SCHEDULE 14A

INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934

[X] Filed by the Registrant
[ ] Filed by a Party other than the Registrant

Check the appropriate box:

[ ] Preliminary Proxy Statement
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12

HEADWATERS INCORPORATED
-----------------------------------------------
(Name of Registrant as Specified in Its Charter)

-----------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

(1) Title of each class of securities to which transaction applies:
____________________________________________________________________________

(2) Aggregate number of securities to which transaction applies:
____________________________________________________________________________

(3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
____________________________________________________________________________

(4) Proposed maximum aggregate value of transaction:
____________________________________________________________________________

(5) Total fee paid:
____________________________________________________________________________

[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:_________________________________________________
(2) Form, Schedule or Registration Statement No.:___________________________
(3) Filing Party:___________________________________________________________
(4) Date Filed:_____________________________________________________________

HEADWATERS INCORPORATED
11778 South Election Road, Suite 210
Draper, Utah 84020

January 28, 2002

Dear Stockholder:

You are cordially invited to attend the Annual Meeting of Stockholders
of Headwaters Incorporated, which will be held on Friday, March 15, 2002, at
2:00 p.m., Mountain Standard Time, at the Country Inn & Suites, 10499 South
Jordan Gateway, South Jordan, UT 84095. In addition to the matters to be acted
upon at the meeting, which are described in the attached Notice of Annual
Meeting of Stockholders and Proxy Statement, there will be a report with respect
to the current status of Headwaters' operations and an opportunity for
stockholders to ask questions.

Whether or not you plan to attend the meeting, please complete, date,
sign and return the enclosed proxy card or voting instruction form in the
accompanying envelope as promptly as possible to ensure that your shares are
represented and voted in accordance with your wishes.

The Proxy Statement contains a more extensive discussion of each
proposal and therefore you should read the Proxy Statement carefully. After you
have read the Proxy Statement and accompanying instructions, you should execute
and return the enclosed form of proxy card or voting instructions with respect
to the proposed matters. THE BOARD OF DIRECTORS RECOMMENDS THAT YOU APPROVE ALL
PROPOSALS.

Only stockholders of record at the close of business on January 18,
2002 are entitled to vote at the meeting. Stockholders are cordially invited to
attend the meeting in person. However, to assure your representation at the
meeting, please complete, date and sign the enclosed proxy card and return it
promptly. If you choose, you may still vote in person at the meeting even though
you previously submitted a proxy card.

If you have any questions after reading the Proxy Statement and other
materials we have sent, please call Sharon Madden, Headwaters' Director of
Investor Relations, at 1-800-316-6214.

Sincerely,

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

THE BOARD ENCOURAGES STOCKHOLDERS TO ATTEND THE MEETING IN PERSON. WHETHER OR
NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE URGED TO COMPLETE, DATE, SIGN AND
RETURN THE ENCLOSED PROXY PROMPTLY IN THE ACCOMPANYING ENVELOPE. STOCKHOLDERS
WHO ATTEND THE MEETING MAY VOTE THEIR SHARES PERSONALLY EVEN THOUGH THEY HAVE
SENT THEIR PROXIES.

HEADWATERS INCORPORATED
11778 South Election Road, Suite 210
Draper, Utah 84020

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

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON FRIDAY, MARCH 15, 2002

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

To the Stockholders of Headwaters Incorporated:

The 2002 Annual Meeting of Stockholders (the "Meeting") of Headwaters
Incorporated, a Delaware corporation ("Headwaters"), will be held on Friday,
March 15, 2002, starting at 2:00 p.m., Mountain Standard Time, at the Country
Inn & Suites, 10499 South Jordan Gateway, South Jordan, UT 84095, for the
following purposes:

1. To elect three Class II directors of Headwaters to serve until
the 2005 annual meeting, one Class III director to serve until
the 2003 annual meeting, or until their successors are duly
elected and qualified, and also, pursuant to a contractual
obligation connected with the acquisition of Hydrocarbon
Technologies, Inc. ("HTI") by Headwaters, one additional Class
I director to serve a contractual term ending March 31, 2004
and one additional Class III director to serve a contractual
term ending March 31, 2003;
2. To ratify the selection by the Board of Directors of Arthur
Andersen LLP as independent auditors of Headwaters for the
fiscal year ending September 30, 2002;
3. To approve a new stock incentive plan which was approved by
Headwaters' Board of Directors in November 2001 and which
authorizes a minimum of 2,000,000 shares available for grant
thereunder; and
4. To transact such other business as may properly come before
the Meeting and any and all adjournments or postponements
thereof.

The Board has fixed the close of business on Friday, January 18, 2002
as the record date for determining the stockholders entitled to notice of, and
to vote at, the Meeting. Only stockholders of record as of the record date are
entitled to notice of, and to vote at, the Meeting and any adjournments or
postponements thereof. A copy of Headwaters' Proxy Statement and a proxy card
accompany this notice. These materials will be first sent to stockholders on or
about January 31, 2002.

Stockholders are cordially invited to attend the Meeting in person.
However, to assure your representation at the Meeting, please complete, date and
sign the enclosed proxy card and return it promptly. If you choose, you may
still vote in person at the Meeting even though you previously submitted a proxy
card.

By Order of the Board of Directors,

/s/ Harlan M. Hatfield
Harlan M. Hatfield
Secretary
Draper, Utah
January 28, 2002

Your vote is important.

You are urged to date, sign and promptly return your proxy card so that your
shares may be voted in accordance with your wishes and that the presence of a
quorum may be assured. The prompt return of your signed proxy card, regardless
of the number of shares you hold, will aid Headwaters in avoiding the expense of
additional proxy solicitations. Giving your proxy does not affect your right to
vote in person at the meeting or your right to resubmit later dated proxy cards.

HEADWATERS INCORPORATED
11778 South Election Road, Suite 210
Draper, Utah 84020

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

PROXY STATEMENT
Annual Meeting of Stockholders
To Be Held on Friday, March 15, 2002

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GENERAL INFORMATION

This Proxy Statement is being furnished to the stockholders of
Headwaters Incorporated ("Headwaters"), in connection with the solicitation of
proxies on behalf of the Board of Directors of Headwaters (the "Board") for use
at Headwaters' Annual Meeting of Stockholders and any and all adjournments or
continuations thereof (the "Meeting"), to be held Friday, March 15, 2002,
starting at 2:00 p.m., Mountain Standard Time, at the Country Inn & Suites,
10499 South Jordan Gateway, South Jordan, UT 84095, for the purposes set forth
in the accompanying Notice of Annual Meeting of Stockholders (the "Notice").
These materials will be first mailed to stockholders on or about January 31,
2002.

PURPOSE OF ANNUAL MEETING

At the Meeting, stockholders will be asked: (i) to elect three Class II
directors of Headwaters to serve until the 2005 annual meeting, one Class III
director to serve until the 2003 annual meeting, or until their successors are
duly elected and qualified, and also, pursuant to a contractual obligation
connected with the acquisition of HTI by Headwaters, one additional Class I
director to serve a contractual term ending March 31, 2004 and one additional
Class III director to serve a contractual term ending March 31, 2003; (ii) to
ratify the selection by the Board of Arthur Andersen LLP as independent auditors
of Headwaters for the fiscal year ending September 30, 2002; (iii) to approve a
new stock incentive plan which was approved by Headwaters' Board of Directors in
November 2001 and which authorizes a minimum of 2,000,000 shares available for
grant thereunder; and (iv) to transact such other business as may properly come
before the Meeting and any and all adjournments or postponements thereof.

Headwaters' Common Stock, $.001 par value (the "Common Stock"), will be
entitled to vote at the Meeting. If a quorum exists, action on items (ii) and
(iii) above will be approved by affirmative vote of the holders of a majority of
the shares of Common Stock present or represented by proxy at the Meeting and
entitled to vote on such matters. Directors are elected by a plurality of the
shares of Common Stock represented at the Meeting. The Board recommends a vote
"FOR" each of the proposals. The Board knows of no other matters which are
likely to be brought before the Meeting. If any other matters properly come
before the Meeting, however, the person named in the enclosed proxy, or his duly
constituted substitute acting at the Meeting, will be authorized to vote or
otherwise act thereon in accordance with his judgment on such matters. If the
enclosed proxy is properly executed and returned prior to voting at the Meeting,
the shares represented thereby will be voted in accordance with the instructions
marked thereon. In the absence of instructions, executed proxies will be voted
"FOR" the items listed in the Notice.

QUORUM, VOTING RIGHTS AND OTHER MATTERS

The presence, in person or by proxy, of the holders of a majority of
the Common Stock is necessary to constitute a quorum at the Meeting. Only
stockholders of record at the close of business on Friday, January 18, 2002 (the
"Record Date"), will be entitled to notice of, and to vote at, the Meeting. As
of the Record Date, there were 24,373,484 shares of Common Stock outstanding.
Holders of Common Stock as of the Record Date are entitled to one vote for each
share held for each of the proposals.

All shares of Common Stock represented by properly executed proxies
will, unless such proxies have previously been revoked, be voted in accordance
with the instructions indicated in such proxies. If no such instructions are
indicated, such shares will be voted in favor of (i.e., "FOR") the items listed
in the Notice. Abstentions and broker non-votes will be counted as shares
present for quorum purposes and will have no effect on the outcome of the

election of directors. Broker non-votes will not affect the outcome of Proposals
2 and 3. Abstentions will have the effect of a vote against Proposals 2 and 3.

Broker non-votes result from stockholders who own stock through a
brokerage account failing to properly instruct their broker how to vote their
shares. A broker may be allowed to vote on Proposals 1, 2 and 3 without specific
stockholder instructions. Headwaters urges every stockholder to vote (by proxy
or in person) at the Meeting.

Any stockholder executing a proxy has the power to revoke such proxy at
any time prior to its exercise. A proxy may be revoked prior to exercise by (i)
filing with Headwaters a written revocation of the proxy, (ii) appearing at the
Meeting and casting a vote contrary to that indicated on the proxy, or (iii)
submitting a duly executed proxy bearing a later date.

The cost of preparing, printing, assembling and mailing this Proxy
Statement and other material furnished to stockholders in connection with the
solicitation of proxies will be borne by Headwaters. In addition to the mail
solicitation of proxies, officers, directors, employees and agents of Headwaters
may solicit proxies by written communication, telephone, telegraph or personal
call. Such persons are to receive no special compensation for any solicitation
activities. Headwaters will reimburse banks, brokers and other persons holding
Common Stock in their names, or those of their nominees, for their expenses in
forwarding proxy solicitation materials to beneficial owners of Common Stock.

EXECUTIVE OFFICERS

The following table sets forth (i) the names of the executive officers,
(ii) their ages as of the Record Date and (iii) the capacities in which they
serve Headwaters:

Name Age Position(s) Officer Since
---- --- ----------- -------------
Kirk A. Benson 51 Chief Executive Officer 1999
and Chairman of the Board
Brent M. Cook 41 President and Director 1996
Steven G. Stewart 53 Chief Financial Officer 1998
Harlan M. Hatfield 41 Vice President, General Counsel 1998
and Secretary

See "Proposal No. 1 -- Election of Directors, Nominees for Election as
Directors" for biographical information regarding Messrs. Benson and Cook.

Steven G. Stewart was appointed Chief Financial Officer of Headwaters
in July 1998 and served as Vice President of Finance and Treasurer from April
1998 through July 1998. From October 1996 through March 1998, Mr. Stewart was a
business assurance partner at PricewaterhouseCoopers LLP (formerly Coopers &
Lybrand LLP), with primary responsibility for public companies operating in the
high technology, mining and extractive industries. From January 1994 through
September 1996, Mr. Stewart was self-employed and provided consulting and
accounting services to high technology companies, assisted in the negotiation
and establishment of strategic alliances, advised companies on alternative
valuation methods applicable to acquisition targets and negotiated
acquisition/sale transactions. Prior to 1994, Mr. Stewart was an audit partner
with Ernst & Young (formerly Arthur Young) and was the Salt Lake City office
Director of High Technology and Entrepreneurial Services. Mr. Stewart is a
Certified Public Accountant.

Harlan M. Hatfield has served as Corporate Counsel since October 1996,
as Vice President and General Counsel since July 1998, and as Secretary since
July 1999. His primary activities with Headwaters have been the development of
synthetic fuel projects, including licensing, financing, permitting,
construction, feedstocks, site selection, and other aspects of project
development. As General Counsel he oversees the legal staff and outside legal
counsel, litigation, regulatory disputes, contracts, and other legal matters.
Prior to his employment with Headwaters, he was in private practice at the
Seattle law firm of Oles, Morrison and Rinker for more than nine years where he
was a partner.

EXECUTIVE COMPENSATION AND RELATED INFORMATION

The following sets forth the compensation of Headwaters' Chief
Executive Officer and the other officers who were executive officers
(collectively "named executives") as of September 30, 2001 and whose total
annual salary and bonus exceeded $100,000 in fiscal 2001. The amounts shown
represent what was earned in the respective fiscal years.

SUMMARY COMPENSATION TABLE

- -------------------------------------------------------------------------------------------------------------------------
Long-Term Compensation
-----------------------------------
Annual Compensation Awards Payouts
------------------------------------------------------------------------
Restricted Securities
Other Annual Stock Underlying LTIP All Other
Name and Salary Bonus Compensation Awards Options Payouts Compensation
Principal Position Year ($) ($) ($) ($) (#)(3) ($) ($)
- -------------------------------------------------------------------------------------------------------------------------

Kirk A. Benson (1) 2001 250,000 590,424 6,600 - 50,000 - 2,625
Chief Executive Officer 2000 197,500 517,362 6,600 - 300,000 - 1,513
1999 80,000 - 13,142 - 250,000 - -
- -------------------------------------------------------------------------------------------------------------------------
Brent M. Cook (2) 2001 210,000 283,848 53,120 - 35,000 - 72,501(2)
President 2000 187,500 271,615 53,120 - 150,000 - 2,835
1999 180,000 - 52,845 - - - -
- -------------------------------------------------------------------------------------------------------------------------
Steven G. Stewart 2001 174,000 171,223 6,600 - 25,000 - 2,625
Chief Financial Officer 2000 149,907 150,035 6,600 - 100,000 - 1,413
1999 119,580 - 6,325 - 50,000 - -
- -------------------------------------------------------------------------------------------------------------------------
Harlan M. Hatfield Vice 2001 162,000 150,043 6,600 - 25,000 - 2,625
President 2000 130,500 139,688 1,925 - 75,000 - 1,428
1999 80,000 - - - - - -
- -----------------

(1) Mr. Benson was appointed Chairman and CEO in April 1999. The 1999
salary for Mr. Benson is for the period April 1999 through September
1999. Prior to his appointment as CEO, Mr. Benson was not an officer or
employee of Headwaters, but served as a director for which he earned
$10,667 of director fees. These director fees, along with $2,475 of
other compensation, are included in other annual compensation for 1999
in the above table.
(2) For Mr. Cook, $46,520 of other annual compensation in each year
presented represents compensation expense from the grant of options to
purchase Common Stock which had an exercise price at grant date below
market value. Compensation is recognized during the period the stock
options vest. Included in Mr. Cook's all other compensation is $68,351
representing payment for accrued personal time off which was earned
primarily in prior years.
(3) All option grants shown above were granted under the 1995 Stock Option
Plan.

Option Grants in Fiscal 2001

The following table sets forth certain information concerning options
to purchase Common Stock granted during fiscal 2001 to the executives named in
the Summary Compensation Table.

OPTION GRANTS IN FISCAL 2001
- -------------------------------------------------------------------------------------------------------------------
Number of
Securities % of Total
Underlying Options Granted
Options Granted to Employees in Exercise Expiration Grant Date Value
Name (#) 2001 (1) Price ($/Sh) (2) Date ($) (3)
- -------------------------------------------------------------------------------------------------------------------

Kirk A. Benson 50,000 12.6% 9.09 April 2011 259,247
Brent M. Cook 35,000 8.9% 9.09 April 2011 181,473
Steven G. Stewart 25,000 6.3% 9.09 April 2011 129,623
Harlan M. Hatfield 25,000 6.3% 9.09 April 2011 129,623
- ------------------

(1) Headwaters granted options for a total of 395,285 shares during fiscal
2001, including 144,285 options which were issued in exchange for
vested options of HTI, a subsidiary of Headwaters acquired in August
2001. The percentages reflected in the table above were computed based
on the total number of options granted or issued in fiscal 2001, or
395,285.
(2) The fair market value on the date of grant, determined by the closing
price of the Common Stock as reported by the Nasdaq Stock Market, was
$9.09 for all options.
(3) Determined using the Black-Scholes option valuation model.
(4) All of the options granted in fiscal 2001 vest ratably over three
years, beginning on the first year anniversary following the grant
date.

