Document:

5 December 2006 

     Mr. Scott K. Sorensen
2135 Yuma Street
Salt Lake City, UT 84109 

Re:             Employment Agreement 

Dear Scott: 

I am pleased to offer you employment
as Chief Financial Officer of Headwaters Incorporated (“the Company”) on the
terms and conditions set forth in this letter agreement (this “Agreement”). You
may accept this Agreement by signing and returning a copy of this Agreement as provided
below. 

     1.    
          Term of Employment. Your employment commenced effective 1 October 2005
          (“Start Date”) and shall continue under this Agreement until 31 March
          2011, unless it is terminated earlier either by you or the Company or is
          extended by both you and the Company in a signed writing (“Separation
          Date”). Your employment under this Agreement is terminable at will by you
          or the Company at any time (for any reason or for no reason) subject to the
          provisions of Section 3. 

     2.    
          Position and Duties. During the term of this Agreement you shall report
          to the Chief Executive Officer of the Company. Your duties shall include the
          duties set forth in the bylaws of the Company for your position and as
          customarily performed by the CFO of Headwaters and any other duties the Board
          and the Chief Executive Officer of the Company may delegate to you from time to
          time. You will be expected to commit your attention and efforts to the position
          on a full-time basis. During the term of employment, you may serve on one
          corporate board and on one civic or charitable board or committee, as long as
          such activities do not materially conflict with the performance of your duties
          under this Agreement. This Agreement is personal to you and you may not assign
          or delegate any of your rights or obligations hereunder. 

     3.    
          Compensation and Benefits. In consideration for your services to the
          Company during the time period in which this Agreement is effective, you shall
          receive the following compensation and benefits: 

         (a)       
          Base Salary. The Company shall pay you an annual base salary at the rate
          of $297,254 per year to be paid in installments according to the Company’s
          regular payroll policy. Thereafter, your salary will be reviewed on an annual
          basis, and may be increased at the discretion of the Company. The Company shall
          withhold and deduct all applicable federal and state income and employment and
          disability taxes from your base salary as required by applicable laws. 

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         (b)       
          Annual Incentive Opportunity. You shall be eligible to participate in any
          bonus plan which the Company may maintain or establish for its executives on the
          terms of such plan and the awards thereunder. Currently, the Company maintains a
          Short Term Incentive Bonus Plan (“STIB Plan”) and you will be eligible
          to participate in the STIB Plan effective 1 October 2005 with a Bonus Percent
          (as defined in the STIB Plan) of no less than 40 percent. In addition, the
          Company also maintains a Long-Term Incentive Cash Bonus Plan and you are
          eligible to participate in that plan. 

         (c)       
          Restricted Stock Grant. As of a date established by the Compensation
          Committee, Headwaters shall grant you 30,000 shares of restricted Headwaters
          common stock (the “Restricted Stock”) under a stock incentive plan of
          the Company. The Restricted Stock grant will be governed by the terms of the
          stock incentive plan and Headwaters’ usual form of restricted stock award
          agreement. 

	(i)  	  	The
Restricted Stock will vest subject to both service and stock price
                    performance vesting conditions, as follows: First, each March 31st,
                    beginning with 31 March 2007, one-fifth (6,000 shares) will become
eligible for                     vesting, until all shares are eligible for vesting on 31
March 2011. Second, the                     shares eligible for vesting as of each March
31st  shall vest                     provided that the market closing price
for Headwaters common stock on the                     applicable March 31 date is at or
above the sum of $25 plus the product of $5                     multiplied times the
number of years since 31 March 2006. For example, the                     vesting price
on 31 March 2008 for the second 6,000 shares shall be $35. Any                     shares
that are eligible for vesting but which fail to vest because of an
                    inadequate market closing price on the applicable March 31 date shall
continue                     to be eligible for vesting and shall vest on the next March
31 date where the                     applicable stock price for vesting is achieved,
provided that any shares of                     Restricted Stock that have failed to
fully vest by 31 March 2016 shall be                     forfeited. For example, the
vesting price on 31 March 2008 for the second 6,000                     shares is $35; if
the closing market price of Headwaters common stock on 31                     March 2008
is $34, the second 6000 shares will not become vested but may become
                    vested if the closing market price is $35 on 31 March 2009. All
vesting of the                     Restricted Stock shall be subject to continuous
employment with the Company.  

	(ii)  	  	Notwithstanding
any vesting acceleration provision in this Agreement or any                     other
agreement between you and the Company, the stock price performance vesting
                    condition above will not be deemed satisfied unless the Headwaters
closing stock                     price has reached or exceeded the stock price target
for the shares in question                     on any market closing date on or before
the acceleration date.  

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	(iii)  	  	The
Restricted Stock will be released to you from an escrow account as you
                    become vested in the shares subject to the payment by you to
Headwaters of                     applicable taxes.  

