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 June 30, 2003

                                       or

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

                 For the transition period from ______ to ______

                         Commission file number 0-27808


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


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

10653 South River Front Parkway, Suite 300
            South Jordan, Utah                               84095
-------------------------------------------               -----------
 (Address of principal executive offices)                  (Zip Code)

                                 (801) 984-9400
               ---------------------------------------------------
              (Registrant's telephone number, including area code)


                                 Not applicable
              ----------------------------------------------------
              (Former name, former address and former fiscal year,
                         if changed since last report)


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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]


The number of shares outstanding of the Registrant's common stock as of July 31,
2003 was 27,788,530.

<PAGE>

                             HEADWATERS INCORPORATED

                                TABLE OF CONTENTS


PART I - FINANCIAL INFORMATION
                                                                            Page
                                                                             No.
     ITEM 1.  FINANCIAL STATEMENTS (Unaudited):
              Condensed Consolidated Balance Sheets - As of
                September 30, 2002 and June 30, 2003 .......................  3
              Condensed Consolidated Statements of Income - For the
                three and nine months ended June 30, 2002 and 2003 .........  5
              Condensed Consolidated Statement of Changes in Stockholders'
                Equity - For the nine months ended June 30, 2003............  6
              Condensed Consolidated Statements of Cash Flows - For the
                nine months ended June 30, 2002 and 2003....................  7
              Notes to Condensed Consolidated Financial Statements .........  8
     ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
              AND RESULTS OF OPERATIONS..................................... 18
     ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.... 23
     ITEM 4.  CONTROLS AND PROCEDURES....................................... 24

PART II - OTHER INFORMATION

     ITEM 1.  LEGAL PROCEEDINGS ............................................ 24
     ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS .................... 24
     ITEM 3.  DEFAULTS UPON SENIOR SECURITIES .............................. 24
     ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .......... 24
     ITEM 5.  OTHER INFORMATION............................................. 24
     ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K ............................. 25

SIGNATURES.................................................................. 26




Forward-looking Statements

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


Availability of SEC Filings

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

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



                                                HEADWATERS INCORPORATED

                                         CONDENSED CONSOLIDATED BALANCE SHEETS
                                                      (Unaudited)

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

Current assets:
     Cash and cash equivalents                                                              $      7,284    $     13,826
     Short-term investments                                                                        5,907           1,789
     Trade receivables, net                                                                       50,331          53,987
     Inventories                                                                                   8,442           9,266
     Deferred income taxes                                                                         1,814             670
     Other current assets                                                                          4,155           6,527
                                                                                            ------------    ------------
            Total current assets                                                                  77,933          86,065
                                                                                            ------------    ------------

Property, plant and equipment, net                                                                50,549          53,463
                                                                                            ------------    ------------

Other assets:
     Notes and accrued interest receivable                                                         4,593           1,989
     Intangible assets, net                                                                      118,918         114,040
     Goodwill                                                                                    113,367         112,131
     Debt issue costs and other assets                                                             7,497           6,135
                                                                                            ------------    ------------
            Total other assets                                                                   244,375         234,295
                                                                                            ------------    ------------

            Total assets                                                                    $    372,857    $    373,823
                                                                                            ============    ============



                                                     See accompanying notes.

                                                                 3
<PAGE>
<CAPTION>
                                                HEADWATERS INCORPORATED

                                    CONDENSED CONSOLIDATED BALANCE SHEETS, continued
                                                      (Unaudited)

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

Current liabilities:
     Accounts payable                                                                       $     20,773    $     21,164
     Accrued personnel costs                                                                       7,293           5,476
     Accrued interest                                                                                394           2,521
     Income taxes                                                                                  1,244           2,646
     Other accrued liabilities                                                                    13,250          10,756
     Current portion of long-term debt                                                            15,578          23,640
     Current portion of unamortized non-refundable license fees                                    4,378           6,552
                                                                                            ------------    ------------
            Total current liabilities                                                             62,910          72,755
                                                                                            ------------    ------------

Long-term liabilities:
     Long-term debt                                                                              154,552         117,387
     Deferred income taxes                                                                        51,357          50,739
     Unamortized non-refundable license fees                                                       5,010           4,126
     Other long-term liabilities                                                                     432           1,121
                                                                                            ------------    ------------
            Total long-term liabilities                                                          211,351         173,373
                                                                                            ------------    ------------
            Total liabilities                                                                    274,261         246,128
                                                                                            ------------    ------------

Commitments and contingencies

Stockholders' equity:
     Common stock, $0.001 par value; authorized 50,000 shares,
       issued and outstanding 27,327 shares at September 30, 2002
       (including 526 shares held in treasury) and 27,779 shares
       at June 30, 2003 (including 479 shares held in treasury)                                       27              28
     Capital in excess of par value                                                              126,265         129,786
     Retained earnings (accumulated deficit)                                                    (24,418)             967
     Treasury stock, at cost                                                                     (3,013)          (2,826)
     Other                                                                                         (265)            (260)
                                                                                            ------------    ------------
            Total stockholders' equity                                                            98,596         127,695
                                                                                            ------------    ------------

            Total liabilities and stockholders' equity                                      $    372,857    $    373,823
                                                                                            ============    ============


                                                     See accompanying notes.

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

                                         CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                                                         (Unaudited)

                                                             Three Months Ended June 30,        Nine Months Ended June 30,
                                                          ----------------------------------- --------------------------------
(thousands of dollars, except per-share data)                         2002              2003             2002            2003
--------------------------------------------------------- ----------------- ----------------- ---------------- ---------------
<S>                                                            <C>               <C>              <C>             <C>
Revenue:
     Chemical reagent sales                                    $    22,234       $    35,908      $    49,521     $    98,099
     License fees                                                    8,822            10,120           21,263          27,846
     Coal combustion products revenues                                  --            46,005               --         115,460
     Manufactured products sales                                        --            13,257               --          36,041
     Other revenues                                                    912             1,106            4,862           3,712
                                                               -----------       -----------      -----------     -----------
          Total revenue                                             31,968           106,396           75,646         281,158
                                                               -----------       -----------      -----------     -----------

Operating costs and expenses:
     Cost of chemical reagents                                      14,880            25,271           33,749          66,065
     Cost of coal combustion products revenues                          --            33,217               --          84,635
     Cost of manufactured products                                      --            10,059               --          27,535
     Cost of other revenues                                          1,334             1,186            4,256           3,318
     Depreciation and amortization                                     336             3,409            1,000           9,660
     Research and development                                          598             1,052            1,727           3,172
     Selling, general and administrative                             3,905            10,433            9,383          30,259
                                                               -----------       -----------      -----------     -----------
        Total operating costs and expenses                          21,053            84,627           50,115         224,644
                                                               -----------       -----------      -----------     -----------

Operating income                                                    10,915            21,769           25,531          56,514
                                                               -----------       -----------      -----------     -----------

Other income (expense):
     Interest and net investment income                                429               188              432             359
     Interest expense                                                  (12)          (4,205)              (68)       (12,272)
     Other, net                                                        (46)            (208)            2,047         (2,266)
                                                               -----------       -----------      -----------     -----------
          Total other income (expense), net                            371           (4,225)            2,411        (14,179)
                                                               -----------       -----------      -----------     -----------

Income before income taxes                                          11,286           17,544            27,942         42,335

Income tax provision                                                (4,550)          (7,000)          (11,020)       (16,950)
                                                               -----------       -----------      -----------     -----------

Net income                                                     $     6,736       $    10,544      $    16,922     $    25,385
                                                               ===========       ===========      ===========     ===========

Basic net income per common share                              $      0.27       $      0.39      $      0.70     $      0.94
                                                               ===========       ===========      ===========     ===========

Diluted net income per common share                            $      0.26       $      0.37      $      0.66     $      0.90
                                                               ===========       ===========      ===========     ===========


                                                     See accompanying notes.

