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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended December 31, 2007

or



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

For the transition period from to

Commission file number: 1-32459

HEADWATERS INCORPORATED

(Exact name of registrant as specified in its charter)



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

(801) 984-9400

(Registrants telephone number, including area code)

Not applicable

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

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

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

Large accelerated filer    x            Accelerated filer     ̈            Non-accelerated filer     ̈

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

Yes    ̈     No   x

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









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HEADWATERS INCORPORATED

TABLE OF CONTENTS



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

Forward-looking Statements

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

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



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

HEADWATERS INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



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

See accompanying notes.



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HEADWATERS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)



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

See accompanying notes.



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HEADWATERS INCORPORATED

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

For the Three Months
Ended December 31, 2007



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

See accompanying notes.



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HEADWATERS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



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

See accompanying notes.



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HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

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

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

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

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

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

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



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HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007

(Unaudited)

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

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

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



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

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

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

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



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



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007

(Unaudited)



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



|3. | Stock-Based Compensation
|-- | ------------------------

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

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



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

Inventories consisted of the
following at:



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



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007

(Unaudited)



|5. | Intangible Assets
|-- | -----------------

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



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

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



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



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

Long-term debt consisted of
the following at:



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

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

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



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007

(Unaudited)

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

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

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

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

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

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



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007

(Unaudited)

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

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

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

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

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

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

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



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

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



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007

(Unaudited)



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

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

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

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

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

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



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HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007

(Unaudited)

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



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

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



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



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

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

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



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HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007

(Unaudited)

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

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

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

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

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

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

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



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HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007

(Unaudited)



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

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

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

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

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

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



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HEADWATERS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007

(Unaudited)

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

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

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



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



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



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



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

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



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##### 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 2006 refer to our fiscal quarter ended December 31, 2006 and references to 2007 refer to our fiscal quarter ended December 31, 2007. Other references
to years refer to our fiscal year rather than a calendar year.

Overview

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

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

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

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

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

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

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



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

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

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

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

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

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

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

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

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

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

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

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



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

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

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

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

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

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

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

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

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



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

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

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

Impact of Inflation and Related Matters

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

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

Liquidity and Capital Resources

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

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



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

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

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

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

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

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

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

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

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



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

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

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

Legal Matters

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

Recent Accounting
Pronouncements

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



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

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

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

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



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

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

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



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

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

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

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

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

PART II  OTHER INFORMATION



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

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



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

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



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

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



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|                                      |  |                               |  |                           |       |                                                                              |       |                                                                                      |   |       
|------------------------------------- |  | ----------------------------- |  | ------------------------- | ----- | ---------------------------------------------------------------------------- | ----- | ------------------------------------------------------------------------------------ | - | ------
|(in thousands, except per-share data)
|Period                                |  | TotalNumber ofSharesPurchased |  | AveragePricePaid perShare |       | Total Number ofShares Purchasedas Part of PubliclyAnnounced Plansor
Programs |       | Approximate DollarValue of Shares thatMay Yet BePurchased Under thePlans or
Programs
|October 1, 2007  October 31, 2007    |  | 0                             |  |                           | n/a   |                                                                              | 0     |                                                                                      | $ | 15,000
|November 1, 2007  November 30, 2007  |  | 955                           |  | $                         | 12.53 |                                                                              | 955   |                                                                                      |   | 3,034 
|December 1, 2007  December 31, 2007  |  | 250                           |  |                           | 11.50 |                                                                              | 250   |                                                                                      |   | 159   
|                                      |  |                               |  |                           |       |                                                                              |       |                                                                                      |   |       
|Total                                 |  | 1,205                         |  | $                         | 12.32 |                                                                              | 1,205 |                                                                                      | $ | 159   
|                                      |  |                               |  |                           |       |                                                                              |       |                                                                                      |   |       



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

None.



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

None.



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

None.



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

The following exhibits are included
herein:



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





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



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



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



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