         (d)       
           Future Stock Incentive Grants. You shall be eligible to
          participate in future stock incentive grants under such stock incentive plans
          which the Company may maintain or establish, on the terms of such plan and
          grants thereunder. 

         (e)       
          Section 401(k) Plan and Other Benefits. Beginning 1 October 2005 you
          became eligible to participate in the Company’s 401(k) Plan, subject to the
          terms of that plan. Subject to the terms of such other plans, you shall be
          eligible to receive such other benefits or rights as may be provided under any
          employee benefit plans provided by the Company to its executives that are now or
          hereafter will be in effect, including participation in life, medical,
          disability and dental insurance plans. The Company will provide you with a
          Company car through the term of this Agreement. 

         (f)       
          Vacation and Sick Leave. You shall be entitled to four weeks paid
          vacation plus sick leave on the same basis as all other executives of the
          Company in accordance with the terms and conditions of the Company’s
          vacation and sick leave policies. 

         (g)       
          Termination and Change in Control. 

		        (1)        Termination
for Cause, Termination for Other than Good Reason or Termination           Due to Death
or Disability. In the event that your employment with the           Company is
terminated by the Company for “Cause” (as defined below),           is
terminated by you for reasons other than “Good Reason” (as defined
          below), or is terminated due to your death or Disability, then you (or your
          estate, if applicable) shall be entitled to payment of your accrued but unpaid
          salary and vacation pay through the date of the termination of your employment.  

		        (2)        Termination
Without Cause or for Good Reason. In the event that your           employment is
terminated by the Company without Cause or is terminated by you           for a Good
Reason, then, provided that you execute an effective release in a           form to be
provided by the Company with terms substantially as set forth in the           attached
Exhibit A, you shall be entitled to:  

		              (A)        payment
of your accrued but unpaid salary and vacation pay through the date of           the
termination of your employment;  

		              (B)        the
continuation of your health insurance coverage for a 24 month period; and  

		              (C)        payment
of the product of two multiplied by the sum of:  

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		         (i)        your
annual base salary at the rate in effect as of your termination of           employment,
or, if higher, the highest rate in effect during the two-year period           prior to
the date of termination, and  

		         (ii)        the
highest amount of any additional cash incentive compensation, including any
          sums awarded under the Company’s STIB Plan (or any replacement or
successor           plans), awarded to you for either (but not both) of the two preceding
fiscal           years most recently ended.  

		              (D)        the
continued use for sixty days of the Company vehicle on similar terms;  

		              (E)        vesting
of any unvested Restricted Stock.  

		        (3)        Change
in Control. The Company has entered into a change in control           agreement with
you effective 30 September 2006, which agreement is incorporated           by reference.
In the event you become eligible to receive the severance payments           and benefits
under the change in control agreement, such as in the event your           employment
with the Company is terminated within the protection period prior to           and
following a “Change in Control” as defined in the change in           control
agreement, then any severance payments and benefits to be provided to           you by
the Company shall be made under the change in control agreement in lieu           of
severance payments and benefits under this Agreement, and the provisions of           the
change in control agreement pertaining to the your employment and
          post-termination covenants and arbitration as provided in the change in control
          agreement shall apply to you instead of the provisions herein pertaining to
your           employment and post-termination covenants and arbitration set forth in
Sections           4 and 8, respectively.  

		        (4)        Contingent
Delay in Payments. To the extent any payments under this           Section 3(g) are
deemed to be deferred compensation subject to the application           of Section 409A
of the Internal Revenue Code (the “Code”) and required           by Section
409A of the Code to be delayed by six months following the           termination of your
employment with the Company, then the time for such payments           shall be delayed
solely for such period as required to comply with the           requirements of Section
409A of the Code.  

    (h)        Definitions. 

        As
used in this Agreement, the following terms shall have the meanings set forth below: 

		        (1)        “Cause”shall
mean:  

		    (i)                        your
engaging in willful misconduct against the Company that is materially           injurious
to the Company; provided that any action undertaken with a reasonable           and good
faith belief that it is in the best interests of the Company shall not
          constitute willful misconduct for purposes of this clause (i).  

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		    (ii)                        your
engaging in any activity that is a conflict of interest or competitive with           the
Company;  

		    (iii)                       your
engaging in any act of fraud or dishonesty that is materially injurious to           the
Company or any of their subsidiaries or any material breach of federal or           state
securities or commodities laws or regulations;  

		    (iv)                       your
engaging in an act of assault or other acts of violence in the workplace;  

		    (v)                        your
harassment after the Start Date of this Agreement of any individual in the
          workplace based on age, gender or other protected status or class or violation
          of any policy of the Company regarding harassment (subject to a factual finding
          made by a court of law that you have in fact engaged in the above prohibited
          conduct); or  

		    (vi)                        your
conviction, guilty plea or plea of nolo contendre for any felony           crime.  

