SHAREHOLDERS’LETTER

DEAR FELLOW SHAREHOLDERS:$819$858$860

$768

$348

revenue(excludes Section 45K)

FY04 FY05 FY06 FY07 FY08

$362

$314$287

$248$214

revenue(excludes section 45K and building products)

FY04 FY05 FY06 FY07 FY08

PA G E O N E

“Life isn’t about waiting for the

storm to pass, it’s about learning how to dance in the rain.”

PA G E T W O

S U S TA I N A B I L I T YConserving natural resources. Productively using materials once considered waste. Consuming less energy to make our products. Making products that enable people to use less energy. Striving to meet the needs of the present without compromising the ability of future generations to meet their own needs.

These are the principles that bind Headwaters’ businesses – a commitment to our vision statement:

This commitment to sustainability has garnered recognition for Headwaters in diverse industries. For instance, in 2007 the Company was honored with the prestigious Presidential Green Chemistry Award for the development of nanocatalysts that improve the production of hydrogen peroxide. In 2008, Headwaters was recognized by the U.S. Environmental Protection Agency with its C2P2 award for the Company’s longstanding leadership in increasing the utilization of coal combustion products.

Finding uses for underutilized resources is only half of the story. Creating real value for customers and shareholders is the second half. Headwaters’ products derived from underutilized resources are not lower quality “recycled” materials. They are products that often exceed the performance of the “brand new” materials they replace.

Consider Headwaters Energy Services. The Company recovers coal from waste piles and waste ponds left over from decades of mining activities. During the recovery process, the coal is cleaned to reduce contaminants such as ash, sulfur and mercury that would otherwise create harmful air emissions. The resulting coal product also exhibits higher heating value and more stable combustion characteristics, further improving energy efficiency and reducing emission of nitrogen oxides.

Or consider Headwaters Resources. The Company uses materials left over after coal is burned – chiefly fly ash – to improve the quality of building products – mainly concrete. Concrete made with fly ash is stronger and more durable than concrete made with cement alone. The reasons for improved concrete quality are both mechanical and chemical. Physically, the small, spherical structure of fly ash permits the production of concrete that is more dense and uses less water. Chemically, fly ash uses a waste product (calcium hydroxide) that is created during cement hydration to produce more of the durable “glue” that holds concrete together.

Employing underutilized resources to create higher quality finished products is a powerful combination for creating value. Future return on invested capital for the Energy Services coal cleaning business is estimated at greater than 15 percent when ramp up is completed. Return on invested capital for Headwaters Resources, Headwaters’ coal combustion products business, was over 12 percent in 2008.

.”

“Headwatersimproves

sustainabilityby transforming

underutilizedresources

into valuable products

Physically, the small, spherical structure of fly ash permits the production of concrete that is more dense and uses less water.

PA G E T H R E E

“ …to meet the needs of the present without compromising the ability of future generations to meet their own needs. ”

World Commission on Environment and Development

sustainabilitysə-stā-nə-bi-lə-tē

C OA L

PRE-COMBUSTION

POST-COMBUSTION

PA G E F O U R

revenue

$13.1

$17.9

$1.4

$6.2

1st QTR2008

2nd QTR2008

3rd QTR2008

4th QTR2008

(clean coal)

FY08FY07FY06FY05

PA G E F I V E

operationalclean coal facilities

operating facilityin construction

UTUT

ILIL

KYKY

TNTNNCNC

SCSC

GAGAALALMSMS

ININ OHOH

WVWVVAVA

4

5

6

8

11

9

1ST QTR ‘08

2ND QTR ‘08

3RD QTR ‘08

4TH QTR ‘08

PROJECTED1ST QTR ‘09

ORIGINAL GOALBY 1ST QTR ‘09

one ton of fly ash usageCO2 EMISSIONS REDUCED: Equal to two months of emissions from an automobile.

LANDFILL SPACE CONSERVED: Enough for 455 days of solid waste produced by an average American.

ENERGY SAVED:Enough to provide electricity to an average American home for 24 days.

BUILDING PRODUCTS

SUSTAINABILITY FOR OUR BUILT ENVIRONMENT

Headwaters‘ Building Products businesses contribute to sustainability both by improving the efficiency of manu-facturing operations and by creating products that are environmentally responsible.