Aggregated Option Exercises in Fiscal 2001 and September 30, 2001 Option Values

The following table summarizes for the named executive officers of
Headwaters the number of stock options exercised during fiscal 2001, the
aggregate dollar value realized upon exercise, the total number of unexercised
options held at September 30, 2001 and the aggregate dollar value of
in-the-money unexercised options held at September 30, 2001. Value realized upon
exercise is the difference between the fair market value of the underlying stock
on the exercise date (based upon the average of the three prior days' closing
bid prices of Common Stock as reported by the Nasdaq Stock Market) and the
exercise price of the option. Options are in-the-money if the fair market value
of the underlying securities exceeds the exercise price of the option. The value
of unexercised, in-the-money options at September 30, 2001 is the aggregate
amount of the difference between their exercise price and $11.00 per share, the
fair market value of the underlying stock on September 30, 2001, based on the
closing price of the Common Stock on that date. The underlying options have not
been and may never be exercised. The actual gains, if any, on exercise will
depend on the value of the Common Stock on the actual date of exercise. There
can be no assurance that these values will be realized.

AGGREGATED OPTION EXERCISES IN FISCAL 2001 AND SEPTEMBER 30, 2001 OPTION VALUES

- -------------------------------------------------------------------------------------------------------------------
Shares Number of Securities Value of Unexercised
Acquired Value Underlying Unexercised In-the-Money Options at
on Exercise Realized Options at 9/30/01 (#) 9/30/01 ($)
Name (#) ($) Exercisable / Unexercisable Exercisable / Unexercisable
- -------------------------------------------------------------------------------------------------------------------

Kirk A. Benson 0 0 291,667 / 308,333 2,098,127 / 2,002,373
Brent M. Cook 56,270 350,918 294,563 / 221,667 1,058,248 / 924,038
Steven G. Stewart 34,164 397,878 68,337 / 122,499 202,786 / 607,844
Harlan M. Hatfield 0 0 122,502 / 92,498 483,297 / 381,329

Long-Term Incentive Plan ("LTIP") Awards in Fiscal 2001

Headwaters granted no LTIP awards in fiscal 2001.

Future Benefits of Pension Plan Disclosure in Fiscal 2001

Headwaters has no defined benefit pension plans.

Employee Benefit Plans

In addition to Headwaters' 1995 Stock Option Plan, in fiscal 2000, the
Board of Directors approved three employee benefit plans, the Headwaters
Incorporated 401(k) Profit Sharing Plan, the 2000 Employee Stock Purchase Plan,
and the Headwaters Incorporated Incentive Bonus Plan, all of which were
implemented in May 2000. Headwaters also provides health, dental and life
insurance coverage for its employees. The Board may recommend and adopt other
programs in the future for the benefit of officers, directors and employees.

Stock Option Plans

1995 Stock Option Plan. Until November 2001, Headwaters had only one
stock option plan, the 1995 Stock Option Plan (the "1995 Plan"), under which
2,400,000 shares of Common Stock are reserved for ultimate issuance. A committee
of Headwaters' Board of Directors, or in its absence, the Board (the
"Committee") administers and interprets the 1995 Plan. This Committee is
authorized to grant options under the terms of the 1995 Plan to eligible
employees and consultants and to grant options and other awards outside the 1995
Plan to eligible employees, officers, directors, and consultants of Headwaters.
The 1995 Plan provides for the granting of both incentive stock options ("ISOs")
and nonstatutory stock options ("NSOs"). Terms of options granted under the 1995
Plan, including vesting requirements, are determined by the Committee. Options
granted under the 1995 Plan vest over periods ranging from 0 to ten years,
expire no more than ten years from the date of grant and are not transferable
other than by will or by the laws of descent and distribution. ISO grants must
meet the requirements of the Internal Revenue Code and the 1995 Plan and will be
made only to employees of Headwaters.

In May 2000, the Board clarified which prior years' option grants were
granted under the 1995 Plan and which option grants were not granted under the
1995 Plan. As of January 18, 2002, Headwaters had issued 357,386 shares of
Common Stock upon exercise of options granted under the 1995 Plan. Options for
the purchase of an aggregate of 2,041,254 shares of Common Stock (net of
exercises and cancellations) were outstanding under the 1995 Plan. Options for
an additional 1,360 shares could be granted in the future under terms of the
1995 Plan. During fiscal 2001, options to purchase 395,285 shares of Common
Stock were granted to officers and employees, including 144,285 options which
were issued in exchange for vested options of HTI, a subsidiary of Headwaters
acquired in August 2001. Of the total options granted in fiscal 2001, 135,000
were granted to the named executives, as shown in the Summary Compensation
Table. The fiscal 2001 option grants to the named executives have terms of ten
years and an exercise price of $9.09. The fair market value on the date of
grant, determined by the closing price of the Common Stock as reported by the
Nasdaq Stock Market, was $9.09 for all options granted to the named executives.
The options vest over a three-year period, beginning on the first year
anniversary following the grant date.

2002 Stock Incentive Plan. In November 2001, the Board of Directors
approved a new stock option plan, the 2002 Stock Incentive Plan (the "2002
Plan"), which is described in detail in "Proposal No. 3 - Approval of 2002 Stock
Incentive Plan." Options for 30,000 shares granted in November 2001 will be
included in the 2002 Plan, if the 2002 Plan is approved by the stockholders.

Other Options. In addition to options granted under the 1995 Plan and
the 2002 Plan, Headwaters has in prior years granted options for the purchase of
Common Stock to employees, officers, directors and consultants outside the 1995
Plan that were not qualified as ISOs for tax purposes. There were no such option
grants during fiscal 2001.

401(k) Profit Sharing Plan

The Board of Directors approved a 401(k) profit sharing plan for the
benefit of Headwaters employees and in May 2000 the Headwaters Incorporated
401(k) Profit Sharing Plan was adopted. The 401(k) Plan is administered by a
committee of the Board of Directors and is subject to the requirements of ERISA.
The 401(k) Plan is designed to encourage the accumulation of retirement savings
by employees, and substantially all employees of Headwaters are eligible to
participate in the 401(k) Plan. Non-employee directors are not eligible.

Under the terms of the 401(k) Plan, employees may elect to make
tax-deferred contributions to the 401(k) Plan of up to 15% of their
compensation, subject to statutory limitations. Beginning January 1, 2002,
Headwaters is obligated to match 100% of an employee's contribution up to a
maximum rate of 3% of the employee's compensation and to match 50% of an
employee's contribution up to a maximum of an additional 2% of the employee's
compensation. No net profits are required for matching contributions by
Headwaters. In December 2000, the Board of Directors approved a matching
contribution totaling $51,523, which included $5,250 for each of the named
executives. In December 2001, the matching contribution for Headwaters totaled
$63,565, which included $5,250 for each of the named executives. HTI's matching
contribution for the calendar year 2001 totaled $153,809.

Participation in the 401(k) Plan is voluntary and each eligible
employee makes his or her own election whether and to what extent to participate
in the 401(k) Plan. It is therefore not possible to determine the benefits or
amounts that will be received in the future by individual employees or groups of
employees, including the named executives.

2000 Employee Stock Purchase Plan

The Board approved The 2000 Employee Stock Purchase Plan ("ESPP") in
May 2000 to provide eligible employees with an opportunity to increase their
proprietary interest in the success of Headwaters by purchasing Common Stock in
Headwaters on favorable terms and to pay for such purchases through payroll
deductions. The Board subsequently amended the ESPP in February 2001 and in
April 2001. The Board believes that this plan is mutually beneficial to
employees and Headwaters and its stockholders because such a plan enhances the
interest of employees in the continued success of Headwaters and further aligns
the interests of employees and stockholders. In addition, the Board is of the
opinion that employee stock purchase plans provide an aid in recruiting
qualified and talented employees. For these reasons, the Board authorized the
adoption of the ESPP. The ESPP was approved by stockholders in September 2000 at
a Special Meeting of Stockholders.

Substantially all employees of Headwaters are eligible to participate
in the ESPP after three months of employment. Non-employee directors are not
eligible. A total of 500,000 shares of stock are reserved for issuance under the
ESPP, of which 60,089 shares have been issued through January 18, 2002. Under
the ESPP, employees purchase shares of Common Stock directly from Headwaters,
which shares are made available either from Headwaters' authorized but unissued
shares or from treasury shares, including shares repurchased on the open market.
The ESPP is intended to comply with Section 423 of the Internal Revenue Code,
but is not subject to the requirements of ERISA. Employees purchase stock
through payroll deductions of from 1% to 10% of cash compensation, subject to
certain limitations. The stock is purchased in a series of calendar quarter
offerings. The cost per share to the employee is 85% of the lesser of the fair
market value at the beginning of the offering period and the end of the offering
period.

Participation in the ESPP is voluntary and each eligible employee will
make his or her own election whether and to what extent to participate in the
ESPP. It is therefore not possible to determine the benefits or amounts that
will be received in the future by individual employees or groups of employees,
including the named executives.

Incentive Bonus Plan

The Incentive Bonus Plan ("Bonus Plan"), approved annually by the
Compensation Committee of the Board of Directors, which is comprised only of
independent directors ("Compensation Committee"), provides for annual cash
bonuses to be paid if Headwaters accomplishes certain financial goals and if
employees' business units meet certain goals. A participant's cash bonus is
based on Headwaters' success in exceeding specified financial performance

targets established by the Compensation Committee, the employee's base pay, and
the performance targets of the employee and of the employee's business unit
during the year. Headwaters' financial goals are based upon an economic value
added concept ("EVA") which purports to more closely align with a company's
share price than other measurements of performance. EVA is a concept that is
founded on the assumption that "free cash flow" is the primary driver of
corporate value over time. This concept and EVA-based compensation plans began
in the early 1970s and are still used today by some of the most successful
companies in the U.S.

Under the terms of the Bonus Plan, annual cash awards can be earned by
participants who are employed at the end of the fiscal year, provided
Headwaters' and the participant's business unit goals are met or exceeded.
Participants include all full-time employees except those directly involved in
the operations of alternative fuel facilities owned by a licensee, who are
covered under a separate production incentive plan. The amount of the cash
awards is dependent on several factors, the most important of which is the EVA
multiplier, or a factor determined by how much Headwaters' performance exceeds a
financial threshold ("EVA target") established by the Compensation Committee for
each fiscal year. No awards are earned if the EVA target is not achieved. EVA
profit, which varies from traditional accrual accounting earnings, is determined
each fiscal year and is then compared to the EVA target, which determines the
EVA multiplier. EVA profit is defined as net income, plus or minus economic
adjustments, minus the cost of capital. A portion of annual cash awards "earned"
by management personnel are banked, meaning that the awards are not actually
earned and paid unless the EVA target is achieved in each of the two succeeding
fiscal years. This banking mechanism helps motivate management and employees to
achieve long-term sustainable stockholder value and discourages short-term
performance at the expense of long-term stockholder value creation. The bonus
amounts for 2000 reflected in the cash compensation table represent the cash
awards paid to the named executives for fiscal 2000, but do not include the
current year banked amounts because these need to be earned by achieving the EVA
targets in fiscal 2001 and 2002. The bonus amounts for 2001 in the cash
compensation table represent the cash awards paid to the named executives for
fiscal 2001, and include 50% of the banked amounts from fiscal 2000, which were
earned in 2001.

Employment Contracts and Termination of Employment and Change in Control
Arrangements

Kirk A. Benson. Effective April 1999, Headwaters and Mr. Benson entered
into an employment agreement covering the succeeding three-year term, with a
salary of $15,000 per month until adjusted by the Board of Directors. An
adjustment was made effective July 1, 2000 to increase Mr. Benson's monthly
salary to $20,833. The employment agreement further provides for participation
in Headwaters' incentive bonus plan, if any, as in effect from time to time,
expense reimbursement, and the grant of stock options. Specifically, the
agreement provided for the grant of options for 250,000 shares of Common Stock
at an exercise price of $4.13 per share, to vest on a pro rata basis at the
beginning of each 12 month anniversary during the term of the employment
agreement, which are exercisable through April 2009, with full vesting upon
disability or death. This grant was made in fiscal 1999. Under the agreement,
Mr. Benson is entitled to six weeks annual paid vacation and other benefits
comparable to those generally available to Headwaters employees. If his
employment is terminated by Headwaters without cause or terminated by Mr. Benson
for good reason, he is entitled to termination benefits equal to 100% of his
then annual base salary.

Brent M. Cook. In April 1998, Headwaters and Mr. Cook entered into an
employment agreement covering the succeeding five year term, with the salary to
be established by the Board of Directors consistent with an annual compensation
review of comparable positions of public companies. Mr. Cook's current monthly
salary is $17,500. The employment agreement further provides for participation
in Headwaters' incentive bonus plan, if any, as in effect from time to time,
expense reimbursement, and the grant of stock options. Specifically, the
agreement provided for the grant of options for 250,000 shares of Common Stock
at an exercise price of $12.97 per share, to vest on a pro rata basis at the
beginning of each month during the term of the employment agreement, which are
exercisable through April 2008, with full vesting upon disability or death. This
grant was made in fiscal 1998. Under the agreement, Mr. Cook is entitled to six
weeks annual paid vacation, an annual dental allowance of $4,500, and other
benefits comparable to those generally available to Headwaters employees. If his
employment is terminated by Headwaters without cause or terminated by Mr. Cook
for good reason, he is entitled to termination benefits equal to 100% of his
then annual base salary.

Steven G. Stewart. Effective May 1998, Headwaters and Mr. Stewart
entered into an employment agreement covering a continuous three-year period,
unless terminated by Headwaters for cause or disability, or by Mr. Stewart for
good cause or without good reason provided 90 days prior written notice is
given. Mr. Stewart's regular monthly salary was required to be at least $8,334
for the period from May 1998 through September 1999 and $11,360 thereafter. Mr.
Stewart's current monthly salary is $14,500. The employment agreement further
provides for participation in Headwaters' incentive bonus plan, if any, as in
effect from time to time, and the grant of stock options. Specifically, the
agreement provided for the grant of options for 50,000 shares of Common Stock at
an exercise price of $12.63 per share, to vest on a pro rata basis over 60
months beginning May 1998, which are exercisable through April 2008, with full
vesting upon disability or death. This grant was made in fiscal 1998. In

addition, Mr. Stewart receives other benefits comparable to those generally
available to Headwaters employees. If his employment is terminated by Headwaters
without cause or terminated by Mr. Stewart for good reason, he is entitled to
termination benefits equal to 200% of his then annual base salary and all
outstanding options vest immediately.

Board Meetings

The Board held a total of nine regular and special meetings during
fiscal 2001. With the exception of two directors who each attended eight
meetings, all directors attended all of the meetings.

Committees of the Board

The Board of Directors has two committees, an Audit Committee and a
Compensation Committee, both of which are comprised solely of outside directors.
The Compensation Committee currently consists of Mr. Weller, as chair, Mr.
Herickhoff and Mr. Tanner. The Audit Committee currently consists of Mr.
Herickhoff, as chair, and Mr. Tanner. Mr. Squire was a member of the Audit
Committee prior to his resignation from the Board in January 2002. Headwaters
will add one additional outside director to the Audit Committee at the next
Board meeting. The Audit Committee held one meeting in fiscal 2001 and the
Compensation Committee held one meeting in fiscal 2001.

Compensation Committee Report on Executive Compensation

The Compensation Committee reviews and makes recommendations to the
Board of Directors concerning the overall compensation for Headwaters' officers
and other key executives, including the named executives. The Committee also
oversees the granting of stock options and the payment of incentive bonuses to
all executives and employees of Headwaters. Future compensation polices will be
dependent on Headwaters' performance and cash flow and employee performance.

Headwaters seeks to compensate executives at competitive levels,
considering current compensation surveys for companies in similar industries and
development patterns, the growth of Headwaters, each executive's individual
contribution to meeting Headwaters' goals and objectives, and overall business
conditions, as part of the total benefit package for employees. Beginning in
early fiscal 2000, Headwaters' management and the Board of Directors initiated a
comprehensive review of Headwaters' compensation program for its executives,
management personnel and all other employees. This review consisted of a formal
study by a well-known international human resources consulting firm of current
employee responsibilities and compensation as well as a study of compensation
programs used by other similarly situated public companies. This compensation
review culminated in a detailed report presented to the Compensation Committee
by the consulting firm.