		        (2)        “Disability” shall
mean a disability as determined under           the Company’s long-term disability
plan that prevents you from performing           your duties under this Agreement (even
with a reasonable accommodation by the           Company) for a period of six months or
more.  

		        (3)        “Good
Reason”shall mean any one of the following           without your consent:  

		    (i)                        a
demotion or any action by the Company which results in diminution of your
          position, reporting relationship, authority, duties or responsibilities (other
          than changes permitted by this Agreement or any insubstantial action not taken
          in bad faith and which is promptly remedied by the Company upon notice by you);  

		    (ii)                        requirement
that you report to work more than 50 miles from the Company’s           existing
headquarters (not including normal business travel required of your           position);  

		    (iii)                        a
reduction in your base salary or benefits (unless, in the case of a reduction
          in benefits only, such reduction in benefits applies to all officers of the
          Company);  

		    (iv)                        a
material breach by the Company of its obligations hereunder which is not cured
          within thirty (30) days following written notice to the Board by you; or  

		    (v)                        any
failure by a successor to the Company to assume and agree to perform the           Company’s
obligations hereunder.

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		    (4)               “Service” shall
mean service to the Company or           any of their subsidiaries, other than as an
employee, such as a member of the           Board or a consultant.  

     4.    
          Employment and Post Termination Covenants.  By accepting the terms of
          this Agreement and as a condition for the termination payments and benefits you
          hereby agree to the following covenants in addition to any obligations you may
          have by law and make the following representations: 

         (a)       
          Confidentiality. You acknowledge that, in connection with your employment
          by the Company, you will have access to trade secrets of the Company and its
          subsidiaries and other information and materials which the Company desires to
          keep confidential, including customer lists, supplier lists, financial
          statements, business records and data, marketing and business plans, and
          information and materials relating to the Company’s services, products,
          methods of operation, key personnel, proprietary software and other proprietary
          intellectual property and information disclosed to the Company of third parties
          to which the Company owes a duty of nondisclosure (collectively, the
          “Confidential Information”); provided, however, that Confidential
          Information does not include information which (i) is or becomes publicly known
          other than as a result of your actions in violation of this Agreement; (ii) is
          or becomes available to you from a source (other than the Company) that you
          reasonably believe is not prohibited from disclosing such information to you by
          a contractual or fiduciary obligation to the Company, (iii) has been made
          available by the Company, directly or indirectly, to a non-affiliated third
          party without obligation of confidentiality; (iv) you are obligated to produce
          as a result of a court order or pursuant to governmental action or proceeding,
          provided that you give the Company prompt written notice of such requirement
          prior to such disclosure and assistance in obtaining an order protecting such
          Confidential Information from public disclosure; or (v) business knowledge you
          have acquired unrelated to any specific proprietary information relating to the
          Company. You covenant and agree that, both during and after the term of your
          employment with the Company, you will keep secret all Confidential Information
          and will not disclose, reveal, divulge or otherwise make known any Confidential
          Information to any person (other than the Company or its employees or agents in
          the course of performing you duties hereunder) or use any Confidential
          Information for your own account or for the benefit of any other individual or
          entity, except with the prior written consent of the Company. 

         (b)       
          Ownership of Intellectual Property. You agree that all inventions,
          copyrightable material, software, formulas, trademarks, trade secrets and the
          like which are developed or conceived by you in the course of your employment by
          the Company or on the Company’s time or property (collectively, the
          “Intellectual Property”) shall be disclosed promptly to the Company
          and the Company shall own all right, title and interest in and to the
          Intellectual Property. The parties expressly agree that any and all of the
          Intellectual Property developed by the Employee shall be considered works
          made-for-hire for the Company pursuant to the United States Copyright Act of
          1976, as amended from time to time. In order to ensure that the Company shall
          own all right, title and interest in and to the Intellectual Property in the
          event that any of the Intellectual Property is not deemed a work made-for-hire
          (as defined in the Copyright Act of 1976) and in any other event, you hereby
          sell and assign all right, title and interest in and to all such Intellectual
          Property to the Company, and you covenant and agree to affix to the Intellectual
          Property appropriate legends and copyright notices indicating the Company’s
          ownership of all Intellectual Property and all underlying documentation to the
          extent reasonably appropriate, and shall execute such instruments of transfer,
          assignment, conveyance or confirmation as the Company reasonably considers
          necessary to transfer, confirm, vest, perfect, maintain or defend the
          Company’s right, title and interest in and to the Intellectual Property
          throughout the world. Your obligation under this Section 4(b) to assign to the
          Company inventions created or conceived by you shall not apply to an invention
          that you developed entirely on your own time without using the Company’s
          equipment, supplies, facilities, or trade secret information, provided that
          those inventions (i) do not or did not relate directly, at the time of
          conception or reduction to practice of the invention, to the Company’s
          business as conducted at such time or actual or demonstrably anticipated
          research or development of the Company; and (ii) do not or did not result from
          any work performed by you for the Company. 