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

                         CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
                                             For the Nine Months Ended June 30, 2003


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

Exercise of stock options and warrants                         452         1         1,493

Tax benefit from exercise of stock options                                           1,650

47 shares of treasury stock transferred to employee stock
      purchase plan, at cost                                                           378                         187

Other                                                                                                                          5

Net income                                                                                       25,385
                                                            ------    ------     ---------    ---------       --------    ------
Balances as of June 30, 2003                                27,779    $   28     $ 129,786    $     967       $ (2,826)   $ (260)
                                                            ======    ======     =========    =========       ========    ======


                                                     See accompanying notes.

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

                                         CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                           (Unaudited)


                                                                                              Nine Months Ended June 30,
                                                                                            --------------------------------
  (thousands of dollars)                                                                              2002             2003
------------------------------------------------------------------------------------------- --------------- ----------------
<S>                                                                                             <C>             <C>
  Cash flows from operating activities:
  Net income                                                                                    $   16,922      $   25,385
  Adjustments to reconcile net income to net cash provided by operating activities:
       Depreciation and amortization                                                                 1,000           9,660
       Interest expense related to amortization of debt discount and debt issue costs                   44           2,872
       Deferred income taxes                                                                         8,131            (761)
       Income tax benefit from exercise of stock options                                             2,680           1,650
       Amortization of non-refundable license fees                                                    (848)           (884)
       Net gain on disposition of property, plant and equipment                                     (1,283)           (260)
       Write-downs of note receivable and investment                                                    --           2,436
       Other changes in operating assets and liabilities                                           (25,843)          1,077
                                                                                                ----------      ----------
Net cash provided by operating activities                                                              803          41,175
                                                                                                ----------      ----------

Cash flows from investing activities:
     Purchase of property, plant and equipment                                                        (457)         (6,321)
     Proceeds from disposition of property, plant and equipment                                        115             253
     Collections on notes receivable                                                                 6,877              54
     Additional cash payment for acquisition of Hydrocarbon Technologies, Inc.                        (419)             --
     Net increase in other assets                                                                   (3,418)           (344)
                                                                                                ----------      ----------
Net cash provided by (used in) investing activities                                                  2,698          (6,358)
                                                                                                ----------      ----------

Cash flows from financing activities:
     Payments on long-term debt and short-term borrowings                                           (6,392)        (30,334)
     Proceeds from exercise of options and warrants                                                  5,097           1,494
     Employee stock purchases                                                                          263             565
     Proceeds from issuance of short-term borrowings                                                 2,056              --
     Purchase of common stock for the treasury                                                      (1,188)             --
                                                                                                ----------      ----------
Net cash used in financing activities                                                                 (164)        (28,275)
                                                                                                ----------      ----------

Net increase in cash and cash equivalents                                                            3,337           6,542

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

Cash and cash equivalents, end of period                                                        $    4,336      $   13,826
                                                                                                ==========      ==========


                                                     See accompanying notes.

                                                                 7
</TABLE>
<PAGE>

                             HEADWATERS INCORPORATED

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2003
                                   (Unaudited)
                                 _______________

1.       Nature of Operations and Basis of Presentation

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

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

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

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

         Basis of Presentation - The accompanying unaudited condensed
         consolidated financial statements have been prepared in accordance with
         the rules and regulations of the Securities and Exchange Commission
         ("SEC") for quarterly reports on Form 10-Q. In the opinion of
         management, all adjustments considered necessary for a fair
         presentation have been included, and consist of normal recurring
         adjustments (including the write-down in March 2003 of a note
         receivable in the amount of approximately $2,142,000). Certain
         information and footnote disclosures normally included in financial
         statements prepared in accordance with accounting principles generally
         accepted in the United States have been condensed or omitted. These
         financial statements should be read in conjunction with the
         consolidated financial statements and notes thereto included in
         Headwaters' Annual Report on Form 10-K for the year ended September 30,
         2002 ("Form 10-K") and in Headwaters' Quarterly Reports on Form 10-Q
         for the quarters ended December 31, 2002 and March 31, 2003. Certain
         prior period amounts have been reclassified to conform to the current
         periods' presentation. The reclassifications had no effect on net
         income or total assets.

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

         ISG's results of operations for the three- and nine-month periods ended
         June 30, 2003 are consolidated with Headwaters' 2003 results. ISG's
         results of operations for periods prior to the September 2002
         acquisition date have not been consolidated with Headwaters' 2002
         results. Due to the seasonality of ISG's business and other factors,
         Headwaters' consolidated results of operations for 2003 are not
         indicative of the results to be expected for the full fiscal 2003 year.

2.       ISG Acquisition

         On September 19, 2002, Headwaters acquired 100% of the common stock of
         ISG, assumed or paid off all of ISG's outstanding debt and redeemed all
         of ISG's outstanding preferred stock. As described in more detail in

                                       8
<PAGE>

                             HEADWATERS INCORPORATED

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2003
                                   (Unaudited)
                                 _______________


         the notes to the consolidated financial statements included in the Form
         10-K, the ISG acquisition was accounted for using the purchase method
         of accounting as required by Statement of Financial Accounting
         Standards ("SFAS") No. 141, "Business Combinations." Assets acquired
         and liabilities assumed were recorded at their estimated fair values as
         of September 19, 2002. An adjusted allocation of the purchase price,
         which is not materially different from the preliminary allocation
         reflected in the Form 10-K, was completed during the quarter ended June
         30, 2003. The adjustments made relate primarily to the completion of
         property, plant and equipment valuations, income tax returns for ISG
         for the period ended September 18, 2002 and certain valuations of other
         liabilities acquired. The following table sets forth the current
         allocation of the total consideration paid to the tangible and
         intangible assets acquired and liabilities assumed:

                    (thousands of dollars)
                   ----------------------------------------------- -------------

                   Cash                                               $ 19,238
                   Trade receivables                                    33,820
                   Inventory and other assets                           11,794
                   Net property, plant and equipment                    48,981
                   Intangible assets acquired:
                        Contracts                                      106,400
                        Patents                                          2,764
                   Goodwill                                            107,873
                   Accounts payable and accrued liabilities            (24,294)
                   Net deferred income tax liabilities                 (48,720)
                                                                   -------------
                        Net assets acquired                           $257,856
                                                                   =============

3.       Segment Reporting

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

         The following segment information for 2003 has been prepared in
         accordance with SFAS No. 131, "Disclosure about Segments of an
         Enterprise and Related Information." Performance of the segments is
         evaluated on several factors, including (i) operating income, and (ii)
         earnings before interest, taxes, depreciation and amortization, and
         other income/expense items ("EBITDA"). Intersegment sales are
         immaterial. Amounts included in the "Corporate" column represent costs
         not specifically attributable to any segment and include administrative
         departmental costs, general corporate overhead and research and
         development expenses. Segment assets reflect those specifically
         attributable to individual segments and primarily include accounts
         receivable, inventories, property, plant and equipment, intangible
         assets and goodwill. Other assets are included in the "Corporate"
         column.
<TABLE>
<CAPTION>
                                                   Alternative                Manufactured
       (thousands of dollars)                        Energy        CCPs         Products       Corporate     Totals
       ------------------------------------------ ------------- ------------ ---------------- ------------ -----------
       <S>                                          <C>          <C>            <C>           <C>           <C>
       Three Months ended June 30, 2003

       Segment revenue                              $   47,134   $   46,005     $   13,257    $       --    $ 106,396
                                                    ----------   ----------     ----------    ----------    ---------

       EBITDA                                       $   19,684   $    9,937     $    1,421    $   (5,864)   $  25,178
       Depreciation and amortization                      (279)      (2,824)          (151)         (155)      (3,409)
                                                    ----------   ----------     ----------    ----------    ---------
       Operating income                             $   19,405   $    7,113     $    1,270    $   (6,019)      21,769
                                                    ==========   ==========     ==========    ==========
            Net interest expense                                                                               (4,017)
            Other income (expense), net                                                                          (208)
            Income tax provision                                                                               (7,000)
                                                                                                            ---------
       Net income                                                                                           $  10,544
                                                                                                            =========
       Capital expenditures                         $        6   $    3,124     $       64    $      217    $   3,411
                                                    ==========   ==========     ==========    ==========    =========