The consulting firm's report recommended several changes in Headwaters'
compensation policies and programs, including changes in base salary levels and
long-term incentives such as stock option grants as well as implementation of a
bonus plan. Following the issuance of the report, the Compensation Committee
made several recommendations to the Board, which the Board subsequently adopted.
It was determined that an incentive bonus program that closely linked bonus
compensation to the creation of stockholder value as measured under the EVA
concept would be in the best interests of Headwaters and its stockholders since
EVA-based plans are purported to be one of the best indicators of actual
stockholder value creation. Accordingly, the Board adopted a formal EVA-based
incentive bonus plan in fiscal 2000. The Board determined that such a plan was
the best way to motivate Headwaters' management and employees to continuously
seek to meet and exceed performance goals.

These recommendations, which affected all executives, management
personnel and other employees of Headwaters, included changes in base salary
levels and long-term incentives such as stock option grants as well as
implementation of an incentive bonus plan. The incentive bonus plan is deemed to
be a significant part of the total compensation package for the named
executives.

The current employment agreement for Mr. Benson was approved by the
Board of Directors in a meeting on April 20, 1999. The Compensation Committee
recommended the fiscal 2001 cash compensation, cash bonus and grant of options
to Mr. Benson based on Mr. Benson's ability to meet Headwaters' objectives.

The Compensation Committee strives to ensure that Headwaters'
compensation plan attracts, retains and rewards both staff and management
personnel while continuing to operate in the best interests of the stockholders.

Compensation Committee
Raymond J. Weller, Chairman
James A. Herickhoff
Ronald S. Tanner

Compensation of Directors

Headwaters' directors hold office until the end of their respective
terms or until their successors have been duly elected and qualified.

Outside directors not serving as Chairman or Vice Chairman are entitled
to annual cash compensation of $32,000, which is paid quarterly. Beginning
January 2002, the Chairman of the Board and the Vice Chairman, unless salaried
employees of Headwaters, are entitled to cash compensation in the amount of
$40,000, which is paid quarterly. Also beginning January 2002, any director who
serves as a committee chair receives additional cash compensation of $5,000
annually. The outside directors also receive 12,000 options for each year of
service, vesting annually. Directors receive reimbursement for out-of-pocket
expenses. The cash compensation and options described in this section do not
apply to directors who are salaried employees of Headwaters.

In December 1998, each of Headwaters' outside directors received (i)
7,000 options for the period of service from the fiscal 1998 annual
stockholders' meeting to the fiscal 1999 stockholders' meeting, subject to
vesting, and (ii) 36,000 options for the three-year period following the 1999
annual stockholders' meeting, subject to vesting, on a pro rata basis, at the
fiscal 2000, 2001 and 2002 annual stockholders' meetings. The options granted in
December 1998 have exercise prices equal to the closing price of the Common
Stock on the grant date. None of these option grants were granted under the 1995
Stock Option Plan. In November 2001, the three outside directors who will
continue to serve on the Board (Messrs. Herickhoff, Tanner, and Weller) each
received 36,000 options, which vest ratably in December 2002, December 2003 and
December 2004. These options have an exercise price equal to the closing stock
price of Headwaters' Common Stock as of the grant date. Options for 78,000
shares were granted under the 1995 Stock Option Plan. Options for 30,000 shares
will be included in the 2002 Plan, if the 2002 Plan is approved by the
stockholders (see "Proposal No. 3 - Approval of 2002 Stock Incentive Plan").

Headwaters' executive officers are appointed by the Board of Directors
and serve at the discretion of the Board. The authority of the Board of
Directors over the officers of Headwaters has been delegated to the Chief
Executive Officer.

Audit Committee Report

The primary purposes of the audit committee are to provide oversight of
Headwaters' management in the areas of corporate governance including i) the
financial reporting system, the system of internal controls, and the outside
independent auditing process and audit results, and ii) legal and regulatory
compliance in areas where control systems must be in place to reduce financial
risk to Headwaters to acceptable levels. The audit committee consists only of
outside directors who have not previously been officers of Headwaters and
generally meets at least semi-annually. Each of the members of the audit
committee is independent under the current listing standards of the National
Association of Securities Dealers.

The audit committee meets periodically with management to consider the
adequacy of Headwaters internal controls and the reliability of Headwaters'
financial statements. The committee also meets privately with the independent
auditors, who have unrestricted access to the committee. The committee
recommends to the Board the appointment of the independent auditors and
periodically reviews their performance and independence from management. The
Board has adopted a written charter setting forth the mission, structure and
responsibilities of the committee. A copy of the charter was included with
Headwaters' 2001 proxy statement.

Management has primary responsibility for Headwaters' financial
statements and financial reporting process, including Headwaters' system of
internal controls. The independent auditors audit the annual financial
statements prepared by management, express an opinion as to whether those
financial statements fairly present the financial position, results of
operations and cash flows of Headwaters in conformity with accounting principles
generally accepted in the United States and discuss with us any issues they
believe should be raised with us.

This year, we reviewed the audited financial statements and met with
both management and Arthur Andersen, Headwaters independent auditors, to discuss
those financial statements. Management has represented to us that the financial
statements were prepared in accordance with accounting principles generally
accepted in the United States. We have received from and discussed with Arthur
Andersen LLP the written disclosure and letter required by Independence
Standards Board Standard No. 1. These items relate to that firm's independence
from Headwaters. We also discussed with Arthur Andersen LLP the matters required
to be discussed by Statement on Auditing Standards No. 61, "Communication with
Audit Committees."

Based on these reviews and discussions, we recommended to the Board
that the audited financial statements be included in Headwaters' Annual Report
on Form 10-K for the fiscal year ended September 30, 2001.

Audit Committee
James A. Herickhoff, Chairman
Ronald S. Tanner

Audit Fees

The following table summarizes the fees paid or payable to Arthur
Andersen LLP for services rendered for the fiscal year ended September 30, 2001.
Audit fees include the costs of quarterly reviews and the audits of Headwaters'
subsidiary, HTI. Audit-related fees consist primarily of acquisition due
diligence and accounting consultations. Other fees consist primarily of tax
services.

Audit fees $113,289
Financial systems design and implementation fees 0
All other fees:
Audit-related 19,855
Other 15,510
-----------
Total all other fees 35,365
-----------
Total $148,654
===========

Stockholder Return Performance Graph

The following graph shows a comparison of the cumulative total
stockholder return, calculated on a dividend reinvestment basis, for September
30, 1996 through September 30, 2001, on Headwaters' Common Stock with (1) the
Nasdaq Composite Index - U.S., (2) the Standard & Poors Energy - 500 Index, and
(3) the Standard & Poors Chemicals (Specialty) - 500 Index. The comparison
assumes $100 was invested on September 30, 1996.

Please note that historic stock price performance shown on the graph is
not necessarily indicative of future price performance. Headwaters has not paid
dividends on its Common Stock.

[GRAPHIC OMITTED]

9/30/96 9/30/97 9/30/98 9/30/99 9/30/00 9/30/01
----------- ---------- ---------- ----------- ---------- -----------

Headwaters $100 $112 $114 $ 30 $ 35 $133
S&P Energy - 500 100 147 139 166 190 164
S&P Chemicals (Specialty) - 500 100 113 89 108 84 89
Nasdaq Composite - US 100 137 139 228 302 124

SECURITY OWNERSHIP OF DIRECTORS, NOMINEES
AND PRINCIPAL STOCKHOLDERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information as of January 18,
2002 regarding the beneficial ownership of Headwaters' Common Stock, for: (i)
each person (or group of affiliated persons) who, insofar as Headwaters has been
able to ascertain, beneficially owned more than 5% of the outstanding shares of
Common Stock; (ii) each director and executive officer of Headwaters; and (iii)
all directors and executive officers of Headwaters as a group. Headwaters has
relied on information received from each stockholder as to beneficial ownership,
including information contained on Schedules 13D and 13G and Forms 3, 4 and 5.
As of January 18, 2002, there were 24,373,484 shares of Common Stock
outstanding. As of that date, there were outstanding options to purchase
3,332,192 shares of Common Stock and outstanding warrants to purchase 254,299
shares of Common Stock.

Name and Address of Amount and Nature of Percent
Beneficial Owner (1) Beneficial Ownership(2) of Class
-------------------- ----------------------- --------
Directors
---------
Kirk A. Benson 1,106,164 (3) 4.5%
Brent M. Cook 372,467 (4) 1.5%
Raymond J. Weller 352,928 (5) 1.4%
James A. Herickhoff 66,500 (6) *
Ronald S. Tanner 55,000 (7) *
E. J. "Jake" Garn 0 0%
Alfred G. Comolli 192,483 (8) *
L. K. (Theo) Lee 125,546 (9) *

Executive Officers
------------------
Steven G. Stewart 115,201 (10) *
Harlan M. Hatfield 141,252 (11) *
All directors and executive 2,527,541 (12) 9.9%
officers as a group (ten persons)
- ------------------
* Less than 1%

(1) The address of each person named in the table is c/o Headwaters
Incorporated, 11778 South Election Road, Suite 210, Draper, Utah 84020.
(2) The persons named in this table have sole voting and investment power
with respect to all shares of Common Stock reflected as beneficially
owned by them. A person is deemed to be the beneficial owner of
securities that can be acquired by such person within sixty (60) days
from January 18, 2002, and the total outstanding shares used to
calculate each beneficial owner's percentage includes such shares.
Beneficial ownership as reported does not include shares subject to
option or conversion that are not exercisable within 60 days of
January 18, 2002.
(3) Consists of 708,748 shares owned by Mr. Benson, warrants for 55,749
shares exercisable within 60 days of January 18, 2002, and options to
purchase 341,667 shares held by Mr. Benson exercisable within 60 days
of January 18, 2002.
(4) Consists of 28,070 shares owned by Mr. Cook and options to purchase
344,397 shares held by Mr. Cook exercisable within 60 days of
January 18, 2002.
(5) Consists of 217,668 shares owned by Mr. Weller, warrants for 33,510
shares exercisable within 60 days of January 18, 2002, and options to
purchase 101,750 shares held by Mr. Weller exercisable within 60 days
of January 18, 2002.
(6) Consists of 8,000 shares owned by Mr. Herickhoff and options to
purchase 58,500 shares held by Mr. Herickhoff exercisable within 60
days of January 18, 2002.
(7) Consists of 48,000 shares owned by Mr. Tanner and options to purchase
7,000 shares exercisable within 60 days of January 18, 2002.
(8) Consists of 124,140 shares owned by Mr. Comolli and options to purchase
68,343 shares held by Mr. Comolli exercisable within 60 days of
January 18, 2002. Of the total shares owned by Mr. Comolli, 24,828
shares are currently held in escrow to secure certain indemnification
obligations related to the acquisition of HTI by Headwaters.
(9) Consists of 88,526 shares owned by Mr. Lee and options to purchase
37,020 shares held by Mr. Lee exercisable within 60 days of
January 18, 2002. Of the total shares owned by Mr. Lee, 17,706 shares
are currently held in escrow to secure certain indemnification
obligations related to the acquisition of HTI by Headwaters.
(10) Consists of 7,913 shares owned by Mr. Stewart, 11,287 shares owned by
Mr. Stewart's wife, for which he disclaims ownership, 1,000 shares
owned by a trust, for which Mr. Stewart is co-trustee, and options to
purchase 95,001 shares held by Mr. Stewart exercisable within 60 days
of January 18, 2002.
(11) Consists of options to purchase 141,252 shares held by Mr. Hatfield
exercisable within 60 days of January 18, 2002.
(12) Consists of 1,243,352 shares issued and outstanding, and options and
warrants to purchase 1,284,189 shares exercisable within 60 days of
January 18, 2002.

TRANSACTIONS WITH RELATED PARTIES

Employment Agreements. Headwaters has entered into employment
agreements with Messrs. Benson, Cook and Stewart which provide for significant
benefits. See "Employment Contracts and Termination of Employment and Change in
Control Arrangements." As of September 30, 2001, Headwaters had also entered
into employment agreements with four other officers, including three HTI
officers. The agreements generally are renewable by Headwaters and have original
terms ranging from three to five years. They provide for annual salaries and
benefits ranging from approximately $143,000 to $257,000 annually per officer.
The annual commitment under all Headwaters and HTI agreements combined was
approximately $1,278,000 as of September 30, 2001. All agreements provide for
termination benefits, ranging from at least six-month's salary, up to a maximum
period equal to the remaining term of the agreement.

Insurance Benefits. Headwaters purchases certain insurance benefits for
its employees from various companies for which Mr. Weller, a director, acts as a
broker or agent. Gross payment to those insurance companies totaled
approximately $381,000 in fiscal 2001.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires
Headwaters' officers and directors, and persons who own more than 10% of a
registered class of Headwaters' equity securities, to file reports of ownership
and changes in ownership with the SEC and the National Association of Securities
Dealers. Officers, directors, and greater than 10% stockholders are required by
SEC regulations to furnish Headwaters with copies of all Section 16(a) forms
they file. Based solely on a review of the copies of such forms furnished to
Headwaters between October 1, 2000 and September 30, 2001, on year-end reports
furnished to Headwaters after September 30, 2001, and on representations that no
other reports were required, Headwaters has determined that during the 2001
fiscal year all applicable 16(a) filing requirements were met.

PROPOSAL NO. 1 - ELECTION OF DIRECTORS

Nominees for Election as Directors

At the Meeting, the stockholders will elect three Class II directors of
Headwaters to serve until the 2005 annual meeting and one Class III director to
serve until the 2003 annual meeting, or until their successors are duly elected
and qualified. Also at the Meeting, the stockholders, pursuant to a contractual
obligation connected with the acquisition of HTI by Headwaters, will elect an
additional Class I director to serve a contractual term ending March 31, 2004
and an additional Class III director to serve a contractual term ending March
31, 2003. The Board of Directors is divided into three classes, currently
comprised of two Class I directors, one whose term will expire at Headwaters'
annual meeting in 2004 and another whose term will expire March 31, 2004; three
Class II directors, whose terms will expire at the Meeting in March 2002 and who
will stand for election at that Meeting; and three Class III directors, two of
whose terms will expire at Headwaters' annual meeting in 2003 and another whose
term will expire March 31, 2003. The two directors standing for election at the
Meeting due to the contractual obligation will not serve on the Board following
Headwaters' contractual obligation. The Board currently consists of eight
members: Kirk A. Benson, Brent M. Cook, Raymond J. Weller, James A. Herickhoff,
Ronald S. Tanner, E. J. "Jake" Garn, Alfred G. Comolli, and L. K. (Theo) Lee.
The Board proposes that the individuals listed below as nominees be elected as
directors of Headwaters. The nominees have consented to serve if elected to the
Board. In the event that one or more of the nominees are unable to serve as
director at the time of the Meeting (which is not expected), proxies with
respect to which no contrary direction is made will be voted "FOR" such
substitute nominee(s) as shall be designated by the Board to fill the vacancy or
vacancies.

The name of the Class I nominee, together with certain information
about him, is set forth below:

Name Age Position with Headwaters Director Since
---- --- ------------------------ --------------
L. K. (Theo) Lee 51 Director and Senior Vice 2001
President of HTI

L. K. (Theo) Lee, PhD. has served as a Director of Headwaters since
August 2001, at the time HTI was acquired by Headwaters. Dr. Lee currently
serves as director due a contractual obligation connected with that acquisition
and has agreed to serve only through the end of Headwaters' contractual
obligation. Dr. Lee currently is the Senior Vice President of Technology,
Business Development and Technical Sales for HTI, a position he has held for
seven years. Dr. Lee has over 25 years of experience in research and development
of heavy oil upgrading, coal conversion, environmental control and petrochemical
production. His background includes technical management and development of new
technologies, pilot plant demonstration and process scale up. Dr. Lee has been
the Vice President of Technology and Supporting Services overseeing all in-house
research and external contracts. Dr. Lee holds a Bachelor of Science degree from
Tunghai University (Taiwan) and Ph.D. in Chemical Engineering from the
University of New Brunswick (Canada). Dr. Lee's term as Director will expire
March 31, 2004, at which time his contractual commitment to serve on the Board
ends.