Page 7

         (c)       
          Non-Solicitation. You agree for a period of not less than twenty four
          (24) months following termination of your employment or service (whichever is
          later) with the Company that you shall not solicit the services or employment or
          engage the services or employ any of the employees of the Company or its
          affiliated companies. 

         (d)       
          Non-Competition. For a period of 24 months following the termination of
          your employment or service with the Company, you agree not to compete directly
          or indirectly by becoming a principal, partner, shareholder, equity holder,
          limited liability company member, agent, officer, other employee, advisor,
          consultant, member of a board of directors, or by becoming interested in any
          other capacity, with any business that competes with any activity of the Company
          or its affiliates conducted at any time during the two years prior to
          termination, or conducted during the six months period following the
          termination, as a result of plans initiated prior to such termination, including
          acquisitions. 

         (e)       
          Authorization to Work for the Company. You represent that you are legally
          authorized to work in the United States and that your employment with the
          Company shall not constitute a violation of any contractual or other legal
          obligation you may have to another entity or employer. 

         (f)       
          Breach of Terms of Section 4. The parties to this Agreement agree that
          (i) if you breach the provisions set forth in Sections 4, 6 and 8 of this
          Agreement, the damage to the Company may be substantial, although difficult to
          ascertain, and money damages will not afford the Company an adequate remedy, and
          (ii) if you are in breach of any provisions of Sections 4 and 6 of this
          Agreement or threaten a breach of any provision of Sections 4 and 6 of this
          Agreement, the Company shall be entitled, in additional to all other rights and
          remedies as may be provided by law, to seek specific performance and injunctive
          and other equitable relief to prevent or restrain a breach of any provision of
          this Sections 4 and 6 of this Agreement. 

Page 8

     5.    
          Business Expenses. You shall be entitled to reimbursement by the Company
          for such customary, ordinary and necessary business expenses as are incurred by
          you in the performance of your duties and activities associated with promoting
          or maintaining the business of the Company. All expenses as described in this
          paragraph shall be reimbursed only upon presentation by you of such
          documentation as may be reasonably necessary to substantiate that all such
          expenses were incurred in the performance of your duties in accordance with the
          Company’s policies. 

     6.    
          Return of Company Property. On the Separation Date or as earlier
          requested by the Company, you agree to return to the Company all Company
          documents (and all copies thereof) and other Company property in your possession
          or control, including, but not limited to, Company files, correspondence, memos,
          notebooks, notes, drawings, records, business plans and forecasts, financial
          information, specifications, computer-recorded information, tangible property
          and equipment, credit cards, entry cards, identification badges and keys; and
          any materials of any kind that contain or embody any proprietary or confidential
          information of the Company (and all reproductions thereof in whole or in part)
          (collectively, the “Company Property”). You agree to conduct a good
          faith and diligent search of your belongings in advance of the aforementioned
          deadline to ensure your compliance with the provisions of this Section 6. 

     7.    
          Binding on Successors. This Agreement may be assigned by the Company to a
          successor by merger, acquisition, consolidation or otherwise to the business
          formerly carried on by the Company and shall be binding upon the Company and any
          entity which is a successor by merger, acquisition, consolidation or otherwise
          to the business formerly carried on by the Company, or an affiliate of any such
          entity, and becomes your employer by reason of (or as the direct result of) any
          direct or indirect sale or other disposition of the Company or substantially all
          of the assets of the business currently carried on by the Company, without
          regard to whether or not such person actively adopts this letter agreement. 

     8.    
          Arbitration. The parties agree that any future disputes between you and
          the Company under this Agreement including but not limited to disputes relating
          to the Release of Claims shall be resolved by binding arbitration, except where
          the law specifically forbids the use of arbitration as a final and binding
          remedy as provided below, except as provided in Section 8(g) below. 

         (a)       
          The complainant shall provide the other party a written statement of the claim.
          Such statement shall identify any supporting witnesses or documents and the
          relief requested. 

         (b)       
          The respondent shall furnish a statement of the relief, if any, that it is
          willing to provide, and identifying supporting witnesses or documents. If the
          matter is not resolved, the parties agree to submit their dispute to a
          non-binding mediation paid for by the Company, provided, however, that if the
          amount in dispute is $50,000 or less, this step may be waived at the election of
          either party. 

Page 9

         (c)       
          If the matter is not resolved, the parties agree that the dispute shall be
          resolved by binding arbitration pursuant to the commercial arbitration rules of
          the American Arbitration Association, including any provisions thereof
          pertaining to discovery. If the parties are not able to agree upon the selection
          of an arbitrator, an arbitrator shall be selected according to the applicable
          procedures established by the American Arbitration Association. 