                                       9
<PAGE>
<CAPTION>

                                                     HEADWATERS INCORPORATED

                                      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                                          June 30, 2003
                                                           (Unaudited)
                                                         _______________


                                                   Alternative                Manufactured
       (thousands of dollars)                        Energy        CCPs         Products       Corporate     Totals
       ------------------------------------------ ------------- ------------ ---------------- ------------ -----------
       <S>                                          <C>          <C>            <C>           <C>           <C>
       Nine Months ended June 30, 2003

       Segment revenue                              $  129,657   $  115,460     $   36,041    $       --    $ 281,158
                                                    ==========   ==========     ==========    ==========    =========

       EBITDA                                       $   57,109   $   22,714     $    3,653    $  (17,302)   $  66,174
       Depreciation and amortization                      (853)      (7,906)          (449)         (452)      (9,660)
                                                    ----------   ----------     ----------    ----------    ---------
       Operating income                             $   56,256   $   14,808     $    3,204    $  (17,754)      56,514
                                                    ==========   ==========     ==========    ==========
            Net interest expense                                                                              (11,913)
            Other income (expense), net                                                                        (2,266)
            Income tax provision                                                                              (16,950)
                                                                                                            ---------
       Net income                                                                                           $  25,385
                                                                                                            =========
       Capital expenditures                         $      135   $    5,481     $      464    $      241    $   6,321
                                                    ==========   ==========     ==========    ==========    =========

       Segment assets as of June 30, 2003           $   37,271   $  285,265     $   21,145    $   30,142    $ 373,823
                                                    ==========   ==========     ==========    ==========    =========
</TABLE>

4.       Inventories

         Inventories consisted of the following at:

                                               September 30,         June 30,
              (thousands of dollars)                    2002             2003
              ------------------------------- --------------- ----------------

              Raw materials                      $     1,198      $     1,102
              Finished goods                           7,244            8,164
                                                 -----------      -----------
                                                 $     8,442      $     9,266
                                                 ===========      ===========

5.       Intangible Assets and Goodwill

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

         Headwaters has no intangible assets that are not being amortized. The
         following table summarizes the gross carrying amounts and the related
         accumulated amortization of all amortizable intangible assets as of:
<TABLE>
<CAPTION>
                                                            September 30, 2002                  June 30, 2003
                                                      -------------------------------- --------------------------------
                                                          Gross                            Gross
                                         Estimated       Carrying       Accumulated       Carrying       Accumulated
         (thousands of dollars)        useful lives       Amount       Amortization        Amount       Amortization
         ----------------------------- -------------- --------------- ---------------- --------------- ----------------
         <S>                          <C>                <C>              <C>             <C>              <C>
         ISG contracts                   20 years        $106,400           $179          $106,400         $4,169
         HTI patented technology         15 years           9,700            647             9,700          1,132
         ISG patents                   7 1/2 years          2,764              4             2,764            281
         Other                         9 - 10 years         1,522            638             1,522            764
                                                         --------         ------          --------         ------
                                                         $120,386         $1,468          $120,386         $6,346
                                                         ========         ======          ========         ======
</TABLE>

         Total amortization expense related to intangible assets was
         approximately $204,000 and $1,626,000 for the three months ended June
         30, 2002 and 2003, respectively, and $611,000 and $4,878,000 for the
         nine months ended June 30, 2002 and 2003, respectively. Total estimated
         annual amortization expense for fiscal years 2003 through 2007 is
         approximately $6,500,000 per year.

                                       10
<PAGE>

                             HEADWATERS INCORPORATED

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2003
                                   (Unaudited)
                                 _______________


         Goodwill - In accordance with the requirements of SFAS No. 142,
         Headwaters does not amortize goodwill, all of which relates to the
         acquisitions of ISG and HTI. In connection with the final allocation of
         the purchase price for ISG, goodwill decreased approximately $1,236,000
         during the quarter ended June 30, 2003 (see Note 2). SFAS No. 142
         requires Headwaters to periodically perform tests for goodwill
         impairment. Step 1 of the initial impairment test was required to be
         performed no later than March 31, 2003; thereafter impairment testing
         is required to be performed no less often than annually, or sooner if
         evidence of possible impairment arises. Impairment testing is performed
         at the reporting unit level and Headwaters has identified four
         reporting units: (i) the Covol Fuels division and (ii) HTI (which
         together comprise the alternative energy segment), (iii) CCPs and (iv)
         Manufactured Products. Currently, goodwill exists only in the CCPs and
         HTI reporting units.

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

         During the quarter ended March 31, 2003, Headwaters performed step 1
         impairment tests of the recorded goodwill in the CCPs and HTI reporting
         units as of October 1, 2002, the beginning of its fiscal year 2003.
         During the quarter ended June 30, 2003 Headwaters performed its annual,
         recurring tests for potential impairment using the date of June 30,
         2003. The tests indicated that the fair values of the reporting units
         exceeded their carrying values as of both October 1, 2002 and June 30,
         2003. Accordingly, step 2 of the impairment tests was not required to
         be performed and no impairment charge was recorded.

6.       Long-term Debt

         Long-term debt consisted of the following at:
<TABLE>
<CAPTION>
                                                                            September 30,        June 30,
         (thousands of dollars)                                                      2002            2003
         --------------------------------------------------------------- ----------------- ---------------
         <S>                                                                     <C>             <C>
         Senior secured debt with a face amount totaling $155,000 at
              September 30, 2002 and $124,722 at June 30, 2003                   $150,378        $121,278

         Senior subordinated debentures with a face amount totaling                19,603          19,662
         $20,000

         Other                                                                        149              87
                                                                                 --------        --------
                                                                                  170,130         141,027
         Less: current portion                                                   (15,578)         (23,640)
                                                                                 --------        --------
         Total long-term debt                                                    $154,552        $117,387
                                                                                 ========        ========
</TABLE>

         Senior Secured Credit Agreement - In connection with the ISG
         acquisition, Headwaters entered into a $175,000,000 senior secured
         credit agreement with a syndication of lenders, under which a total of
         $155,000,000 was borrowed on the acquisition date. The credit agreement
         also allows up to $20,000,000 to be borrowed under a revolving credit
         arrangement. The debt was issued at a 3% discount and Headwaters
         received net cash proceeds of $150,350,000. The original issue discount
         is being accreted using the effective interest method and the accretion
         is recorded as interest expense. The debt is secured by all assets of
         Headwaters, bears interest at a variable rate (approximately 5.6% at
         June 30, 2003), and is repayable in quarterly installments through
         August 2007.

         In the December 2002 quarter, principal repayments totaling $9,875,000
         were made, which included a $6,000,000 optional early repayment. In the
         March 2003 quarter, principal repayments totaling $5,221,000 were made,
         which included a $1,500,000 optional early repayment. In the June 2003
         quarter, principal repayments totaling $15,182,000 were made, which
         included $11,500,000 of optional early repayments. When optional
         prepayments are made, required principal repayments for all future
         periods are reduced and as of June 30, 2003 totaled approximately
         $3,371,000 for the remainder of fiscal 2003, approximately $26,967,000
         in fiscal years 2004, 2005 and 2006, and approximately $40,450,000 in
         fiscal 2007. In certain situations, for example when Headwaters
         receives "excess cash flow," as defined, mandatory prepayments, in

                                       11
<PAGE>

                             HEADWATERS INCORPORATED

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2003
                                   (Unaudited)
                                 _______________


         excess of the scheduled payments, are required. Mandatory prepayments
         are calculated as a percentage of "excess cash flow," ranging up to
         100%, which percentage is based on Headwaters' "leverage ratio."