The names of the Class II nominees, together with certain information
about them, are set forth below:
Director
Name Age Position with Headwaters Since
---- --- ------------------------ --------
Kirk A. Benson 51 Chairman and Chief Executive Officer 1999
Raymond J. Weller 56 Director 1991
E. J. "Jake" Garn 69 Director 2002

Kirk A. Benson has served as a Director of Headwaters since January
1999 and as Chairman and CEO since April 1999. Most recently, Mr. Benson was
Senior Vice President of Foundation Health Systems, Inc., one of the nation's
largest publicly traded managed healthcare companies. Mr. Benson was with
Foundation Health Systems and its predecessors for approximately ten years,
holding various positions including president and chief operating officer for
commercial operations, general counsel, and senior vice president for
development with responsibility for merger and acquisition activity. Mr. Benson
is a Ph.D. student at the Peter F. Drucker Graduate School of Management at
Claremont Graduate University. He also holds a Master of Laws in Taxation from
the University of Denver, and a Master of Accountancy and Juris Doctorate from
Brigham Young University. Mr. Benson's term as a Director expires in 2002.

Raymond J. Weller has served as a Director of Headwaters since July
1991 and served as Chairman of the Board from January 1997 through July 1998.
Since 1991, Mr. Weller has been President of Healthcare Benefits of Utah, a Utah
based insurance brokerage firm. From 1985 to 1991, Mr. Weller was an agent with
the insurance brokerage of Galbraith, Benson, and McKay. Mr. Weller's term
expires in 2002.

E. J. "Jake" Garn has served as a Director of Headwaters since January
2002. Mr. Garn is a former United States Senator from the state of Utah. Mr.
Garn currently serves as Managing Director of Summit Ventures, a lobbying and
consulting firm, a position he has held since 2000. From 1993 to 1999, Mr. Garn
served as Vice Chairman of Huntsman Corporation, a large Utah-based
privately-held chemical company. From 1993 until the present, Mr. Garn has
served as a director of Morgan Stanley Funds and at the present time serves as a
director of the following entities: United Space Alliance, Franklin Covey,
NuSkin Asia Pacific, BMW Bank of NA, and Escrow Bank, USA. Mr. Garn had a long
and distinguished career in national politics. Mr. Garn entered politics in 1967
when he was elected to the Salt Lake City (Utah) Commission. He was elected
mayor of Salt Lake City in 1971 and to the U.S. Senate in 1974. He served as
chairman of the Senate Banking, Housing and Urban Affairs Committee and as a
member of the Senate Appropriations Committee. Senator Garn was re-elected to
the Senate in 1980 and again in 1986, retiring in 1992. Mr. Garn's term as
Director expires in 2002.

The names of the Class III nominees, together with certain information
about them, are set forth below:

Director
Name Age Position with Headwaters Since
---- --- ------------------------------------ ---------
Ronald S. Tanner 45 Director 2001
Alfred G. Comolli 72 Director and CEO and President of HTI 2001

Ronald S. Tanner has served as a Director of Headwaters since June
2001. Mr. Tanner has been a senior securities analyst for Legg Mason, a
Baltimore-based securities brokerage, asset management, and capital markets
firm, for more than eight years. Prior to joining Legg Mason, he was an analyst
at Goldman Sachs & Company in New York, and prior to that, an analyst for Duff &
Phelps in Chicago. Mr. Tanner also worked for Southern California Edison for ten
years in various treasury capacities including Financial Planning and Investor
Relations. He received his undergraduate degree and MBA from California State
University. He is a member of the Association for Investment Management and
Research, the Society of Utility and Regulatory Financial Analysts, the
Baltimore Security Analysts Society and the Philadelphia Securities Association.
Mr. Tanner's term as Director expires in 2002.

Alfred G. Comolli has served as a Director of Headwaters since August
2001, at the time HTI was acquired by Headwaters. Mr. Comolli currently serves
as director due a contractual obligation connected with that acquisition and has
agreed to serve only through the end of Headwaters' contractual obligation. Mr.
Comolli currently serves as President and CEO of HTI, a position he has held for
seven years. Mr. Comolli has over 40 years of experience in the petrochemical,
fossil energy, environmental, rubber and chemical industries. His background
includes a broad area of management and process development activities ranging
from manufacturing, pilot plant operations, process engineering, design and
commercial demonstrations. Mr. Comolli was the Technology Manager on the $300
million US DOE H-Coal pilot plant overseeing all related in-house research,
scale-up and external contracts. Mr. Comolli is a Chemical and Professional
Engineer in New Jersey and Pennsylvania. He is a graduate of the University of
Rhode Island and of the Cornell University Executive Management School. Mr.
Comolli's term as Director will expire March 31, 2003, at which time his
contractual commitment to serve on the Board ends.

Directors not Standing for Election

The names of the other directors of Headwaters who are not standing for
election at the Meeting are James A. Herickhoff, a Class I director whose term
expires in 2004, and Brent M. Cook, a Class III director who term expires in
2003. Information about these directors is set forth below.

Director
Name Age Position with Headwaters Since
---- --- -------------------------- ---------
James A. Herickhoff 59 Vice Chairman and Director 1997
Brent M. Cook 41 Director and President 1996

James A. Herickhoff has served as a Director since August 1997 and was
elected Vice Chairman in April 1999. Mr. Herickhoff is President, Chief
Operating Officer and a principal of Wold Talc Company, which operates one of
the largest talc mines in the United States. From 1987 to 1994 he served as
President of Atlantic Richfield Company's Thunder Basin Coal Company. Mr.
Herickhoff has over 25 years of experience in the coal and mining industries and
extensive experience in strategic positioning of these companies for long-term
growth and competitiveness. Mr. Herickhoff led the growth of the Black Thunder
and Coal Creek coal mines from 19,000,000 to approximately 40,000,000 tons per
year of production. Mr. Herickhoff previously served as President of Mountain
Coal Company, managing all of ARCO's underground mining and preparation plants.
Mr. Herickhoff is the past President of the Wyoming Mining Association and a
former Board member of the Colorado and Utah Mining Associations. Mr. Herickhoff
received a Bachelor degree in 1964 from St. John's University, a Master of
Science degree in 1966 from St. Cloud State University and attended the Kellogg
Executive Management Institute at Northwestern University in 1986. Mr.
Herickhoff's term expires in 2004.

Brent M. Cook has served as President since April 1999. From November
1996 to April 1999 he served as Chief Executive Officer. He also served as
President from October 1996 until July 1998, and as Chief Financial Officer from
June 1996 until November 1996. Mr. Cook is a Certified Public Accountant. Prior
to joining Headwaters, Mr. Cook was Director of Strategic Accounts - Utah
Operations, for PacifiCorp, Inc. ("PacifiCorp"). His responsibilities included
the management of revenues of approximately $128 million per year, and seeking
out and evaluating strategic growth opportunities for PacifiCorp, including
joint ventures and other transactions. Mr. Cook spent more than 12 years with
PacifiCorp. Mr. Cook has served as a Director since November 1996. His term as a
Director expires in 2003.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
THE ELECTION OF MESSRS. BENSON, WELLER, GARN, TANNER, LEE AND COMOLLI

PROPOSAL NO. 2 -- RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS

The Audit Committee and the Board have appointed Arthur Andersen LLP,
certified public accountants, as auditors to examine the financial statements of
Headwaters for Fiscal 2002 and to perform other appropriate accounting services
and are requesting ratification of such appointment by the stockholders.
PricewaterhouseCoopers LLP (formerly Coopers & Lybrand L.L.P.) served as
Headwaters' auditors from 1994 to July 2000, at which time they were dismissed
and Arthur Andersen LLP were appointed as independent auditors.
PricewaterhouseCoopers' reports on the financial statements for the fiscal years
ended September 30, 1998 and 1999 were unqualified. During the two fiscal years
ended September 30, 1999 and through July 2000, there were no disagreements with
PricewaterhouseCoopers on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreement, if not resolved to the satisfaction of PricewaterhouseCoopers,
would have caused them to make reference to the subject matter of the
disagreement in connection with their reports.

In the event that the stockholders do not ratify the appointment of
Arthur Andersen LLP, the adverse vote will be considered a directive to the
Audit Committee and the Board to select other auditors for the next fiscal year.
A representative of Arthur Andersen LLP is expected to attend the Meeting and
will have an opportunity to make a statement if he or she desires to do so and
to respond to appropriate questions.

THE BOARD OF DIRECTORS DEEMS PROPOSAL NO. 2 TO BE IN THE BEST INTERESTS
OF HEADWATERS AND ITS STOCKHOLDERS AND RECOMMENDS
A VOTE "FOR" APPROVAL THEREOF

PROPOSAL NO. 3 - APPROVAL OF 2002 STOCK INCENTIVE PLAN

In November 2001, the Board of Directors approved a new stock incentive
plan, the 2002 Plan, under which 2,000,000 shares of Common Stock are currently
reserved for ultimate issuance. The number of reserved shares is subject to an
automatic increase each year by a number equal to the lesser of 500,000 shares,
2% of the outstanding shares of Common Stock, or a lesser amount determined by
the Board. In no case will the total number of reserved shares under the 2002
Plan exceed 3,000,000 shares. A committee of Headwaters' Board of Directors, or
in its absence, the Board (the "Committee") administers and interprets the 2002
Plan. This Committee is authorized to grant options and other awards to eligible
employees, officers, directors, and consultants of Headwaters. The 2002 Plan
provides for the granting of both ISOs and NSOs, as well as other types of
awards. Terms of options granted under the 2002 Plan, including vesting
requirements, are determined by the Committee. Options granted under the 2002
Plan vest over periods ranging from 0 to ten years, expire no more than ten
years from the date of grant and are not transferable other than by will or by
the laws of descent and distribution. ISO grants must meet the requirements of
the Internal Revenue Code and the 2002 Plan. The following description of the
2002 Plan is a summary only. A copy of the 2002 Plan may be obtained without
charge from the Corporate Secretary of Headwaters, 11778 South Election Road,
Suite 210, Draper, Utah 84020.

Purpose and Types of Awards. The 2002 Plan was adopted by the Board to
promote the long-term success of Headwaters and the creation of stockholder
value by (a) encouraging employees, outside directors and consultants to focus
on critical long-range objectives, (b) encouraging the attraction and retention
of employees, outside directors and consultants with exceptional qualifications
and (c) linking employees, outside directors and consultants directly to
stockholder interests through increased stock ownership. The 2002 Plan seeks to
achieve this purpose by providing for awards in the form of restricted shares,
stock units, options (which may constitute ISOs or NSOs) or stock appreciation
rights ("SARs"). No payment is required upon receipt of an award, except that a
recipient of newly issued restricted shares must pay at least the par value of
such restricted shares to Headwaters. The 2002 Plan requires that the exercise
price of any option granted under the 2002 Plan be at least equal to the fair
market value of Headwaters' Common Stock on the date of grant. The fair market
value of Headwaters' Common Stock is defined by the 2002 Plan as the closing
price of the Common Stock as reported on the Nasdaq Stock Market.

Administration and Eligibility. The 2002 Plan is administered by a
committee (the "Committee") consisting of two or more directors of Headwaters
who shall satisfy the requirements of Rule 16b-3 under the Securities Exchange
Act of 1934 with respect to the grant of awards to persons who are officers or
directors of Headwaters. The Board may also appoint one or more separate
committees of the Board, each composed of one or more directors of Headwaters,
who may administer the 2002 Plan with respect to employees who are not
considered officers or directors of Headwaters.

Subject to the provisions of the 2002 Plan, the Committee shall have
full authority and discretion to take the following actions:

o To interpret the 2002 Plan and to apply its provisions;
o To adopt, amend or rescind rules, procedures and forms relating to
the 2002 Plan;
o To authorize any person to execute, on behalf of Headwaters, any
instrument required to carry out the purposes of the 2002 Plan;
o To determine when shares are to be awarded or offered for sale and
when options are to be granted under the 2002 Plan;
o To select the offerees and optionees;
o To determine the number of shares to be offered to each offeree or
to be made subject to each option;
o To prescribe the terms and conditions of each award or sale of
shares, including (without limitation) the purchase price, the
vesting of the award (including accelerating the vesting of
awards) and to specify the provisions of the stock purchase
agreement relating to such award or sale;
o To prescribe the terms and conditions of each option, including
(without limitation) the exercise price, the vesting or duration
of the option (including accelerating the vesting of the option),
to determine whether such option is to be classified as an ISO or
as a nonstatutory option, and to specify the provisions of the
stock option agreement relating to such option;
o To amend any outstanding stock purchase agreement or stock option
agreement, subject to applicable legal restrictions and to the
consent of the offeree or optionee who entered into such
agreement;
o To prescribe the consideration for the grant of each option or
other right under the 2002 Plan and to determine the sufficiency
of such consideration;
o To determine the disposition of each option or other right under
the 2002 Plan in the event of an optionee's or offeree's divorce
or dissolution of marriage;
o To determine whether options or other rights under the 2002 Plan
will be granted in replacement of other grants under an incentive
or other compensation plan of an acquired business;
o To correct any defect, supply any omission, or reconcile any
inconsistency in the 2002 Plan, any stock option agreement or any
stock purchase agreement; and
o To take any other actions deemed necessary or advisable for the
administration of the 2002 Plan.

Only employees, consultants and outside directors shall be eligible for
the grant of restricted shares, stock units, NSOs or SARs. In addition, only
employees shall be eligible for the grant of ISOs. An employee who owns more
than 10% of the total combined voting power of all classes of outstanding stock
of Headwaters shall not be eligible for the grant of an ISO unless the
requirements set forth in the Internal Revenue Code are satisfied.

The participation of outside directors in the 2002 Plan is limited to
grants of NSOs and is subject to additional restrictions described in the plan
document. An outside director is defined as a member of the Board who is not a
common-law employee of Headwaters or any subsidiary of Headwaters. Subject to
approval by the Board, outside directors may be permitted to receive awards
under the 2002 Plan in lieu of fees. All options will become fully exercisable
upon a change in control of Headwaters. There are currently four outside
directors and approximately 100 employees who are eligible to participate in the
2002 Plan.

Shares Subject to the 2002 Plan. Shares offered under the 2002 Plan
shall be authorized but unissued shares or treasury shares. The maximum
aggregate number of options, SARs, stock units and restricted shares awarded
under the 2002 Plan shall not exceed 2,000,000 shares, plus the additional
shares described in the following sentence, but in no event more than 3,000,000
Shares. As of January 1 of each year, commencing with the year 2003, the
aggregate number of options, SARs, stock units and restricted shares that may be
awarded under the 2002 Plan shall automatically increase by a number equal to
the lesser of (i) 500,000 shares, (ii) 2% of the outstanding shares of stock of
Headwaters on such date or (iii) a lesser amount determined by the Board.
Currently there are no shares of restricted stock issued under the 2002 Plan and
options for a total of 30,000 shares are outstanding, none of which are
currently exercisable.

If restricted shares or shares issued upon the exercise of options are
forfeited, then such shares shall again become available for awards under the
2002 Plan. If stock units, options or SARs are forfeited or terminate for any
other reason before being exercised, then the corresponding shares shall again
become available for awards.

Terms of Awards. Restricted shares are shares of Common Stock that are
subject to forfeiture in the event that the applicable vesting conditions are
not satisfied. Restricted shares are nontransferable prior to vesting (except
for certain transfers to a trustee). Restricted shares have the same voting and
dividend rights as other shares of Common Stock. At the discretion of the
Committee, restricted shares may be awarded under the 2002 Plan in consideration
of services rendered prior to the award.

A stock unit represents the equivalent of one share of Common Stock and
is nontransferable prior to the holder's death (except for certain transfers to
a trustee). Vested stock units will be settled at the time determined by the
Committee in the form of cash, Common Stock, or a combination thereof. A holder
of stock units has no voting rights or other privileges as a stockholder but may
be entitled to receive dividend equivalents on his or her units equal to the
amount of dividends paid on the same number of shares of Common Stock. Dividend
equivalents may be converted into additional stock units or settled in the form
of cash, Common Stock, or a combination thereof. If the time of settlement is
deferred, interest or additional dividend equivalents may be credited on the
deferred payment.

Options may include NSOs as well as ISOs intended to qualify for
special tax treatment. The exercise price of any option under the 2002 Plan must
be equal to or greater than the fair market value of the Common Stock on the
date of grant. The exercise price of shares issued under the 2002 Plan shall be
payable in cash, or to the extent that a stock option agreement so provides,
payment may be made by surrendering, or attesting to the ownership of, shares
which have already been owned by the optionee for more than six months. At the
discretion of the Committee, shares may be awarded under the 2002 Plan in
consideration of services rendered to Headwaters prior to the award. Also, at
the discretion of Headwaters and to the extent that a stock option agreement so
provides, payment may be made all or in part by a full-recourse promissory note
or in any other form that is consistent with applicable laws, regulations and
rules.