         (d)       
          The arbitrator shall have the authority to determine whether the conduct
          complained of in Section 8(a) violates the complainant’s rights under
          this Agreement and, if so, to grant any relief authorized by law; subject to the
          provisions of Section 8(g) below. The arbitrator shall not have the authority to
          modify, change or refuse to enforce any lawful term of this Agreement and the
          Release of Claims. 

         (e)       
          The Company shall pay for the arbitrator’s fees, while each party shall pay
          its own attorneys’ fees. 

         (f)       
          Arbitration shall be the exclusive final remedy for any dispute between the
          parties under this Agreement and disputes involving claims for discrimination or
          harassment (such as claims under the Fair Employment and Housing Act, Title VII
          of the Civil Rights Act of 1964, the Americans with Disabilities Act, or the Age
          Discrimination in Employment Act), wrongful termination, breach of contract,
          breach of public policy, physical or mental harm or distress or any other
          disputes, and the parties agree that no dispute shall be submitted to
          arbitration where the complainant has not complied with the preliminary steps
          provided for in Sections 8(a) and (b) above. 

         (g)       
          The parties agree that the arbitration award shall be enforceable in any court
          having jurisdiction to enforce this Agreement and Release of Claims, so long as
          the arbitrator’s findings of fact are supported by substantial evidence on
          the whole and the arbitrator has not made errors of law; however, either party
          may bring an action in a court of competent jurisdiction, regarding or related
          to matters involving the Company’s confidential, proprietary or trade
          secret information, or regarding or related to inventions that you may claim to
          have developed prior to or after joining the Company, seeking preliminary
          injunctive relief in court to preserve the status quo or prevent irreparable
          injury before the matter can be heard in arbitration. 

         (h)       
          The arbitration shall be held at a location within Salt Lake City, Utah unless
          the parties mutually agree to a different location for the arbitration. 

         (i)        
          In the event that the Company wishes to contest or dispute a termination for
          Good Reason by you, it must give written notice of such dispute within the
          ninety (90) calendar day period after the date of your resignation. If you wish
          to contest or dispute a termination for Cause by the Company, or any failure to
          make payments claimed to be due hereunder, you must give written notice of such
          dispute within ninety (90) calendar days of receiving a Notice of Termination.
          You may, at either your or the Company’s option, be suspended from all
          duties during the pendency of such a contest or dispute. If you prevail in any
          such contest or dispute, the Company or its successor or assign shall thereupon
          be liable for the full amounts due under Section 3 as of the date of termination
          after adjustments for amounts already paid. 

Page 10

     9.    
          Indemnification. Effective as of 1 November, 2005, the Company entered
          into an indemnification agreement with you. 

10.   Miscellaneous. 

         (a)       
          This Agreement constitutes the complete, final and exclusive embodiment of the
          entire agreement between you and the Company with regard to the terms and
          conditions of your employment with the Company and your anticipated termination
          of employment. It is entered into without reliance on any promise or
          representation, written or oral, other than those expressly contained herein,
          and it supersedes any other such promises, warranties or representations and any
          other written or oral statements concerning your rights to any compensation,
          equity or benefits from the Company, its predecessors or successors in interest. 

         (b)       
          Subject to the mandatory arbitration provided in Section 8 above, jurisdiction
          and venue in any action to enforce any arbitration award or to enjoin any action
          that violates the terms of this Agreement shall be in the state and federal
          courts serving the locality of Salt Lake City, Utah. 

         (c)       
          This Agreement may not be modified or amended except in a writing signed by both
          you and a duly authorized officer of the Company. This Agreement shall bind the
          heirs, personal representatives, successors and assigns of both you and the
          Company, and inure to the benefit of both you and the Company, their heirs,
          successors and assigns. If any provision of this Agreement is determined to be
          invalid or unenforceable, in whole or in part, this determination shall not
          affect any other provision of this Agreement and the provision in question shall
          be modified by the court so as to be rendered enforceable in a manner consistent
          with the intent of the parties insofar as possible. Headings and subheadings in
          this Agreement are solely for convenience and do not constitute terms of this
          Agreement. 

         (d)       
          This Agreement may be signed in counterparts and the counterparts taken together
          shall constitute one agreement. Facsimile or photocopied signatures shall be
          deemed as effective as original signatures. 

         (e)       
          This Agreement shall be deemed to have been entered into and shall be construed
          and enforced in accordance with the laws of the State of Utah irrespective of
          any conflicts of law analysis. 

If this Agreement is acceptable to
you, please sign below and return the original, fully executed Agreement to Harlan M.
Hatfield, General Counsel. A copy of the Agreement is also being provided to you for your
records. 

Page 11

I look forward to your future
contributions to the Company. 