         The credit agreement contains restrictions and covenants common to such
         agreements, including limitations on the incurrence of additional debt,
         investments, merger and acquisition activity, asset liens, capital
         expenditures in excess of $15,000,000 in any fiscal year, and the
         payment of dividends, among others. In addition, Headwaters must
         maintain certain financial ratios, including leverage ratios and
         interest coverage, as those terms are defined in the credit agreement.
         As of June 30, 2003, Headwaters must maintain a total leverage ratio of
         2.5:1.0 or less. The maximum ratio declines over time until June 2004,
         at which time the ratio must remain at 2.0:1.0 or less. There is a
         similar leverage ratio requirement for the senior debt alone, which at
         June 30, 2003 must be 2.0:1.0 or less, declining over time through June
         2004, at which time it must be maintained at 1.5:1.0 or less. The
         interest coverage requirement at June 30, 2003 was 4.0:1.0 or more and
         does not change until December 2003, at which time the ratio must be
         maintained at a level of 5.0:1.0 or more. Headwaters was in compliance
         with all debt covenants as of June 30, 2003.

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

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

         The loan agreement contains restrictions and covenants common to such
         agreements, and these are generally consistent with those described
         above for the senior secured debt. As of June 30, 2003, Headwaters must
         maintain a total leverage ratio of 2.75:1.0 or less. The maximum ratio
         declines over time until June 2004, at which time the ratio must remain
         at 2.25:1.0 or less. The interest coverage requirement at June 30, 2003
         was 3.75:1.0 or more and does not change until December 2003, at which
         time the ratio must be maintained at a level of 4.75:1.0 or more.
         Headwaters was in compliance with all debt covenants as of June 30,
         2003.

         Interest Costs - As a result of the early repayments of principal
         totaling $11,500,000 and $19,000,000 in the quarter and nine months
         ended June 30, 2003, respectively, additional non-cash interest expense
         of approximately $654,000 and $1,109,000, respectively, was incurred,
         representing accelerated amortization of debt discount and debt issue
         costs associated with those principal amounts.

         During the quarter ended June 30, 2003, Headwaters incurred total
         interest costs of approximately $4,278,000, including approximately
         $1,268,000 of non-cash interest expense and approximately $73,000 of
         interest costs that were capitalized. During the nine months ended June
         30, 2003, Headwaters incurred total interest costs of approximately
         $12,390,000, including approximately $2,872,000 of non-cash interest
         expense and approximately $118,000 of interest costs that were
         capitalized. During the three- and nine-month periods ended June 30,
         2002, Headwaters incurred total interest costs of approximately $12,000
         and $68,000, respectively, including approximately $14,000 and $44,000,
         respectively, of non-cash interest expense. No interest costs were

                                       12
<PAGE>

                             HEADWATERS INCORPORATED

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2003
                                   (Unaudited)
                                 _______________


         capitalized in the 2002 periods. The weighted-average interest rate on
         the face amount of outstanding long-term debt, disregarding
         amortization of debt issue costs and debt discount, was approximately
         7.3% at September 30, 2002 and June 30, 2003.

7.       Stock Options

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

         In years prior to 1998, certain options were granted with terms
         considered compensatory. In such instances, the related compensation
         cost is amortized to expense over the applicable vesting period on a
         straight-line basis. Amortized compensation expense related to
         compensatory options granted in prior years was approximately $23,000
         for each of the three-month periods ended June 30, 2002 and 2003 and
         approximately $69,000 for each of the nine-month periods ended June 30,
         2002 and 2003. If the fair value provisions of SFAS No. 123 would have
         been applied to all options granted, compensation expense would have
         been approximately $550,000 and $1,070,000, respectively, for the
         three-month periods ended June 30, 2002 and 2003, and approximately
         $1,710,000 and $2,830,000, respectively, for the nine-month periods
         ended June 30, 2002 and 2003.

         If Headwaters had elected to account for options granted based on their
         fair values, as prescribed by SFAS 123, net income and income per share
         for 2002 and 2003 would have been changed to the pro forma amounts
         shown in the table below.
<TABLE>
<CAPTION>
                                                           Three Months Ended June 30,     Nine Months Ended June 30,
                                                        ------------------------------- ------------------------------
         (thousands of dollars, except per-share data)            2002           2003           2002            2003
         ---------------------------------------------  ---------------- -------------- -------------- ---------------
         <S>                                                     <C>           <C>            <C>             <C>
         Net income - as reported                                $6,736        $10,544        $16,922         $25,385

         Pro forma additional compensation expense                 (526)        (1,046)        (1,645)         (2,764)
                                                                 ------        -------        -------         -------
         Net income - pro forma                                  $6,210        $ 9,498        $15,277         $22,621
                                                                 ======        =======        =======         =======

         Basic income per share - as reported                    $ 0.27        $  0.39        $  0.70         $  0.94
                                - pro forma                      $ 0.25        $  0.35        $  0.64         $  0.84

         Diluted income per share - as reported                  $ 0.26        $  0.37        $  0.66         $  0.90
                                  - pro forma                    $ 0.24        $  0.34        $  0.60         $  0.80
</TABLE>

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

         During the quarter ended June 30, 2003, Headwaters granted to employees
         and officers options to purchase approximately 390,000 shares of common
         stock. These options have an exercise price of $16.89 per share, the
         fair market value of Headwaters' common stock on the date of grant.
         Subsequent to June 30, 2003, Headwaters granted to certain employees
         and an officer options to purchase a total of approximately 180,000
         shares of common stock with exercise prices ranging from $14.70 to
         $15.48 per share, the fair market value of Headwaters' common stock on
         the dates of grant.

                                       13
<PAGE>

                             HEADWATERS INCORPORATED

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2003
                                   (Unaudited)
                                 _______________


8.       Income Taxes

         The income tax provision consisted of the following:
<TABLE>
<CAPTION>
                                                         Three Months Ended June 30,     Nine Months Ended June 30,
                                                     -------------------------------- ------------------------------
         (thousands of dollars)                                  2002           2003           2002            2003
         ------------------------------------------- ----------------- -------------- -------------- ---------------
         <S>                                                   <C>            <C>           <C>             <C>
         Current tax provision:
              Federal                                          $1,180         $6,870        $ 2,051         $15,383
              State                                               350          1,213            838           2,328
                                                               ------         ------        -------         -------
         Total current tax provision                            1,530          8,083          2,889          17,711

         Deferred tax provision (benefit):
              Federal                                           2,763           (976)         7,440           (677)
              State                                               257           (107)           691            (84)
                                                               ------         ------        -------         -------
         Total deferred tax provision (benefit)                 3,020         (1,083)         8,131           (761)
                                                               ------         ------        -------         -------
         Total income tax provision                            $4,550         $7,000        $11,020         $16,950
                                                               ======         ======        =======         =======
<CAPTION>
9.       Earnings per Share

         (thousands of dollars and shares,               Three Months Ended June 30,     Nine Months Ended June 30,
                                                     -------------------------------- ------------------------------
         except per-share data)                                  2002           2003           2002            2003
         ------------------------------------------- ----------------- -------------- -------------- ---------------

         <S>                                                   <C>           <C>            <C>             <C>
         Numerator - Net income                                $6,736        $10,544        $16,922         $25,385
                                                               ======        =======        =======         =======
         Denominator:
         Denominator for basic earnings per share
          - weighted-average shares outstanding                24,506         27,192         24,007          27,003

         Effect of dilutive securities - shares
          issuable upon exercise of options and warrants        1,512          1,107          1,555           1,185
                                                               ------        -------        -------         -------
         Denominator for diluted earnings per
          share - weighted-average shares
          outstanding after assumed exercises                  26,018         28,299         25,562          28,188
                                                               ======        =======        =======         =======

         Basic net income per share                            $ 0.27        $  0.39        $  0.70         $  0.94
                                                               ======        =======        =======         =======

         Diluted net income per share                          $ 0.26        $  0.37        $  0.66         $  0.90
                                                               ======        =======        =======         =======
</TABLE>

         Anti-dilutive securities not considered in the diluted earnings per
         share calculations, consisting of out-of-the money options, totaled
         approximately 0 and 740,000 shares for the quarters ended June 30, 2002
         and 2003, respectively, and 270,000 and 510,000 shares for the
         nine-month periods ended June 30, 2002 and 2003, respectively.