Both NSOs and ISOs may be granted in combination with SARs, or SARs may
be added to outstanding NSOs at any time after the grant. SARs may also be
granted independently of options. A SAR permits the participant to elect to
receive any appreciation in the value of the optioned stock directly from
Headwaters, in shares of Common Stock or cash or a combination thereof, in lieu
of exercising the option. The Committee has discretion to determine the form in
which such payment will be made. The amount payable upon exercise of a SAR is
measured by the difference between the market value of the Common Stock at date
of exercise and the exercise price. Generally, SARs coupled with options may be
exercised at any time after the underlying NSO or ISO vests. Upon exercise of a
SAR coupled with an option, the corresponding portion of the related option must
be surrendered and cannot thereafter be exercised. Conversely, upon exercise of
an option to which a SAR is attached, the SAR may no longer be exercised to the
extent that the corresponding option has been exercised. The term of an ISO
cannot exceed ten years. Options and SARs are nontransferable prior to the
optionee's death.

Limits on Individual Awards. No employee or consultant shall be granted
options to purchase more than 250,000 shares in any fiscal year, except that
options granted to a new employee or consultant in the fiscal year of Headwaters
in which his or her service first commences shall not cover more than 300,000
shares. Under Section 162(m) of the Internal Revenue Code, Headwaters may not
claim a deduction for tax purposes for compensation paid to the CEO and the four
other most highly compensated executive officers in excess of $1,000,000 per
person per fiscal year. However, compensation arising out of the exercise of
NSOs is deductible by Headwaters without limit if certain conditions are met,
including approval by stockholders of the material provisions of the 2002 Plan
(including the number of shares available for grant), administration by a

committee composed entirely of outside directors, and a limit on the size of
grants to any individual. The Board believes that options granted under the 2002
Plan meet all of these conditions.

An employee who owns more than 10% of the total combined voting power
of all classes of outstanding stock of Headwaters shall not be eligible for the
grant of an ISO unless such grant satisfies the requirements of the Internal
Revenue Code. The awards that will be received by each of the officers named in
the Summary Compensation Table, the executive officers as a group and all other
employees under the 2002 Plan are not presently determinable.

Federal Income Tax Consequences of Options. Neither the optionee nor
Headwaters will incur any federal tax consequences as a result of the grant of
an option. The optionee will have no taxable income upon exercising an ISO
(except that the alternative minimum tax may apply), and Headwaters will receive
no deduction when an ISO is exercised. Upon exercising a NSO, the optionee
generally must recognize ordinary income equal to the "spread" between the
exercise price and the fair market value of Common Stock on the date of
exercise, and Headwaters will be entitled to a deduction for the same amount. In
the case of an employee, the option spread at the time a NSO is exercised is
subject to income tax withholding, but the optionee generally may elect to
satisfy the withholding tax obligation by having shares of Common Stock withheld
from those purchased under the NSO. The tax treatment of a disposition of option
shares depends on how long the shares have been held and on whether such shares
were acquired by exercising an ISO or an NSO. Headwaters will not be entitled to
a deduction in connection with a disposition of option shares, except in the
case of a disposition of shares acquired under an ISO before the applicable ISO
holding period has been satisfied. Awards under the 2002 Plan may provide that
if any payment (or transfer) by Headwaters to a recipient would be nondeductible
by Headwaters for federal income tax purposes, then the aggregate present value
of all such payments (or transfers) will be reduced to an amount which maximizes
such value without causing any such payment (or transfer) to be nondeductible.

Amendment and Adjustment of Grants. The Committee is authorized, within
the provisions of the 2002 Plan, to amend the terms of outstanding restricted
shares or stock units, to modify or extend outstanding options or to exchange
new options for outstanding options, including outstanding options with a higher
exercise price than the new options. The 2002 Plan provides for appropriate
adjustments in the number of shares available for future awards as well as the
exercise price of and the number of shares covered by outstanding options in the
event of a reclassification, stock split, combination of shares, stock dividend,
extraordinary cash dividend or other recapitalization of Headwaters. In the
event of a merger, awards will be subject to the agreement of merger or
reorganization.

Amendment and Termination of 2002 Plan. The Board of Directors may
amend the 2002 Plan at any time and in any respect, subject to stockholder
approval if required by law. The 2002 Plan will terminate in November 2011
unless terminated sooner by the Board.

Vote Required. The affirmative vote of a majority of the shares present
and entitled to vote is required for approval.

THE BOARD OF DIRECTORS DEEMS PROPOSAL NO. 3 TO BE IN THE BEST INTERESTS
OF HEADWATERS AND ITS STOCKHOLDERS AND RECOMMENDS
A VOTE "FOR" APPROVAL THEREOF

STOCKHOLDER PROPOSALS

Stockholders may submit proposals on matters appropriate for
stockholder action at Headwaters' annual meeting consistent with regulations
adopted by the SEC. For such proposals to be considered for inclusion in the
proxy statement and form of proxy relating to the 2003 annual meeting, they must
be received by Headwaters not later than September 20, 2002 or such later date
as Headwaters may specify in its SEC filings. Such proposals should be addressed
to Headwaters at 11778 South Election Road, Suite 210, Draper, Utah 84020, Attn:
Corporate Secretary.

It is anticipated that proxies solicited in connection with Headwaters'
2003 annual meeting will confer discretionary authority to vote on matters,
among others, of which Headwaters does not receive notice prior to
September 20, 2002.

OTHER MATTERS

Management does not intend to present, and has no information as of the
date of preparation of this Proxy Statement that others will present, any
business at the Meeting other than business pertaining to matters required to be
set forth in the Notice of Annual Meeting and Proxy Statement. However, if other
matters requiring the vote of the stockholders properly come before the Meeting,
it is the intention of the persons named in the enclosed proxy to vote the
proxies held by them in accordance with their best judgment on such matters.

SOLICITATION OF PROXIES

The accompanying form of proxy is being solicited on behalf of the
Board. The expense of solicitation of proxies for the Meeting will be paid by
Headwaters. In addition to the mailing of the proxy material, such solicitation
may be made in person or by written communication, telephone or telegraph by
directors, officers, employees or agents of Headwaters or its subsidiaries.

If you have any questions about giving your proxy or require any
assistance, please contact Sharon Madden, Headwaters' Director of Investor
Relations, at 1-800-316-6214.

YOUR VOTE IS IMPORTANT. YOU ARE URGED TO DATE, SIGN AND PROMPTLY RETURN
YOUR PROXY CARD SO THAT YOUR SHARES MAY BE VOTED IN ACCORDANCE WITH YOUR WISHES
AND THAT THE PRESENCE OF A QUORUM MAY BE ASSURED. THE PROMPT RETURN OF YOUR
SIGNED PROXY CARD, REGARDLESS OF THE NUMBER OF SHARES YOU HOLD, WILL AID
HEADWATERS IN AVOIDING THE EXPENSE OF ADDITIONAL PROXY SOLICITATIONS. GIVING
YOUR PROXY DOES NOT AFFECT YOUR RIGHT TO VOTE IN PERSON AT THE MEETING OR YOUR
RIGHT TO RESUBMIT LATER DATED PROXY CARDS.

Headwaters Incorporated

By Order of the Board of Directors,

/s/ Harlan M. Hatfield
------------------------------------
Harlan M. Hatfield
Secretary

Draper, Utah
January 28, 2002

HEADWATERS INCORPORATED

PROXY SOLICITED BY THE BOARD OF DIRECTORS
ANNUAL MEETING OF STOCKHOLDERS - FRIDAY, MARCH 15, 2002

The undersigned stockholder(s) of Headwaters Incorporated, a Delaware
corporation (the "Company"), revoking all previous proxies, hereby appoints
Harlan M. Hatfield as the attorney and proxy of the undersigned, with full power
of substitution, to cast all votes for all shares of Common Stock of Headwaters
which the undersigned would be entitled to cast if personally present at the
Annual Meeting of Stockholders of Headwaters to be held at the Country Inn &
Suites, 10499 South Jordan Gateway, South Jordan, UT 84095, on Friday, March 15,
2002, at 2:00 p.m., Mountain Standard Time, and any and all adjournments or
postponements thereof. Said proxies are authorized and directed to vote as
indicated with respect to the following matters:

(Please date and sign below)

Please mark your vote as this [X]
1. ELECTION OF DIRECTORS:
Kirk A. Benson FOR [ ] WITHHOLD [ ]
(If elected, Mr. Benson's term would AUTHORITY
expire in 2005)

Raymond J. Weller FOR [ ] WITHHOLD [ ]
(If elected, Mr. Weller's term would AUTHORITY
expire in 2005)

E. J. "Jake" Garn FOR [ ] WITHHOLD [ ]
(If elected, Mr. Garn's term would AUTHORITY
expire in 2005)

Ronald S. Tanner FOR [ ] WITHHOLD [ ]
(If elected, Mr. Tanner's term would AUTHORITY
expire in 2003)

L. K. (Theo) Lee FOR [ ] WITHHOLD [ ]
(If elected, Mr. Lee's term would AUTHORITY
expire in 2004)

Alfred G. Comolli FOR [ ] WITHHOLD [ ]
(If elected, Mr. Comolli's term would AUTHORITY
expire in 2003)

2. RATIFY THE SELECTION BY THE BOARD OF ARTHUR FOR [ ] AGAINST [ ]
ANDERSEN LLP AS INDEPENDENT AUDITORS OF HEADWATERS ABSTAIN [ ]
FOR FISCAL 2002

3. APPROVE THE 2002 STOCK INCENTIVE PLAN FOR [ ] AGAINST [ ]
ABSTAIN [ ]

This Proxy is solicited on behalf of the Board of Directors. Unless
otherwise specified, the shares will be voted "FOR" items 1, 2 and 3. This Proxy
also delegates discretionary authority to the proxy to vote with respect to any
other business which may properly come before the Annual Meeting of Stockholders
and any and all adjournments or postponements thereof to the extent allowed by
Rule 14a-4(c) as promulgated by the U.S. Securities and Exchange Commission.

THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE NOTICE OF ANNUAL MEETING AND
PROXY STATEMENT OF HEADWATERS INCORPORATED.

Dated: ________________________________, 2002

_____________________________________________
Name of Stockholder

PLEASE RETURN YOUR COMPLETED PROXY IN THE ENCLOSED POSTAGE PAID ENVELOPE.

Appendix

HEADWATERS INCORPORATED

2002 STOCK INCENTIVE PLAN

(Adopted by the Board on November 9, 2001)

TABLE OF CONTENTS

Page

SECTION 1. ESTABLISHMENT AND PURPOSE.......................................1

SECTION 2. DEFINITIONS.....................................................1
(a) "Affiliate".......................................................1
(b) "Award"...........................................................1
(c) "Board of Directors"..............................................1
(d) "Change in Control"...............................................1
(e) "Code"............................................................2
(f) "Committee".......................................................2
(g) "Company".........................................................2
(h) "Consultant"......................................................2
(i) "Employee"........................................................2
(j) "Exchange Act"....................................................2
(k) "Exercise Price"..................................................2
(l) "Fair Market Value"...............................................2
(m) "ISO".............................................................3
(n) "Nonstatutory Option" or "NSO"....................................3
(o) "Offeree".........................................................3
(p) "Option"..........................................................3
(q) "Optionee"........................................................3
(r) "Outside Director"................................................3
(s) "Parent"..........................................................3
(t) "Participant".....................................................3
(u) "Plan"............................................................3
(v) "Purchase Price"..................................................3
(w) "Restricted Share"................................................3
(x) "Restricted Share Agreement ".....................................4
(y) "SAR".............................................................4
(z) "SAR Agreement"...................................................4
(aa) "Service".........................................................4
(bb) "Share"...........................................................4
(cc) "Stock"...........................................................4
(dd) "Stock Option Agreement"..........................................4
(ee) "Stock Purchase Agreement"........................................4
(ff) "Stock Unit"......................................................4
(gg) "Stock Unit Agreement"............................................4
(hh) "Subsidiary"......................................................4
(ii) "Total and Permanent Disability"..................................4

SECTION 3. ADMINISTRATION..................................................4
(a) Committee Composition.............................................4
(b) Committee for Non-Officer Grants..................................5

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(c) Committee Procedures..............................................5
(d) Committee Responsibilities........................................5

SECTION 4. ELIGIBILITY.....................................................6
(a) General Rule......................................................6
(b) Outside Directors.................................................6
(c) Limitation On Grants..............................................8
(d) Ten-Percent Stockholders..........................................8
(e) Attribution Rules.................................................8
(f) Outstanding Stock.................................................8

SECTION 5. STOCK SUBJECT TO PLAN...........................................8
(a) Basic Limitation..................................................8
(b) Annual Increase in Shares.........................................8
(c) Additional Shares.................................................8
(d) Dividend Equivalents..............................................9

SECTION 6. RESTRICTED SHARES...............................................9
(a) Restricted Share Agreement........................................9
(b) Payment for Awards................................................9
(c) Vesting...........................................................9
(d) Voting and Dividend Rights.......................................10

SECTION 7. OTHER TERMS AND CONDITIONS OF AWARDS OR SALES..................10
(a) Duration of Offers and Nontransferability of Rights..............10
(b) Purchase Price...................................................10
(c) Withholding Taxes................................................10
(d) Restrictions on Transfer of Shares...............................10

SECTION 8. TERMS AND CONDITIONS OF OPTIONS................................10
(a) Stock Option Agreement...........................................10
(b) Number of Shares.................................................10
(c) Exercise Price...................................................11
(d) Withholding Taxes................................................11
(e) Exercisability and Term..........................................11
(f) Nontransferability...............................................11
(g) Exercise of Options Upon Termination of Service..................11
(h) Effect of Change in Control......................................11
(i) Leaves of Absence................................................11
(j) No Rights as a Stockholder.......................................12
(k) Modification, Extension and Renewal of Options...................12
(l) Restrictions on Transfer of Shares...............................12
(m) Buyout Provisions................................................12

SECTION 9. PAYMENT FOR SHARES.............................................12
(a) General Rule.....................................................12
(b) Surrender of Stock...............................................12

-ii-

(c) Services Rendered................................................13
(d) Cashless Exercise................................................13
(e) Exercise/Pledge..................................................13
(f) Promissory Note..................................................13
(g) Other Forms of Payment...........................................13

SECTION 10. STOCK APPRECIATION RIGHTS.....................................13
(a) SAR Agreement....................................................13
(b) Number of Shares.................................................13
(c) Exercise Price...................................................14
(d) Exercisability and Term..........................................14
(e) Effect of Change in Control......................................14
(f) Exercise of SARs.................................................14
(g) Special Holding Period...........................................14
(h) Special Exercise Window..........................................14
(i) Modification or Assumption of SARs...............................15

SECTION 11. STOCK UNITS...................................................15
(a) Stock Unit Agreement.............................................15
(b) Payment for Awards...............................................15
(c) Vesting Conditions...............................................15
(d) Voting and Dividend Rights.......................................15
(e) Form and Time of Settlement of Stock Units.......................15
(f) Death of Recipient...............................................16
(g) Creditors' Rights................................................16

SECTION 12. ADJUSTMENT OF SHARES..........................................16
(a) Adjustments......................................................16
(b) Dissolution or Liquidation.......................................17
(c) Reorganizations..................................................17
(d) Reservation of Rights............................................17

SECTION 13. DEFERRAL OF AWARDS............................................17

SECTION 14. AWARDS UNDER OTHER PLANS......................................18

PAYMENT OF DIRECTOR'S FEES IN SECURITIES...............................18
(a) Effective Date...................................................18
(b) Elections to Receive NSOs, Restricted Shares or Stock Units......18
(c) Number and Terms of NSOs, Restricted Shares or Stock Units.......18

SECTION 16. LEGAL AND REGULATORY REQUIREMENTS.............................19

SECTION 17. WITHHOLDING TAXES.............................................19
(a) General..........................................................19
(b) Share Withholding................................................19

-iii-

SECTION 18. LIMITATION ON PARACHUTE PAYMENTS..............................19
(a) Scope of Limitation..............................................19
(b) Basic Rule.......................................................19
(c) Reduction of Payments............................................19
(d) Overpayments and Underpayments...................................20
(e) Related Corporations.............................................20

SECTION 19. NO EMPLOYMENT RIGHTS..........................................20

SECTION 20. DURATION AND AMENDMENTS.......................................20
(a) Term of the Plan.................................................20
(b) Right to Amend or Terminate the Plan.............................21
(c) Effect of Amendment or Termination...............................21

SECTION 21. EXECUTION.....................................................21

-iv-

HEADWATERS INCORPORATED

2002 STOCK INCENTIVE PLAN

(Adopted by the Board on November 9, 2001)

SECTION 1. ESTABLISHMENT AND PURPOSE.