Sincerely, 

	HEADWATERS INCORPORATED
		AGREED AND ACCEPTED:

			
	/s/ Kirk A. Benson      

Kirk A. Benson          

Chief Executive Officer
		/s/ Scott K. Sorensen

 Scott K. Sorensen

 Date: December 5, 2006

Page 12

EXHIBIT A 

GENERAL RELEASE
LANGUAGE 

Executive agrees, for himself, his
spouse, heirs, executor or administrator, assigns, insurers, attorneys and other persons
or entities acting or purporting to act on his behalf (the “Executive’s
Parties”), to irrevocably and unconditionally release, acquit and forever discharge
the Company, its parent, affiliates, subsidiaries, directors, officers, employees,
shareholders, partners, agents, representatives, predecessors, successors, assigns,
insurers, attorneys, benefit plans sponsored by the Company and said plans’
fiduciaries, agents and trustees (the “Company’s Parties”), from any and
all actions, cause of action, suits, claims, obligations, liabilities, debts, demands,
contentions, damages, judgments, levies and executions of any kind, whether in law or in
equity, known or unknown, which the Executive’s Parties have, have had, or may in the
future claim to have against the Company’s Parties by reason of, arising out of,
related to, or resulting from Executive’s employment with the Company or the
termination thereof. This release specifically includes without limitation any claims
arising in tort or contract, any claim based on wrongful discharge, any claim based on
breach of contract, any claim arising under federal, state or local law prohibiting race,
sex, age, religion, national origin, handicap, disability or other forms of
discrimination, any claim arising under federal, state or local law concerning employment
practices, and any claim relating to compensation or benefits. This specifically includes,
without limitation, any claim which the Executive has or has had under Title VII of the
Civil Rights Act of 1964, as amended, the Age Discrimination in Employment Act, as
amended, the Americans With Disabilities Act, as amended, and the Employee Retirement
Income Security Act of 1974, as amended. It is understood and agreed that the waiver of
benefits and claims contained in this section does not include a waiver of the right to
payment of any vested, nonforfeitable benefits to which the Executive or a beneficiary of
the Executive may be entitled under the terms and provisions of any employee benefit plan
of the company which have accrued as of the separation date and does not include a waiver
of the right to benefits and payment of consideration to which Executive may be entitled
under this Agreement or any of the agreements contemplated hereby (including the
indemnification agreement and the stock option agreements). Executive acknowledges that he
is only entitled to the severance benefits and compensation set forth in this Agreement,
and that all other claims for any other benefits or compensation are hereby waived, except
those expressly stated in the preceding sentence. 

The Company agrees to irrevocably and
unconditionally release, acquit and forever discharge Executive from any and all actions,
cause of action, suits, claims, obligations, liabilities, debts, demands, contentions,
damages, judgments, levies and executions of any kind, whether in law or in equity, known
or unknown, which the Company has, has had, or may in the future claim to have against the
Executive, liability for which the Company would otherwise be obligated to indemnify the
Executive under Delaware law, the Certificate of Incorporation of the Company, the bylaws
of the Company, or the Executive’s indemnification agreement with the Company by
reason of, arising out of, related to, or resulting from Executive’s employment with
the Company or the termination thereof (the “Company’s Release”), provided
that (i) Executive shall have acted in good faith and in a manner that Executive
reasonably believed to be in or not opposed to the best interest of the Company, and shall
not have engaged in willful misconduct or breach of an agreement with the Company; and
(ii) the Company’s Release shall not extend to any acts or omissions of the Executive
for which the Company would be prohibited from indemnifying the Executive under Delaware
Law, the provisions of the Certificate of Incorporation, or the Bylaws of the Company then
in effect or which would excuse, negate, or invalidate the obligations of the insurer
under any director and officer liability policy procured by the Company and covering the
Executive.<PAGE>

                                                                 Exhibit 10.32

                                    [BANK OF AMERICA logo]
BANC OF AMERICA
SECURITIES ASIA LIMITED                             G.P.O. Box No. 799
A Subsidiary of Bank of America, N.A.               Hong Kong

                                                    Tel (852) 2847 6666

     To:   Smart Shirts Limited (the Company)

     For the attention of:   Lucinda Chan / David Ho

                                                                August 3, 2006

     Dear Sirs

     US$50,000,000 CREDIT AGREEMENT (THE AGREEMENT) DATED 21 DECEMBER 2005 FOR
     THE COMPANY WITH BANC OF AMERICA SECURITIES ASIA LIMITED AS FACILITY
     AGENT

     1.   BACKGROUND

     (a)  This letter is supplemental to and amends the Agreement.

     (b)  All the Lenders have consented to the amendments to the Agreement
          contemplated by this letter. Accordingly, pursuant to Clause 26.1
          (Amendments and waivers), we are authorised to execute this letter
          on behalf of the Finance Parties.

     2.   INTERPRETATION

     (a)  Capitalised terms defined in the Agreement have the same meaning
          when used in this letter.

     (b)  The provisions of clause 1.2 (Construction) of the Agreement apply
          to this letter as though they were set out in full in this letter
          except that references to the Agreement are to be construed as
          references to this letter.