10.      Commitments and Contingencies

         Commitments and contingencies as of June 30, 2003 not disclosed
         elsewhere, are as follows:

         Medical Insurance - Effective January 1, 2003, Headwaters adopted a
         self-insured medical insurance plan for employees of all of its
         subsidiaries. This plan has stop-loss coverage for amounts in excess of
         $75,000 per individual and approximately $6,000,000 in the aggregate
         for the plan year ending December 31, 2003. Headwaters has contracted
         with a third-party administrator to assist in the payment and
         administration of claims. Insurance claims are recognized as expenses
         when incurred and include an estimate of costs for claims incurred but
         not reported at the balance sheet date. As of June 30, 2003,
         approximately $863,000 is accrued for claims incurred from January
         though June 2003. For calendar year 2002, ISG maintained a self-insured
         medical insurance plan for its employees. No liability for 2002 claims
         remains as of June 30, 2003.

                                       14
<PAGE>

                             HEADWATERS INCORPORATED

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2003
                                   (Unaudited)
                                 _______________


         Property, Plant and Equipment - As of June 30, 2003, Headwaters was
         committed to spend approximately $6,000,000 to complete capital
         projects that were in various stages of completion.

         Legal or Contractual Matters - Adtech. In October 1998, Headwaters
         entered into a technology purchase agreement with James G. Davidson and
         Adtech, Inc. The transaction transferred certain patent and royalty
         rights to Headwaters related to an alternative fuel technology invented
         by Davidson. (This technology is distinct from the technology developed
         by Headwaters.) In September 2000, Headwaters received a summons and
         complaint from the United States District Court for the Western
         District of Tennessee filed by Adtech, Inc. against Davidson and
         Headwaters. In the action, certain purported officers and directors of
         Adtech alleged that the technology purchase transaction was an
         unauthorized corporate action and that Davidson and Headwaters
         conspired together to affect the transfer. In August 2001, the trial
         court granted Headwaters' motion to dismiss the complaint. Plaintiffs
         appealed the case to the Sixth Circuit Court of Appeals. In 2002, the
         Sixth Circuit Court of Appeals issued an order i) affirming the
         District Court's judgment and order of dismissal, and ii) transferring
         to the Federal Circuit Court of Appeals plaintiff's appeal of the
         District Court's order denying the motion for relief from judgment. The
         Federal Circuit Court of Appeals has affirmed the District Court's
         order denying the motion for relief from judgment and the case is now
         fully at its end.

         Boynton. This action is factually related to the Adtech matter. In the
         Adtech case, the alleged claims are asserted by certain purported
         officers and directors of Adtech, Inc. In the Boynton action, the
         allegations arise from the same facts, but the claims are asserted by
         certain purported stockholders of Adtech. In June 2002, Headwaters
         received a summons and complaint from the United States District Court
         for the Western District of Tennessee alleging, inter alia, fraud,
         conspiracy, constructive trust, conversion, patent infringement, and
         interference with contract arising out of the 1998 technology purchase
         agreement entered into between Davidson and Adtech on the one hand, and
         Headwaters on the other. The complaint seeks declaratory relief and
         compensatory and punitive damages. Because the litigation is at an
         early stage and resolution is uncertain, legal counsel cannot express
         an opinion as to the ultimate amount, if any, of Headwaters' liability.

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

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

         Nalco. In October 2000, Headwaters filed a complaint in the United
         States District Court for the District of Utah against Nalco Chemical
         Company ("Nalco"). Headwaters alleged that Nalco, by its sale and
         marketing of materials for use in creating alternative fuel, breached a
         non-disclosure agreement, misappropriated trade secrets, and violated
         patent rights of Headwaters. Nalco filed an answer denying the
         allegations in the complaint and asserting counter-claims alleging
         patent invalidity, antitrust violations, and interference with economic
         relations. Headwaters denied the counter-claims. The parties have
         settled the dispute and the case was dismissed. There was no material
         effect on Headwaters' financial statements as a result of the
         settlement.

         Former Director. Headwaters granted stock options to a member of its
         board of directors in 1995. The director resigned from the board in
         1996. The former director recently claimed that he is entitled to
         exercise the options. Headwaters believes that most of the former
         director's options terminated unexercised, but is investigating the
         former director's claim. Because the investigation is at an early stage
         and resolution is uncertain, legal counsel cannot express an opinion as
         to the ultimate amount, if any, of Headwaters' liability.

                                       15
<PAGE>

                             HEADWATERS INCORPORATED

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2003
                                   (Unaudited)
                                 _______________


         License Fees. Pursuant to the contractual terms of an agreement with a
         certain licensee, the cumulative net license fees owed to Headwaters,
         totaling approximately $10,000,000 as of June 30, 2003, have been
         placed in escrow for the benefit of Headwaters. Headwaters currently
         expects the escrowed amounts to increase as additional license fees are
         generated and that most, if not all, of such amounts will be recognized
         as revenue at some future date. Certain accounting rules governing
         revenue recognition require that the seller's price to the buyer be
         "fixed or determinable" as well as reasonably certain of collection. In
         this situation, those rules appear to currently preclude revenue
         recognition. Accordingly, none of the escrowed amounts have been
         recognized as revenue in the consolidated statements of income.

         Other. Headwaters and its subsidiaries are also involved in other legal
         proceedings that have arisen in the normal course of business. For
         example, certain subsidiaries of ISG are involved in legal proceedings
         involving allegations of breach of warranty and sales of defective
         building products applied by third parties to building exteriors. Many
         claims are covered by insurance. Generally, ISG denies and defends such
         allegations or resolves such matters as appropriate. Management does
         not believe that the outcome of these matters will have a significant
         adverse effect upon the operations or the financial position of
         Headwaters; however, it is possible that a change in management's
         estimates of probable liability could occur and the change could be
         significant.

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

         IRS Announcement. An essential element for the production of qualified
         solid alternative fuel under section 29 of the Internal Revenue Code
         requires that coal undergo significant chemical change. In June 2003,
         the IRS in a general announcement, stated that it "has had reason to
         question the scientific validity of test procedures and results that
         have been presented as evidence that fuel underwent a significant
         chemical change, and is currently reviewing information regarding these
         test procedures and results." At the same time, the IRS announced that
         private letter rulings ("PLRs") on the question of significant chemical
         change would be suspended for requests relying on the procedures and
         results being reviewed. In addition, the IRS indicated that it may
         revoke PLRs that have relied on the procedures and results under review
         if it determines that those test procedures and results do not
         demonstrate that a significant chemical change has occurred. PLRs from
         the IRS are requested by taxpayers to gain assurance that the tax
         treatment proposed by the taxpayer is acceptable to the IRS.

         Section 29 tax credits have been considered and discussed on several
         occasions in the past among Treasury, the IRS, industry participants,
         and members of Congress. The IRS has previously suspended the issuance
         of PLRs, most recently in late 2000 through the first half of 2001.
         Each time that the IRS has suspended the making of rulings, the issues
         raised by the IRS ultimately were satisfactorily resolved, and the IRS
         resumed rulings. Headwaters is participating in industry groups that
         are seeking additional information from the IRS in order to address its
         concerns. At this time, however, Headwaters cannot predict the outcome
         of the IRS's review, when the review will be completed, or the ultimate
         impact of the review on Headwaters.

         The ability to generate and use tax credits by Headwaters' licensees is
         critical to their continued alternative fuel production. If the ability
         to use credits is diminished or the production of the solid alternative
         fuel does not qualify for the credits, a licensee may choose to sell
         its interest in an alternative fuel facility or curtail production.

                                       16
<PAGE>

                             HEADWATERS INCORPORATED

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2003
                                   (Unaudited)
                                 _______________


         Several facility sales have occurred in the past year, but the sale of
         a facility normally requires a new PLR. Until the IRS resumes its
         rulings on the question of significant chemical change, the transfer of
         facilities will be delayed. If a licensee cannot use credits generated
         by the facility and cannot sell the facility, the licensee may elect to
         reduce or suspend production of alternative fuel. Headwaters' license
         fee revenue and chemical reagent sales have been negatively affected by
         one licensee's decision to limit production until the IRS's position on
         chemical change is clarified and rulings on that issue are again
         available. Headwaters cannot predict whether other customers and
         licensees may elect to reduce or suspend production of alternative
         fuel.

