                             | 47,651  |   |                           |   | 36,480   |      |  |   | 103,559 |   |  |   | 83,540   |  
|Energy                                |  |                             | 10,150  |   |                           |   | 22,464   |      |  |   | 58,247  |   |  |   | 39,665   |  
|                                      |  |                             |         |   |                           |   |          |      |  |   |         |   |  |   |          |  
|Total cost of revenue                 |  |                             | 130,644 |   |                           |   | 115,026  |      |  |   | 316,485 |   |  |   | 249,551  |  
|                                      |  |                             |         |   |                           |   |          |      |  |   |         |   |  |   |          |  
|                                      |  |                             |         |  
|Gross profit                          |  |                             | 41,335  |   |                           |   | 22,642   |      |  |   | 104,391 |   |  |   | 54,283   |  
|                                      |  |                             |         |  
|Operating expenses:                   |  |                             |         |   |                           |   |          |      |  |   |         |   |  |   |          |  
|Amortization                          |  |                             | 5,431   |   |                           |   | 6,210    |      |  |   | 10,943  |   |  |   | 11,955   |  
|Research and development              |  |                             | 3,827   |   |                           |   | 1,834    |      |  |   | 7,968   |   |  |   | 5,295    |  
|Selling, general and administrative   |  |                             | 40,959  |   |                           |   | 27,284   |      |  |   | 75,988  |   |  |   | 58,892   |  
|Goodwill impairment                   |  |                             |        |   |                           |   | 465,656  |      |  |   |        |   |  |   | 465,656  |  
|                                      |  |                             |         |   |                           |   |          |      |  |   |         |   |  |   |          |  
|Total operating expenses              |  |                             | 50,217  |   |                           |   | 500,984  |      |  |   | 94,899  |   |  |   | 541,798  |  
|                                      |  |                             |         |   |                           |   |          |      |  |   |         |   |  |   |          |  
|                                      |  |                             |         |  
|Operating income (loss)               |  |                             | (8,882  | ) |                           |   | (478,342 | )    |  |   | 9,492   |   |  |   | (487,515 | )
|                                      |  |                             |         |  
|Other income (expense):               |  |                             |         |   |                           |   |          |      |  |   |         |   |  |   |          |  
|Net interest expense                  |  |                             | (6,207  | ) |                           |   | (8,467   | )    |  |   | (12,051 | ) |  |   | (17,158  | )
|Other, net                            |  |                             | 3,795   |   |                           |   | 3,250    |      |  |   | 7,778   |   |  |   | 20,685   |  
|                                      |  |                             |         |   |                           |   |          |      |  |   |         |   |  |   |          |  
|Total other income (expense), net     |  |                             | (2,412  | ) |                           |   | (5,217   | )    |  |   | (4,273  | ) |  |   | 3,527    |  
|                                      |  |                             |         |   |                           |   |          |      |  |   |         |   |  |   |          |  
|                                      |  |                             |         |  
|Income (loss) before income taxes     |  |                             | (11,294 | ) |                           |   | (483,559 | )    |  |   | 5,219   |   |  |   | (483,988 | )
|                                      |  |                             |         |  
|Income tax benefit (provision)        |  |                             | 2,090   |   |                           |   | 77,290   |      |  |   | (4,510  | ) |  |   | 76,840   |  
|                                      |  |                             |         |   |                           |   |          |      |  |   |         |   |  |   |          |  
|                                      |  |                             |         |  
|Net income (loss)                     |  | $                           | (9,204  | ) |                           | $ | (406,269 | )    |  | $ | 709     |   |  | $ | (407,148 | )
|                                      |  |                             |         |   |                           |   |          |      |  |   |         |   |  |   |          |  
|                                      |  |                             |         |  
|Basic earnings (loss) per share       |  | $                           | (0.22   | ) |                           | $ | (9.78    | )    |  | $ | 0.02    |   |  | $ | (9.82    | )
|                                      |  |                             |         |   |                           |   |          |      |  |   |         |   |  |   |          |  
|                                      |  |                             |         |  
|Diluted earnings (loss) per share     |  | $                           | (0.22   | ) |                           | $ | (9.78    | )    |  | $ | 0.02    |   |  | $ | (9.82    | )
|                                      |  |                             |         |   |                           |   |          |      |  |   |         |   |  |   |          |  

See accompanying notes.



4



---

##### Table of Contents

HEADWATERS INCORPORATED

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

For the Six Months Ended March 31, 2009



|                                                                                                               |  |              |  |                              |    |  |                                      |         |   |                       |   |          |       |  |   |                          |   |  |   |        |   |  |   |          |  
|-------------------------------------------------------------------------------------------------------------- |  | ------------ |  | ---------------------------- | -- |  | ------------------------------------ | ------- | - | --------------------- | - | -------- | ----- |  | - | ------------------------ | - |  | - | ------ | - |  | - | -------- | -
|                                                                                                               |  | Common stock |  | Capital inexcessof par value |    |  | Retainedearnings(accumulateddeficit) |         |   | Treasurystock,at cost |   |          | Other |  |   | Totalstockholdersequity |  
|(in thousands)                                                                                                 |  | Shares       |  | Amount                       |    |  |                                      |         |  
|Balances as of September 30, 2008                                                                              |  | 42,035       |  | $                            | 42 |  | $                                    | 509,977 |   |                       | $ | 130,394  |       |  | $ | (7,281                   | ) |  | $ | (1,580 | ) |  | $ | 631,552  |  
|                                                                                                               |  |              |  |                              |    |  |                                     
|Issuance of restricted stock, net of cancellations                                                             |  | 225          |  |                              |   |  |                                      |         |   |                       |   |          |       |  |   |                          |   |  |   |        |   |  |   |         |  
|                                                                                                               |  |              |  |                              |    |  |                                     
|Exercise of stock options                                                                                      |  | 73           |  |                              |   |  |                                      | 410     |   |                       |   |          |       |  |   |                          |   |  |   |        |   |  |   | 410      |  
|                                                                                                               |  |              |  |                              |    |  |                                     
|Income tax benefit from exercise of stock options                                                              |  |              |  |                              |    |  |                                      | 189     |   |                       |   |          |       |  |   |                          |   |  |   |        |   |  |   | 189      |  
|                                                                                                               |  |              |  |                              |    |  |                                     
|273 shares of treasury stock transferred to employee stock purchase plan, at cost                              |  |              |  |                              |    |  |                                      | (2,857  | ) |                       |   |          |       |  |   | 3,600                    |   |  |   |        |   |  |   | 743      |  
|                                                                                                               |  |              |  |                              |    |  |                                     
|Stock-based compensation                                                                                       |  |              |  |                              |    |  |                                      | 3,002   |   |                       |   |          |       |  |   |                          |   |  |   |        |   |  |   | 3,002    |  
|                                                                                                               |  |              |  |                              |    |  |                                     
|Other comprehensive income (loss), net of taxes  cash flow hedge and foreign currency translation adjustments |  |              |  |                              |    |  |                                      |         |   |                       |   |          |       |  |   |                          |   |  |   | (440   | ) |  |   | (440     | )
|                                                                                                               |  |              |  |                              |    |  |                                     
|Net loss for the six months ended March 31, 2009                                                               |  |              |  |                              |    |  |                                      |         |   |                       |   | (407,148 | )     |  |   |                          |   |  |   |        |   |  |   | (407,148 | )
|                                                                                                               |  |              |  |                              |    |  |                                      |         |   |                       |   |          |       |  |   |                          |   |  |   |        |   |  |   |          |  
|Balances as of March 31, 2009                                                                                  |  | 42,333       |  | $                            | 42 |  | $                                    | 510,721 |   |                       | $ | (276,754 | )     |  | $ | (3,681                   | ) |  | $ | (2,020 | ) |  | $ | 228,308  |  
|                                                                                                               |  |              |  |                              |    |  |                                      |         |   |                       |   |          |       |  |   |                          |   |  |   |        |   |  |   |          |  

See accompanying notes.



5



---

##### Table of Contents

HEADWATERS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                         |  |                           |         |   |      |   |          |  
|---------------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ---- | - | -------- | -
|                                                                                         |  | Six Months EndedMarch 31, |        
|(in thousands)                                                                           |  | 2008                      |         |   | 2009 |  
|Cash flows from operating activities:                                                    |  |                           |         |   |      |   |          |  
|Net income (loss)                                                                        |  | $                         | 709     |   |      | $ | (407,148 | )
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                           |         |   |      |   |          |  
|Goodwill impairment                                                                      |  |                           |        |   |      |   | 465,656  |  
|Depreciation and amortization                                                            |  |                           | 33,633  |   |      |   | 37,255   |  
|Stock-based compensation                                                                 |  |                           | 2,500   |   |      |   | 3,002    |  
|Interest expense related to amortization of debt issue costs                             |  |                           | 1,332   |   |      |   | 2,919    |  
|Deferred income taxes                                                                    |  |                           | 12,039  |   |      |   | (71,692  | )
|Gain on extinguishment of debt                                                           |  |                           |        |   |      |   | (19,224  | )
|Net losses of unconsolidated joint ventures                                              |  |                           | 5,246   |   |      |   | 3,453    |  
|Net gain on disposition of property, plant and equipment                                 |  |                           | (8,031  | ) |      |   | (1,337   | )
|Amortization of non-refundable license fees                                              |  |                           | (5,517  | ) |      |   |         |  
|Decrease in trade receivables                                                            |  |                           | 68,160  |   |      |   | 42,656   |  
|Increase in inventories                                                                  |  |                           | (13,060 | ) |      |   | (3,638   | )
|Decrease in accounts payable and accrued liabilities                                     |  |                           | (31,623 | ) |      |   | (27,293  | )
|Other changes in operating assets and liabilities, net                                   |  |                           | (42,998 | ) |      |   | (290     | )
|                                                                                         |  |                           |         |   |      |   |          |  
|Net cash provided by operating activities                                                |  |                           | 22,390  |   |      |   | 24,319   |  
|                                                                                         |  |                           |         |   |      |   |          |  
|                                                                                         |  |                          
|Cash flows from investing activities:                                                    |  |                           |         |   |      |   |          |  
|Purchase of property, plant and equipment                                                |  |                           | (56,888 | ) |      |   | (37,923  | )
|Proceeds from disposition of property, plant and equipment                               |  |                           | 12,905  |   |      |   | 2,956    |  
|Payments for acquisitions                                                                |  |                           | (19,000 | ) |      |   | (10,792  | )
|Net increase in other assets                                                             |  |                           | (3,741  | ) |      |   | (4,342   | )
|                                                                                         |  |                           |         |   |      |   |          |  
|Net cash used in investing activities                                                    |  |                           | (66,724 | ) |      |   | (50,101  | )
|                                                                                         |  |                           |         |   |      |   |          |  
|                                                                                         |  |                          
|Cash flows from financing activities:                                                    |  |                           |         |   |      |   |          |  
|Net proceeds from issuance of long-term debt                                             |  |                           | 18,867  |   |      |   | 15,000   |  
|Payments on long-term debt                                                               |  |                           |        |   |      |   | (2,500   | )
|Convertible debt and other debt issue costs                                              |  |                           |        |   |      |   | (1,090   | )
|Employee stock purchases                                                                 |  |                           | 985     |   |      |   | 743      |  
|Proceeds from exercise of stock options                                                  |  |                           | 1       |   |      |   | 410      |  
|Income tax benefit from exercise of stock options                                        |  |                           |        |   |      |   | 189      |  
|Treasury stock purchases                                                                 |  |                           | (14,841 | ) |      |   |         |  
|                                                                                         |  |                           |         |   |      |   |          |  
|Net cash provided by financing activities                                                |  |                           | 5,012   |   |      |   | 12,752   |  
|                                                                                         |  |                           |         |   |      |   |          |  
|                                                                                         |  |                          
|Net decrease in cash and cash equivalents                                                |  |                           | (39,322 | ) |      |   | (13,030  | )
|                                                                                         |  |                          
|Cash and cash equivalents, beginning of period                                           |  |                           | 55,787  |   |      |   | 21,637   |  
|                                                                                         |  |                           |         |   |      |   |          |  
|                                                                                         |  |                          
|Cash and cash equivalents, end of period                                                 |  | $                         | 16,465  |   |      | $ | 8,607    |  
|                                                                                         |  |                           |         |   |      |   |          |  
|                                                                                         |  |                          
|Supplemental schedule of non-cash investing and financing activities:                    |  |                           |         |   |      |   |          |  
|Exchanges of convertible senior subordinated notes                                       |  | $                         |        |   |      | $ | 68,786   |  
|Cancellation of treasury stock                                                           |  |                           | 7,335   |   |      |   |         |  
|Decrease in accrued liabilities for acquisition-related commitments                      |  |                           | (3,000  | ) |      |   |         |  

See accompanying notes.



6



---

##### Table of Contents

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2009

(Unaudited)



|1. | Nature of Operations and Basis of Presentation
|-- | ----------------------------------------------

Description of Business and Organization  Headwaters Incorporated (Headwaters) is a diversified company incorporated in Delaware, which provides products, technologies and services in three industries: building products, coal
combustion products (CCPs) and energy. Headwaters vision is to improve sustainability by transforming underutilized resources into valuable products.

The building products segment designs, manufactures, and sells architectural stone, resin-based exterior siding accessories (such as shutters, mounting blocks, and vents), concrete block and other building products.
Headwaters believes that many of its branded products have a leading market position. Revenue from Headwaters building products businesses are diversified geographically and also by market, including the new housing and residential remodeling
markets.

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

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

Basis of Presentation  Headwaters fiscal year ends on September 30 and unless otherwise noted, references to 2008 refer to Headwaters fiscal quarter and/or six-month period ended
March 31, 2008 and references to 2009 refer to Headwaters fiscal quarter and/or six-month period ended March 31, 2009. Other references to years refer to Headwaters fiscal year rather than a calendar year.

The consolidated financial statements include the accounts of Headwaters, all of its subsidiaries and other entities in which Headwaters has a controlling
interest. All significant intercompany transactions and accounts are eliminated in consolidation. Due to the seasonality of most of Headwaters operations and other factors, the consolidated results of operations for 2009 are not indicative of
the results to be expected for the full fiscal 2009 year.

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC) for quarterly reports on Form 10-Q. In the opinion of management, all adjustments considered necessary for a fair presentation have been included,
and consist of normal recurring adjustments. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted.
These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Headwaters Annual Report on Form 10-K for the year ended September 30, 2008 (Form 10-K) and in
Headwaters Quarterly Report on Form 10-Q for the quarter ended December 31, 2008.

Recent Accounting Pronouncements 
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value Measurements, which addresses how companies should measure fair value when they are required to use a fair value measure for
recognition or disclosure purposes under generally accepted accounting principles. Headwaters adopted SFAS No. 157 as of October 1, 2008 but this adoption did not have a material effect on reported results for 2009. Headwaters uses fair
value measurements to determine the reported amounts of assets acquired and liabilities assumed in purchase transactions, in testing for potential goodwill impairment, for disclosure of the fair value of financial instruments, and elsewhere. It is
therefore possible that the implementation of SFAS No. 157 could have a material effect on the reported amounts or disclosures in Headwaters consolidated financial statements in future periods.



7



---

##### Table of Contents

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2009

(Unaudited)



The Emerging Issues Task Force (EITF) of the FASB has published EITF Issue No. 07-5,
Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entitys Own Stock, which could affect Headwaters accounting for the fiscal 2007 convertible note hedge and warrant transactions described in Note 6.
Headwaters must apply the provisions of EITF 07-5 in its financial statements issued for periods beginning on or after October 1, 2009. At the current time, Headwaters has not determined what impact, if any, EITF 07-5 will have on the
accounting and future financial statement disclosures for the convertible note hedge and warrant transactions.

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

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an Amendment of SFAS
No. 133. This new standard requires enhanced disclosures about how and why an entity uses derivative instruments, how such instruments and related hedged items are accounted for under SFAS No. 133, and how those instruments and items
affect an entitys financial position, financial performance, and cash flows. Headwaters must adopt SFAS No. 161 no later than October 1, 2009. Headwaters has no derivatives outstanding as of March 31, 2009. Accordingly, the
adoption of this standard could affect future disclosures related to any derivative instruments or related hedges that are entered into in future periods.

In May 2008, the FASB issued FASB Staff Position APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (the FSP). The FSP
specifies that issuers of convertible debt that can be settled in cash should separately account for the liability (debt) and equity (conversion option) components in a manner that reflects the entitys nonconvertible debt borrowing rate when
interest cost is recognized. The adoption of the FSP, which for Headwaters is required October 1, 2009, will require different accounting for Headwaters 2.50% Convertible Senior Subordinated Notes due 2014 issued in January 2007, the 16%
Convertible Senior Subordinated Notes due 2016 issued in December 2008, and the 14.75% Convertible Senior Subordinated Notes due 2014 issued in March and April 2009 (see Note 6). The provisions of the FSP must be applied retrospectively to all
periods presented, or all periods subsequent to January 2007 for Headwaters.