     (c)  EFFECTIVE DATE means the date of this letter.

     3.   AMENDMENTS

     (a)  Subject to sub-paragraph (b) below, the Agreement will be amended
          from the Effective Date in accordance with sub-paragraph (c) below.

     (b)  The Agreement will not be amended by this letter unless the Facility
          Agent notifies the Company and the Lenders that it has received a
          copy of this letter countersigned by the Company and each of the
          Guarantors.

          The Facility Agent must give this notification as soon as reasonably
          practicable.

     (c)  The Agreement will be amended as follows:

          (i)     Clause 5.1(b) of the Agreement shall be deleted and replaced
                  with the following:

                  "Unless the Facility Agent otherwise agrees, the latest time
                  for receipt by the Facility Agent of a duly completed
                  Request is:

<PAGE>
<PAGE>

                                    [BANK OF AMERICA logo]
BANC OF AMERICA
SECURITIES ASIA LIMITED                             G.P.O. Box No. 799
A Subsidiary of Bank of America, N.A.               Hong Kong

                                                    Tel (852) 2847 6666

                  (i)      for a Term Loan, 10:00 a.m. one Business Day before
                           the Rate Fixing Day; and

                  (ii)     for a Revolving Credit Loan, 10:00 a.m. on the Rate
                           Fixing Day,

                  for the proposed borrowing";

          (ii)    Clause 5.2(c)(i) of the Agreement shall be deleted and
                  replaced with the following:

                  "(A) for a Term Loan, a minimum of US$5,000,000 and an
                  integral multiple of US$1,000,000 and (B) for a Revolving
                  Credit Loan, a minimum of US$500,000 and an integral
                  multiple of US$100,000; or";

          (iii)   Clause 9.2(c)(i) of the Agreement shall be deleted and
                  replaced with the following:

                  "one week, two weeks, or one, two or three month(s); or";

          (iv)    Clause 17.1(a)(ii) of the Agreement shall be deleted and
                  replaced with the following:

                  "in the case of KAL only:

                  (A)      its audited consolidated financial statements for
                           each year ended 31 December;

                  (B)      its unaudited consolidated financial statements for
                           each of its financial years; and

                  (C)      its unaudited consolidated financial statements for
                           each quarter of each of its financial years.";

          (v)     Clause 17.1(a)(iii) of this Agreement shall be deleted;

          (vi)    Clause 17.1 of this Agreement shall be amended by:

                  (A)      inserting in sub-paragraph (c), "signed by a
                           director of KAL" after "a reconciliation statement"
                           and before "reconciling such material
                           discrepancies"; and

                  (B)      inserting the following new sub-paragraph (d):

                           "For each unaudited consolidated financial
                           statements of KAL for any financial year, KAL must
                           deliver to the Facility Agent a reconciliation
                           statement signed by a director of KAL reconciling
                           all discrepancies and changes from those set out in
                           the audited consolidated financial statement for
                           the year ending the immediately preceding 31
                           December, and including all

                                      2

<PAGE>
<PAGE>

                                    [BANK OF AMERICA logo]
BANC OF AMERICA
SECURITIES ASIA LIMITED                             G.P.O. Box No. 799
A Subsidiary of Bank of America, N.A.               Hong Kong

                                                    Tel (852) 2847 6666

                           information required by the Facility Agent acting
                           reasonably, in form and substance satisfactory to
                           the Facility Agent acting reasonably.";

          (vii)   Clause 17.3(a) of the Agreement shall be amended by deleting
                  "(other than its unaudited annual consolidated financial
                  statements)"; and

          (viii)  Clause 18.4 of the Agreement shall be deleted and replaced
                  with the following:

                  "KAL must ensure that for each year ending on each of the
                  dates specified below, the ratio of Consolidated Funded Debt
                  to Consolidated EBITDA for that year must not exceed the
                  ratio set opposite that date. The required ratio of
                  Consolidated Funded Debt to Consolidated EBITDA shall be
                  complied with by KAL at all times during each such year but
                  shall only be calculated on each Calculation Date. However,
                  if KAL reasonably believes that, at any time between the
                  last Calculation Date and the next Calculation Date, it is
                  not in compliance with the required ratio, it will notify
                  the Facility Agent within 10 Business Days.

                 ---------------------------------------------------------------

                    YEAR ENDING ON                                RATIO
                 ---------------------------------------------------------------

                    31 December 2005                               3:1
                 ---------------------------------------------------------------

                    31 January 2006                                3:1
                 ---------------------------------------------------------------

                    31 December 2006                               3:1
                 ---------------------------------------------------------------

                    31 January 2007                                3:1
                 ---------------------------------------------------------------

                    31 December 2007 or thereafter                2.5:1
                 ---------------------------------------------------------------

                    31 January 2008 or thereafter                 2.5:1
                 ---------------------------------------------------------------

          (ix)    Clause 18.6 of the Agreement shall be deleted and replaced
                  with the following:

                  "(a)     KAL must ensure that Capital Expenditure during any
                           financial year of KAL or calendar year does not
                           exceed the Maximum Capex Amount.