The Plan was adopted by the Board of Directors effective November 9,
2001. The purpose of the Plan is to promote the long-term success of the Company
and the creation of stockholder value by (a) encouraging Employees, Outside
Directors and Consultants to focus on critical long-range objectives, (b)
encouraging the attraction and retention of Employees, Outside Directors and
Consultants with exceptional qualifications and (c) linking Employees, Outside
Directors and Consultants directly to stockholder interests through increased
stock ownership. The Plan seeks to achieve this purpose by providing for Awards
in the form of Restricted Shares, Stock Units, Options (which may constitute
incentive stock options or nonstatutory stock options) or stock appreciation
rights.

SECTION 2. DEFINITIONS.

(a) "Affiliate" shall mean any entity other than a Subsidiary, if the
Company and/or one or more Subsidiaries own not less than 50% of such entity.

(b) "Award" shall mean any award of an Option, a SAR, a Restricted
Share or a Stock Unit under the Plan.

(d) "Change in Control" shall mean the occurrence of either of the
following events:

(i) A change in the composition of the Board of Directors, as
a result of which fewer than one-half of the incumbent directors are
directors who either:

(A) Had been directors of the Company 24 months prior
to such change; or

(B) Were elected, or nominated for election, to the
Board of Directors with the affirmative votes of at least a
majority of the directors who had been directors of the
Company 24 months prior to such change and who were still in
office at the time of the election or nomination; or

(ii) Any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act) who by the acquisition or aggregation of
securities, is or becomes the beneficial owner (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of
the Company representing twenty (20%) or more of the combined voting
power of the Company's then outstanding securities ordinarily (and
apart from rights accruing under special circumstances) having the

-1-

right to vote at elections of directors (the "Base Capital Stock");
except that any change in the relative beneficial ownership of the
Company's securities by any person resulting solely from a reduction in
the aggregate number of outstanding shares of Base Capital Stock, and
any decrease thereafter in such person's ownership of securities, shall
be disregarded until such person increases in any manner, directly or
indirectly, such person's beneficial ownership of any securities of the
Company. For purposes of this subsection (d)(ii), the term "person"
shall exclude a trustee or other fiduciary holding securities under an
employee benefit plan maintained by the Company or a Parent or
Subsidiary.

A transaction shall not constitute a Change in Control if its sole purpose is to
change the state of the Company's incorporation or to create a holding company
that will be owned in substantially the same proportions by the persons who held
the Company's securities immediately before such transaction.

(e) "Code" shall mean the Internal Revenue Code of 1986, as amended.

(f) "Committee" shall mean the committee designated by the Board of
Directors, which is authorized to administer the Plan, as described in Section 3
hereof.

(g) "Company" shall mean Headwaters Incorporated, a Delaware
corporation.

(h) "Consultant" shall mean a consultant or advisor who provides bona
fide services to the Company, a Parent, a Subsidiary or an Affiliate as an
independent contractor. Service as a Consultant shall be considered Service for
all purposes of the Plan.

(i) "Employee" shall mean any individual who is a common-law employee
of the Company, a Parent or a Subsidiary.

(j) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.

(k) "Exercise Price" shall mean, in the case of an Option, the amount
for which one Common Share may be purchased upon exercise of such Option, as
specified in the applicable Stock Option Agreement. "Exercise Price," in the
case of a SAR, shall mean an amount, as specified in the applicable SAR
Agreement, which is subtracted from the Fair Market Value of one Common Share in
determining the amount payable upon exercise of such SAR.

(l) "Fair Market Value" with respect to a Share, shall mean the market
price of one Share of Stock, determined by the Committee as follows:

(i) If the Stock was traded over-the-counter on the date in
question but was not traded on The Nasdaq Stock Market, then the Fair
Market Value shall be equal to the last transaction price quoted for
such date by the OTC Bulletin Board or, if not so quoted, shall be
equal to the mean between the last reported representative bid and
asked prices quoted for such date by the principal automated
inter-dealer quotation system on which the Stock is quoted or, if the
Stock is not quoted on any such system, by the "Pink Sheets" published
by the National Quotation Bureau, Inc.;

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(ii) If the Stock was traded on The Nasdaq Stock Market, then
the Fair Market Value shall be equal to the last reported sale price
quoted for such date by The Nasdaq Stock Market;

(iii) If the Stock was traded on a United States stock
exchange on the date in question, then the Fair Market Value shall be
equal to the closing price reported for such date by the applicable
composite-transactions report; and

(iv) If none of the foregoing provisions is applicable, then
the Fair Market Value shall be determined by the Committee in good
faith on such basis as it deems appropriate.

In all cases, the determination of Fair Market Value by the Committee shall be
conclusive and binding on all persons.

(m) "ISO" shall mean an employee incentive stock option described in
Code Section 422 of the Code.

(n) "Nonstatutory Option" or "NSO" shall mean an employee stock option
that is not an ISO.

(o) "Offeree" shall mean an individual to whom the Committee has
offered the right to acquire Shares under the Plan (other than upon exercise of
an Option).

(p) "Option" shall mean an ISO or Nonstatutory Option granted under the
Plan and entitling the holder to purchase Shares.

(q) "Optionee" shall mean an individual or estate who holds an Option
or SAR.

(r) "Outside Director" shall mean a member of the Board of Directors
who is not a common-law employee of the Company, a Parent or a Subsidiary.
Service as an Outside Director shall be considered Service for all purposes of
the Plan.

(s) "Parent" shall mean any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company, if each of the
corporations other than the Company owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain. A corporation that attains the status of a Parent on
a date after the adoption of the Plan shall be a Parent commencing as of such
date.

(t) "Participant" shall mean an individual or estate who holds an
Award.

(u) "Plan" shall mean this 2002 Stock Incentive Plan of Headwaters
Incorporated, as amended from time to time.

(v) "Purchase Price" shall mean the consideration for which one Share
may be acquired under the Plan (other than upon exercise of an Option), as
specified by the Committee.

(w) "Restricted Share" shall mean a Share awarded under the Plan.

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(x) "Restricted Share Agreement " shall mean the agreement between the
Company and the recipient of a Restricted Share which contains the terms,
conditions and restrictions pertaining to such Restricted Shares.

(y) "SAR" shall mean a stock appreciation right granted under the Plan.

(z) "SAR Agreement" shall mean the agreement between the Company and an
Optionee which contains the terms, conditions and restrictions pertaining to his
or her SAR.

(aa) "Service" shall mean service as an Employee, Consultant or Outside
Director.

(bb) "Share" shall mean one share of Stock, as adjusted in accordance
with Section 9 (if applicable).

(cc) "Stock" shall mean the Common Stock of the Company.

(dd) "Stock Option Agreement" shall mean the agreement between the
Company and an Optionee that contains the terms, conditions and restrictions
pertaining to his or her Option.

(ee) "Stock Purchase Agreement" shall mean the agreement between the
Company and an Offeree who acquires Shares under the Plan that contains the
terms, conditions and restrictions pertaining to the acquisition of such Shares.

(ff) "Stock Unit" shall mean a bookkeeping entry representing the
equivalent of one Share, as awarded under the Plan.

(gg) "Stock Unit Agreement" shall mean the agreement between the
Company and the recipient of a Stock Unit which contains the terms, conditions
and restrictions pertaining to such Stock Unit.

(hh) "Subsidiary" shall mean any corporation, if the Company and/or one
or more other Subsidiaries own not less than 50% of the total combined voting
power of all classes of outstanding stock of such corporation. A corporation
that attains the status of a Subsidiary on a date after the adoption of the Plan
shall be considered a Subsidiary commencing as of such date.

(ii) "Total and Permanent Disability" shall mean that the Optionee is
unable to engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment that can be expected to result in
death or that has lasted, or can be expected to last, for a continuous period of
not less than 12 months.

SECTION 3. ADMINISTRATION.

(a) Committee Composition. The Plan shall be administered by the
Committee. The Committee shall consist of two or more directors of the Company
who shall satisfy the requirements of Rule 16b-3 (or its successor) under the
Exchange Act with respect to the grant of Awards to persons who are officers or
directors of the Company under Section 16 of the Exchange Act or the Board
itself.

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(b) Committee for Non-Officer Grants. The Board may also appoint one or
more separate committees of the Board, each composed of one or more directors of
the Company who need satisfy the requirements of Section 3(a), who may
administer the Plan with respect to Employees who are not considered officers or
directors of the Company under Section 16 of the Exchange Act, may grant Awards
under the Plan to such Employees and may determine all terms of such grants.
Within the limitations of the preceding sentence, any reference in the Plan to
the Committee shall include such committee or committees appointed pursuant to
the preceding sentence.

(c) Committee Procedures. The Board of Directors shall designate one of
the members of the Committee as chairman. The Committee may hold meetings at
such times and places as it shall determine. The acts of a majority of the
Committee members present at meetings at which a quorum exists, or acts reduced
to or approved in writing by all Committee members, shall be valid acts of the
Committee.

(d) Committee Responsibilities. Subject to the provisions of the Plan,
the Committee shall have full authority and discretion to take the following
actions:

(i) To interpret the Plan and to apply its provisions;

(ii) To adopt, amend or rescind rules, procedures and forms
relating to the Plan;

(iii) To authorize any person to execute, on behalf of the
Company, any instrument required to carry out the purposes of the Plan;

(iv) To determine when Shares are to be awarded or offered for
sale and when Options are to be granted under the Plan;

(v) To select the Offerees and Optionees;

(vi) To determine the number of Shares to be offered to each
Offeree or to be made subject to each Option;

(vii) To prescribe the terms and conditions of each award or
sale of Shares, including (without limitation) the Purchase Price, the
vesting of the award (including accelerating the vesting of awards) and
to specify the provisions of the Stock Purchase Agreement relating to
such award or sale;

(viii) To prescribe the terms and conditions of each Option,
including (without limitation) the Exercise Price, the vesting or
duration of the Option (including accelerating the vesting of the
Option), to determine whether such Option is to be classified as an ISO
or as a Nonstatutory Option, and to specify the provisions of the Stock
Option Agreement relating to such Option;

(ix) To amend any outstanding Stock Purchase Agreement or
Stock Option Agreement, subject to applicable legal restrictions and to
the consent of the Offeree or Optionee who entered into such agreement;

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(x) To prescribe the consideration for the grant of each
Option or other right under the Plan and to determine the sufficiency
of such consideration;

(xi) To determine the disposition of each Option or other
right under the Plan in the event of an Optionee's or Offeree's divorce
or dissolution of marriage;

(xii) To determine whether Options or other rights under the
Plan will be granted in replacement of other grants under an incentive
or other compensation plan of an acquired business;

(xiii) To correct any defect, supply any omission, or
reconcile any inconsistency in the Plan, any Stock Option Agreement or
any Stock Purchase Agreement; and

(xiv) To take any other actions deemed necessary or advisable
for the administration of the Plan.

Subject to the requirements of applicable law, the Committee may designate
persons other than members of the Committee to carry out its responsibilities
and may prescribe such conditions and limitations as it may deem appropriate,
except that the Committee may not delegate its authority with regard to the
selection for participation of or the granting of Options or other rights under
the Plan to persons subject to Section 16 of the Exchange Act. All decisions,
interpretations and other actions of the Committee shall be final and binding on
all Offerees, all Optionees, and all persons deriving their rights from an
Offeree or Optionee. No member of the Committee shall be liable for any action
that he has taken or has failed to take in good faith with respect to the Plan,
any Option, or any right to acquire Shares under the Plan.

SECTION 4. ELIGIBILITY.

(a) General Rule. Only Employees, Consultants and Outside Directors
shall be eligible for the grant of Restricted Shares, Stock Units, NSOs or SARs.
In addition, only Employees shall be eligible for the grant of ISOs. An Employee
who owns more than 10% of the total combined voting power of all classes of
outstanding stock of the Company, a Parent or Subsidiary shall not be eligible
for the grant of an ISO unless the requirements set forth in Section 422(c)(6)
of the Code are satisfied.

(b) Outside Directors. Any other provision of the Plan notwithstanding,
the participation of Outside Directors in the Plan shall be subject to the
following restrictions:

(i) Outside Directors shall only be eligible for the grant of
Restricted Shares, Stock Units, Nonstatutory Options and SARs.

(ii) The Exercise Price of all Nonstatutory Options granted to
an Outside Director under this Section 4(b) shall be not less than 100%
of the Fair Market Value of a Share on the date of grant, payable in
one of the forms described in Section 9(a), (b) and (d).

(iii) Unless otherwise stated in the Stock Option Agreement,
each Option granted under Section 4(b)(ii) shall become exercisable in
three equal annual installments on each of the first three

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anniversaries of the date of grant. Each Option that has been
outstanding for not less than six months shall become exercisable in
full in the event that a Change in Control occurs with respect to the
Company.

(iv) Subject to Sections 4(b)(vii) and (viii), all
Nonstatutory Options granted to an Outside Director under this Section
4(b) shall terminate on the tenth anniversary of the date of grant of
such Options.

(v) If an Optionee's Service terminates for any reason other
than death, then his or her Options shall expire on the earliest of the
following occasions:

(A) The expiration date determined pursuant to
Section 4(b)(vi) above;

(B) The date 24 months after the termination of the
Optionee's Service, if the termination occurs because of his
or her Total and Permanent Disability; or

(C) The date six months after the termination of the
Optionee's Service for any reason other than Total and
Permanent Disability.

The Optionee may exercise all or part of his or her Options at any time
before the expiration of such Options under the preceding sentence, but
only to the extent that such Options had become exercisable before his
or her Service terminated. The balance of such Options shall lapse when
the Optionee's Service terminates. In the event that the Optionee dies
after the termination of his or her Service but before the expiration
of his or her Options, all or part of such Options may be exercised at
any time prior to their expiration by the executors or administrators
of the Optionee's estate or by any person who has acquired such Options
directly from him or her by bequest, inheritance or beneficiary
designation under the Plan, but only to the extent that such Options
had become exercisable before his or her Service terminated.

(vi) If an Optionee dies while he or she is in Service, then
his or her Options shall expire on the earlier of the following dates:

(A) The expiration date determined pursuant to
Section 4(b)(vi) above; or

(B) The date 24 months after his or her death.

All or part of the Optionee's Options may be exercised at any time
before the expiration of such Options under the preceding sentence by
the executors or administrators of his or her estate or by any person
who has acquired such Options directly from him or her by bequest,
inheritance or beneficiary designation under the Plan.

(vii) No Option shall be transferable by the Optionee other
than by will, by written beneficiary designation or by the laws of
descent and distribution. An Option may be exercised during the
lifetime of the Optionee only by the Optionee or by the Optionee's

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guardian or legal representative. No Option or interest therein may be
transferred, assigned, pledged or hypothecated by the Optionee during
his or her lifetime, whether by operation of law or otherwise, or be
made subject to execution, attachment or similar process.

(c) Limitation On Grants. No Employee or Consultant shall be granted
Options to purchase more than 250,000 Shares in any fiscal year of the Company,
except that Options granted to a new Employee or Consultant in the fiscal year
of the Company in which his or her Service first commences shall not cover more
than 300,000 Shares (in each case subject to adjustment in accordance with
Section 12).

(d) Ten-Percent Stockholders. An Employee who owns more than 10% of the
total combined voting power of all classes of outstanding stock of the Company,
a Parent or Subsidiary shall not be eligible for the grant of an ISO unless such
grant satisfies the requirements of Section 422(c)(6) of the Code.

(e) Attribution Rules. For purposes of Section 4(d) above, in
determining stock ownership, an Employee shall be deemed to own the stock owned,
directly or indirectly, by or for such Employee's brothers, sisters, spouse,
ancestors and lineal descendants. Stock owned, directly or indirectly, by or for
a corporation, partnership, estate or trust shall be deemed to be owned
proportionately by or for its shareholders, partners or beneficiaries.

(f) Outstanding Stock. For purposes of Section 4(d) above, "outstanding
stock" shall include all stock actually issued and outstanding immediately after
the grant. "Outstanding stock" shall not include shares authorized for issuance
under outstanding options held by the Employee or by any other person.

SECTION 5. STOCK SUBJECT TO PLAN.