The adoption of the FSP will result in a redetermination of
the carrying amounts of Headwaters 2.50% convertible notes, 16% convertible notes and 14.75% convertible notes, calculated by measuring the fair values of similar debt instruments that do not have the conversion features, and recording an
equity component for the difference between the original proceeds of the debt and the redetermined amounts of debt. Any basis differences that arise from this accounting that represent a temporary difference will also require the recording of
deferred taxes. The original debt issuance costs will be allocated pro-rata between debt and equity issuance costs and accounted for accordingly. Debt discount recorded as a result of the redetermination of the debt carrying values will be amortized
using the interest method and will result in recognition of additional interest cost for all periods subsequent to January 2007. If material, a portion of the increased interest cost will be capitalized, as required by SFAS No. 34,
Capitalization of Interest Cost. Headwaters currently estimates that the adoption of the FSP will increase reported interest cost by approximately $3.8 million, $6.0 million and $7.4 million in fiscal years 2007, 2008 and 2009,
respectively, and will not have a material affect on interest capitalized in any of these periods.

In April 2009, the FASB issued FASB
Staff Positions FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (FSPs). These FSPs require disclosures about fair value of financial instruments for interim reporting periods as well as in annual
financial statements. Headwaters must adopt these FSPs effective for its Quarterly Report on Form 10-Q for the quarter ending June 30, 2009, at which time Headwaters will provide fair value disclosures of its financial instruments similar to
disclosures historically made in its Form 10-K.



8



---

##### Table of Contents

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2009

(Unaudited)



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

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



|2. | Segment Reporting
|-- | -----------------

Headwaters operates three
business segments: building products, CCPs and energy. These segments are managed and evaluated separately by management due to differences in their markets, operations, products and services. Revenues for the building products segment consist of
product sales to wholesale and retail distributors, contractors and other users of building products. Revenues for the CCP segment consist primarily of CCP product sales with a smaller amount of service revenue. Revenues for the energy segment
through December 31, 2007 consisted primarily of sales of chemical reagents and license fees related to Headwaters former Section 45K business. Beginning January 1, 2008, and for the foreseeable future, revenues for this segment
consist primarily of coal sales.

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

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



|                              |  |                                   |         |   |      |   |        |        |  |   |           |   |  |        |        |   |  |   |         |  
|----------------------------- |  | --------------------------------- | ------- | - | ---- | - | ------ | ------ |  | - | --------- | - |  | ------ | ------ | - |  | - | ------- | -
|                              |  | Three Months Ended March 31, 2008 |        
|(in thousands)                |  | BuildingProducts                  |         |   | CCPs |   |        | Energy |  |   | Corporate |   |  | Totals |       
|Segment revenue               |  | $                                 | 93,560  |   |      | $ | 60,982 |        |  | $ | 17,437    |   |  | $      |       |   |  | $ | 171,979 |  
|                              |  |                                   |         |   |      |   |        |        |  |   |           |   |  |        |        |   |  |   |         |  
|Depreciation and amortization |  | $                                 | (12,017 | ) |      | $ | (3,028 | )      |  | $ | (1,545    | ) |  | $      | (90    | ) |  | $ | (16,680 | )
|                              |  |                                   |         |   |      |   |        |        |  |   |           |   |  |        |        |   |  |   |         |  
|Operating income (loss)       |  | $                                 | (8,114  | ) |      | $ | 6,275  |        |  | $ | (1,464    | ) |  | $      | (5,579 | ) |  | $ | (8,882  | )
|                              |  |                                   |         |   |      |   |        |        |  |   |           |   |  |        |        |   |  |   |         |  
|Net interest expense          |  |                                   |         |   |      |   |        |        |  |   |           |   |  |        |        |   |  |   | (6,207  | )
|Other income (expense), net   |  |                                   |         |   |      |   |        |        |  |   |           |   |  |        |        |   |  |   | 3,795   |  
|Income tax benefit            |  |                                   |         |   |      |   |        |        |  |   |           |   |  |        |        |   |  |   | 2,090   |  
|                              |  |                                   |         |   |      |   |        |        |  |   |           |   |  |        |        |   |  |   |         |  
|Net loss                      |  |                                   |         |   |      |   |        |        |  |   |           |   |  |        |        |   |  | $ | (9,204  | )
|                              |  |                                   |         |   |      |   |        |        |  |   |           |   |  |        |        |   |  |   |         |  
|                              |  |                                   |         |   |     
|Capital expenditures          |  | $                                 | 11,326  |   |      | $ | 5,453  |        |  | $ | 14,444    |   |  | $      | 96     |   |  | $ | 31,319  |  
|                              |  |                                   |         |   |      |   |        |        |  |   |           |   |  |        |        |   |  |   |         |  



9



---

##### Table of Contents

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2009

(Unaudited)



|                                    |  |                                   |           |   |      |   |         |        |  |   |           |   |  |        |        |   |  |   |           |  
|----------------------------------- |  | --------------------------------- | --------- | - | ---- | - | ------- | ------ |  | - | --------- | - |  | ------ | ------ | - |  | - | --------- | -
|                                    |  | Three Months Ended March 31, 2009 |          
|(in thousands)                      |  | BuildingProducts                  |           |   | CCPs |   |         | Energy |  |   | Corporate |   |  | Totals |       
|Segment revenue                     |  | $                                 | 68,401    |   |      | $ | 48,083  |        |  | $ | 21,184    |   |  | $      |       |   |  | $ | 137,668   |  
|                                    |  |                                   |           |   |      |   |         |        |  |   |           |   |  |        |        |   |  |   |           |  
|Depreciation and amortization       |  | $                                 | (11,366   | ) |      | $ | (3,147  | )      |  | $ | (3,192    | ) |  | $      | (88    | ) |  | $ | (17,793   | )
|                                    |  |                                   |           |   |      |   |         |        |  |   |           |   |  |        |        |   |  |   |           |  
|Operating income (loss)             |  | $                                 | (468,815  | ) |      | $ | 4,804   |        |  | $ | (12,128   | ) |  | $      | (2,203 | ) |  | $ | (478,342  | )
|                                    |  |                                   |           |   |      |   |         |        |  |   |           |   |  |        |        |   |  |   |           |  
|Net interest expense                |  |                                   |           |   |      |   |         |        |  |   |           |   |  |        |        |   |  |   | (8,467    | )
|Other income (expense), net         |  |                                   |           |   |      |   |         |        |  |   |           |   |  |        |        |   |  |   | 3,250     |  
|Income tax benefit                  |  |                                   |           |   |      |   |         |        |  |   |           |   |  |        |        |   |  |   | 77,290    |  
|                                    |  |                                   |           |   |      |   |         |        |  |   |           |   |  |        |        |   |  |   |           |  
|Net loss                            |  |                                   |           |   |      |   |         |        |  |   |           |   |  |        |        |   |  | $ | (406,269  | )
|                                    |  |                                   |           |   |      |   |         |        |  |   |           |   |  |        |        |   |  |   |           |  
|                                    |  |                                   |           |   |     
|Capital expenditures                |  | $                                 | 2,228     |   |      | $ | 4,855   |        |  | $ | 12,744    |   |  | $      | 2      |   |  | $ | 19,829    |  
|                                    |  |                                   |           |   |      |   |         |        |  |   |           |   |  |        |        |   |  |   |           |  
|                                    | 
|                                    |  | Six Months Ended March 31, 2008   |          
|(in thousands)                      |  | BuildingProducts                  |           |   | CCPs |   |         | Energy |  |   | Corporate |   |  | Totals |       
|Segment revenue                     |  | $                                 | 208,326   |   |      | $ | 138,408 |        |  | $ | 74,142    |   |  | $      |       |   |  | $ | 420,876   |  
|                                    |  |                                   |           |   |      |   |         |        |  |   |           |   |  |        |        |   |  |   |           |  
|Depreciation and amortization       |  | $                                 | (23,156   | ) |      | $ | (6,032  | )      |  | $ | (4,260    | ) |  | $      | (185   | ) |  | $ | (33,633   | )
|                                    |  |                                   |           |   |      |   |         |        |  |   |           |   |  |        |        |   |  |   |           |  
|Operating income (loss)             |  | $                                 | 601       |   |      | $ | 20,504  |        |  | $ | (1,658    | ) |  | $      | (9,955 | ) |  | $ | 9,492     |  
|                                    |  |                                   |           |   |      |   |         |        |  |   |           |   |  |        |        |   |  |   |           |  
|Net interest expense                |  |                                   |           |   |      |   |         |        |  |   |           |   |  |        |        |   |  |   | (12,051   | )
|Other income (expense), net         |  |                                   |           |   |      |   |         |        |  |   |           |   |  |        |        |   |  |   | 7,778     |  
|Income tax provision                |  |                                   |           |   |      |   |         |        |  |   |           |   |  |        |        |   |  |   | (4,510    | )
|                                    |  |                                   |           |   |      |   |         |        |  |   |           |   |  |        |        |   |  |   |           |  
|Net income                          |  |                                   |           |   |      |   |         |        |  |   |           |   |  |        |        |   |  | $ | 709       |  
|                                    |  |                                   |           |   |      |   |         |        |  |   |           |   |  |        |        |   |  |   |           |  
|                                    |  |                                   |           |   |     
|Capital expenditures                |  | $                                 | 25,247    |   |      | $ | 6,285   |        |  | $ | 24,906    |   |  | $      | 450    |   |  | $ | 56,888    |  
|                                    |  |                                   |           |   |      |   |         |        |  |   |           |   |  |        |        |   |  |   |           |  
|                                    |  |                                   |           |   |     
|Segment Assets as of March 31, 2008 |  | $                                 | 1,061,547 |   |      | $ | 294,287 |        |  | $ | 168,436   |   |  | $      | 62,883 |   |  | $ | 1,587,153 |  
|                                    |  |                                   |           |   |      |   |         |        |  |   |           |   |  |        |        |   |  |   |           |  
|                                    | 
|                                    |  | Six Months Ended March 31, 2009   |          
|(in thousands)                      |  | BuildingProducts                  |           |   | CCPs |   |         | Energy |  |   | Corporate |   |  | Totals |       
|Segment revenue                     |  | $                                 | 156,628   |   |      | $ | 115,309 |        |  | $ | 31,897    |   |  | $      |       |   |  | $ | 303,834   |  
|                                    |  |                                   |           |   |      |   |         |        |  |   |           |   |  |        |        |   |  |   |           |  
|Depreciation and amortization       |  | $                                 | (22,953   | ) |      | $ | (6,269  | )      |  | $ | (7,850    | ) |  | $      | (183   | ) |  | $ | (37,255   | )
|                                    |  |                                   |           |   |      |   |         |        |  |   |           |   |  |        |        |   |  |   |           |  
|Operating income (loss)             |  | $                                 | (472,122  | ) |      | $ | 17,887  |        |  | $ | (26,766   | ) |  | $      | (6,514 | ) |  | $ | (487,515  | )
|                                    |  |                                   |           |   |      |   |         |        |  |   |           |   |  |        |        |   |  |   |           |  
|Net interest expense                |  |                                   |           |   |      |   |         |        |  |   |           |   |  |        |        |   |  |   | (17,158   | )
|Other income (expense), net         |  |                                   |           |   |      |   |         |        |  |   |           |   |  |        |        |   |  |   | 20,685    |  
|Income tax benefit                  |  |                                   |           |   |      |   |         |        |  |   |           |   |  |        |        |   |  |   | 76,840    |  
|                                    |  |                                   |           |   |      |   |         |        |  |   |           |   |  |        |        |   |  |   |           |  
|Net loss                            |  |                                   |           |   |      |   |         |        |  |   |           |   |  |        |        |   |  | $ | (407,148  | )
|                                    |  |                                   |           |   |      |   |         |        |  |   |           |   |  |        |        |   |  |   |           |  
|                                    |  |                                   |           |   |     
|Capital expenditures                |  | $                                 | 2,511     |   |      | $ | 7,764   |        |  | $ | 27,612    |   |  | $      | 36     |   |  | $ | 37,923    |  
|                                    |  |                                   |           |   |      |   |         |        |  |   |           |   |  |        |        |   |  |   |           |  
|                                    |  |                                   |           |   |     
|Segment assets as of March 31, 2009 |  | $                                 | 348,994   |   |      | $ | 286,944 |        |  | $ | 185,188   |   |  | $      | 48,016 |   |  | $ | 869,142   |  
|                                    |  |                                   |           |   |      |   |         |        |  |   |           |   |  |        |        |   |  |   |           |  



|3. | Equity Securities and Stock-Based Compensation
|-- | ----------------------------------------------

Shelf Registration  Headwaters filed with the SEC a universal shelf registration statement for the potential sale of a total of $250.0 million of debt or equity securities. This registration statement was declared effective in
April 2009. A prospectus supplement describing the terms of any additional securities to be issued is required to be filed before any future offering could commence under the registration statement.



10



---

##### Table of Contents

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2009

(Unaudited)



Stock-Based Compensation  In 2009, the Compensation Committee of Headwaters Board
of Directors granted approximately 0.1 million restricted stock units to the non-affiliated directors of Headwaters. The units were granted subject to the terms of an existing incentive plan and vest during calendar year 2009. Each unit
provides for the issuance of one share of Headwaters common stock, to be issued at the time of termination of a directors service on the Board of Directors, provided vesting has occurred. Subsequent to March 31, 2009, the
Compensation Committee granted approximately 1.2 million stock appreciation rights to certain officers and employees under the terms of an existing stock incentive plan.

Total stock-based compensation expense was approximately $1.3 million for each of the three-month periods ended March 31, 2008 and 2009, and
approximately $2.5 million and $3.0 million for the six months ended March 31, 2008 and 2009, respectively. As of March 31, 2009, there was approximately $8.1 million of total compensation cost related to unvested awards not yet
recognized, which will be recognized in future periods subject to applicable vesting terms.



|4. | Inventories
|-- | -----------

Inventories consisted of the
following at:



|               |  |                   |        |               |   |       
|-------------- |  | ----------------- | ------ | ------------- | - | ------
|(in thousands) |  | September 30,2008 |        | March 31,2009
|Raw materials  |  | $                 | 11,239 |               | $ | 11,148
|Finished goods |  |                   | 41,829 |               |   | 45,126
|               |  |                   |        |               |   |       
|               |  | $                 | 53,068 |               | $ | 56,274
|               |  |                   |        |               |   |       



|5. | Intangible Assets and Goodwill
|-- | ------------------------------

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



|                                  |  |                       |  |                     |         |                         |   |                     |  |                         |         |  |   |        
|--------------------------------- |  | --------------------- |  | ------------------- | ------- | ----------------------- | - | ------------------- |  | ----------------------- | ------- |  | - | -------
|                                  |  |                       |  | September 30, 2008  |         | March 31, 2009         
|(in thousands)                    |  | Estimateduseful lives |  | GrossCarryingAmount |         | AccumulatedAmortization |   | GrossCarryingAmount |  | AccumulatedAmortization
|CCP contracts                     |  | 8 -20 years           |  | $                   | 117,690 |                         | $ | 38,449              |  | $                       | 117,690 |  | $ | 41,815 
|Customer relationships            |  | 71/2-15 years         |  |                     | 77,403  |                         |   | 20,826              |  |                         | 77,603  |  |   | 23,754 
|Trade names                       |  | 5 - 20 years          |  |                     | 68,412  |                         |   | 14,227              |  |                         | 68,512  |  |   | 16,043 
|Patents and patented technologies |  | 6 - 19 years          |  |                     | 54,635  |                         |   | 23,354              |  |                         | 54,967  |  |   | 26,087 
|Other                             |  | 1 - 15 years          |  |                     | 6,370   |                         |   | 1,486               |  |                         | 5,690   |  |   | 2,018  
|                                  |  |                       |  |                     |         |                         |   |                     |  |                         |         |  |   |        
|                                  |  |                       |  | $                   | 324,510 |                         | $ | 98,342              |  | $                       | 324,462 |  | $ | 109,717
|                                  |  |                       |  |                     |         |                         |   |                     |  |                         |         |  |   |        



11



---

##### Table of Contents

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2009

(Unaudited)



Total amortization expense related to intangible assets was approximately $5.4 million and $6.2
million for the three months ended March 31, 2008 and 2009, respectively, and approximately $10.9 million and $12.0 million for the six months ended March 31, 2008 and 2009, respectively. Total estimated annual amortization expense for
fiscal years 2009 through 2014 is shown in the following table.



|                          |  |                |       
|------------------------- |  | -------------- | ------
|Year ending September 30: |  | (in thousands)
|2009                      |  | $              | 23,356
|2010                      |  |                | 22,047
|2011                      |  |                | 21,636
|2012                      |  |                | 19,869
|2013                      |  |                | 18,960
|2014                      |  |                | 18,582

Goodwill  SFAS No. 142 requires Headwaters to periodically test for goodwill
impairment, at least annually, or sooner if indicators of possible impairment arise. Headwaters performs its annual impairment testing as of June 30. As a result of the depressed new housing and residential remodeling markets, Headwaters
determined that the building products reporting units goodwill was impaired as of the June 30 test date in both fiscal 2007 and 2008, and non-cash impairment charges of $98.0 million and $205.0 million were recorded in fiscal 2007 and
2008, respectively.