                  (b)      If Capital Expenditure in a financial year of KAL
                           is less than the Maximum Capex Amount (such
                           difference being the UNUSED FINANCIAL YEAR CAPEX
                           AMOUNT), the Maximum Capex Amount applicable to the
                           next financial year of KAL will be increased by an
                           amount equal to the lower of (i) the Unused
                           Financial Year Capex Amount and (ii) US$10,000,000.

                  (c)      If Capital Expenditure in a calendar year is less
                           than the Maximum Capex Amount (such difference
                           being the UNUSED CALENDAR YEAR CAPEX AMOUNT), the
                           Maximum Capex Amount applicable to the next
                           calendar year

                                      3

<PAGE>
<PAGE>

                                    [BANK OF AMERICA logo]
BANC OF AMERICA
SECURITIES ASIA LIMITED                             G.P.O. Box No. 799
A Subsidiary of Bank of America, N.A.               Hong Kong

                                                    Tel (852) 2847 6666

                           will be increased by an amount equal to the lower
                           of (i) the Unused Calendar Year Capex Amount and
                           (ii) US$10,000,000.".

          (x)     Clause 19.14(b) of the Agreement shall be amended by:

                  (A)      adding "or" to the end of sub-clause (i);

                  (B)      replacing "; or" with "," in sub-clause (ii); and

                  (C)      deleting sub-clause (iii).

          (xi)    Paragraph 2(d) of Schedule 6 to the Agreement shall be
                  deleted and replaced with "[Capital Expenditure for the
                  [calendar year/financial year] ended [ ] was [ ]; and]".

4.   CONFIRMATION

     Each of the Company and the Guarantors agrees, acknowledges and confirms
     that, notwithstanding the amendments to the Agreement effected by this
     letter:

     (a)  its obligations, liabilities and covenants under each of the Finance
          Documents to which it is a party shall remain valid, binding and
          subsisting and enforceable against it; and

     (b)  the rights, powers and remedies of the Finance Parties under the
          Finance Documents to which it is a party shall remain in full force
          and effect.

     (c)  without limiting the generality of sub-paragraphs (a) and (b) above,
          the guarantee under the Agreement:

          (i)     shall extend to guarantee the prompt repayment of all
                  amounts outstanding from time to time under the Agreement,
                  as amended by this letter, and

          (ii)    shall not be in any way discharged, released, reduced,
                  diminished, prejudiced or otherwise adversely affected by
                  the execution of this letter and the transaction
                  contemplated by it.

5.   REPRESENTATIONS

     The Company confirms to each Finance Party that on the date of this
     letter and on the Effective Date the Repeating Representations set forth
     in clauses 16.2 to 16.16 of the Agreement would be true if references to
     the Agreement are construed as references to the Agreement as amended by
     this letter.

     Such Repeating Representations are applied to the circumstances existing
     at the time such Repeating Representations are made.

                                      4

<PAGE>
<PAGE>

                                    [BANK OF AMERICA logo]
BANC OF AMERICA
SECURITIES ASIA LIMITED                             G.P.O. Box No. 799
A Subsidiary of Bank of America, N.A.               Hong Kong

                                                    Tel (852) 2847 6666

6.   MISCELLANEOUS

(a)  This letter is a Finance Document.

(b)  Subject to the terms of this letter, the Agreement will remain in full
     force and effect and the Agreement and this letter will be read and
     construed as one document.

(c)  This letter may be executed in any number of counterparts. This has the
     same effect as if the signature on the counterparts were on a single copy
     of this letter.

7.   GOVERNING LAW

     This letter is governed by Hong Kong law.

/s/ Susana Yen
---------------
Susana Yen
For
Banc of America Securities Asia Limited
as Facility Agent

We agree with the terms of this letter.

/s/ Jesse Zee                               /s/ Jesse Zee
-------------------                         --------------------
Jesse Zee                                   Jesse Zee

/s/ Gerald K. Rhoads                        /s/ Gerald K. Rhoads
---------------------                       ---------------------
Gerald K. Rhoads                            Gerald K. Rhoads

/s/ W. Lee Capps III                        /s/ W. Lee Capps III
---------------------                       ---------------------
W. Lee Capps III                            W. Lee Capps III

For                                         For
Smart Shirts Limited                        Kellwood Asia Limited
as the Company                              as Guarantor

Date:                                       Date:

/s/ Jesse Zee
-------------------
Jesse Zee

/s/ Gerald K. Rhoads
---------------------
Gerald K. Rhoads

/s/ W. Lee Capps III
---------------------
W. Lee Capps III

For
Smart Shirts Manufacturers, Limited
as Guarantor

Date:

                                      5

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