11.      SEC Shelf Registration

         In July 2002, Headwaters filed a $250,000,000 universal shelf
         registration statement with the SEC that can be used for the sale of
         common stock, preferred stock, convertible debt and other securities,
         should Headwaters so choose. The SEC declared this registration
         statement effective in August 2002. In July 2003, Headwaters filed an
         amendment to the registration statement for the purpose of
         deregistering $100,000,000 of the originally registered securities,
         thereby decreasing the maximum amount of securities that can be sold
         thereunder to $150,000,000. A prospectus supplement describing the
         terms of any securities to be issued is required to be filed before any
         offering would commence under the shelf registration. The most likely
         use of proceeds from securities offered under the shelf registration
         would be to reduce long-term debt; however, proceeds could also be used
         for working capital and other general corporate purposes.

12.      Recent Accounting Pronouncements

         In January 2003, Financial Accounting Interpretation No. 46,
         "Consolidation of Variable Interest Entities," ("FIN No. 46") was
         issued. This interpretation of Accounting Research Bulletin No. 51,
         "Consolidated Financial Statements," addresses consolidation by
         business enterprises of variable interest entities that have certain
         characteristics. FIN No. 46 was required to be implemented by
         Headwaters immediately for any variable interests in variable interest
         entities created after January 31, 2003; and no later than July 1, 2003
         for any variable interests in variable interest entities created before
         February 1, 2003. Headwaters has reviewed this interpretation and 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
         recent accounting pronouncements will have a significant effect on its
         current or future financial position or results of operations.

                                       17
<PAGE>

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

         The following discussion and analysis should be read in conjunction
with the accompanying unaudited consolidated financial statements and notes
thereto.

Acquisition of ISG and Segments

         The consolidated financial statements include the accounts of
Headwaters and all of its subsidiaries, only two of which have significant
operations, ISG and HTI. As more fully described in Note 2 to the consolidated
financial statements, Headwaters acquired ISG on September 19, 2002.
Accordingly, ISG's results of operations for the three- and nine-month periods
ended June 30, 2003 are consolidated with Headwaters' 2003 results. ISG's
results of operations for periods prior to the September 2002 acquisition date
have not been consolidated with Headwaters' 2002 results. ISG's business is
seasonal; its strongest quarter is typically the September quarter, followed by
the June quarter and then the December quarter. The slowest quarter for ISG is
the March quarter. Due to the seasonality of ISG's business and other factors,
Headwaters' consolidated results of operations for 2003 are not indicative of
the results to be expected for the full fiscal 2003 year.

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

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

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

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

Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002

         The information set forth below compares Headwaters' operating results
for the three months ended June 30, 2003 ("2003") with operating results for the
three months ended June 30, 2002 ("2002").

         Revenue. Total revenue for 2003 increased by $74.4 million or 233% to
$106.4 million as compared to $32.0 million for 2002. The major components of
revenue are discussed in the sections below.

         Chemical Reagent Sales. Chemical reagent sales during 2003 were $35.9
million with a corresponding direct cost of $25.3 million. Chemical reagent
sales during 2002 were $22.2 million with a corresponding direct cost of $14.9
million. The increase in chemical reagent sales during 2003 was due to increased
alternative fuel production by Headwaters' licensees, as well as sales of
chemical reagents to new customers. In June 2003, one of Headwaters' licensees
significantly reduced production of alternative fuel, and as a result chemical
reagent sales from this licensee could decrease by as much as $3.5 million in
the September 2003 quarter as compared to the June 2003 quarter (See "IRS
Announcement" in Note 10 to the consolidated financial statements). The gross
margin percentage decreased in 2003 from 2002 due primarily to higher chemical
reagent costs and differing chemical reagent formula margins. Headwaters
currently expects its per unit chemical reagent costs to decrease slightly
during the September 2003 quarter and into early fiscal 2004; however, actual
future gross margin percentages will depend on several factors, including which
chemical reagent formulas customers use and in what quantities.

         License Fees. As more fully described in Headwaters Form 10-K, "ITEM 1:
BUSINESS, Covol Fuels," Headwaters earns license fees from the owners of
facilities which use Headwaters' proprietary technology to produce solid
alternative fuel. This alternative fuel, when sold, is eligible for federal tax
credits under Section 29 of the Internal Revenue Code, currently through
December 31, 2007, subject to changes in laws or regulations. During 2003,

                                       18
<PAGE>

Headwaters recognized license fee revenue totaling $10.1 million, an increase of
$1.3 million or 15% over $8.8 million of license fee revenue recognized during
2002. License fees in 2003 consisted of recurring license fees or royalty
payments of $9.8 million and deferred revenue amortization of $0.3 million.
License fees in 2002 consisted of recurring license fees of $8.5 million and
deferred revenue amortization of $0.3 million. The increase in license fee
revenue in 2003 is largely attributable to one licensee that significantly
increased its production of alternative fuel. This same licensee significantly
decreased its production of alternative fuel in June 2003 and it is not
currently known at what levels it will operate its facilities during the
September 2003 quarter and beyond. Headwaters recognized approximately $2.0
million of license fee revenue from this licensee during the June 2003 quarter
(See "IRS Announcement" in Note 10 to the consolidated financial statements).

         Pursuant to the contractual terms of an agreement with a certain
licensee, the cumulative net license fees owed to Headwaters, totaling
approximately $10,000,000 as of June 30, 2003, have been placed in escrow for
the benefit of Headwaters. Headwaters currently expects the escrowed amounts to
increase as additional license fees are generated and that most, if not all, of
such amounts will be recognized as revenue at some future date. Certain
accounting rules governing revenue recognition require that the seller's price
to the buyer be "fixed or determinable" as well as reasonably certain of
collection. In this situation, those rules appear to currently preclude revenue
recognition. Accordingly, none of the escrowed amounts have been recognized as
revenue in the consolidated statements of income.

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

         Depreciation and Amortization. These costs increased by $3.1 million to
$3.4 million in 2003 from $0.3 million in 2002. The increase was primarily
attributable to depreciation and amortization of the tangible and intangible
assets related to the ISG acquisition. Depreciation and amortization expense in
subsequent quarters should be comparable to 2003, but will increase
substantially in fiscal 2003 over the respective 2002 periods as a result of the
ISG acquisition.

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

         Selling, General and Administrative Expenses. These expenses increased
$6.5 million or 167% to $10.4 million for 2003 from $3.9 million for 2002. The
increase in 2003 was due primarily to the inclusion of ISG's costs.

         Other Income and Expense. During 2003, Headwaters reported net other
expense of $4.2 million compared to net other income of $0.4 million during
2002. The change of $4.6 million is primarily attributable to an increase in
interest expense of $4.2 million, $0.7 million of which resulted from the early
repayments of debt principal which accelerated the amortization of debt discount
and debt issue costs related to the principal that was repaid. Interest expense
increased in 2003 due to the substantial increase in debt incurred in September
2002 to finance the acquisition of ISG. Interest expense will be significantly
higher in fiscal 2003 compared to the respective fiscal 2002 periods as a result
of this debt. Any future early repayments of debt principal will accelerate the
amortization of debt discount and debt issue costs.

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

Nine Months Ended June 30, 2003 Compared to Nine Months Ended June 30, 2002

         The information set forth below compares Headwaters' operating results
for the nine months ended June 30, 2003 ("2003") with operating results for the
nine months ended June 30, 2002 ("2002").

         Revenue. Total revenue for 2003 increased by $205.6 million or 272% to
$281.2 million as compared to $75.6 million for 2002. The major components of
revenue are discussed in the sections below.

         Chemical Reagent Sales. Chemical reagent sales during 2003 were $98.1
million with a corresponding direct cost of $66.1 million. Chemical reagent
sales during 2002 were $49.5 million with a corresponding direct cost of $33.7
million. The increase in chemical reagent sales during 2003 was due to increased
alternative fuel production by Headwaters' licensees, as well as sales of
chemical reagents to new customers.