Due to the continuing decline in the new housing and residential remodeling markets, the ongoing downward revisions by
market analysts of near-term projections in these markets, and the significant decline in Headwaters stock price during 2009, management determined that indicators of further goodwill impairment in the building products reporting unit existed.
In addition, the significant declines in coal and oil prices and in Headwaters stock price indicated potential goodwill impairment in the energy reporting unit. Accordingly, Headwaters performed goodwill impairment tests for both the building
products and energy reporting units during the quarter ended March 31, 2009. Upon completion of the impairment tests, Headwaters wrote off all remaining goodwill in the building products and energy reporting units, totaling approximately $465.7
million. None of the impairment charges in fiscal 2007, 2008 or 2009 affected Headwaters cash position, cash flow from operating activities or debt covenant compliance.

In connection with the goodwill impairment testing for the building products and energy reporting units in 2009, Headwaters also performed a formal
analysis for potential impairments of other long-lived assets in those reporting units, including all intangible assets and property, plant and equipment. The results of this analysis did not result in any significant impairment of any other
long-lived assets.



|6. | Long-term Debt
|-- | --------------

Long-term debt consisted of
the following at:



|                                      |  |                   |         |               |   |         |  
|------------------------------------- |  | ----------------- | ------- | ------------- | - | ------- | -
|(in thousands)                        |  | September 30,2008 |         | March 31,2009 |  
|Senior secured debt                   |  | $                 | 200,000 |               | $ | 212,500 |  
|Convertible senior subordinated notes |  |                   | 332,500 |               |   | 313,276 |  
|                                      |  |                   |         |               |   |         |  
|                                      |  |                   | 532,500 |               |   | 525,776 |  
|Less current portion                  |  |                   |        |               |   | (15,000 | )
|                                      |  |                   |         |               |   |         |  
|Total long-term debt                  |  | $                 | 532,500 |               | $ | 510,776 |  
|                                      |  |                   |         |               |   |         |  

Senior Secured Credit Agreements  Headwaters senior secured credit facility
currently consists of a first lien term loan in the amount of $197.5 million, plus $15.0 million outstanding under the revolving credit arrangement. The credit facility provides for up to $60.0 million of borrowings under the revolving credit
arrangement. The first lien term loan is senior in priority to all other debt and, with the exception of joint venture assets, is secured by all assets of Headwaters. The terms of the credit facility, as currently amended, are described in more
detail in the following paragraphs. Headwaters is in compliance with all debt covenants as of March 31, 2009. However, given the continuing decrease in building products revenues as a result of the



12



---

##### Table of Contents

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2009

(Unaudited)



depressed new housing and residential remodeling markets and the termination of Headwaters Section 45K business, combined with the high level of
capital expenditures during fiscal 2008 and thus far in fiscal 2009, there is increased risk of noncompliance with certain leverage and fixed charge coverage ratios in future periods.

The first lien term loan bears interest, at Headwaters option, at either i) the London Interbank Offered Rate (LIBOR) plus 3.5%, 4.0%, 4.5% or 5.0%,
depending on the credit ratings that have been most recently announced for the loans by Standard & Poors Ratings Services (S&P) and Moodys Investors Service, Inc. (Moodys); or ii) the Base Rate plus 2.5%,
3.0%, 3.5% or 4.0%, again depending on the credit ratings announced by S&P and Moodys. Base rate is defined as the higher of the rate announced by Morgan Stanley Senior Funding and the overnight rate charged by the Federal Reserve Bank of
New York plus 0.5%. As of March 31, 2009, the interest rate was LIBOR plus 5.0%. Headwaters can select new LIBOR rates for the first lien term loan for one, two, three or six month periods. The weighted-average interest rate on the first lien
term loan was approximately 6.5% at March 31, 2009. Interest on the first lien term loan is generally payable on a quarterly or more frequent basis.

The first lien term loan is repayable $74.8 million in February 2011 and $122.7 million in April 2011, the maturity date of the credit facility. There are mandatory prepayments of the first lien term loan in the event
of certain asset sales and debt and equity issuances and from excess cash flow, as defined in the agreement. A mandatory prepayment of $2.5 million was made during the quarter ended March 31, 2009 as a result of an asset sale.
Optional prepayments of the first lien term loan are permitted without penalty or premium. Once repaid in full or in part, no reborrowings can be made.

Borrowings under the revolving credit arrangement are generally subject to the terms of the first lien term loan agreement. Borrowings and reborrowings of any available portion of the $60.0 million revolver can be
made at any time through September 2009, when all revolver loans must be repaid and the revolving credit arrangement terminates. The fees for the unused portion of the revolving credit arrangement range from 0.5% to 0.75% (depending on
Headwaters total leverage ratio, as defined). As of March 31, 2009, there was $15.0 million outstanding under the revolving credit arrangement, which amount was increased to $25.0 million subsequent to March 31, 2009. The
credit agreement also allows for the issuance of letters of credit, provided there is capacity under the $60.0 million revolver. As of March 31, 2009, stand-by letters of credit totaling approximately $9.4 million were outstanding, with
expiration dates ranging from July 2009 to September 2009.

The credit facility contains restrictions and covenants common to such
agreements, including limitations on the incurrence of additional debt, investments, merger and acquisition activity, asset sales and liens, capital expenditures in excess of $100.0 million annually (plus, in certain circumstances, the unused amount
from the prior fiscal year), and the payment of dividends, among others. In addition, Headwaters must maintain certain leverage and fixed charge coverage ratios, as those terms are defined in the agreements, as follows: i) a total leverage ratio of
4.75:1 as of March 31, 2009, 4.25:1 as of June 30, 2009, 3.75:1 as of September 30, 2009, then 3.5:1 from December 31, 2009 through the maturity date; ii) a maximum ratio of consolidated funded indebtedness minus subordinated
indebtedness to EBITDA of 2.5:1; and iii) a minimum ratio of EBITDA plus rent payments (EBITDAR), less certain capital expenditures and taxes for the four preceding fiscal quarters, to scheduled rent payments and payments of principal and interest
on all indebtedness for the next four fiscal quarters of 1:1 through June 30, 2009, then 1.25:1 for periods ending on or after September 30, 2009.

2.875% Convertible Senior Subordinated Notes Due 2016  In 2002, Headwaters issued $172.5 million of 2.875% convertible senior subordinated notes due June 2016, with interest payable semi-annually. In
December 2008, Headwaters entered into separate, privately-negotiated agreements with certain holders of the notes to exchange approximately $80.9 million in aggregate principal amount of the notes for approximately $63.3 million in aggregate
principal amount of new 16% convertible senior subordinated notes due 2016, described below.

Following the extinguishment of $80.9 million
principal amount of the 2.875% notes, approximately $91.6 million principal amount of the notes remain outstanding as of March 31, 2009. These notes are subordinate to the senior secured debt described above and rank equally with the 16%
convertible senior subordinated notes due 2016 and the 2.50% and 14.75% convertible senior subordinated notes due 2014 described below, as well as any future issuances of senior subordinated debt. Holders



13



---

##### Table of Contents

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2009

(Unaudited)



of the 2.875% notes may convert the notes into shares of Headwaters common stock at a conversion rate of 33.3333 shares per $1,000 principal amount
($30 conversion price), or approximately 3.1 million aggregate shares of common stock, contingent upon certain events. The conversion rate adjusts for events related to Headwaters common stock, including common stock issued as a dividend,
rights or warrants to purchase common stock issued to all holders of Headwaters common stock, and other similar rights or events that apply to all holders of common stock.

The 2.875% notes are convertible if any of the following five criteria are met: 1) satisfaction of a market price condition which becomes operative if,
prior to June 1, 2011, in any calendar quarter the closing price of Headwaters common stock exceeds $39 per share for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the calendar quarter, or,
at any time on or after June 1, 2011 the closing price of Headwaters common stock exceeds $39 per share; 2) a credit rating, if any, assigned to the notes is three or more rating subcategories below the initial rating; 3) the notes trade
at less than 98% of the product of the common stock trading price and the number of shares of common stock issuable upon conversion of $1,000 principal amount of the notes, except this provision is not available if the closing common stock price is
between 100% and 120% of the current conversion price of the notes; 4) Headwaters calls the notes for redemption; or 5) upon the occurrence of specified corporate transactions.

Headwaters may call the 2.875% notes for redemption at any time prior to June 4, 2011 if the closing common stock price exceeds 130% of the
conversion price for 20 trading days in any consecutive 30-day trading period (in which case Headwaters must provide a make whole payment of the present value of all remaining interest payments on the redeemed notes through June 1,
2011). Headwaters may redeem any portion of the notes at any time on or after June 4, 2011. In addition, the holders of the notes have the right to require Headwaters to repurchase all or a portion of the notes on June 1, 2011 or if a
fundamental change in common stock has occurred, including termination of trading. Subsequent to June 1, 2011, the notes require an additional interest payment equal to 0.40% of the average trading price of the notes if the trading price equals
120% or more of the principal amount of the notes. When dilutive, Headwaters includes the additional shares of common stock contingently issuable under the convertible notes in its diluted EPS calculations on an if-converted basis (see Note 8).

16% Convertible Senior Subordinated Notes Due 2016  As noted above, in December 2008, Headwaters exchanged approximately $80.9
million of its 2.875% convertible senior subordinated notes due 2016 for $63.3 million of new 16% convertible senior subordinated notes due 2016. In accordance with the provisions of EITF Issue No. 96-19, Debtors Accounting for a
Modification or Exchange of Debt Instruments (EITF 96-19), Headwaters accounted for the exchange of convertible debt securities as an extinguishment of the original debt and an issuance of new debt. A gain, recorded in other income (expense)
of approximately $17.6 million was recognized on the extinguishment of debt. Additionally, approximately $1.0 million of unamortized debt issue costs related to the extinguished $80.9 million of debt was charged to interest expense.

The 16% notes are subordinate to the senior secured debt described above and rank equally with the 2.875% convertible senior subordinated notes due 2016
described above and the 2.50% and 14.75% convertible senior subordinated notes due 2014 described below, as well as any future issuances of senior subordinated debt. Holders of the notes may convert the notes into shares of Headwaters common
stock at a conversion rate of 42.5532 shares per $1,000 principal amount ($23.50 conversion price), or approximately 2.7 million aggregate shares of common stock, contingent upon certain events. The conversion rate adjusts for events related to
Headwaters common stock, including common stock issued as a dividend, rights or warrants to purchase common stock issued to all holders of Headwaters common stock, and other similar rights or events that apply to all holders of common
stock. Upon conversion, Headwaters will pay cash up to the principal amount of the notes, and, at Headwaters option, cash, shares of common stock, or a combination of cash and shares, to the extent the price of Headwaters common stock
exceeds the conversion price during a 20-trading-day observation period. The conversion rate is adjusted for certain corporate transactions referred to as fundamental changes. As described in more detail in Note 1, the accounting for
these notes will change upon adoption of FSP APB 14-1 in October 2009.

The 16% notes are convertible if any of the following five criteria
are met: 1) satisfaction of a market price condition which becomes operative if, prior to June 1, 2012, in any calendar quarter the closing price of Headwaters common stock



14



---

##### Table of Contents

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2009

(Unaudited)



exceeds $30.55 per share for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the calendar quarter, or, at any
time on or after June 1, 2012 the closing price of Headwaters common stock exceeds $30.55 per share; 2) a credit rating, if any, assigned to the notes is three or more rating subcategories below the initial rating; 3) the notes trade at
less than 98% of the product of the common stock trading price and the number of shares of common stock issuable upon conversion of $1,000 principal amount of the notes; 4) Headwaters calls the notes for redemption; or 5) upon the occurrence of
specified corporate transactions.

Headwaters may call the 16% notes for redemption at any time prior to June 1, 2012 if the closing
common stock price exceeds 130% of the conversion price for 20 trading days in any consecutive 30-day trading period. Headwaters may redeem any portion of the notes at any time on or after June 1, 2012. In addition, the holders of the notes
have the right to require Headwaters to repurchase all or a portion of the notes on June 1, 2012 or if a fundamental change in common stock has occurred, including termination of trading.

2.50% Convertible Senior Subordinated Notes Due 2014  In fiscal 2007, Headwaters issued $160.0 million of 2.50% convertible senior
subordinated notes due February 2014, with interest payable semi-annually. In March and April 2009, Headwaters entered into separate, privately-negotiated agreements with certain holders of the notes to exchange approximately $39.1 million in
aggregate principal amount of the notes for approximately $27.4 million in aggregate principal amount of new 14.75% convertible senior subordinated notes due 2014, described below.

Following the March 2009 extinguishment of $5.5 million principal amount of the 2.50% notes, approximately $154.5 million principal amount of the notes
remained outstanding as of March 31, 2009 ($120.9 million following the April transaction). These notes are subordinate to the senior secured debt and rank equally with the 2.875% and 16% convertible senior subordinated notes due 2016 described
above, the 14.75% convertible senior subordinated notes due 2014 described below, and any future issuances of senior subordinated debt. The conversion rate for the notes is 33.9236 shares per $1,000 principal amount ($29.48 conversion price),
subject to adjustment. Upon conversion, Headwaters will pay cash up to the principal amount of the notes, and shares of common stock to the extent the price of Headwaters common stock exceeds the conversion price during a 20-trading-day
observation period. The conversion rate is adjusted for certain corporate transactions referred to as fundamental changes. As described in more detail in Note 1, the accounting for these notes will change upon adoption of FSP APB 14-1 in
October 2009.

The 2.50% notes are convertible at the option of the holders prior to December 1, 2013 if any of the following criteria
are met: 1) during any fiscal quarter the closing price of Headwaters common stock exceeds $38.32 per share for at least 20 trading days during a period of 30 consecutive trading days ending on the last trading day of the preceding fiscal
quarter; 2) during the five-business-day period after any ten-consecutive-trading-day period, the notes trade at less than 98% of the product of the common stock trading price and the number of shares of common stock issuable upon conversion of
$1,000 principal amount of the notes; or 3) upon the occurrence of specified corporate transactions. The notes are convertible on or after December 1, 2013 regardless of the foregoing circumstances. Headwaters may not redeem the notes. If
Headwaters has a fundamental change, holders may require Headwaters to repurchase the notes at a price equal to the principal amount plus any accrued interest.

In connection with the issuance of the 2.50% notes, Headwaters entered into convertible note hedge and warrant transactions for the purpose of effectively increasing the common stock conversion price for the notes
from $29.48 per share to $35.00 per share. The convertible note hedge terminates upon the maturity of the notes or when none of the notes remain outstanding due to conversion or otherwise.

14.75% Convertible Senior Subordinated Notes Due 2014  As noted above, in March and April 2009, Headwaters exchanged approximately $39.1
million ($5.5 million prior to March 31, 2009) of its 2.50% convertible senior subordinated notes due 2014 for approximately $27.4 million ($3.9 million prior to March 31, 2009) of new 14.75% convertible senior subordinated notes due 2014.
In accordance with the provisions of EITF 96-19, Headwaters accounted for the exchange of convertible debt securities as an extinguishment of the original debt and an issuance of new debt. A gain, recorded in other income (expense) in the
accompanying consolidated statements of operations for 2009, of approximately $1.6 million was recognized on the extinguishment of debt, and approximately $0.2 million of unamortized debt issue costs related to the extinguished $5.5 million



15



---

##### Table of Contents

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2009

(Unaudited)



of debt was charged to interest expense in 2009. In April 2009, an additional $10.1 million gain was recognized on the extinguishment of debt, and
approximately $0.8 million of unamortized debt issue costs related to the extinguished $33.6 million of debt was charged to interest expense.

The conversion rate for the 14.75% notes is 48.4623 shares per $1,000 principal amount ($20.63 conversion price), subject to adjustment. The conversion rate and the interest rate are the primary differences in terms between the 2.50% notes
and the 14.75% notes. As described in more detail in Note 1, the accounting for these notes will also change upon adoption of FSP APB 14-1 in October 2009.

Interest and Debt Maturities  During the three months ended March 31, 2008 and 2009, Headwaters incurred total interest costs of approximately $6.6 million and $8.9 million, respectively, including
approximately $0.7 million and $0.9 million, respectively, of non-cash interest expense and approximately $0.2 million in both periods of interest costs that were capitalized. During the six months ended March 31, 2008 and 2009, Headwaters
incurred total interest costs of approximately $13.4 million and $18.1 million, respectively, including approximately $1.3 million and $2.9 million, respectively, of non-cash interest expense and approximately $0.4 million and $0.5 million,
respectively, of interest costs that were capitalized.

Interest income was approximately $0.2 million during each of the three-month
periods ended March 31, 2008 and 2009, and approximately $0.9 million and $0.4 million during the six months ended March 31, 2008 and 2009, respectively. The weighted-average interest rate on the face amount of outstanding long-term debt,
disregarding amortization of debt issue costs, was approximately 4.8% at September 30, 2008 and 5.9% at March 31, 2009.