(a) Basic Limitation. Shares offered under the Plan shall be authorized
but unissued Shares or treasury Shares. The maximum aggregate number of Options,
SARs, Stock Units and Restricted Shares awarded under the Plan shall not exceed
2,000,000 Shares, plus the additional Shares described in Sections (b) and (c),
but in no event more than 3,000,000 Shares. The limitation of this Section 5(a)
shall be subject to adjustment pursuant to Section 12.

(b) Annual Increase in Shares. As of January 1 of each year, commencing
with the year 2003, the aggregate number of Options, SARs, Stock Units and
Restricted Shares that may be awarded under the Plan shall automatically
increase by a number equal to the lesser of (i) 500,000 shares, (ii) 2% of the
outstanding shares of Stock of the Company on such date or (iii) a lesser amount
determined by the Board. The aggregate number of Shares that may be issued under
the Plan shall at all times be subject to adjustment pursuant to Section 12. The
number of Shares that are subject to Options or other rights outstanding at any
time under the Plan shall not exceed the number of Shares which then remain
available for issuance under the Plan. The Company, during the term of the Plan,
shall at all times reserve and keep available sufficient Shares to satisfy the
requirements of the Plan.

(c) Additional Shares. If Restricted Shares or Shares issued upon the
exercise of Options are forfeited, then such Shares shall again become available
for Awards under the Plan. If Stock Units, Options or SARs are forfeited or

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terminate for any other reason before being exercised, then the corresponding
Shares shall again become available for Awards under the Plan. If Stock Units
are settled, then only the number of Shares (if any) actually issued in
settlement of such Stock Units shall reduce the number available under Section
5(a) and the balance shall again become available for Awards under the Plan. If
SARs are exercised, then only the number of Shares (if any) actually issued in
settlement of such SARs shall reduce the number available in Section 5(a) and
the balance shall again become available for Awards under the Plan. The
foregoing notwithstanding, the aggregate number of Shares that may be issued
under the Plan upon the exercise of ISOs shall not be increased when Restricted
Shares or other Shares are forfeited.

(d) Dividend Equivalents. Any dividend equivalents paid or credited
under the Plan shall not be applied against the number of Restricted Shares,
Stock Units, Options or SARs available for Awards, whether or not such dividend
equivalents are converted into Stock Units.

SECTION 6. RESTRICTED SHARES

(a) Restricted Share Agreement. Each grant of Restricted Shares under
the Plan shall be evidenced by a Restricted Share Agreement between the
recipient and the Company. Such Restricted Shares shall be subject to all
applicable terms of the Plan and may be subject to any other terms that are not
inconsistent with the Plan. The provisions of the various Restricted Share
Agreements entered into under the Plan need not be identical.

(b) Payment for Awards. Subject to the following sentence, Restricted
Shares may be sold or awarded under the Plan for such consideration as the
Committee may determine, including (without limitation) cash, cash equivalents,
full-recourse promissory notes, past services and future services. To the extent
that an Award consists of newly issued Restricted Shares, the Award recipient
shall furnish consideration with a value not less than the par value of such
Restricted Shares in the form of cash, cash equivalents, or past services
rendered to the Company (or a Parent or Subsidiary), as the Committee may
determine.

(c) Vesting. Each Award of Restricted Shares may or may not be subject
to vesting. Vesting shall occur, in full or in installments, upon satisfaction
of the conditions specified in the Restricted Share Agreement. The Committee may
include among such conditions the requirement that the performance of the
Company or a business unit of the Company for a specified period of one or more
years equal or exceed a target determined in advance by the Committee. The
Committee may specify that Such performance shall be determined by the Company's
independent auditors. The Committee shall determine such target not later than
the 90th day of such period. In no event shall the number of Restricted Shares
which are subject to performance based vesting conditions exceed [50% of the
Restricted Shares], subject to adjustment in accordance with Section 12. A
Restricted Share Agreement may provide for accelerated vesting in the event of
the Participant's death, disability or retirement or other events. The Committee
may determine, at the time of granting Restricted Shares of thereafter, that all
or part of such Restricted Shares shall become vested in the event that a Change
in Control occurs with respect to the Company.

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(d) Voting and Dividend Rights. The holders of Restricted Shares
awarded under the Plan shall have the same voting, dividend and other rights as
the Company's other stockholders. A Restricted Share Agreement, however, may
require that the holders of Restricted Shares invest any cash dividends received
in additional Restricted Shares. Such additional Restricted Shares shall be
subject to the same conditions and restrictions as the Award with respect to
which the dividends were paid.

SECTION 7. OTHER TERMS AND CONDITIONS OF AWARDS OR SALES.

(a) Duration of Offers and Nontransferability of Rights. Any right to
acquire Shares under the Plan (other than an Option) shall automatically expire
if not exercised by the Offeree 30 days after the grant of such right was
communicated to him by the Committee. Such right shall not be transferable and
shall be exercisable only by the Offeree to whom such right was granted.

(b) Purchase Price. The Purchase Price shall be determined by the
Committee at its sole discretion. The Purchase Price shall be payable in one of
the forms described in Sections 9(a), (b) or (c).

(c) Withholding Taxes. As a condition to the purchase of Shares, the
Offeree shall make such arrangements as the Committee may require for the
satisfaction of any federal, state or local withholding tax obligations that may
arise in connection with such purchase.

(d) Restrictions on Transfer of Shares. Any Shares awarded or sold
under the Plan shall be subject to such special forfeiture conditions, rights of
repurchase, rights of first refusal and other transfer restrictions as the
Committee may determine. Such restrictions shall be set forth in the applicable
Stock Purchase Agreement and shall apply in addition to any general restrictions
that may apply to all holders of Shares.

SECTION 8. TERMS AND CONDITIONS OF OPTIONS.

(a) Stock Option Agreement. Each grant of an Option under the Plan
shall be evidenced by a Stock Option Agreement between the Optionee and the
Company. Such Option shall be subject to all applicable terms and conditions of
the Plan and may be subject to any other terms and conditions which are not
inconsistent with the Plan and which the Committee deems appropriate for
inclusion in a Stock Option Agreement. The Stock Option Agreement shall specify
whether the Option is an ISO or an NSO. The provisions of the various Stock
Option Agreements entered into under the Plan need not be identical. Options may
be granted in consideration of a reduction in the Optionee's other compensation.
A Stock Option Agreement may provide that a new Option will be granted
automatically to the Optionee when he or she exercises a prior Option and pays
the Exercise Price in a form described in Section 9.

(b) Number of Shares. Each Stock Option Agreement shall specify the
number of Shares that are subject to the Option and shall provide for the
adjustment of such number in accordance with Section 12. Options granted to an
Optionee in a single fiscal year of the Company shall not cover more than
250,000 Shares, except that Options granted to a new Employee or Consultant in
the fiscal year of the Company in which his or her Service first commences shall
not pertain to more than 300,000 Shares.

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(c) Exercise Price. Each Stock Option Agreement shall specify the
Exercise Price. The Exercise Price of an ISO shall not be less than 100% of the
Fair Market Value of a Share on the date of grant, except as otherwise provided
in Section 4(d). Subject to the foregoing in this Section 8(c), the Exercise
Price under any Option shall be determined by the Committee at its sole
discretion. The Exercise Price shall be payable in one of the forms described in
Section 9.

(d) Withholding Taxes. As a condition to the exercise of an Option, the
Optionee shall make such arrangements as the Committee may require for the
satisfaction of any federal, state or local withholding tax obligations that may
arise in connection with such exercise. The Optionee shall also make such
arrangements as the Committee may require for the satisfaction of any federal,
state or local withholding tax obligations that may arise in connection with the
disposition of Shares acquired by exercising an Option.

(e) Exercisability and Term. Each Stock Option Agreement shall specify
the date when all or any installment of the Option is to become exercisable. The
Stock Option Agreement shall also specify the term of the Option; provided that
the term of an ISO shall in no event exceed 10 years from the date of grant
(five years for Employees described in Section 4(d)). A Stock Option Agreement
may provide for accelerated exercisability in the event of the Optionee's death,
disability, or retirement or other events and may provide for expiration prior
to the end of its term in the event of the termination of the Optionee's
service. Options may be awarded in combination with SARs, and such an Award may
provide that the Options will not be exercisable unless the related SARs are
forfeited. Subject to the foregoing in this Section 8(e), the Committee at its
sole discretion shall determine when all or any installment of an Option is to
become exercisable and when an Option is to expire.

(f) Nontransferability. During an Optionee's lifetime, his Option(s)
shall be exercisable only by him or her and shall not be transferable by
operation of law or agreement. In the event of an Optionee's death, his or her
Option(s) shall not be transferable other than by will or by the laws of descent
and distribution.

(g) Exercise of Options Upon Termination of Service. Each Stock Option
Agreement shall set forth the extent to which the Optionee shall have the right
to exercise the Option following termination of the Optionee's Service with the
Company and its Subsidiaries, and the right to exercise the Option of any
executors or administrators of the Optionee's estate or any person who has
acquired such Option(s) directly from the Optionee by bequest or inheritance.
Such provisions shall be determined in the sole discretion of the Committee,
need not be uniform among all Options issued pursuant to the Plan, and may
reflect distinctions based on the reasons for termination of Service.

(h) Effect of Change in Control. The Committee may determine, at the
time of granting an Option or thereafter, that such Option shall become
exercisable as to all or part of the Shares subject to such Option in the event
that a Change in Control occurs with respect to the Company, subject to the
following limitation: In the case of an ISO, the acceleration of exercisability
shall not occur without the Optionee's written consent.

(i) Leaves of Absence. An Employee's Service shall cease when such
Employee ceases to be actively employed by, or a consultant or adviser to, the

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Company (or any subsidiary) as determined in the sole discretion of the Board of
Directors. For purposes of Options, Service does not terminate when an Employee
goes on a bona fide leave of absence, that was approved by the Company in
writing, if the terms of the leave provide for continued service crediting, or
when continued service crediting is required by applicable law. However, for
purposes of determining whether an Option is entitled to ISO status, an
Employee's Service will be treated as terminating 90 days after such Employee
went on leave, unless such Employee's right to return to active work is
guaranteed by law or by a contract. Service terminates in any event when the
approved leave ends, unless such Employee immediately returns to active work.
The Company determines which leaves count toward Service, and when Service
terminates for all purposes under the Plan.

(j) No Rights as a Stockholder. An Optionee, or a transferee of an
Optionee, shall have no rights as a stockholder with respect to any Shares
covered by his Option until the date of the issuance of a stock certificate for
such Shares. No adjustments shall be made, except as provided in Section 12.

(k) Modification, Extension and Renewal of Options. Within the
limitations of the Plan, the Committee may modify, extend or renew outstanding
options or may accept the cancellation of outstanding options (to the extent not
previously exercised), whether or not granted hereunder, in return for the grant
of new Options for the same or a different number of Shares and at the same or a
different exercise price. The foregoing notwithstanding, no modification of an
Option shall, without the consent of the Optionee, impair his rights or increase
his obligations under such Option.

(l) Restrictions on Transfer of Shares. Any Shares issued upon exercise
of an Option shall be subject to such special forfeiture conditions, rights of
repurchase, rights of first refusal and other transfer restrictions as the
Committee may determine. Such restrictions shall be set forth in the applicable
Stock Option Agreement and shall apply in addition to any general restrictions
that may apply to all holders of Shares.

(m) Buyout Provisions. The Committee may at any time (a) offer to buy
out for a payment in cash or cash equivalents an Option previously granted or
(b) authorize an Optionee to elect to cash out an Option previously granted, in
either case at such time and based upon such terms and conditions as the
Committee shall establish.

SECTION 9. PAYMENT FOR SHARES.

(a) General Rule. The entire Exercise Price of Shares issued under the
Plan shall be payable in lawful money of the United States of America at the
time when such Shares are purchased, except as provided in Sections 9(b) through
9(g) below.

(b) Surrender of Stock. To the extent that a Stock Option Agreement so
provides, payment may be made all or in part by surrendering, or attesting to
the ownership of, Shares which have already been owned by the Optionee or his
representative for more than 6 months. Such Shares shall be valued at their Fair
Market Value on the date when the new Shares are purchased under the Plan. The
Optionee shall not surrender, or attest to the ownership of, Shares in payment
of the Exercise Price if such action would cause the Company to recognize

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compensation expense (or additional compensation expense) with respect to the
Option for financial reporting purposes.

(c) Services Rendered. At the discretion of the Committee, Shares may
be awarded under the Plan in consideration of services rendered to the Company
or a Subsidiary prior to the award. If Shares are awarded without the payment of
a Purchase Price in cash, the Committee shall make a determination (at the time
of the award) of the value of the services rendered by the Offeree and the
sufficiency of the consideration to meet the requirements of Section 6(c).

(d) Cashless Exercise. At the discretion of the Company and to the
extent that a Stock Option Agreement so provides, payment may be made all or in
part by delivery (on a form prescribed by the Committee) of an irrevocable
direction to a securities broker to sell Shares and to deliver all or part of
the sale proceeds to the Company in payment of the aggregate Exercise Price.

(e) Exercise/Pledge. To the extent that a Stock Option Agreement so
provides, payment may be made all or in part by delivery (on a form prescribed
by the Committee) of an irrevocable direction to a securities broker or lender
to pledge Shares, as security for a loan, and to deliver all or part of the loan
proceeds to the Company in payment of the aggregate Exercise Price.

(f) Promissory Note. To the extent that a Stock Option Agreement so
provides, payment may be made all or in part by delivering (on a form prescribed
by the Company) a full-recourse promissory note. However, the par value of the
Common Shares being purchased under the Plan, if newly issued, shall be paid in
cash or cash equivalents.

(g) Other Forms of Payment. To the extent that a Stock Option Agreement
so provides, payment may be made in any other form that is consistent with
applicable laws, regulations and rules.

SECTION 10. STOCK APPRECIATION RIGHTS.

(a) SAR Agreement. Each grant of a SAR under the Plan shall be
evidenced by a SAR Agreement between the Optionee and the Company. Such SAR
shall be subject to all applicable terms of the Plan and may be subject to any
other terms that are not inconsistent with the Plan. The provisions of the
various SAR Agreements entered into under the Plan need not be identical. SARs
may be granted in consideration of a reduction in the Optionee's other
compensation.

(b) Number of Shares. Each SAR Agreement shall specify the number of
Shares to which the SAR pertains and shall provide for the adjustment of such
number in accordance with Section 12. SARs granted to any Optionee in a single
calendar year shall in no event pertain to more than 250,000 Shares, except that
SARs granted to a new Employee or Consultant in the fiscal year of the Company
in which his or her Service first commences shall not pertain to more than
300,000 Shares. The limitations set forth in the preceding sentence shall be
subject to adjustment in accordance with Section 12.

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(c) Exercise Price. Each SAR Agreement shall specify the Exercise
Price. A SAR Agreement may specify an Exercise Price that varies in accordance
with a predetermined formula while the SAR is outstanding.

(d) Exercisability and Term. Each SAR Agreement shall specify the date
when all or any installment of the SAR is to become exercisable. The SAR
Agreement shall also specify the term of the SAR. A SAR Agreement may provide
for accelerated exercisability in the event of the Optionee's death, disability
or retirement or other events and may provide for expiration prior to the end of
its term in the event of the termination of the Optionee's service. SARs may be
awarded in combination with Options, and such an Award may provide that the SARs
will not be exercisable unless the related Options are forfeited. A SAR may be
included in an ISO only at the time of grant but may be included in an NSO at
the time of grant or thereafter. A SAR granted under the Plan may provide that
it will be exercisable only in the event of a Change in Control.

(e) Effect of Change in Control. The Committee may determine, at the
time of granting a SAR or thereafter, that such SAR shall become fully
exercisable as to all Common Shares subject to such SAR in the event that a
Change in Control occurs with respect to the Company, subject to the following
sentence. If the Company and the other party to the transaction constituting a
Change in Control agree that such transaction is to be treated as a "pooling of
interests" for financial reporting purposes, and if such transaction in fact is
so treated, then the acceleration of exercisability shall not occur to the
extent that the Company's independent accountants and such other party's
independent accountants separately determine in good faith that such
acceleration would preclude the use of "pooling of interests" accounting.

(f) Exercise of SARs. Upon exercise of a SAR, the Optionee (or any
person having the right to exercise the SAR after his or her death) shall
receive from the Company (a) Shares, (b) cash or (c) a combination of Shares and
cash, as the Committee shall determine. The amount of cash and/or the Fair
Market Value of Shares received upon exercise of SARs shall, in the aggregate,
be equal to the amount by which the Fair Market Value (on the date of surrender)
of the Shares subject to the SARs exceeds the Exercise Price. If, on the date
when a SAR expires, the Exercise Price under such SAR is less than the Fair
Market Value on such date but any portion of such SAR has not been exercised or
surrendered, then such SAR shall automatically be deemed to be exercised as of
such date with respect to such portion.

