Dear Fellow Stockholders:

Fiscal 2007 proved to be a challenging year for Headwaters and its shareholders. Headwaters’ building products segment was negatively impacted by the steady down-turn in new residential housing starts. In addition, we are transitioning away from the Section 29/45K synfuel business. Notwithstanding the challenging environment, the Company was able to demonstrate strong financial and operational performance, improving margins in building products, setting records in our coal combustion products segment, and aggressively advancing our new businesses.

Total revenue for the year ended September 30, 2007 was $1.208 billion, up 8% from $1.121 billion for the year ended September 30, 2006. Before a charge to goodwill, Headwaters was able to book near record numbers for net income of $118.1 million and earnings per share of $2.53.

Headwaters is required by generally accepted accounting principles to evaluate its goodwill at least annually. Because of the downturn in the building products markets and changes in valuation assumptions, we were required to write down the goodwill of Tapco, one of our building products units. The write down was $98.0 million. However, the write down does not affect important investor parameters such as cash flow.

Several years ago, Headwaters commenced implementation of Lean Six Sigma throughout the Company. In spite of the recent downturn in building products, we have improved our business processes. The results have been clear and measurable: better lead time, lower costs, and better customer satisfaction. Our operating margins actually improved in the September quarter compared to 2006.

Headwaters believes that the combination of its diversified end products, strong product categories, and continued integration of new niche products into its large distribution system will help to mitigate the impact of the down cycle on our revenues. In 2007, our new products and brands enjoyed a 22% organic growth rate and produced $81 million in revenue.

Headwaters’ coal combustion products (CCPs) segment continued to exceed expectations, with a record-breaking September 2007 quarter, both in revenue and operating income. We anticipate sustainable growth in CCPs as we continue our efforts to expand distribution, capture new supply contracts, and further our fly ash improvement technologies.

Unfortunately, our outlook for new residential construction is not as positive. We do not foresee any improvements in this sector until 2009 at the earliest, and anticipate calendar 2008 will be another year of downward pressure. However, we ended 2007 with operational momentum and we look forward to the challenge of improving our business, even in a down cycle.

Headwaters Energy Services (HES) continues to develop multiple coal cleaning facilities and is projected to have a total of five facilities operating near the end of calendar year 2007. We have investigated more than 65 carbon mineral sites and secured mineral rights to millions of tons of waste coal. Over time, we anticipate that coal cleaning will replace our Section 29/45K business.

Beginning in fiscal 2006 and through the end of fiscal 2007, Headwaters completed three HCAT™ commercial runs at two re-fineries. In addition, we completed the construction of a mixing skid to be used at a third refinery and have already shipped our HCAT catalyst precursor materials that will be used in the scheduled test. If the test proves successful, we have negotiated long term agreements with this refinery for extended use and long term sales of our HCAT catalyst materials.

As many of our shareholders are aware, our legacy Section 29/45K tax credit business will sunset at the end of December 2007. We are well positioned to deal with the uncertainties associated with the loss of Section 29/45K. We have developed very strong businesses, creating substantial cash flow and placing us squarely on the path to building long term value for our shareholders.


Sincerely,
Kirk A. Benson

Chairman and CEO