As noted
above, the holders of the 2.875% convertible senior subordinated notes due June 2016, totaling $91.6 million, have the right to require Headwaters to repurchase all or a portion of those notes on June 1, 2011. Also, the holders of the 16%
convertible senior subordinated notes due June 2016, totaling $63.3 million, have the right to require Headwaters to repurchase all or a portion of those notes on June 1, 2012. Headwaters currently believes it is likely that the holders of the
2.875% notes will require Headwaters to repurchase those notes on June 1, 2011 and it is possible that the holders of the 16% notes will require Headwaters to repurchase those notes on June 1, 2012.



|7. | Income Taxes
|-- | ------------

Headwaters estimated
effective income tax rate for the fiscal year ending September 30, 2009, exclusive of discrete items, is currently estimated to be less than 20.0%. During the six months ended March 31, 2009, Headwaters also recognized $0.6 million of
income tax expense for discrete items that did not affect the calculation of the estimated effective income tax rate for the 2009 fiscal year. For the six months ended March 31, 2008, Headwaters used an estimated effective income tax rate of
29.0%, exclusive of discrete items, and recognized $3.0 million of additional income tax expense for discrete items that primarily related to Section 45K-related adjustments pertaining to prior periods.

The estimated effective tax rate for fiscal 2009, exclusive of discrete items, is lower than the statutory rate because a significant portion of the
goodwill impairment recorded in 2009 is not tax deductible. Accordingly, the tax benefit expected to be recorded for fiscal 2009 will be significantly less than the statutory rate. The fiscal 2009 estimated effective tax rate was also affected by
estimated Section 45 refined coal tax credits (which are different from the Section 45K tax credits discussed elsewhere) related to the coal cleaning facilities that Headwaters owns and operates, but to a far lesser extent than by the
portion of the goodwill impairment representing a permanent difference. The estimated effective tax rate for fiscal 2008, exclusive of discrete items, was lower than the statutory rate primarily due to estimated Section 45 refined coal tax
credits. Headwaters believes it is more likely than not that the refined coal produced at its coal cleaning facilities qualifies for tax credits pursuant to Section 45 of the Internal Revenue Code, notwithstanding the uncertainties and risks
associated with the tax credits, as more fully described in Note 9. Excluding the effect of Section 45 tax credits and goodwill impairment, Headwaters estimated effective tax rate for fiscal 2009 would be approximately 88%, due primarily
to the effect of valuation allowances and permanent differences unrelated to goodwill impairment, combined with low expected pre-tax income for the year.



16



---

##### Table of Contents

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2009

(Unaudited)



As of March 31, 2009, Headwaters had approximately $10.4 million of unrecognized tax benefits,
net of an $11.2 million refund claim related to an uncertain tax position. Headwaters has recorded approximately $22.6 million of gross unrecognized income tax benefits which would affect the fiscal 2009 effective tax rate if released into income.
Headwaters recognizes accrued interest and potential penalties related to all income tax liabilities, including unrecognized income tax benefits, in income tax expense. During the six months ended March 31, 2009, Headwaters released
approximately $2.9 million of interest and penalties and as of March 31, 2009, approximately $4.1 million was accrued for the payment of interest and penalties. Changes to the estimated liability for unrecognized income tax benefits during 2009
were primarily the result of settlement of the IRS audit for the years 2003 and 2004.

The calculation of tax liabilities involves
uncertainties in the application of complex tax regulations in multiple jurisdictions. For example, Headwaters is currently under audit by the IRS for the years 2005 and 2006 and has open tax periods subject to examination by both federal and state
taxing authorities for the years 2005 through 2008. Headwaters recognizes potential liabilities for anticipated tax audit issues in the U.S. and state tax jurisdictions based on estimates of whether, and the extent to which, additional taxes and
interest will be due. If events occur and the payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when it is determined the liabilities are no
longer probable or necessary. If the estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result. It is reasonably possible that the amount of Headwaters unrecognized income tax benefits
will change significantly within the next 12 months. These changes could be the result of Headwaters ongoing tax audits or the settlement of outstanding audit issues. However, due to the number of years under audit and the matters being
examined, at the current time, an estimate of the range of reasonably possible outcomes cannot be made, beyond amounts currently accrued.



|8. | Earnings per Share
|-- | ------------------

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



|                                                                                                                     |  |                             |        |   |                           |   |          |      |  |      |        |  |   |          |  
|-------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ------------------------- | - | -------- | ---- |  | ---- | ------ |  | - | -------- | -
|                                                                                                                     |  | Three Months EndedMarch 31, |        |   | Six Months EndedMarch 31, |  
|(in thousands, except per-share data)                                                                                |  | 2008                        |        |   | 2009                      |   |          | 2008 |  | 2009 |       
|Numerator:                                                                                                           |  |                             |        |   |                           |   |          |      |  |      |        |  |   |          |  
|Numerator for basic and diluted earnings per share  net income (loss)                                               |  | $                           | (9,204 | ) |                           | $ | (406,269 | )    |  | $    | 709    |  | $ | (407,148 | )
|                                                                                                                     |  |                             |        |   |                           |   |          |      |  |      |        |  |   |          |  
|                                                                                                                     |  |                             |        |  
|Denominator:                                                                                                         |  |                             |        |   |                           |   |          |      |  |      |        |  |   |          |  
|Denominator for basic earnings per share  weighted-average shares outstanding                                       |  |                             | 41,117 |   |                           |   | 41,556   |      |  |      | 41,502 |  |   | 41,459   |  
|Effect of dilutive securities  shares issuable upon exercise of options and SARs and vesting of restricted stock    |  |                             |       |   |                           |   |         |      |  |      | 120    |  |   |         |  
|                                                                                                                     |  |                             |        |   |                           |   |          |      |  |      |        |  |   |          |  
|Denominator for diluted earnings per share  weighted-average shares outstanding after assumed exercises and vesting |  |                             | 41,117 |   |                           |   | 41,556   |      |  |      | 41,622 |  |   | 41,459   |  
|                                                                                                                     |  |                             |        |   |                           |   |          |      |  |      |        |  |   |          |  
|                                                                                                                     |  |                             |        |  
|Basic earnings (loss) per share                                                                                      |  | $                           | (0.22  | ) |                           | $ | (9.78    | )    |  | $    | 0.02   |  | $ | (9.82    | )
|                                                                                                                     |  |                             |        |   |                           |   |          |      |  |      |        |  |   |          |  
|                                                                                                                     |  |                             |        |  
|Diluted earnings (loss) per share                                                                                    |  | $                           | (0.22  | ) |                           | $ | (9.78    | )    |  | $    | 0.02   |  | $ | (9.82    | )
|                                                                                                                     |  |                             |        |   |                           |   |          |      |  |      |        |  |   |          |  
|Anti-dilutive securities not considered in diluted EPS calculation:                                                  |  |                             |        |   |                           |   |          |      |  |      |        |  |   |          |  
|Stock options                                                                                                        |  |                             | 2,297  |   |                           |   | 1,988    |      |  |      | 2,143  |  |   | 1,994    |  
|SARs                                                                                                                 |  |                             | 1,187  |   |                           |   | 2,093    |      |  |      | 1,159  |  |   | 2,122    |  
|Restricted stock                                                                                                     |  |                             |       |   |                           |   | 352      |      |  |      |       |  |   | 358      |  
|Weighted-average shares issuable upon conversion of convertible notes                                                |  |                             | 5,750  |   |                           |   | 3,055    |      |  |      | 5,750  |  |   | 4,212    |  



17



---

##### Table of Contents

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2009

(Unaudited)



|9. | Commitments and Contingencies
|-- | -----------------------------

Significant
new commitments and ongoing contingencies as of March 31, 2009 not disclosed previously, are as follows.

Acquisitions  In
fiscal 2008, Headwaters acquired certain assets and assumed certain liabilities of a privately-held company in the building products industry. Total consideration for this acquisition was approximately $15.8 million, of which approximately $5.0
million was paid at the date of acquisition and approximately $10.8 was paid in 2009. Pursuant to contractual terms for some small 2006 acquisitions in the building products segment, additional amounts may be payable in the future, based on the
achievement of stipulated revenue or earnings targets for periods ending no later than March 2010. At the current time, Headwaters does not believe that any such payments will be material. If any future earn-out consideration is paid for any
acquisition, the amounts will be charged to income because all goodwill in the building products reporting unit has been written off.

Performance Unit Awards  In 2008, Headwaters Compensation Committee approved grants of performance unit awards to certain officers and employees, to be settled in cash, based on the achievement of goals tied to cumulative
divisional free cash flow generated subsequent to September 30, 2008 and prior to September 30, 2028, at which time the awards expire, if not forfeited earlier. These awards replaced all existing long-term cash-based awards, except for
certain awards already earned at the date of grant. For purposes of these awards, free cash flow is generally defined as operating income plus depreciation and amortization, reduced by capital expenditures. Payments will vest according to a
predetermined schedule as free cash flow accumulates over time. The maximum payout under the performance unit awards if all performance criteria were to be achieved by all of Headwaters operating divisions would be approximately $84.0 million.
No amounts have been expensed for these awards through March 31, 2009 because significant progress has not yet been made towards achievement of the performance criteria.

Property, Plant and Equipment  As of March 31, 2009, Headwaters was committed to spend approximately $19.7 million on capital projects
that were in various stages of completion.

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

Historically,
costs paid to outside legal counsel for litigation have comprised a majority of Headwaters litigation-related costs. During the six months ended March 31, 2009, Headwaters incurred approximately $1.5 million of expense for legal matters,
which consisted primarily of costs for outside legal counsel. Headwaters currently believes the range of potential loss for all unresolved matters, excluding costs for outside counsel, is from $1.0 million up to the amounts sought by claimants and
has recorded a total liability as of March 31, 2009 of $1.0 million. Claims and damages sought by claimants in excess of this amount are not deemed to be probable. Headwaters and its outside counsel currently believe that unfavorable outcomes
of outstanding litigation are neither probable nor remote and declined to express opinions concerning the likely outcomes or liability to Headwaters. It is not possible to estimate what litigation-related costs will be in future periods.

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



18



---

##### Table of Contents

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2009

(Unaudited)



Boynton. In October 1998, Headwaters entered into a technology purchase agreement with James
G. Davidson and Adtech, Inc. The transaction transferred certain patent and royalty rights to Headwaters related to a synthetic fuel technology invented by Davidson. This action is factually related to an earlier action brought by certain purported
officers and directors of Adtech, Inc. That action was dismissed by the United States District Court for the Western District of Tennessee and the District Courts order of dismissal was affirmed on appeal. In the current action, the
allegations arise from the same facts, but the claims are asserted by certain purported stockholders of Adtech. In June 2002, Headwaters received a summons and complaint from the United States District Court for the Western District of Tennessee
alleging, among other things, fraud, conspiracy, constructive trust, conversion, patent infringement and interference with contract arising out of the 1998 technology purchase agreement entered into between Davidson and Adtech on the one hand, and
Headwaters on the other. The plaintiffs seek declaratory relief, compensatory and punitive damages, and have recently reported an alleged compensatory damages calculation in the approximate amount of $61.2 million plus $73.4 million for alleged
future damages. In February 2006, the District Court dismissed all claims against Headwaters. Also in February 2006, plaintiffs filed an appeal. In July 2007, the United States Court of Appeals for the Federal Circuit vacated the dismissal in favor
of Headwaters as to the civil conspiracy and constructive trust claims and remanded the case to the District Court for further proceedings. The District Court has certified a class comprised of substantially all purported stockholders of Adtech,
Inc. and set a trial date for June 2009. The trial is expected to try common issues for all plaintiffs and individual issues for representative plaintiffs, reserving individual issues for all other class members for future proceedings. Because the
resolution of the litigation is uncertain, legal counsel cannot express an opinion as to the ultimate amount, if any, of Headwaters liability.

Ecologica Carmelo. Headwaters Resources, Inc. (HRI), a subsidiary through which Headwaters conducts its CCP business, entered into a fly ash supply agreement with Ecologica Carmelo, Inc. (Carmelo) in February 2002 to supply fly ash
to Carmelo for sale and use in the Caribbean basin region. The agreement guarantees first availability of fly ash to Carmelo from specific power generating plants and Carmelo agreed to purchase exclusively from HRI and to purchase a minimum tonnage
of fly ash annually. In April 2008, HRI filed an arbitration demand against Carmelo with AAA Arbitration in Atlanta, Georgia, alleging that Carmelo breached the fly ash supply agreement by failing to purchase the minimum annual
volume of fly ash it was obligated to purchase under that agreement and for violation of Carmelos obligation to exclusively purchase fly ash from HRI. HRI is seeking approximately $3.9 million for lost profits on minimum fly ash
purchases, plus other direct, incidental, and consequential damages relating to Carmelos failure to purchase from HRI exclusively.

In
June 2008, Carmelo filed its response to HRIs arbitration demand. Carmelo denied that it breached the fly ash supply agreement, alleged that it properly terminated the agreement, and filed a counterclaim against
HRI. Carmelo has alleged that HRI failed to secure a cost-effective source of fly ash for Carmelo in violation of the fly ash supply agreement. Carmelo has asserted claims for breach of contract, breach of Puerto Rico
Law No. 75, and breach of the covenant of good faith and fair dealing. Carmelo is seeking damages of at least $12.3 million which allegedly represents the lost value of its investment in a facility designed for
the intake and storage of fly ash from HRI. Because the resolution of the arbitration action is uncertain, legal counsel cannot express an opinion concerning the likely outcome of this matter or the liability of HRI, if any.

Mainland Laboratory. HRI entered into a license agreement for the use of a fly ash carbon treatment technology with Mainland Laboratory, LTD
(Mainland) in April 2000. The agreement grants exclusive rights to the patented carbon treatment technology owned by Mainland. In 2006, HRI became aware of prior art relating to the Mainland patented technology which Headwaters believes invalidates
the Mainland patent and HRI stopped paying royalties under the agreement. In September 2007, Mainland filed suit against HRI in the United States District Court for the Southern District of Texas with a demand for arbitration under the terms of the
license agreement, for breach of contract and patent infringement. HRI has requested that the District Court invalidate the Mainland patent and cancel the license agreement due to Mainlands inability to provide HRI with exclusivity to practice
the patented technology. Mainland is seeking approximately $23.0 million in damages, enhancement of any damages award based on alleged willful infringement of its patent, and recovery of its costs associated with the litigation, including its
attorneys fees. Additionally, Mainland is seeking an injunction to stop HRI from practicing the technology covered by the patent. HRI filed a motion for summary judgment on the patent validity and is currently waiting for the courts
decision. Because the resolution of the federal court and arbitration actions are uncertain, legal counsel cannot express an opinion concerning the likely outcome of this matter or the liability of HRI, if any.



19



---

##### Table of Contents

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2009

(Unaudited)



Coalco Corporation. Beginning in 1996, Headwaters entered into a series of agreements with
Coalco Corporation by which Coalco would assist Headwaters in identifying financing sources for synthetic fuel manufacturing projects. Under these agreements, Headwaters agreed to pay certain fees to Coalco. Beginning in 1997, Pelletco Company, an
affiliate of Coalco, entered into license agreements for the use of Headwaters synthetic fuel technology for which Pelletco agreed to pay certain license fees to Headwaters. As of December 31, 2008, trade receivables include $3.8 million
which is due from Pelletco to Headwaters. The synthetic fuel businesses underlying all of these agreements ended during fiscal 2008. In January 2009, Coalco filed a complaint in the Commonwealth of Massachusetts Suffolk County Superior Court, which
has been removed to the United States District Court for the District of Massachusetts, alleging that Headwaters has breached its agreements to pay certain fees to Coalco. Coalco seeks damages in the principal amount of approximately $20.8 million,
plus approximately $2.7 million in interest, attorneys fees, and other costs. Pelletco joined the complaint with Coalco, both seeking declaratory judgment as to their rights and obligations under the various agreements. Headwaters has filed an
answer denying the allegations of the complaint. Headwaters also filed a counterclaim against the plaintiffs and their principals claiming breach of contract and related claims for failure to pay the $3.8 million due from Pelletco to Headwaters.
Because the resolution of the litigation is uncertain, legal counsel cannon express an opinion as to the ultimate amount, if any, of Headwaters liability. Although the merits of Coalco and Pelletcos claims against Headwaters will be
determined in due legal course, management currently believes that the $3.8 million owed to Headwaters from Pelletco is due and collectible.

Headwaters Building Products Matters.There are litigation and pending and threatened claims made against certain subsidiaries of Headwaters Building Products (HBP), a division within Headwaters building products segment, with
respect to several types of exterior finish systems manufactured and sold by its subsidiaries for application by contractors on residential and commercial buildings. Typically, litigation and these claims are defended by such subsidiaries
insurance carriers. The plaintiffs or claimants in these matters have alleged that the structures have suffered damage from latent or progressive water penetration due to some alleged failure of the building product or wall system. Some claims
involve alleged defects associated with components of an Exterior Insulating and Finish System (EIFS) which was produced for a limited time (through 1997) by the HBP subsidiaries. There is a 10-year projected claim period following discontinuation
of the product. Other claims involve alleged liabilities associated with certain stucco and architectural stone veneer products which are produced and sold by certain subsidiaries of HBP.