(g) Special Holding Period. To the extent required by Section 16 of the
Exchange Act or any rule thereunder, an SAR shall not be exercised for cash
unless both it and the related Option have been outstanding for more than six
months.

(h) Special Exercise Window. To the extent required by Section 16 of
the Exchange Act or any rule thereunder, an SAR may only be exercised for cash
during a period which (a) begins on the third business day following a date when
the Company's quarterly summary statement of sales and earnings is released to
the public and (b) ends on the third business day following such date. This
Section 10(h) shall not apply if the exercise occurs automatically on the date
when the related Option expires, and the Committee may determine that it shall
not apply to limited SARs that are exercisable only in the event of a Change in
Control.

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(i) Modification or Assumption of SARs. Within the limitations of the
Plan, the Committee may modify, extend or assume outstanding SARs or may accept
the cancellation of outstanding SARs (whether granted by the Company or by
another issuer) in return for the grant of new SARs for the same or a different
number of shares and at the same or a different exercise price. The foregoing
notwithstanding, no modification of a SAR shall, without the consent of the
Optionee, may alter or impair his or her rights or obligations under such SAR.

SECTION 11. STOCK UNITS.

(a) Stock Unit Agreement. Each grant of Stock Units under the Plan
shall be evidenced by a Stock Unit Agreement between the recipient and the
Company. Such Stock Units shall be subject to all applicable terms of the Plan
and may be subject to any other terms that are not inconsistent with the Plan.
The provisions of the various Stock Unit Agreements entered into under the Plan
need not be identical. Stock Units may be granted in consideration of a
reduction in the recipient's other compensation.

(b) Payment for Awards. To the extent that an Award is granted in the
form of Stock Units, no cash consideration shall be required of the Award
recipients.

(c) Vesting Conditions. Each Award of Stock Units may or may not be
subject to vesting. Vesting shall occur, in full or in installments, upon
satisfaction of the conditions specified in the Stock Unit Agreement. A Stock
Unit Agreement may provide for accelerated vesting in the event of the
Participant's death, disability or retirement or other events. The Committee may
determine, at the time of granting Stock Units or thereafter, that all or part
of such Stock Units shall become vested in the event that a Change in Control
occurs with respect to the Company, except as provided in the next following
sentence. If the Company and the other party to the transaction constituting a
Change in Control agree that such transaction is to be treated as a "pooling of
interests" for financial reporting purposes, and if such transaction in fact is
so treated, then the acceleration of vesting shall not occur to the extent that
the Company's independent accountants and such other party's independent
accountants separately determine in good faith that such acceleration would
preclude the use of "pooling of interests" accounting.

(d) Voting and Dividend Rights. The holders of Stock Units shall have
no voting rights. Prior to settlement or forfeiture, any Stock Unit awarded
under the Plan may, at the Committee's discretion, carry with it a right to
dividend equivalents. Such right entitles the holder to be credited with an
amount equal to all cash dividends paid on one Share while the Stock Unit is
outstanding. Dividend equivalents may be converted into additional Stock Units.
Settlement of dividend equivalents may be made in the form of cash, in the form
of Shares, or in a combination of both. Prior to distribution, any dividend
equivalents which are not paid shall be subject to the same conditions and
restrictions (including without limitation, any forfeiture conditions) as the
Stock Units to which they attach.

(e) Form and Time of Settlement of Stock Units. Settlement of vested
Stock Units may be made in the form of (a) cash, (b) Shares or (c) any
combination of both, as determined by the Committee. The actual number of Stock
Units eligible for settlement may be larger or smaller than the number included
in the original Award, based on predetermined performance factors. Methods of
converting Stock Units into cash may include (without limitation) a method based

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on the average Fair Market Value of Shares over a series of trading days. Vested
Stock Units may be settled in a lump sum or in installments. The distribution
may occur or commence when all vesting conditions applicable to the Stock Units
have been satisfied or have lapsed, or it may be deferred to any later date. The
amount of a deferred distribution may be increased by an interest factor or by
dividend equivalents. Until an Award of Stock Units is settled, the number of
such Stock Units shall be subject to adjustment pursuant to Section 12.

(f) Death of Recipient. Any Stock Units Award that becomes payable
after the recipient's death shall be distributed to the recipient's beneficiary
or beneficiaries. Each recipient of a Stock Units Award under the Plan shall
designate one or more beneficiaries for this purpose by filing the prescribed
form with the Company. A beneficiary designation may be changed by filing the
prescribed form with the Company at any time before the Award recipient's death.
If no beneficiary was designated or if no designated beneficiary survives the
Award recipient, then any Stock Units Award that becomes payable after the
recipient's death shall be distributed to the recipient's estate.

(g) Creditors' Rights. A holder of Stock Units shall have no rights
other than those of a general creditor of the Company. Stock Units represent an
unfunded and unsecured obligation of the Company, subject to the terms and
conditions of the applicable Stock Unit Agreement.

SECTION 12. ADJUSTMENT OF SHARES.

(a) Adjustments. In the event of a subdivision of the outstanding
Stock, a declaration of a dividend payable in Shares, a declaration of a
dividend payable in a form other than Shares in an amount that has a material
effect on the price of Shares, a combination or consolidation of the outstanding
Stock (by reclassification or otherwise) into a lesser number of Shares, a
recapitalization, a spin-off or a similar occurrence, the Committee shall make
such adjustments as it, in its sole discretion, deems appropriate in one or more
of:

(i) The number of Options, SARs, Restricted Shares and Stock
Units available for future Awards under Section 5;

(ii) The limitations set forth in Sections 4(c), 8(b) and
10(b);

(iii) The number of NSOs to be granted to Outside Directors
under Section 4(b);

(iv) The number of Shares covered by each outstanding Option
and SAR;

(v) The Exercise Price under each outstanding Option and SAR;
or

(vi) The number of Stock Units included in any prior Award
which has not yet been settled.

Except as provided in this Section 12, a Participant shall have no rights by
reason of any issue by the Company of stock of any class or securities

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convertible into stock of any class, any subdivision or consolidation of shares
of stock of any class, the payment of any stock dividend or any other increase
or decrease in the number of shares of stock of any class.

(b) Dissolution or Liquidation. To the extent not previously exercised
or settled, Options, SARs and Stock Units shall terminate immediately prior to
the dissolution or liquidation of the Company.

(c) Reorganizations. In the event that the Company is a party to a
merger or other reorganization, outstanding Awards shall be subject to the
agreement of merger or reorganization. Such agreement shall provide for:

(i) The continuation of the outstanding Awards by the Company,
if the Company is a surviving corporation;

(ii) The assumption of the outstanding Awards by the surviving
corporation or its parent or subsidiary;

(iii) The substitution by the surviving corporation or its
parent or subsidiary of its own awards for the outstanding Awards;

(iv) Full exercisability or vesting and accelerated expiration
of the outstanding Awards; or

(v) Settlement of the full value of the outstanding Awards in
cash or cash equivalents followed by cancellation of such Awards.

(d) Reservation of Rights. Except as provided in this Section 12, an
Optionee or Offeree shall have no rights by reason of any subdivision or
consolidation of shares of stock of any class, the payment of any dividend or
any other increase or decrease in the number of shares of stock of any class.
Any issue by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall not affect, and no
adjustment by reason thereof shall be made with respect to, the number or
Exercise Price of Shares subject to an Option. The grant of an Option pursuant
to the Plan shall not affect in any way the right or power of the Company to
make adjustments, reclassifications, reorganizations or changes of its capital
or business structure, to merge or consolidate or to dissolve, liquidate, sell
or transfer all or any part of its business or assets.

SECTION 13. DEFERRAL OF AWARDS.

The Committee (in its sole discretion) may permit or require a
Participant to:

a) Have cash that otherwise would be paid to such Participant as
a result of the exercise of a SAR or the settlement of Stock
Units credited to a deferred compensation account established
for such Participant by the Committee as an entry on the
Company's books;

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b) Have Shares that otherwise would be delivered to such
Participant as a result of the exercise of an Option or SAR
converted into an equal number of Stock Units; or

c) Have Shares that otherwise would be delivered to such
Participant as a result of the exercise of an Option or SAR or
the settlement of Stock Units converted into amounts credited
to a deferred compensation account established for such
Participant by the Committee as an entry on the Company's
books. Such amounts shall be determined by reference to the
Fair Market Value of such Shares as of the date when they
otherwise would have been delivered to such Participant.

A deferred compensation account established under this Section 13 may be
credited with interest or other forms of investment return, as determined by the
Committee. A Participant for whom such an account is established shall have no
rights other than those of a general creditor of the Company. Such an account
shall represent an unfunded and unsecured obligation of the Company and shall be
subject to the terms and conditions of the applicable agreement between such
Participant and the Company. If the deferral or conversion of Awards is
permitted or required, the Committee (in its sole discretion) may establish
rules, procedures and forms pertaining to such Awards, including (without
limitation) the settlement of deferred compensation accounts established under
this Section 13.

SECTION 14. AWARDS UNDER OTHER PLANS.

The Company may grant awards under other plans or programs. Such awards
may be settled in the form of Shares issued under this Plan. Such Shares shall
be treated for all purposes under the Plan like Shares issued in settlement of
Stock Units and shall, when issued, reduce the number of Shares available under
Section 5.

SECTION 15. PAYMENT OF DIRECTOR'S FEES IN SECURITIES.

(a) Effective Date. No provision of this Section 15 shall be effective
unless and until the Board has determined to implement such provision.

(b) Elections to Receive NSOs, Restricted Shares or Stock Units. An
Outside Director may elect to receive his or her annual retainer payments and/or
meeting fees from the Company in the form of cash, NSOs, Restricted Shares or
Stock Units, or a combination thereof, as determined by the Board. Such NSOs,
Restricted Shares and Stock Units shall be issued under the Plan. An election
under this Section 15 shall be filed with the Company on the prescribed form.

(c) Number and Terms of NSOs, Restricted Shares or Stock Units. The
number of NSOs, Restricted Shares or Stock Units to be granted to Outside
Directors in lieu of annual retainers and meeting fees that would otherwise be
paid in cash shall be calculated in a manner determined by the Board. The terms
of such NSOs, Restricted Shares or Stock Units shall also be determined by the
Board.

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SECTION 16. LEGAL AND REGULATORY REQUIREMENTS.

Shares shall not be issued under the Plan unless the issuance and
delivery of such Shares complies with (or is exempt from) all applicable
requirements of law, including (without limitation) the Securities Act of 1933,
as amended, the rules and regulations promulgated thereunder, state securities
laws and regulations and the regulations of any stock exchange on which the
Company's securities may then be listed, and the Company has obtained the
approval or favorable ruling from any governmental agency which the Company
determines is necessary or advisable.

SECTION 17. WITHHOLDING TAXES.

(a) General. To the extent required by applicable federal, state, local
or foreign law, a Participant or his or her successor shall make arrangements
satisfactory to the Company for the satisfaction of any withholding tax
obligations that arise in connection with the Plan. The Company shall not be
required to issue any Shares or make any cash payment under the Plan until such
obligations are satisfied.

(b) Share Withholding. The Committee may permit a Participant to
satisfy all or part of his or her withholding or income tax obligations by
having the Company withhold all or a portion of any Shares that otherwise would
be issued to him or her or by surrendering all or a portion of any Shares that
he or she previously acquired. Such Shares shall be valued at their Fair Market
Value on the date when taxes otherwise would be withheld in cash.

SECTION 18. LIMITATION ON PARACHUTE PAYMENTS.

(a) Scope of Limitation. This Section 18 shall apply to an Award unless
the Committee, at the time of making an Award under the Plan or at any time
thereafter, specifies in writing that such Award shall not be subject to this
Section 18. If this Section 18 applies to an Award, it shall supersede any
contrary provision of the Plan or of any Award granted under the Plan.

(b) Basic Rule. In the event that the independent auditors most
recently selected by the Board (the "Auditors") determine that any payment or
transfer by the Company under the Plan to or for the benefit of a Participant (a
"Payment") would be nondeductible by the Company for federal income tax purposes
because of the provisions concerning "excess parachute payments" in Section 280G
of the Code, then the aggregate present value of all Payments shall be reduced
(but not below zero) to the Reduced Amount. For purposes of this Section 18, the
"Reduced Amount" shall be the amount, expressed as a present value, which
maximizes the aggregate present value of the Payments without causing any
Payment to be nondeductible by the Company because of Section 280G of the Code.

(c) Reduction of Payments. If the Auditors determine that any Payment
would be nondeductible by the Company because of Section 280G of the Code, then
the Company shall promptly give the Participant notice to that effect and a copy
of the detailed calculation thereof and of the Reduced Amount, and the
Participant may then elect, in his or her sole discretion, which and how much of
the Payments shall be eliminated or reduced (as long as after such election the
aggregate present value of the Payments equals the Reduced Amount) and shall
advise the Company in writing of his or her election within 10 days of receipt

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of notice. If no such election is made by the Participant within such 10-day
period, then the Company may elect which and how much of the Payments shall be
eliminated or reduced (as long as after such election the aggregate present
value of the Payments equals the Reduced Amount) and shall notify the
Participant promptly of such election. For purposes of this Section 18, present
value shall be determined in accordance with Section 280G(d)(4) of the Code. All
determinations made by the Auditors under this Section 18 shall be binding upon
the Company and the Participant and shall be made within 60 days of the date
when a Payment becomes payable or transferable. As promptly as practicable
following such determination and the elections hereunder, the Company shall pay
or transfer to or for the benefit of the Participant such amounts as are then
due to him or her under the Plan and shall promptly pay or transfer to or for
the benefit of the Participant in the future such amounts as become due to him
or her under the Plan.

(d) Overpayments and Underpayments. As a result of uncertainty in the
application of Section 280G of the Code at the time of an initial determination
by the Auditors hereunder, it is possible that Payments will have been made by
the Company that should not have been made (an "Overpayment") or that additional
Payments that will not have been made by the Company could have been made (an
"Underpayment"), consistent in each case with the calculation of the Reduced
Amount hereunder. In the event that the Auditors, based upon the assertion of a
deficiency by the Internal Revenue Service against the Company or the
Participant that the Auditors believe has a high probability of success,
determine that an Overpayment has been made, such Overpayment shall be treated
for all purposes as a loan to the Participant which he or she shall repay to the
Company, together with interest at the applicable federal rate provided in
Section 7872(f)(2) of the Code; provided, however, that no amount shall be
payable by the Participant to the Company if and to the extent that such payment
would not reduce the amount subject to taxation under Section 4999 of the Code.
In the event that the Auditors determine that an Underpayment has occurred, such
Underpayment shall promptly be paid or transferred by the Company to or for the
benefit of the Participant, together with interest at the applicable federal
rate provided in Section 7872(f)(2) of the Code.

(e) Related Corporations. For purposes of this Section 18, the term
"Company" shall include affiliated corporations to the extent determined by the
Auditors in accordance with Section 280G(d)(5) of the Code.

SECTION 19. NO EMPLOYMENT RIGHTS.

No provision of the Plan, nor any right or Option granted under the
Plan, shall be construed to give any person any right to become, to be treated
as, or to remain an Employee. The Company and its Subsidiaries reserve the right
to terminate any person's Service at any time and for any reason, with or
without notice.

SECTION 20. DURATION AND AMENDMENTS.

(a) Term of the Plan. The amended and restated Plan, as set forth
herein, shall terminate automatically on the10th anniversary of date of Plan and
may be terminated on any earlier date pursuant to Subsection (b) below.

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(b) Right to Amend or Terminate the Plan. The Board of Directors may
amend the Plan at any time and from time to time. Rights and obligations under
any Option granted before amendment of the Plan shall not be materially impaired
by such amendment, except with consent of the person to whom the Option was
granted. An amendment of the Plan shall be subject to the approval of the
Company's stockholders only to the extent required by applicable laws,
regulations or rules.

(c) Effect of Amendment or Termination. No Shares shall be issued or
sold under the Plan after the termination thereof, except upon exercise of an
Option granted prior to such termination. The termination of the Plan, or any
amendment thereof, shall not affect any Share previously issued or any Option
previously granted under the Plan.

SECTION 21. EXECUTION.

To record the adoption of the amended and restated Plan by the Board of
Directors effective as of November 9, 2001, the Company has caused its
authorized officer to execute the same.

Headwaters Incorporated

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

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