         License Fees. During 2003, Headwaters recognized license fee revenue
totaling $27.8 million, an increase of $6.5 million or 31% over $21.3 million of
license fee revenue recognized during 2002. License fees in 2003 consisted of
recurring license fees or royalty payments of $26.9 million and deferred revenue
amortization of $0.9 million. License fees in 2002 consisted of recurring
license fees of $20.1 million and deferred revenue amortization of $1.2 million.
There were two primary reasons for the increase in license fee revenue in 2003
compared to 2002. A major licensee that purchased four facilities from a former

                                       19
<PAGE>

licensee in October 2001 did not begin operating those facilities until early
calendar 2002. Headwaters earned approximately $8.6 million in license fees from
this licensee in 2003 and $4.2 million in 2002. Also, another licensee
significantly increased its production of alternative fuel in 2003. This same
licensee significantly decreased its production of alternative fuel in June 2003
and it is not currently known at what levels it will operate its facilities
during the September 2003 quarter and beyond. Headwaters has recognized $5.0
million of revenue from this licensee in 2003.

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

         Depreciation and Amortization. These costs increased by $8.7 million to
$9.7 million in 2003 from $1.0 million in 2002. The increase was primarily
attributable to depreciation and amortization of the tangible and intangible
assets related to the ISG acquisition.

         Research and Development. Research and development expenses increased
by $1.5 million to $3.2 million in 2003 from $1.7 million in 2002. The increase
was primarily attributable to the inclusion of additional costs relating to
ISG's research and development activities. In 2002, research and development
expenses primarily represent costs related to HTI's activities.

         Selling, General and Administrative Expenses. These expenses increased
$20.9 million or 222% to $30.3 million for 2003 from $9.4 million for 2002. The
increase in 2003 was due primarily to the inclusion of ISG's costs, and to a
lesser extent, an increase in professional services expenses of approximately
$1.1 million related to legal actions Headwaters is currently pursuing.

         Other Income and Expense. During 2003, Headwaters reported net other
expense of $14.2 million compared to net other income of $2.4 million during
2002. The change of $16.6 million is primarily attributable to an increase in
interest expense of $12.2 million, gains in 2002 for $1.3 million related to the
sale of an interest in an alternative fuel facility and $0.8 million related to
the collection of a note receivable that had previously been written off, and a
$2.1 million write-down of a note receivable in 2003.

         Interest expense increased in 2003 due to the substantial increase in
debt incurred in September 2002 to finance the acquisition of ISG. Interest
expense in 2003 also includes $1.1 million related to accelerated amortization
of debt discount and debt issue costs associated with $19.0 million of early
repayments of senior debt principal.

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

Liquidity and Capital Resources

         Net cash provided by operations during the nine months ended June 30,
2003 ("2003") was $41.2 million compared to $0.8 million of net cash provided by
operations during the nine months ended June 30, 2002 ("2002"). Most of the
positive cash flow from operating activities in both periods was attributable to
net income; however in 2002, due to large cash expenditures for short-term
investments ($18.8 million) and the significant growth in Headwaters' business,
operating activities resulted in a low amount of net cash inflow. During 2003,
investing activities consisted primarily of payments for the purchase of
property, plant and equipment. Investing activities in 2002 consisted primarily
of the collection of a $6.5 million note receivable and an increase in other
assets, primarily costs associated with potential acquisitions and related
projects. Financing activities in both 2003 and 2002 consisted primarily of
repayments of long-term debt and short-term borrowings, proceeds from exercise
of options and warrants and employee stock purchases. More details about these
activities are provided in the following paragraphs.

         Operating Activities. Cash provided from operations in 2003 of $41.2
million primarily resulted from net income of $25.4 million plus depreciation
and amortization of $9.7 million.

         Investing Activities. In 2003, payments for the purchase of property,
plant and equipment totaled $6.3 million. These capital expenditures primarily
related to ISG's business, in particular the CCP segment. Capital expenditures
are currently expected to total approximately $10.0 million in fiscal 2003.

         In September 2001, Headwaters sold all of its remaining high-risk
investments in exchange for a $4.0 million note receivable from a limited
liability corporation. This note is due no later than September 2004, is
collateralized by the bridge loans and equity investments sold and is being
accounted for on the cost recovery method. In March 2003, Headwaters recorded a
$2.1 million write-down of this note and as of June 30, 2003, this note has a
carrying value of $0.5 million. Headwaters could incur additional losses if the
remaining balance on the note is not repaid. At September 30, 2001, Headwaters
had outstanding one other note receivable in the amount of $6.5 million. This
note and the related accrued interest were collected in October 2001. Also in
2002, Headwaters capitalized over $3.0 million of costs associated with
potential acquisitions and related projects.

                                       20
<PAGE>

         Financing Activities. Headwaters acquired ISG in September 2002. In
order to obtain the cash necessary to acquire ISG and retire ISG's debt,
Headwaters issued $175.0 million of new debt consisting of $155.0 million of
senior secured debt and $20.0 million of subordinated debt (see Note 6 to the
consolidated financial statements). During 2003, principal repayments of the
senior debt totaling $30.3 million were made, which included $19.0 million of
optional early repayments. When optional prepayments are made, required
principal repayments for all future periods are reduced. Currently, the
remaining required fiscal 2003 principal repayment is $3.4 million. Headwaters
may, in the future, make additional optional early repayments of the senior debt
depending on actual cash flows, Headwaters' current and expected cash
requirements and other factors deemed significant by management.

         In 2003, cash proceeds from employee stock purchases and from the
exercise of options and warrants totaled $2.1 million, compared to $5.4 million
in 2002. Option and warrant exercise activity is largely dependent on
Headwaters' stock price and is not predictable. To the extent non-qualified
stock options are exercised, or there are disqualifying dispositions of shares
obtained upon the exercise of incentive stock options, Headwaters receives a tax
benefit generally equal to the income recognized by the optionee. Such amounts,
reflected in cash flows from operations in the consolidated statements of cash
flows, were $2.7 million in 2002 and $1.7 million in 2003.

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

         In July 2002, Headwaters filed a $250.0 million universal shelf
registration statement with the SEC that can be used for the sale of common
stock, preferred stock, convertible debt and other securities, should Headwaters
so choose. The SEC declared this registration statement effective in August
2002. In July 2003, Headwaters filed an amendment to the registration statement
for the purpose of deregistering $100.0 million of the originally registered
securities, thereby decreasing the maximum amount of securities that can be sold
thereunder to $150.0 million. A prospectus supplement describing the terms of
any securities to be issued is required to be filed before any offering would
commence under the shelf registration. The most likely use of proceeds from
securities offered under the shelf registration would be to reduce long-term
debt; however, proceeds could also be used for working capital and other general
corporate purposes.

         Working Capital. Headwaters' working capital decreased by $1.7 million
from September 30, 2002, to $13.3 million as of June 30, 2003. The most
significant change in the components of working capital was an increase of $8.1
million in the current portion of long-term debt, reflecting senior debt
repayment obligations which are higher for fiscal 2004 than for fiscal 2003.
Headwaters expects operations to produce positive cash flows in future periods,
which, combined with current working capital and the $20.0 million revolving
line of credit described below, is expected to be sufficient for operating needs
for the next 12 months.

         Long-term Debt. In connection with the ISG acquisition, Headwaters
entered into a $175.0 million senior secured credit agreement with a syndication
of lenders, under which a total of $155.0 million was borrowed on the
acquisition date. The credit agreement also allows up to $20.0 million to be
borrowed under a revolving credit arrangement. The debt is secured by all assets
of Headwaters, bears interest at a variable rate (approximately 5.6% at June 30,
2003), and is repayable in quarterly installments through August 2007. Future
required principal repayments for all future periods currently total
approximately $3.4 million for the remainder of fiscal 2003, approximately $27.0
million in fiscal years 2004, 2005, and 2006, and approximately $40.4 million in
fiscal 2007. In certain situations, for example when Headwaters receives "excess
cash flow," as defined, mandatory prepayments, in excess of the scheduled
payments, are required. Mandatory prepayments are calculated as a percentage of
"excess cash flow," ranging up to 100%, which percentage is based on Headwaters'
"leverage ratio."