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

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

Section 45K
Matters  A material amount of Headwaters consolidated revenue and net income through December 31, 2007 was derived from license fees and sales of chemical reagents, both of which were dependent on the ability of licensees and
other



20



---

##### Table of Contents

HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2009

(Unaudited)



customers to manufacture and sell qualified synthetic fuel that generated tax credits under Section 45K (formerly Section 29) of the Internal
Revenue Code. Headwaters has also claimed Section 45K tax credits for synthetic fuel sales from facilities in which it owned an interest (see Note 7). The following issues exist related to Section 45K tax credits.

Termination of Section 45K. By law, Section 45K tax credits for synthetic fuel produced from coal expired for synthetic fuel sold after
December 31, 2007. With the expiration of Section 45K at the end of calendar 2007, Headwaters licensees synthetic fuel facilities and the facilities owned by Headwaters were closed because production of synthetic fuel was not
profitable absent the tax credits. The closure of these synfuel facilities has had, and will continue to have, a material adverse effect on the current and future revenue, net income and cash flow of Headwaters, when compared to prior periods.

IRS Audits. The IRS is currently auditing Headwaters tax credits claimed for synthetic fuel sold from the facilities in which
it owned an interest. The tax credits which are under audit that Headwaters believes are more likely than not to be sustained, and are therefore not included in unrecognized income tax benefits in the balance sheet, total approximately $30.0
million.

Section 45 Matters  As explained in Note 7, Headwaters effective tax rate for fiscal 2008 and 2009 is
lower than the statutory rate in part due to refined coal tax credits related to facilities that Headwaters owns and operates. Headwaters believes the refined coal produced at these facilities and sold to qualified buyers qualifies for tax credits
under Section 45 (which is different from the Section 45K tax credits discussed in preceding paragraphs) of the Internal Revenue Code. To date, the IRS has issued limited guidance about how this tax credit program will be administered and
the restrictions on the availability of such credits. Based on the language of Section 45, Headwaters believes that its coal cleaning facilities are eligible for Section 45 refined coal tax credits, and as a result, has recognized a
benefit for such credits in its fiscal 2008 and 2009 tax provisions. The ability to claim tax credits is dependent upon a number of conditions, including, but not limited to:



| |  |  | Placing facilities in service on or before December 31, 2008;
| | - |  | -------------------------------------------------------------



| |  |  | Producing a fuel from coal that is lower in NOxand either SOxor mercury emissions by the specified amount as compared to the emissions of the feedstock;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Producing a fuel at least 50% more valuable than the feedstock; and
| | - |  | -------------------------------------------------------------------



| |  |  | Sale of the fuel to a third party for the purpose of producing steam.
| | - |  | ---------------------------------------------------------------------

The IRS may challenge Section 45 tax credits claimed by Headwaters on any one of these or other conditions. In addition, Congress may modify or
repeal Section 45 so that these tax credits may not be available in the future. From fiscal 2007 through March 31, 2009, Headwaters has recognized a total benefit of approximately $5.8 million related to Section 45 tax credits.

In the Energy Improvement and Extension Act of 2008, Congress extended the benefits
of Section 45 tax credits to refined coal facilities placed in service after December 31, 2008 and before January 1, 2010. For refined coal facilities placed in service in calendar year 2009, Congress also eliminated the
Section 45 requirement that there be a 50% increase in market value but increased the emissions reduction required of either SOxor mercury to
40% from 20%. Headwaters does not believe that these revised requirements apply to its existing coal cleaning facilities.



21



---

##### Table of Contents

|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included in this Form
10-Q. Our fiscal year ends on September 30 and unless otherwise noted, references to 2008 refer to our fiscal quarter and/or six-month period ended March 31, 2008 and references to 2009 refer to our fiscal quarter and/or six-month period
ended March 31, 2009. Other references to years refer to our fiscal year rather than a calendar year.

Overview

Consolidation and Segments. The consolidated financial statements include the accounts of Headwaters, all of our subsidiaries, and other entities
in which we have a controlling interest. All significant intercompany transactions and accounts are eliminated in consolidation.

We
currently operate in three industries: building products, coal combustion products (CCPs) and energy. In the building products segment, we design, manufacture, and sell architectural stone, resin-based exterior siding accessories (such as shutters,
mounting blocks, and vents), concrete block and other building products. Revenues consist of product sales to wholesale and retail distributors, contractors and other users of building products. We are a nationwide leader in the management and
marketing of CCPs, including fly ash used as a substitute for portland cement. Revenues in the CCP segment consist primarily of CCP product sales with a smaller amount of service revenue. In the energy segment, we are focused on reducing waste and
increasing the value of energy-related feedstocks, primarily in the areas of low-value coal and oil. Revenues for the energy segment through December 31, 2007 consisted primarily of sales of chemical reagents and license fees related to our
former Section 45K business. Beginning January 1, 2008, and for the foreseeable future, revenues for this segment consist primarily of coal sales.

Operations and Strategy. During the past several years, we have executed our two-fold plan of maximizing cash flow from our existing operating business units and diversifying from significant reliance on the
legacy energy segment Section 45K (formerly Section 29) business. With the addition and expansion of our CCP management and marketing business through acquisitions beginning in 2002, and the growth of our building products business through
several acquisitions beginning in 2004, we have achieved revenue growth and diversification in three business segments. Because we also incurred increased indebtedness to make strategic acquisitions, one of our historical financial objectives has
been to focus on increasing cash flows to reduce debt levels. During fiscal 2008 and through March 31, 2009, our primary focus has been on the development of our coal cleaning business and our primary use of cash consisted of maintenance and
growth capital expenditures, a major portion of which related to our coal cleaning facilities in the energy segment.

A material amount of
our consolidated revenue and net income through December 31, 2007 was derived from license fees and sales of chemical reagents, both of which were dependent on the ability of licensees and other customers to manufacture and sell qualified
synthetic fuel that generated tax credits under Section 45K of the Internal Revenue Code. We have also claimed Section 45K tax credits for synthetic fuel sales from facilities in which we owned an interest.

By law, Section 45K tax credits for synthetic fuel produced from coal expired for synthetic fuel sold after December 31, 2007. With the
expiration of Section 45K at the end of calendar 2007, our licensees synthetic fuel facilities and the facilities we owned were closed because production of synthetic fuel was not profitable absent the tax credits. The closure of these
synfuel facilities has had, and will continue to have, a material adverse effect on our current and future revenue, net income and cash flow, when compared to prior periods.

Section 45K tax credits were subject to phase-out after the average annual U.S. wellhead oil price (reference price) reached a beginning phase-out
threshold price, and would have been eliminated entirely if the reference price had reached the full phase-out price. The calendar 2007 reference price and phase-out range were announced in calendar 2008 and accordingly, in the March and June 2008
quarters we adjusted previously recognized revenue and tax credits as required to reflect the finalized phase-out. The existence and unpredictability of phase-out had a material adverse effect on both the amount and timing of recognition of our
revenue, net income and cash flow beginning in fiscal 2006 and continuing into fiscal 2008. At the current time, we do not believe there are any material residual contingencies related to phase-out.

We own and operate several newly-constructed and recently-renovated coal cleaning facilities that remove rock, dirt, and other impurities from waste
coal, resulting in higher-value, marketable coal. Construction of these facilities was our largest single investment of cash during fiscal 2008 and through March 31, 2009 and currently we expect construction activities in the energy segment and
other business segments will be our most significant investment of cash in fiscal 2009. Capital expenditures in fiscal 2008 and through March 31, 2009 were financed primarily with available cash and with lease financing.



22



---

##### Table of Contents

For the six months ended March 31, 2009, coal sales were $33.3 million, compared to $7.6 million for
the six months ended March 31, 2008. Despite this growth in coal sales from 2008 to 2009, there has been a rapid decline in demand and pricing for coal from 2008 to 2009, especially metallurgical grade coal. In addition, we have experienced
high start-up costs and operational challenges as we have finished construction and renovation activities and commenced operations at many facilities in a short period of time. Finally, as of March 31, 2009, we have temporarily shut down four
of our coal cleaning facilities, due primarily to industry market conditions, and reduced staffing at other facilities to better match coal production with current demand. These circumstances have had a negative effect on our 2009 revenue and are
currently expected to have a negative effect on the fiscal 2009 years revenue and operating income.

Our CCP segment business
strategy is to continue to negotiate long-term contracts with suppliers, supported by investment in transportation and storage infrastructure for the marketing and sale of CCPs. We are also continuing our efforts to expand the use of high-value
CCPs, develop more uses for lower-value CCPs such as in blending, and expand our CCP disposal services. While all of our businesses have been affected by the current recession, the impact on our CCP segment has been less than on our other segments.

Our building products segment has been significantly affected by the depressed new housing and residential remodeling markets and our
current strategy is to reduce operating costs as much as possible and be positively positioned to take advantage of an industry turnaround at some point in the future. We are also continuing to develop new building products and to leverage our
robust distribution system which we believe is a competitive advantage for us.

The building products industry is experiencing a severe
downturn that may continue for an indefinite period into the future. Because the markets for our building products are heavily dependent on the residential construction and remodeling markets, our revenues could decrease as a result of events
outside our control that impact home construction and home improvement activity, including economic factors specific to the building products industry.

There has been a severe slowing in fiscal 2007 and fiscal 2008 of new housing starts and in home sales generally. Bank foreclosures have put a large number of homes into the market for sale, effectively limiting some
of the incentives to build new homes. The homebuilding industry continues to experience a significant and sustained decrease in demand for new homes and an oversupply of new and existing homes available for sale. While our residential building
products business relies upon the home improvement and remodeling markets as well as new construction, we have experienced a slowdown in sales activity in 2009. Interest rate increases, limits on credit availability, further foreclosures, home price
depreciation, and an oversupply of homes for sale in the market may adversely affect homeowners ability or desire to engage in construction or remodeling, resulting in a continued or further slowdown in new construction or remodeling and
repair activities.

We, like many others in the building products industry, experienced a large drop in orders and a reduction in our
margins in fiscal 2008 and continuing into 2009 relative to prior years. For the past two years and in 2009, we have recorded significant goodwill impairments associated with our building products business. We can provide no assurances that the
building products market will improve in the near future. We expect weakness to continue through fiscal 2009 and into 2010 and to have an adverse affect on our business and our results of operations.

In addition, the recent financial crisis could negatively affect our business, results of operations, and financial condition. Market conditions in the
mortgage lending and mortgage finance industries deteriorated significantly in fiscal 2008 and remain poor, which adversely affects the availability of credit for home purchasers and remodelers.

The recent financial crisis affecting the banking system and financial markets and the going concern threats to banks and other financial institutions
have resulted in a tightening in the credit markets, a low level of liquidity in many financial markets, including mortgages and home equity loans, and extreme volatility in credit and equity markets. Continued tightness of mortgage lending or
mortgage financing requirements could adversely affect the availability of credit for purchasers of our products and thereby reduce our sales. There could be a number of follow-on effects from the credit crisis on our business, including the
inability of prospective homebuyers or remodelers to obtain credit for financing the purchase of our building products. These and other similar factors could cause decisions to delay or forego new home construction or improvement projects, cause our
customers to delay or decide not to purchase our building products, or lead to a decline in customer transactions and our financial performance.

As a result of the above circumstances, we determined that the building products reporting units goodwill was impaired in both fiscal 2007 and 2008, and non-cash impairment charges of $98.0 million and $205.0 million were recorded in
fiscal 2007 and 2008, respectively. Due to the continuing decline in the new housing and residential remodeling markets, the ongoing downward revisions by market analysts of near-term projections in these markets, and the significant decline in our
stock price during the six months ended March 31, 2009, management determined that indicators of further goodwill impairment in the building products reporting unit existed. In addition, the significant declines in coal and oil prices and in
our stock price indicated potential goodwill impairment in the energy reporting unit. Accordingly, we performed goodwill impairment tests for both the building products and energy reporting



23



---

##### Table of Contents

units during 2009. Upon completion of the impairment tests, we wrote off all remaining goodwill in the building products and energy reporting units, totaling
approximately $465.7 million. None of the impairment charges in fiscal 2007, 2008 or 2009 affected our cash position, cash flow from operating activities or debt covenant compliance. Changes in the credit markets have increased our borrowing rate,
which borrowing rate directly affects the discount rate used in the goodwill impairment calculations. The increase in the discount rate led to the majority of the goodwill impairment.

Our CCPs and building products businesses are significantly affected by seasonality, with the highest revenue and profitability produced in the June and
September quarters.

Our historical acquisition strategy has targeted businesses that are leading companies in their respective industries
and that have strong operating margins, thus providing additional cash flow that complements the financial performance of our existing businesses. In 2006, we began to acquire small companies in the building products industry with innovative
products that can be marketed using our existing distribution channels. We are also committed to continuing to invest in research and development activities that are focused on energy-related technologies and nanotechnology. We participate in joint
ventures that operate an ethanol plant located in North Dakota and a hydrogen peroxide plant in South Korea. To a smaller degree, we are also investing in other energy projects such as the refining of heavy crude oils into lighter transportation
fuels.

In 2005 and subsequent years, we focused on the integration of our large 2004 acquisitions, including the marketing of diverse
kinds of building products through our national distribution network. We became highly leveraged as a result of those acquisitions, but reduced our outstanding debt significantly since that time through cash generated from operations, from an
underwritten public offering of common stock and from proceeds from settlement of litigation. During fiscal years 2005 through 2008, we made several early repayments of our long-term debt. In fiscal 2008 and through March 31, 2009, early
repayments of long-term debt decreased as compared to earlier periods primarily due to our investments of available cash in the development of our coal cleaning business in the energy segment. Cash needs for capital expenditures will continue in
fiscal 2009, so we are highly focused on liquidity to enable us to continue implementing our overall operational strategy.

Although our
historical emphasis on the early repayment of long-term debt has diminished temporarily, a significant amount of our long-term debt is repayable beginning in 2011. Current and planned operational improvements, along with growth in the coal cleaning
business, are currently expected to partially offset the impact of reduced revenues on our cash flow from operations. However, the anticipated increase in cash flow from these actions, along with the cash flow currently being generated, may not
provide sufficient funds for operations and for the retirement of all of our maturing debt. Accordingly, managements plans to increase liquidity and minimize the risk of noncompliance with debt covenants also include additional actions, all as
described in the section Potential Liquidity Risks and Managements Plans near the end of this Managements Discussion.

Critical Accounting Policies and Estimates

Our significant accounting policies are identified and described in Note 2 to
the consolidated financial statements in our Form 10-K. In addition, there is a discussion of critical accounting policies and estimates in Managements Discussion and Analysis of Financial Condition and Results of Operations
in that Form 10-K. The following is an update of the Form 10-K discussion of one of our critical accounting policies.

Valuation of
Long-Lived Assets, including Intangible Assets and Goodwill. Long-lived assets consist primarily of property, plant and equipment, intangible assets and goodwill. Intangible assets consist primarily of identifiable intangible assets obtained in
connection with acquisitions. These intangible assets are being amortized using the straight-line method, our best estimate of the pattern of economic benefit, over their estimated useful lives.

Goodwill consists of the excess of the purchase price for businesses acquired over the fair value of identified assets acquired, net of liabilities
assumed. In accordance with the requirements of SFAS No. 142, we do not amortize goodwill, all of which relates to acquisitions. SFAS No. 142 requires us to periodically test for goodwill impairment, at least annually, or sooner if
indicators of possible impairment arise. We perform our annual goodwill impairment testing as of June 30, using the two-step process described in Note 7 to the consolidated financial statements in our Form 10-K. As a result of the depressed new
housing and residential remodeling markets, we determined that the building products reporting units goodwill was impaired as of the June 30 test date in both fiscal 2007 and 2008, and non-cash impairment charges of $98.0 million and
$205.0 million were recorded in fiscal 2007 and 2008, respectively.

Due to the continuing decline in the new housing and residential
remodeling markets, the ongoing downward revisions by market analysts of near-term projections in these markets, and the significant decline in our stock price during 2009, management determined that indicators of further goodwill impairment in the
building products reporting unit existed. In addition, the significant



24



---

##### Table of Contents

declines in coal and oil prices and in our stock price indicated potential goodwill impairment in the energy reporting unit. Accordingly, we performed
goodwill impairment tests for both the building products and energy reporting units during the quarter ended March 31, 2009. Upon completion of the impairment tests in 2009, we wrote off all remaining goodwill in the building products and
energy reporting units, totaling approximately $465.7 million. None of the impairment charges in fiscal 2007, 2008 or 2009 affected our cash position, cash flow from operating activities or debt covenant compliance and will not have any impact on
future operations. Changes in the credit markets have increased our borrowing rate, which borrowing rate directly affects the discount rate used in the goodwill impairment calculations. The increase in the discount rate led to the majority of the
goodwill impairment.

As disclosed in Note 7 to the consolidated financial statements in the Form 10-K, through fiscal 2007, we had five
reporting units with allocated goodwill, three of which were in the building products segment. There has been one reporting unit with goodwill in each of the CCPs and energy segments. As a result of changes in the operations and management of the
businesses in the building products segment, and in accordance with the requirements contained in SFAS No. 142, SFAS No. 131 and EITF Topic D-101, Clarification of Reporting Unit guidance in Paragraph 30 of SFAS No. 142,
commencing with our 2008 fiscal year we aggregated the three reporting units in the building products segment into one reporting unit for the purpose of goodwill impairment testing.

The changes in the building products segment resulting in aggregation of the reporting units included, among other things, consolidation under a single
management team, consolidation of incentive compensation programs to be dependent upon combined segment operating results, consolidation of some sales chains such that these chains sell many of the segments products, and cross selling into
other sales chains, collaboration on new products, and cash flow/resource allocation decisions being made on a combined basis. If these three reporting units had not been aggregated into a single reporting unit, the recorded goodwill impairment
charge for fiscal 2008 would have been lower by approximately $6.0 million. As of September 30, 2008, there was approximately $461.9 million of goodwill remaining in the building products reporting unit.

The CCP reporting unit had recorded goodwill of approximately $116.0 million as of September 30, 2008 and March 31, 2009. The estimated fair
value of the CCP reporting unit exceeded its carrying value as of the June 30, 2008 test date by approximately $194.0 million. Despite the current economic downturn, the demand for CCPs has declined significantly less than many other types of
construction materials and thus continues to generate strong operating results. Revenue for this reporting unit increased by approximately $7.0 million in fiscal 2008 compared to fiscal 2007; meanwhile, the gross margin decreased by only
approximately 1% during the same time period. The anticipated future cash flows for this reporting unit are not currently expected to change significantly from 2008 levels. The energy segment reporting unit had recorded goodwill of approximately
$4.3 million as of September 30, 2008 and there was a difference of approximately $8.0 million between the estimated fair value of the reporting unit and its carrying value as of the June 30, 2008 test date.

The Tapco reporting unit failed step 1 of the goodwill impairment test in 2007 and the aggregated building products reporting unit failed step 1 in 2008
and in 2009. In addition, the energy reporting unit failed step 1 in 2009. These step 1 results required completion of step 2, which resulted in a determination that Tapcos goodwill was impaired in 2007, the building products segment goodwill
was impaired in 2008 and in 2009, and the energy segment goodwill was impaired in 2009. Accordingly, non-cash impairment charges of $98.0 million, $205.0 million and $465.7 million were recorded in fiscal 2007, 2008 and 2009, respectively.

In determining the fair values of the reporting units, all three of the traditional valuation approaches, the income approach, the market
approach and the asset-based approach, were considered. The fair values of the reporting units were calculated using the income approach, determined by discounting expected future cash flows. This method was chosen because it specifically considers
the operations, opportunities and risks applicable to the reporting units. The market approach, specifically the guideline public company method, was also considered. However, the reporting units direct competitors are either subsets of large
corporate entities or are privately held. Therefore, there is limited comparability between the reporting units and the potential guideline public companies. Accordingly, the guideline public company method was utilized only as a reasonableness test
of the results from the income approach. Finally, the asset-based approach was also considered; however, it was not utilized because it does not consider the income producing/going concern nature of the reporting units assets.

As discussed above, the fair values of the reporting units are calculated primarily using discounted expected future cash flows. There are many estimates
and assumptions involved in preparing these expected future cash flows, including most significantly the weighted average cost of capital used to discount future cash flows, anticipated long-term growth rates, future profit margins, working capital
requirements and required capital expenditures. Management uses its best efforts to reasonably estimate all of these and other inputs in the cash flow models utilized; however, it is certain that actual results will differ from these estimates and
the differences could be material. Materially different input estimates and assumptions would necessarily result in materially different calculations of discounted expected future cash flows and reporting unit fair values and materially different
goodwill impairment estimates.



25



---

##### Table of Contents

The most sensitive assumptions for the income approach were the discount rates (based on weighted average
cost of capital), the expected long-term growth rate and expected future gross profit margins. For the building products reporting unit, discount rates of 11.8% and 19.0% were used in fiscal 2008 and 2009, respectively. Each 1% change in the
discount rate would have changed the fair value of the reporting unit by approximately $100.0 million in 2008 and $18.0 million in 2009. The long-term growth rate used was 3.2% in both fiscal 2008 and 2009. Each 1% change in the long-term growth
rate would have changed the fair value by approximately $70.0 million in 2008 and $8.0 million in 2009. The expected future gross profit margins used ranged from 28%-34% in fiscal 2008 and 27%-32% in fiscal 2009. Each 1% change in the gross profit
margins would have changed the fair value by approximately $47.0 million in 2008 and $19.0 million in 2009. The sensitivity to a 1% change in these assumptions was much less pronounced in 2009 because of the high discount rate used, thereby
lessening the impact of other variables on the fair value calculation.

Our building products segment gross margin percentage for fiscal
years 2005 through 2008 was 33%, 31%, 30% and 26%, respectively. The year-over-year revenue growth (decrease) was 10%, (5)%, and (16)% over the same period. The results for fiscal years 2007 and 2008 reflect the recent dramatic slowing of the
building products industry; however, we did not believe that recent conditions were indicative of the long-term future of the housing market. The housing market is extremely cyclical and the cycles can vary materially in length and scope. Average
housing starts reported by the U.S. National Association of Home Builders (NAHB) for the last seventeen years, including 2008, were 1.6 million units per year. While the estimated housing starts for 2009 were 0.6 million, the five-year
average that included current estimates for 2009 and 2010 indicated estimated average housing starts of more than 1.1 million units, which is nearly 20% higher than the 2008 actual starts. We believe that the gross profit margins used in the
cash flow forecast of 28%-34% in fiscal 2008 and 27%-32% in fiscal 2009, which are consistent with our actual 2005-2007 levels, were reasonable in the long term, especially given productivity improvements being implemented through application of
lean manufacturing techniques. We also believe that the long-term revenue growth rate of 3.2% will be achieved as the housing market rebounds.

In addition to the annual review, we evaluate, based on current events and circumstances, the carrying value of all long-lived assets, including intangible assets and goodwill, as well as the related amortization periods, to determine
whether adjustments to these amounts or to the estimated useful lives are required. Changes in circumstances such as technological advances, or changes in our business model or capital strategy could result in the actual useful lives differing from
our current estimates. In those cases where we determine that the useful lives of property, plant and equipment or intangible assets should be changed, we amortize the net book value in excess of salvage value over the revised remaining useful
lives, thereby prospectively adjusting depreciation or amortization expense as necessary. In connection with the goodwill impairment testing for the building products and energy reporting units in 2009, we also performed a formal analysis for
potential impairments of other long-lived assets in those reporting units, including all intangible assets and property, plant and equipment. The results of this analysis did not result in any significant impairment of any other long-lived assets.

The carrying value of a long-lived asset is considered impaired when the anticipated cumulative undiscounted cash flow from that asset is
less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Indicators of impairment include such things as a significant adverse change in
legal factors or in the general business climate, a decline in operating performance indicators, a significant change in competition, or an expectation that significant assets will be sold or otherwise disposed of. No significant changes have been
made to estimated useful lives during the periods presented.

It is possible that some of our tangible or intangible long-lived assets or
goodwill could be impaired in the future and that resulting write-downs could be material.

Three Months Ended March 31, 2009 Compared to Three
Months Ended March 31, 2008

The information set forth below compares our operating results for the quarter ended March 31,
2009 (2009) with operating results for the quarter ended March 31, 2008 (2008).

Summary. Our total revenue for 2009 was
$137.7 million, down 20% from $172.0 million for 2008. Gross profit decreased 45%, from $41.3 million in 2008 to $22.6 million in 2009. Operating income (loss) decreased from an operating loss of $(8.9) million in 2008 to an operating loss of
$(478.3) million in 2009. Net income (loss) decreased from a net loss of $(9.2) million, with diluted earnings (loss) per share of $(0.22), in 2008, to a net loss of $(406.3) million, or $(9.78) per diluted share, in 2009. The most significant
reason for the change in results from 2008 to 2009 was the goodwill impairment charge totaling approximately $465.7 million in 2009.

In
addition to the goodwill impairment charge in 2009, our Section 45K business terminated in fiscal 2008 and we sold the mortar/stucco business in our building products segment in fiscal 2008. Removing the effect of these two profitable
operations



26



---

##### Table of Contents

from the numbers for 2008 and the effect of the goodwill impairment charge for 2009, our total revenue for 2009 was $137.7 million, down 15% from $162.7
million for 2008. Gross profit decreased 32%, from $33.3 million in 2008 to $22.6 million in 2009. Operating income (loss) increased from an operating loss of $(16.8) million in 2008 to an operating loss of $(12.7) million in 2009, and net income
(loss) decreased from a net loss of $(16.1) million, with diluted earnings (loss) per share of $(0.39), in 2008, to a net loss of $(34.0) million, or $(0.82) per diluted share, in 2009.

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

Building Products Segment. Sales of building products during 2009 were $68.4 million with a corresponding gross profit of $12.3 million. Sales of
building products during 2008 were $93.6 million with a corresponding gross profit of $20.7 million. The decrease in our sales of building products in 2009 was due primarily to the continuing effects of the depressed new housing and residential
remodeling markets which impacted sales across most of our product lines. The gross margin percentage declined from 2008 to 2009 due primarily to fewer fixed costs being absorbed as a result of lower sales. We believe our niche strategy and our
focus on productivity improvements tempered somewhat the impact of the severe slowdown in new residential construction; however, the recession has resulted in higher unemployment, adding to the home foreclosure rate, putting additional homes on the
market and further reducing the demand for new construction.

New housing starts according to the NAHB were 1.3 million and
0.9 million units in calendar 2007 and 2008, respectively, compared to a 10-year average of 1.6 million units. Our building products business relies on the home improvement and remodeling markets as well as new construction. The U.S.
Census Bureaus Value of Private Residential Construction Spending Put in Place data on homeowner improvement activity shows that the four quarter moving average peaked at $147.4 billion in the second calendar quarter of 2007 and fell to
approximately $124.6 billion by the first calendar quarter of 2009. The Leading Indicator of Remodeling Activity estimate issued by the Joint Center for Housing Studies at Harvard University has estimated that the four-quarter moving average will be
only $110.2 billion in the fourth calendar quarter of 2009, which would be the lowest level since the second calendar quarter of 2004. Based on the forecasted declines in new housing starts and remodeling activity for calendar 2009, we expect that
our revenues and operating results will also decline in fiscal 2009 as compared to fiscal 2008 levels.

CCP Segment. CCP revenues
for 2009 were $48.1 million with a corresponding gross profit of $11.6 million. CCP revenues for 2008 were $61.0 million with a corresponding gross profit of $13.3 million. We believe the decrease in CCP revenues in 2009 compared to 2008 was due
primarily to severe winter weather in 2009 and general economic conditions affecting the construction industry in California and Florida. The gross margin percentage increased from 2008 to 2009 primarily due to declines in the costs of rail and
truck transportation and improved productivity.

Energy Segment. In 2008, our energy segment revenue consisted largely of residual
revenues related to our Section 45K business. In 2009, there was no Section 45K revenue and energy segment revenue consisted almost exclusively of coal sales. Cost of revenue exceeded revenue for this segment in 2009 due primarily to
start-up and ramp-up costs for newly-constructed and renovated coal cleaning facilities that were placed into service in late fiscal 2008 and in the quarter ended December 31, 2008.

Operating Expenses. The increase in amortization expense of $0.8 million from 2008 to 2009 was due primarily to accelerated amortization of
certain intangible assets and additional intangible assets that were acquired in a fiscal 2008 acquisition. Research and development expense decreased by $2.0 million from 2008 to 2009, primarily because of decreased spending on our coal-to-liquids
and hydrogen peroxide technologies. Selling, general and administrative expenses decreased $13.7 million, or 33%, to $27.3 million in 2009 from $41.0 million in 2008. The decrease in 2009 was due to reduced expenses in every significant category of
expense, with the largest contributor being reduced incentive pay expenses and other personnel-related costs totaling $5.9 million. Incentive pay decreased due to reduced profitability of our operations and other personnel-related costs decreased
due to headcount reductions. In addition, in 2008, $3.8 million of restructuring costs related to plant consolidations and other cost improvement projects undertaken in our building products segment were recorded, and such costs in 2009 were
minimal. Because of ongoing cost-cutting activities, we expect future selling, general and administrative expenses in fiscal 2009 to be below comparable fiscal 2008 levels.

Other Income and Expense. During 2009, we reported net other expense of $5.2 million, compared to net other expense of $2.4 million during 2008.
The increase in net other expense of $2.8 million was comprised of an increase in net interest expense of approximately $2.3 million and a decrease in net other income of approximately $0.5 million.

Net interest expense increased from $6.2 million in 2008 to $8.5 million in 2009 due to several factors, most notably increased interest expense
attributed to our convertible debt exchange in the quarter ended December 31, 2008 that resulted in the extinguishment of $80.9 million of 2.875% convertible notes and the issuance of $63.3 million of 16% convertible notes. In addition, we
experienced higher interest rates on our senior debt as a result of the August 2008 amendment to our senior secured credit agreement. Due to the increased interest rates on our convertible debt and senior debt, we expect interest expense in fiscal
2009 to exceed the respective fiscal 2008 levels.



27



---

##### Table of Contents

The decrease in net other income of $0.5 million consisted primarily of a decrease of $2.0 million in
gain on sale of assets in 2009, largely offset by the gain of approximately $1.6 million recognized on the extinguishment of $5.5 million of 2.50% convertible notes in 2009, as described in Note 6 to the consolidated financial statements. In 2008,
we sold certain non-strategic mortar/stucco assets in the building products segment on which a gain of approximately $3.6 million was recognized. A portion of the proceeds from this sale were used to acquire assets that have increased the capacity
of our Texas-based concrete block business, which contributed to higher revenue and operating income of this business in 2009.

Income
Tax Provision. The recorded income tax rates for 2008 and 2009 were 19% and 16%, respectively, including discrete items. Our estimated effective income tax rate for the fiscal year ending September 30, 2009, exclusive of discrete items, is
currently estimated to be less than 20.0%. During 2009, we also recognized $0.1 million of income tax expense for discrete items that did not affect the calculation of the estimated effective income tax rate for the 2009 fiscal year. For 2008, we
used an estimated effective income tax rate of 29.0%, exclusive of discrete items, and recognized $1.2 million of additional income tax expense for discrete items that primarily related to Section 45K-related adjustments pertaining to prior
periods.

The estimated effective tax rate for fiscal 2009, exclusive of discrete items, is lower than the statutory rate because a
significant portion of the goodwill impairment recorded in 2009 is not tax deductible. Accordingly, the tax benefit expected to be recorded for fiscal 2009 will be significantly less than the statutory rate. The fiscal 2009 estimated effective tax
rate was also affected by estimated Section 45 refined coal tax credits (which are different from the Section 45K tax credits discussed elsewhere) related to the coal cleaning facilities that we own and operate, but to a far lesser extent
than by the portion of the goodwill impairment representing a permanent difference. The estimated effective tax rate for fiscal 2008, exclusive of discrete items, was lower than the statutory rate primarily due to estimated Section 45 refined
coal tax credits. We believe it is more likely than not that the refined coal produced at our coal cleaning facilities qualify for tax credits pursuant to Section 45 of the Internal Revenue Code, notwithstanding the uncertainties and risks
associated with the tax credits, as more fully described in Note 9 to the consolidated financial statements.

Excluding the effect of
expected tax credits in both fiscal 2008 and 2009 and goodwill impairment in fiscal 2009, our effective tax rate for fiscal 2008 and 2009 would have been approximately 39% and 88%, respectively. The high rate for 2009 is due primarily to the effect
of valuation allowances and permanent differences unrelated to goodwill impairment, combined with low expected pre-tax income for the year.

The calculation of our income tax provision involves uncertainties in the application of complex tax regulations in multiple jurisdictions. For example, we are currently under audit by the IRS for the years 2005 and 2006 and have open tax
periods subject to examination by both federal and state taxing authorities for the years 2003 through 2008. We recognize potential liabilities for anticipated tax audit issues in the U.S. and state tax jurisdictions based on estimates of whether,
and the extent to which, additional taxes and interest will be due. If events occur and the payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period
when it is determined the liabilities are no longer probable or necessary. If the estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result. It is reasonably possible that the amount of our
unrecognized income tax benefits will change significantly within the next 12 months. These changes could be the result of the ongoing tax audits or the settlement of outstanding audit issues. However, due to the number of years under audit and the
matters being examined, at the current time, an estimate of the range of reasonably possible outcomes cannot be made, beyond amounts currently accrued.

Six Months Ended March 31, 2009 Compared to Six Months Ended March 31, 2008

The information set forth below
compares our operating results for the six months ended March 31, 2009 (2009) with operating results for the six months ended March 31, 2008 (2008).

Summary. Our total revenue for 2009 was $303.8 million, down 28% from $420.9 million for 2008. Gross profit decreased 48%, from $104.4 million in 2008 to $54.3 million in 2009. Operating income decreased from
$9.5 million in 2008 to an operating loss of $(487.5) million in 2009. Net income decreased from $0.7 million, with diluted earnings per share of $0.02, in 2008, to a net loss of $(407.1) million, or $(9.82) per diluted share, in 2009. The most
significant reason for the change in results from 2008 to 2009 was the goodwill impairment charge totaling approximately $465.7 million in 2009.