         The credit agreement contains restrictions and covenants common to such
agreements, including limitations on the incurrence of additional debt,
investments, merger and acquisition activity, asset liens, capital expenditures
in excess of $15.0 million in any fiscal year, and the payment of dividends,
among others. In addition, Headwaters must maintain certain financial ratios,
including leverage ratios and interest coverage, as those terms are defined in
the credit agreement. As of June 30, 2003, Headwaters must maintain a total
leverage ratio of 2.5:1.0 or less. The maximum ratio declines over time until
June 2004, at which time the ratio must remain at 2.0:1.0 or less. There is a
similar leverage ratio requirement for the senior debt alone, which at June 30,
2003 must be 2.0:1.0 or less, declining over time through June 2004, at which
time it must be maintained at 1.5:1.0 or less. The interest coverage requirement
at June 30, 2003 was 4.0:1.0 or more and does not change until December 2003, at
which time the ratio must be maintained at a level of 5.0:1.0 or more.
Headwaters was in compliance with all debt covenants as of June 30, 2003.

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

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

         The loan agreement contains restrictions and covenants common to such
agreements, and these are generally consistent with those described above for
the senior secured debt. As of June 30, 2003, Headwaters must maintain a total
leverage ratio of 2.75:1.0 or less. The maximum ratio declines over time until
June 2004, at which time the ratio must remain at 2.25:1.0 or less. The interest

                                       21
<PAGE>

coverage requirement at June 30, 2003 was 3.75:1.0 or more and does not change
until December 2003, at which time the ratio must be maintained at a level of
4.75:1.0 or more. Headwaters was in compliance with all debt covenants as of
June 30, 2003.

         Income Taxes. In fiscal 2002, Headwaters' cash requirements for income
taxes were not significant due to the availability and utilization of net
operating loss carryforwards ("NOLs"). Although Headwaters currently has some
NOLs in certain states, remaining NOLs for federal tax purposes are not
material. Accordingly, Headwaters' cash requirements for income taxes in fiscal
2003 are expected to approximate the income tax provision, with some lag due to
the seasonality of operations and because estimated income tax payments are
typically based on annualizing the fiscal year's income based on year-to-date
results. In 2003, payments totaling approximately $12.1 million have been made.

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

IRS Announcement

         As more fully described in "IRS Announcement" in Note 10 to the
consolidated financial statements, the IRS is reviewing test procedures and
results regarding chemical change as it relates to the production of solid
alternative fuel under section 29 of the Internal Revenue Code. The ability to
generate and use tax credits by Headwaters' licensees is critical to their
continued alternative fuel production. Headwaters' license fee revenue and
chemical reagent sales have been negatively affected by one licensee's decision
to limit production until the IRS's position on chemical change is clarified and
rulings on that issue are again available. Headwaters cannot predict whether
other customers and licensees may elect to reduce or suspend production of
alternative fuel.

Recent Accounting Pronouncements

         In January 2003, Financial Accounting Interpretation No. 46,
"Consolidation of Variable Interest Entities," ("FIN No. 46") was issued. This
interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," addresses consolidation by business enterprises of variable
interest entities that have certain characteristics. FIN No. 46 was required to
be implemented by Headwaters immediately for any variable interests in variable
interest entities created after January 31, 2003, and no later than July 1, 2003
for any variable interests in variable interest entities created before February
1, 2003. Headwaters has reviewed this interpretation and 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 recent accounting pronouncements will have a
significant effect on its current or future financial position or results of
operations.


Forward-looking Statements

         Statements in this Quarterly Report on Form 10-Q regarding Headwaters'
expectations as to the managing and marketing of coal combustion products,
operation of facilities utilizing alternative fuel technologies, the marketing
of alternative fuels, the receipt of licensing fees, royalties, and product
sales revenues, the development, commercialization and financing of new
technologies and other strategic business opportunities and acquisitions and
other information about Headwaters that is not purely historical by nature,
including those statements regarding Headwaters' future business plans, the
operation of facilities, the availability of tax credits, the availability of
feedstocks, and the marketability of the coal combustion products and
alternative fuel, constitute forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Although Headwaters
believes that its expectations are based on reasonable assumptions within the
bounds of its knowledge of its business and operations, there can be no

                                       22
<PAGE>

assurance that actual results will not differ materially from its expectations.
In addition to matters affecting the coal combustion products and alternative
fuel industries or the economy generally, factors which could cause actual
results to differ from expectations stated in these forward-looking statements
include, among others, the following:

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

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Headwaters is exposed to financial market risks, primarily related to
changes in interest rates. Headwaters does not use derivative financial
instruments for speculative or trading purposes, and no significant derivative
financial instruments were outstanding as of June 30, 2003 or subsequent
thereto.

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

                                       23
<PAGE>

         As described in more detail in Note 6 to the unaudited consolidated
financial statements, Headwaters has outstanding $124.7 million of variable-rate
long-term debt as of June 30, 2003, which is repayable through August 2007. The
interest rate on this debt as of June 30, 2003 was approximately 5.6%, which
rate changed in July 2003 to approximately 5.5%. At that time, Headwaters locked
in a rate for three months. In October 2003, Headwaters can lock in a new rate
for one, three, or six months. A change in the interest rate of 1% would change
interest expense by approximately $1.2 million during the next 12 months,
considering required principal repayments.

ITEM 4.  CONTROLS AND PROCEDURES

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

         The evaluation of Headwaters' disclosure controls by the CEO and CFO
included a review of the controls' objectives and design, the operation of the
controls, and the effect of the controls on the information presented in this
Quarterly Report. Headwaters' management, including the CEO and CFO, does not
expect that disclosure controls can or will prevent or detect all errors and all
fraud, if any. A control system, no matter how well designed and operated, can
provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Also, projections of any evaluation of the disclosure
controls and procedures to future periods are subject to the risk that the
disclosure controls and procedures may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may
deteriorate.

         Based on their review and evaluation as of June 30, 2003, and subject
to the inherent limitations as described above, Headwaters' CEO and CFO have
concluded that Headwaters' disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are
effective. In addition, they are not aware of any change in Headwaters' internal
control over financial reporting during the quarter ended June 30, 2003 that has
materially affected, or is reasonably likely to materially affect, Headwaters'
internal control over financial reporting.


                          PART II -- OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

         See "Legal or Contractual Matters" in Note 10 to the consolidated
financial statements for a description of current legal proceedings.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

Recent Sales of Unregistered Securities

         During the quarter ended June 30, 2003, pursuant to the exercise of
options and warrants, approximately 104,000 shares of Headwaters restricted
common stock were issued. Headwaters has several outstanding effective
registration statements filed on Forms S-3 and Forms S-8. All of the shares of
restricted common stock issued during the quarter have been registered under one
of these registration statements.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

         None.

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

         None.

ITEM 5.  OTHER INFORMATION

         None.

                                       24
<PAGE>

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)      The following exhibits are included herein:

                  10.60.0  Amendment to Employment Agreement with         *
                           Kirk A. Benson dated July 9, 2003
                  12       Computation of ratio of earnings to            *
                           combined fixed charges and preferred
                           stock dividends
                  31       Section 302 Certification of Chief             *
                           Executive Officer
                  31.1     Section 302 Certification of Chief             *
                           Financial Officer
                  32       Section 906 Certifications of Chief            *
                           Executive Officer and Chief Financial
                           Officer
                  _______________________
                  *        Filed herewith.

         (b)      The following Form 8-K was furnished to the SEC during the
                  quarter ended June 30, 2003:

                  Form 8-K dated April 24, 2003 announcing Headwaters' results
                  for the quarter ended March 31, 2003.

                                       25
<PAGE>

                                   SIGNATURES


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

                                  HEADWATERS INCORPORATED

Date:  August 8, 2003             By: /s/ Kirk A. Benson
                                      ------------------------------------------
                                      Kirk A. Benson, Chief Executive Officer
                                      and Principal Executive Officer

Date: August 8, 2003              By: /s/ Steven G. Stewart
                                      ------------------------------------------
                                      Steven G. Stewart, Chief Financial Officer
                                      and Principal Financial Officer

                                       26