In addition to the goodwill impairment charge in 2009, our Section 45K business terminated in fiscal 2008 and we sold the mortar/stucco business in our building products segment in fiscal 2008. Removing the effect of these two
profitable operations from the numbers for 2008 and the effect of the goodwill impairment charge for 2009, our total revenue for 2009 was $303.8 million, down 13% from $348.9 million for 2008. Gross profit decreased 34%, from $82.6 million in 2008
to $54.3 million in 2009. Operating income (loss) decreased from an operating loss of $(11.4) million in 2008 to an operating loss of $(21.9) million in 2009, and net income (loss) decreased from a net loss of $(16.4) million, with diluted earnings
(loss) per share of $(0.39), in 2008, to a net loss of $(34.8) million, or $(0.86) per diluted share, in 2009.



28



---

##### Table of Contents

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

Building Products Segment. Sales of building products during 2009 were $156.6 million with a
corresponding gross profit of $30.3 million. Sales of building products during 2008 were $208.3 million with a corresponding gross profit of $53.6 million. The decrease in our sales of building products in 2009 was due primarily to the continuing
effects of the depressed new housing and residential remodeling markets which impacted sales across most of our product lines. Also, in early fiscal 2008, we sold certain non-strategic mortar/stucco assets in the building products segment which
accounted for approximately $9.7 million of the decrease in revenue from 2008 to 2009. The gross margin percentage declined from 2008 to 2009 due primarily to fewer fixed costs being absorbed as a result of lower sales.

CCP Segment. CCP revenues for 2009 were $115.3 million with a corresponding gross profit of $31.8 million. CCP revenues for 2008 were $138.4
million with a corresponding gross profit of $34.8 million. We believe the decrease in CCP revenues in 2009 compared to 2008 was due primarily to severe winter weather in 2009 and general economic conditions affecting the construction industry in
California and Florida. The gross margin percentage increased from 2008 to 2009 primarily due to declines in the costs of rail and truck transportation and improved productivity.

Energy Segment. In 2008, our energy segment revenue consisted primarily of residual revenues related to our Section 45K business. In 2009,
there was no Section 45K revenue and energy segment revenue consisted almost exclusively of coal sales. Cost of revenue exceeded revenue for this segment in 2009 due primarily to start-up and ramp-up costs for newly-constructed and renovated
coal cleaning facilities that were placed into service in late fiscal 2008 and in the quarter ended December 31, 2008.

Operating
Expenses. The increase in amortization expense of $1.0 million from 2008 to 2009 was due primarily to accelerated amortization of certain intangible assets and additional intangible assets that were acquired in a fiscal 2008 acquisition.
Research and development expense decreased by $2.7 million from 2008 to 2009, primarily because of decreased spending on our coal-to-liquids and hydrogen peroxide technologies. Selling, general and administrative expenses decreased $17.1 million, or
22%, to $58.9 million in 2009 from $76.0 million in 2008. The decrease in 2009 was due to reduced expenses in every significant category of expense, with the largest contributor being reduced incentive pay expenses and other personnel-related costs
totaling $10.5 million. Incentive pay decreased due to reduced profitability of our operations and other personnel-related costs decreased due to headcount reductions. In addition, in 2008, $3.8 million of restructuring costs related to plant
consolidations and other cost improvement projects undertaken in our building products segment were recorded, and such costs in 2009 were minimal.

Other Income and Expense. During 2009, we reported net other income of $3.5 million, compared to net other expense of $4.3 million during 2008. The change in other income and expense of $7.8 million was comprised of an increase in
net interest expense of approximately $5.1 million and an increase in net other income of approximately $12.9 million.

Net interest
expense increased from $12.1 million in 2008 to $17.2 million in 2009 due to several factors, most notably increased interest expense attributed to our convertible debt exchange in the quarter ended December 31, 2008 that resulted in the
extinguishment of $80.9 million of 2.875% convertible notes and the issuance of $63.3 million of 16% convertible notes. In addition, there was approximately $1.2 million of accelerated amortization of unamortized debt issue costs related to the
extinguished $80.9 million of 2.875% convertible notes and the extinguished $5.5 million of 2.50% convertible notes. We also experienced higher interest rates on our senior debt as a result of the August 2008 amendment to our senior secured credit
agreement.

The increase in net other income of $12.9 million consisted primarily of the gains on the 2009 debt extinguishments aggregating
$19.2 million, partially offset by a decrease of $6.7 million in gain on sale of assets in 2009. In 2008, we sold certain non-strategic mortar/stucco assets in the building products segment on which a gain of approximately $8.0 million was
recognized. A portion of the proceeds from this sale were used to acquire assets that have increased the capacity of our Texas-based concrete block business, which contributed to higher operating income of this business in 2009.

Income Tax Provision. The recorded income tax rates for 2008 and 2009 were 86% and 16%, respectively, including discrete items. During the six
months ended March 31, 2009, we recognized $0.6 million of income tax expense for discrete items that did not affect the calculation of the estimated effective income tax rate for the 2009 fiscal year. For the six months ended March 31,
2008, we recognized $3.0 million of additional income tax expense for discrete items that primarily related to Section 45K-related adjustments pertaining to prior periods.



29



---

##### Table of Contents

Impact of Inflation and Related Matters

Some of our operations have been negatively impacted by increased raw materials costs for commodities, such as polypropylene and poly-vinyl chloride in
the building products segment; however, the negative impact has generally been less significant during 2009 than during the latter part of the 2008 fiscal year. We have been successful in passing on some, but not all, of the increased materials
costs to customers. Additionally, recent decreases in fuel costs have benefited all of our business units during 2009. It is not possible to predict the future trends of these costs, nor our ability to pass on any future price increases to
customers.

Liquidity and Capital Resources

Summary of Cash Flow Activities. Net cash provided by operating activities for the six months ended March 31, 2009 (2009) was $24.3 million compared to $22.4 million for the six months ended March 31, 2008 (2008). The
2009 net loss would have been approximately $(13.2) million instead of $(407.1) million if adjusted for the goodwill impairment and related decrease in deferred taxes. After adjusting for the effects of goodwill impairment, profitability decreased
in 2009 compared to 2008 primarily due to the effects on our building products business of the depressed new housing and residential remodeling markets, losses sustained by our coal cleaning business, and the absence of Section 45K-related
operations in 2009. The termination of our Section 45K business was also one of the reasons for the higher cash flow from collection of trade receivables in 2008 than 2009 and was the cause of some of the other changes in operating assets and
liabilities reflected in the statements of cash flows.

In both 2009 and 2008, the primary investing activities consisted of the purchase
of property, plant and equipment and payments for acquisitions. In 2009, our primary financing activities consisted of the exchange of convertible senior subordinated notes resulting in the extinguishment of approximately $19.2 million of
convertible debt, and borrowings under our revolving credit arrangement. In 2008, our primary financing activities consisted of borrowings under our revolving credit arrangement and the purchase of treasury stock. More details about our investing
and financing activities are provided in the following paragraphs.

Investing Activities. Total expenditures for property, plant and
equipment in 2009 were $37.9 million, a decrease of $19.0 million from 2008. In 2008, a large majority of capital expenditures were for projects in the energy and building products segments. The energy segment expenditures were for the construction
and renovation of coal cleaning facilities and the building products segment expenditures were for both expansion of operations (primarily our Texas block business) and maintenance of operating capacity. In 2009, a substantial majority of total
capital expenditures related to our coal cleaning facilities in the energy segment. Spending on coal cleaning facilities will comprise a smaller portion of total expenditures for the remainder of fiscal 2009 and in future years as compared to fiscal
2008 and 2009. Total fiscal 2009 capital expenditures are currently expected to be less than $65.0 million and could be as low as $60.0 million.

Capital expenditures are limited by our senior debt covenants to $100.0 million annually. In certain circumstances, the unused amount from a fiscal year can be carried forward and used in the subsequent fiscal year; however, as of
September 30, 2008, we had no unused amount available to be carried forward to future periods. As of March 31, 2009, we were committed to spend approximately $19.7 million on capital projects that were in various stages of completion. In
2008, we realized $12.9 million of proceeds from the sale of property, plant and equipment, most of which represented non-strategic assets in our building products segment. A portion of the proceeds from this sale was used to acquire assets that
increased the capacity of our Texas-based concrete block business, enabling us to meet current and projected demand in this line of business. In 2009, proceeds from disposition of property, plant and equipment were at a more normal level of $3.0
million.

In fiscal 2007, we acquired 100% of the ownership interests of Dutch Quality Stone (DQS), a privately-held company in the
building products business. Total consideration paid at the date of acquisition was approximately $52.9 million. An additional $19.0 million was paid in 2008, based on earnings of DQS for the 12-month period ended September 30, 2007 that
exceeded an agreed-upon threshold. In fiscal 2008, we acquired certain assets and assumed certain liabilities of a privately-held company in the building products industry. Total consideration for this acquisition was approximately $15.8 million, of
which approximately $5.0 million was paid at the date of acquisition and approximately $10.8 was paid in 2009. Pursuant to contractual terms for some small 2006 acquisitions in the building products segment, additional amounts may be payable in the
future, based on the achievement of stipulated revenue or earnings targets for periods ending no later than March 2010. At the current time, we do not believe that any such payments will be material. If any future earn-out consideration is paid for
any acquisition, the amounts will be charged to income because all goodwill in the building products reporting unit has been written off.

We intend to continue to expand our business through growth of existing operations, commercialization of technologies currently being developed, and possible strategic acquisitions of products or entities that expand our current operating
platform. Acquisitions have historically been an important part of our long-term business strategy. We have routinely reviewed potential



30



---

##### Table of Contents

acquisitions, including those in the areas of building products, CCP marketing, and coal and catalyst technologies. It is possible that some portion of
future cash and cash equivalents and/or proceeds from the issuance of stock or debt could be used to fund acquisitions of complementary businesses in the building products, CCP and energy industries; however, because of cash flow considerations and
current events affecting the debt and equity markets, we do not currently anticipate any significant acquisitions in fiscal 2009. Our senior secured credit agreement limits acquisitions in the aggregate to $50.0 million of cash consideration and
$20.0 million of non-cash consideration annually, with no more than $30.0 million of cash consideration for any one acquisition. If our total leverage ratio, as defined, is less than or equal to 3.50:1.0, after giving effect to an
acquisition, these limitations do not apply.

The senior secured credit agreement also limits the amount we can invest in joint ventures
and other less than 100%-owned entities. We have invested in several joint ventures, which are accounted for using the equity method of accounting, but do not currently have plans to significantly increase our investments in those entities.

Financing Activities. In December 2008, we exchanged approximately $80.9 million of our 2.875% convertible senior subordinated
notes due 2016 for $63.3 million of new 16% convertible senior subordinated notes due 2016. In March and April 2009, we exchanged approximately $39.1 million of our 2.50% convertible senior subordinated notes due 2014 for approximately $27.4 million
of new 14.75% convertible senior subordinated notes due 2014. Gains of approximately $19.2 million, recorded in other income (expense) in the accompanying consolidated statement of operations for 2009, were recognized on the extinguishments of debt
in 2009, and an additional gain of approximately $10.1 million was recognized in April 2009. Additionally, approximately $1.2 million of unamortized debt issue costs related to the extinguished debt was charged to interest expense in 2009 and
approximately $0.8 million of unamortized debt issue costs was charged to interest expense in April 2009. New debt issue costs of approximately $0.9 million were incurred related to the new 16% and 14.75% convertible notes.

In both 2008 and 2009, we had borrowings under our revolving credit arrangement of $15.0 million, which amount was increased to $25.0 million subsequent
to March 31, 2009. In 2008, financing activities also included treasury stock purchases totaling $14.8 million.

With the exception of
amounts outstanding under our revolving credit arrangement, which are repayable not later than September 2009, we have no long-term debt repayments that are due prior to 2011. There are mandatory prepayments of the first lien term loan in the event
of certain asset sales and debt and equity issuances and from excess cash flow, as defined in the agreement. A mandatory prepayment of $2.5 million was made in 2009 as a result of an asset sale. Optional prepayments of the first lien
term loan are permitted without penalty or premium. Once repaid in full or in part, no reborrowings can be made. We may, in the future, make optional prepayments of senior debt depending on actual cash flows, our current and expected cash
requirements and other applicable factors we deem to be significant.

We filed with the SEC a universal shelf registration statement for
the potential sale of a total of $250.0 million of debt or equity securities. This registration statement was declared effective in April 2009. A prospectus supplement describing the terms of any additional securities to be issued is required to be
filed before any future offering could commence under the registration statement.

In fiscal 2008, we obtained an amendment to our senior
secured credit agreement to provide additional flexibility for capital leases and sale-leaseback transactions and to temporarily modify certain of the leverage and fixed charge coverage ratios described in more detail below and in Note 6 to the
consolidated financial statements. We are in compliance with all debt covenants as of March 31, 2009. However, given the continuing decrease in building products revenues as a result of the depressed new housing and residential remodeling
markets and the termination of our Section 45K business, combined with the high level of capital expenditures during fiscal 2008 and thus far in fiscal 2009, there is increased risk of noncompliance with certain leverage and fixed charge
coverage ratios in future periods.

Due to covenants associated with our senior debt, we currently have restrictions on our ability to
obtain significant additional amounts of long-term debt. However, we have historically experienced strong positive cash flow from operations which has enabled us to repay a substantial amount of our long-term debt prior to scheduled maturities.
While we expect our positive cash flow to continue in the future, our positive cash flow from operations is expected to be lower in fiscal 2009 than it was in fiscal 2008 and in recent years due to the termination of our Section 45K business
and the continued weakness in the new housing and residential remodeling markets. Also, while we have periodically accessed the debt and equity markets in prior years, affordable and available additional debt and equity may be much more difficult
for us to obtain in future periods than in the past, due to less favorable market conditions as well as changes in our business model.

Reference is made to Note 6 to the consolidated financial statements for detailed information about our outstanding long-term debt and compliance with debt covenants, as well as the available $60.0 million revolving credit arrangement,
which terminates in September 2009. The senior credit facility contains restrictions and covenants common to such agreements, including limitations



31



---

##### Table of Contents

on the incurrence of additional debt, investments, merger and acquisition activity, asset sales and liens, annual capital expenditures in excess of $100.0
million annually, and the payment of dividends, among others. In addition, we must maintain certain leverage and fixed charge coverage ratios. Reference is made to the subsequent section titled Potential Liquidity Risks and
Managements Plans for detailed information about our debt covenant ratio calculations and related matters.

In both 2008
and 2009, cash proceeds from the exercise of options and employee stock purchases were not material. Option exercise activity is primarily dependent on our stock price and is not predictable. To the extent non-qualified stock options are exercised,
or there are disqualifying dispositions of shares obtained upon the exercise of incentive stock options, we receive an income tax deduction generally equal to the income recognized by the optionee. Such amounts were not material in either 2008 or
2009.

Working Capital. As of March 31, 2009, our working capital was $84.6 million. Notwithstanding the termination of our
Section 45K business as of December 31, 2007 and the depressed new housing and residential remodeling markets, with the resulting negative impact on cash flow, we currently expect operations to produce positive cash flow in future periods
and believe working capital, along with available borrowings under the revolving credit arrangement for our seasonal needs through September 2009, will be sufficient for operating needs for the next 12 months.

Income Taxes. Historically, there has often been some lag in paying estimated taxes during a fiscal year due to the seasonality of our operations
and because estimated income tax payments are typically based on annualizing a fiscal years taxable income based on year-to-date results. We currently expect this pattern to continue, but to have a less significant effect on our cash flow in
future periods due to expected results of operations that are closer to break-even than what we have historically experienced. We currently expect our effective income tax rate in future years to be less than the statutory rate due primarily to the
availability of Section 45 refined coal tax credits. These tax credits relate to the coal cleaning facilities that we currently own and operate. The tax credits are expected to reduce required cash payments for estimated taxes during the year
they are earned.

As of March 31, 2009, we had approximately $10.4 million of unrecognized tax benefits, net of an $11.2 million
refund claim related to an uncertain tax position. We have recorded approximately $22.6 million of gross unrecognized income tax benefits which would affect the fiscal 2009 effective tax rate if released into income. We recognize accrued interest
and potential penalties related to all income tax liabilities, including unrecognized income tax benefits, in income tax expense. During 2009, we released approximately $2.9 million of interest and penalties and as of March 31, 2009,
approximately $4.1 million was accrued for the payment of interest and penalties. Changes to the estimated liability for unrecognized income tax benefits during 2009 were primarily the result of settlement of the IRS audit for the years 2003 and
2004.

The calculation of tax liabilities involves uncertainties in the application of complex tax regulations in multiple jurisdictions.
For example, we are currently under audit by the IRS for the years 2005 and 2006 and have open tax periods subject to examination by both federal and state taxing authorities for the years 2005 through 2008. We recognize potential liabilities for
anticipated tax audit issues in the U.S. and state tax jurisdictions based on estimates of whether, and the extent to which, additional taxes and interest will be due. If events occur and the payment of these amounts ultimately proves to be
unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when it is determined the liabilities are no longer probable or necessary. If the estimate of tax liabilities proves to be less than the
ultimate assessment, a further charge to expense would result. It is reasonably possible that the amount of our unrecognized income tax benefits will change significantly within the next 12 months. These changes could be the result of ongoing tax
audits or the settlement of outstanding audit issues. However, due to the number of years under audit and the matters being examined, at the current time, an estimate of the range of reasonably possible outcomes cannot be made, beyond amounts
currently accrued.

As discussed previously, cash payments for income taxes are reduced for tax deductions resulting from disqualifying
dispositions of incentive stock options and from the exercise of non-qualified stock options, which amounts were not material in 2008 or 2009. Option exercise activity is primarily dependent on our stock price which is not predictable, and likewise,
it is not possible to estimate what tax benefits may be realized from future option exercises.

Summary of Future Cash Requirements.
Significant future cash needs, beyond operational working capital requirements, including income tax payments and interest payments on long-term debt, are currently expected to consist primarily of capital expenditures and repayment of amounts
outstanding under our revolving credit arrangement.

Potential Liquidity Risks and Managements Plans. Operational
improvements, including reduced headcount, reduced or eliminated advertising and marketing programs, the ongoing realignment of manufacturing capacity with projections of future requirements, reduced plant overhead expenses and reduced fuel costs,
along with growth in the coal cleaning business, are



32



---

##### Table of Contents

currently expected to partially offset the impact of reduced revenues on our cash flow from operations. However, the anticipated increase in cash flow from
these actions, along with the cash flow currently being generated, may not provide sufficient funds for operations and for the retirement of all of our maturing debt. Accordingly, managements plans to increase liquidity and minimize the risk
of noncompliance with debt covenants also include the following potential actions: the delay, postponement or cancellation of certain planned capital expenditures; the sale of assets; obtaining asset-based loans; refinancing debt obligations; the
sale of equity, the proceeds of which would be used to repay long-term debt; additional amendments to our senior secured credit agreement; or restructuring our credit facilities and capitalization.

Most of our potential debt covenant compliance risk relates to compliance with certain leverage and fixed charge coverage ratios in future periods. The
potential risk is primarily a result of declining EBITDA and covenant ratios that adjust over the next three quarters, combined with increased levels of capital expenditures, as compared to prior periods. EBITDA consists of net income adjusted for
net interest expense, income taxes, depreciation and amortization and goodwill and other impairments, as these items are defined in our senior secured debt agreement. Because our net income declined significantly during fiscal 2008 and through
March 31, 2009, EBITDA has also declined significantly. Our trailing twelve months (TTM) EBITDA, which is used to calculate many of the required leverage and fixed coverage ratios, may not significantly improve during fiscal 2009 and
early fiscal 2010, primarily due to the depressed new housing and residential remodeling markets and the challenges of ramping up and operating our coal cleaning facilities in a difficult coal market.

The three primary debt covenant ratios with which we must comply are: i) a total leverage ratio of 4.75:1 as of March 31, 2009, 4.25:1 as of
June 30, 2009, 3.75:1 as of September 30, 2009, then 3.5:1 from December 31, 2009 through the maturity date (total leverage ratio); ii) a maximum ratio of consolidated funded indebtedness minus subordinated indebtedness to EBITDA of
2.5:1 (senior leverage ratio); and iii) a minimum ratio of EBITDA plus rent payments (EBITDAR), less certain capital expenditures and taxes for the four preceding fiscal quarters, to scheduled rent payments and payments of principal and interest on
all indebtedness for the next four fiscal quarters of 1:1 through June 30, 2009, then 1.25:1 for periods ending on or after September 30, 2009 (fixed charge coverage ratio). The following table summarizes the calculations of each of these
three key ratios for the dates indicated. All components have been calculated based on the definitions of such items in our senior secured credit facility.



|                                                                                   |  |                   |       |   |                   |   |       |               |  |   |       |  
|---------------------------------------------------------------------------------- |  | ----------------- | ----- | - | ----------------- | - | ----- | ------------- |  | - | ----- | -
|(in millions)                                                                      |  | September 30,2007 |       |   | September 30,2008 |   |       | March 31,2009 | 
|Senior debt, including revolver (A)                                                |  | $                 | 210.0 |   |                   | $ | 200.0 |               |  | $ | 212.5 |  
|Convertible debt (B)                                                               |  |                   | 332.5 |   |                   |   | 332.5 |               |  |   | 313.3 |  
|                                                                                   |  |                   |       |   |                   |   |       |               |  |   |       |  
|Total long-term debt, including current portion                                    |  |                   | 542.5 |   |                   |   | 532.5 |               |  |   | 525.8 |  
|                                                                                   |  |                   |      
|Stand-by letters of credit                                                         |  |                   | 6.0   |   |                   |   | 9.7   |               |  |   | 9.4   |  
|Other long-term obligations                                                        |  |                   |      |   |                   |   | 9.7   |               |  |   | 9.3   |  
|                                                                                   |  |                   |       |   |                   |   |       |               |  |   |       |  
|Total indebtedness, as defined (C)                                                 |  | $                 | 548.5 |   |                   | $ | 551.9 |               |  | $ | 544.5 |  
|                                                                                   |  |                   |       |   |                   |   |       |               |  |   |       |  
|TTM EBITDA, as defined (D)                                                         |  | $                 | 301.2 |   |                   | $ | 142.1 |               |  | $ | 126.3 |  
|                                                                                   |  |                   |       |   |                   |   |       |               |  |   |       |  
|                                                                                   |  |                   |      
|Total leverage ratio (C ÷ D)                                                       |  |                   | 1.82  |   |                   |   | 3.88  |               |  |   | 4.31  |  
|                                                                                   |  |                   |       |   |                   |   |       |               |  |   |       |  
|                                                                                   |  |                   |      
|Senior leverage ratio ((C  B) ÷ D)                                                |  |                   | 0.72  |   |                   |   | 1.54  |               |  |   | 1.83  |  
|                                                                                   |  |                   |       |   |                   |   |       |               |  |   |       |  
|TTM EBITDA                                                                         |  | $                 | 301.2 |   |                   | $ | 142.1 |               |  | $ | 126.3 |  
|Rent expense                                                                       |  |                   | 34.2  |   |                   |   | 35.4  |               |  |   | 35.8  |  
|Less certain capital expenditures                                                  |  |                   | (55.0 | ) |                   |   | (40.1 | )             |  |   | (28.2 | )
|Income taxes                                                                       |  |                   | (60.9 | ) |                   |   | (1.4  | )             |  |   | 76.3  |  
|                                                                                   |  |                   |       |   |                   |   |       |               |  |   |       |  
|TTM EBITDAR, as defined (E)                                                        |  | $                 | 219.5 |   |                   | $ | 136.0 |               |  | $ | 210.2 |  
|                                                                                   |  |                   |       |   |                   |   |       |               |  |   |       |  
|Future twelve months scheduled interest Payments                                  |  | $                 | 24.4  |   |                   | $ | 31.7  |               |  | $ | 37.5  |  
|Future twelve months scheduled repayments of long-term debt and other obligations |  |                   |      |   |                   |   | 1.0   |               |  |   | 16.0  |  
|Future twelve months scheduled rent Payments                                      |  |                   | 38.5  |   |                   |   | 36.0  |               |  |   | 37.0  |  
|                                                                                   |  |                   |       |   |                   |   |       |               |  |   |       |  
|Future fixed charges, as defined (F)                                               |  | $                 | 62.9  |   |                   | $ | 68.7  |               |  | $ | 90.5  |  
|                                                                                   |  |                   |       |   |                   |   |       |               |  |   |       |  
|                                                                                   |  |                   |      
|Fixed charge coverage ratio (E ÷ F)                                                |  |                   | 3.49  |   |                   |   | 1.98  |               |  |   | 2.32  |  
|                                                                                   |  |                   |       |   |                   |   |       |               |  |   |       |  



33



---

##### Table of Contents

Trailing twelve months (TTM) EBITDA, as used in the above table, is calculated as follows:



|                                          |  |                   |       |                   |   |        |               |  |   |        |  
|----------------------------------------- |  | ----------------- | ----- | ----------------- | - | ------ | ------------- |  | - | ------ | -
|(in thousands)                            |  | September 30,2007 |       | September 30,2008 |   |        | March 31,2009 | 
|Net income (loss)                         |  | $                 | 20.1  |                   | $ | (169.7 | )             |  | $ | (577.5 | )
|Net interest expense                      |  |                   | 31.1  |                   |   | 23.8   |               |  |   | 28.9   |  
|Income taxes, as defined                  |  |                   | 69.8  |                   |   | 2.2    |               |  |   | (76.3  | )
|Depreciation and amortization, as defined |  |                   | 82.2  |                   |   | 74.2   |               |  |   | 78.3   |  
|Impairments, as defined                   |  |                   | 98.0  |                   |   | 211.6  |               |  |   | 672.9  |  
|                                          |  |                   |       |                   |   |        |               |  |   |        |  
|TTM EBITDA, as defined (D)                |  | $                 | 301.2 |                   | $ | 142.1  |               |  | $ | 126.3  |  
|                                          |  |                   |       |                   |   |        |               |  |   |        |  

Before a potential debt covenant violation becomes imminent, we would take several potential
actions, including all of the steps discussed above, as well as negotiate with the holders of our senior secured debt with a view to obtaining a waiver or an amendment to the debt agreement (such as we did in fiscal 2008). If our efforts to increase
EBITDA were unsuccessful and we failed to obtain a waiver or amendment to our debt agreement, a breach of our covenants could result in a default, in which event our lenders could elect to declare all amounts outstanding to be immediately due and
payable. If we were not able to repay our obligations if they were accelerated, the lenders could foreclose on our assets.

In addition to
the risks of noncompliance with leverage and fixed charge coverage ratios, our $60.0 million revolving credit arrangement expires in September 2009. During fiscal 2008 and through the current time, we have used this revolver for short-term working
capital needs and for stand-by letters of credit, which at March 31, 2009 totaled $9.4 million. We currently expect to continue to use the revolver for seasonal working capital needs and for letters of credit until it expires. Our seasonal
working capital needs should decline as coal cleaning operations continue to grow because this business is less seasonal than our building products and CCP businesses. We continue to evaluate our liquidity needs and the potential replacement of the
revolving credit facility.

As noted, the $15.0 million ($25.0 million subsequent to March 31, 2009) outstanding under our revolving
credit arrangement is required to be repaid in September 2009. Our first lien term loan in the amount of $197.5 million is required to be repaid in February 2011 and April 2011. Our 2.50% and 14.75% convertible senior subordinated notes totaling
$158.4 million ($148.3 million subsequent to March 31, 2009) are repayable in 2014. The holders of the 2.875% convertible senior subordinated notes due June 2016, totaling $91.6 million, have the right to require us to repurchase all or a
portion of those notes on June 1, 2011. Also, the holders of the 16% convertible senior subordinated notes due June 2016, totaling $63.3 million, have the right to require us to repurchase all or a portion of those notes on June 1, 2012.
We currently believe it is likely that the holders of the 2.875% notes will require us to repurchase those notes on June 1, 2011 and it is possible that the holders of the 16% notes will require us to repurchase those notes on June 1,
2012.

Subsequent to March 31, 2009, a decrease in the credit rating on our debt was announced; however, there was no direct effect of
this action on the variable interest rate applicable to our senior secured credit facility or on our debt covenant compliance.

Legal Matters

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

Recent
Accounting Pronouncements

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



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

We are exposed to financial market risks, primarily related to changes in interest rates and certain foreign currencies. We do not use derivative financial instruments for speculative or trading purposes. We have entered into certain hedge
transactions in the past, primarily to limit our variable interest rate exposure, but there are no such hedges outstanding as of March 31, 2009. The Blue Flint joint venture has derivatives in place related to variable interest rates and
commodities.

As described in more detail in Note 6 to the consolidated financial statements, our senior debt, which totaled $212.5 million
as of March 31, 2009, bears interest at a variable-rate. Accordingly, assuming no change in the amount of senior debt outstanding except for repayment of outstanding amounts under the revolving credit arrangement prior to the end of fiscal
2009, a change in the interest rate of 1% would change our interest expense by $2.1 million during the 12 months ending March 31, 2010.



34



---

##### Table of Contents

We have limited operations in foreign jurisdictions. However, one of our joint ventures with Evonik
Industries AG owns a hydrogen peroxide business located in South Korea. This joint venture has  25.0 million (approximately $33.0 million at March 31, 2009) of long-term debt along with other obligations denominated in Euros. Because
the debt and other obligations are repayable in a currency different from the Korean Won, the joint ventures functional currency, they must be remeasured into Korean Won at the end of each reporting period based on then current exchange rates,
with the impact recorded in earnings. As a result of this requirement, the joint venture is subject to foreign currency exchange rate movements. During the six months ended March 31, 2009, the joint venture recorded foreign currency exchange
losses of which $0.3 million has been included in our results of operations. As of March 31, 2009, a change in the relationship between the Euro and Korean Won of 10% would result in a gain or loss of approximately $1.7 million for us.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

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

Our management evaluated, with the participation of our CEO and CFO, the effectiveness of
our disclosure controls and procedures as of March 31, 2009, pursuant to paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act. This evaluation included a review of the controls objectives and design, the operation of the
controls, and the effect of the controls on the information presented in this Quarterly Report. Our management, including the CEO and CFO, do not expect that disclosure controls can or will prevent or detect all errors and all fraud, if any. A
control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Our disclosure controls and procedures are designed to provide such reasonable
assurance of achieving their objectives. Also, the projection of any evaluation of the disclosure controls and procedures to future periods is subject to the risk that the disclosure controls and procedures may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Based on their review and evaluation, and
subject to the inherent limitations described above, our CEO and CFO have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective as of March 31, 2009 at the
above-described reasonable assurance level.

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

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

There has been no change in our internal control over financial reporting during the quarter ended March 31, 2009 that has materially affected, or
is reasonably likely to materially affect, our internal control over financial reporting.



35



---

##### Table of Contents

PART II  OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

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



|ITEM 1A. | RISK FACTORS
|-------- | ------------

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



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

None.



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES
|------- | -------------------------------

None.



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

On March 3, 2009 we held our 2009 Annual Meeting of Stockholders for the following purposes:



| | 1. | To elect two Class III directors to serve until the 2012 annual meeting, or until their successors are duly elected and qualified;
| | -- | ----------------------------------------------------------------------------------------------------------------------------------



| | 2. | To approve amendments to our Long Term Incentive Compensation Plan, including an increase in the number of shares available under the Plan;
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | To ratify the selection by the Board of Directors of Ernst & Young LLP as our independent auditors for the fiscal year ending September 30, 2009.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------

A total of 35,876,061 shares were voted on proposals 1 and 3. A total of 22,285,991 shares were voted on proposal 2, for
which there were 13,590,070 broker non-votes. All proposals were approved by the stockholders. The results of the voting were as follows:



| | 1. | To elect Mr. Blake O. Fisher, Jr. as a Class III director: for  33,830,727 withheld authority  2,045,334.
| | -- | -----------------------------------------------------------------------------------------------------------

To elect Mr. James A. Herickhoff as a Class III director: for  33,818,775; withheld authority  2,057,286.



| | 2. | To approve amendments to our Long Term Incentive Compensation Plan: for  20,293,053; against  1,868,977; abstain  123,961.
| | -- | -----------------------------------------------------------------------------------------------------------------------------



| | 3. | To ratify the selection of Ernst & Young LLP as independent auditors for the fiscal year ending September 30, 2009: for  35,107,514; against  536,126;
abstain  232,420.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|ITEM 5. | OTHER INFORMATION
|------- | -----------------

On April 10, 2009, our
Audit Committee dismissed Ernst & Young LLP as our independent auditors and on April 13, 2009, the Audit Committee appointed BDO Seidman, LLP as our independent auditors. This change is described in more detail in our Amendment
No. 1 to Form 8-K filed on April 20, 2009.



36



---

##### Table of Contents

|ITEM 6. | EXHIBITS
|------- | --------

The following exhibits are included
herein:



|      |  |                                                                                          |  |  
|----- |  | ---------------------------------------------------------------------------------------- |  | -
|12    |  | Computation of ratio of earnings to combined fixed charges and preferred stock dividends |  | *
|      |  |                                                                                         
|31.1  |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer                        |  | *
|      |  |                                                                                         
|31.2  |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer                        |  | *
|      |  |                                                                                         
|32    |  | Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer       |  | *
|      |  |                                                                                         
|99.10 |  | Amended and Restated Long Term Incentive Compensation Plan (Effective March 3, 2009)     |  | *



|* | Filed herewith.
|- | ---------------



37



---

##### Table of Contents

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, 2009 |  | By:                     |  | /s/    Kirk A. Benson                     
|                  |  |                         |  | Kirk A. Benson, Chief Executive Officer   
|                  |  |                         |  | (Principal Executive Officer)             
|                  |  |                        
|Date: May 7, 2009 |  | By:                     |  | /s/    Steven G. Stewart                  
|                  |  |                         |  | Steven G. Stewart, Chief Financial Officer
|                  |  |                         |  | (Principal Financial Officer)             



38