Well-known Headwaters brands include: Eldorado Stone, Tapco Building Systems, Atlantic Shutter Systems, Stone Craft Industries, and Southwest Concrete Products. Manufacturing operations for all of these brands employ lean management systems that emphasize continuous improvement and innovation. These systems, combined with the brands’ superior distribution channels, have al-lowed the company to maintain high levels of manufac-turing efficiency even during the most severe building industry downturn in decades.

Product innovation is another key. More than 20 percent of Headwaters’ building products sales in 2008 were from new products and brands and more than 58 percent of sales were from products utilizing sustainable compo-nents such as coal fly ash or other recycled materials.

FY06

FY07

FY08

9.4%

14.9%

20.1%

% of total building products revenuenew products & brands

revenue growthnew products & brands

as % of total revenuesustainable product revenue

18.9%21.0%

58.8%

FY06 FY07 FY08

$54.0

$81.0

$92.0

FY06 FY07 FY08

TECHNOLOGIES

S E V E N

SUSTAINABILITY THROUGH TECHNOLOGY

Sustainability improvements are not all measured in tons – they can also occur at the molecular level.

Headwaters’ proprietary NxCat™ Direct Synthe-sis Hydrogen Peroxide catalyst is a nanoscale innovation that significantly reduces the number of manufacturing steps required to produce hydrogen peroxide while simultaneously elimi-nating many hazardous byproducts. Recipient of the prestigious 2007 Presidential Green Chemistry Award, the technology is currently being demonstrated at a facility in Germany.

HCAT™, another one of Headwaters’ catalyst technologies, efficiently converts heavy “bot-tom of the barrel” residual oil into higher value fuels and chemical feedstocks. One barrel of heavy oil processed through traditional cok-ing operations produces approximately 70% of high value liquid fuels and large quantities of low value petroleum coke byproduct. By comparison, Headwaters’ HCAT technology produces approximately 105% of liquid fuels from the same barrel and creates no low value byproducts. The HCAT technology has success-fully completed commercial demonstrations at refineries worldwide.

FAST FACTS

RECENT PRICE (as of September 30, 2008) $13.35

52-WEEK RANGE $8.8 - $16.40

MARKET CAPITALIZATION ($ in millions) $561

SHARES OUTSTANDING (millions) 42.0

INSTITUTIONAL OWNERSHIP 78%

PA G E E I G H T

STOCK DATASELECTED BUILDING PRODUCT BRANDS

As of September 30, 2008, we employed approximately 3,400 full-time employees. The table below lists the approximate number of employees by business unit.

FY06 FY07 FY08

estimated EPSunrelated to Section 45K*Excludes Goodwill write off of $98 million

**Excludes Goodwill write off of $205 million

Visit www.headwaters.com for complete investor and company information.

HBP 2,175

HRI 775

HES 299

HTI 72

CORPORATE 59

OPERATIONAL DATA(year ended September 30, 2008)

REVENUE ($ in millions) $819*

OPERATING MARGIN 3.4%*

DILUTED EPS (FY 2008) $0.27*

DEBT/EBITDA 3.75

*Excludes Section 45K and goodwill impairment of $205 million.

2 0 0 8 A N N U A L R E P O R T

Chairman, Chief Executive Offi

President of WanSutter, L.L.C.

President, Chief Executive OfficeAmerican Talc Company

Former United States Senator

Trustee of General Partner of BlVentures, L.P.

Executive Vice President, Avista

V.P. of Engineering and TechnoloArco Products Co. (Retired)

President of Blake Fisher Associdire

ctor

sdi

rect

ors

South Jordan, Utah 84095

phone: (801) 984.9400fax: (801) 984.9410www.headwaters.com

NYSE: HWNYSE Disclosure Requirement: Our Chief Executive Officer has submitted NYSE Section 303A annual certification for 2008, and our Chief Executive Officer and Chief Financial Officer have filed with the SEC their Sarbanes-Oxley Section 302 certification as exhibits to our Annual report on Form 10-K for 2008.

FORWARD LOOKING STATEMENTS Certain statements contained in this press release are forward-looking statements within the meaning of federal securities laws and Headwaters intends that such forward-looking

include Headwaters’ expectations as to the managing and marketing of coal combustion products, the production and marketing of building materials and products, the production and marketing of cleaned coal, the production and marketing of hydrogen peroxide, the licensing of resid hydrocracking technology and catalyst sales to oil refineries, the availability of refined coal tax credits, the development, commercialization, and financing of new technologies and other strategic business opportunities and

purely historical by nature, including those statements regarding Headwaters’ future business plans, the operation of facilities, the availability of feedstocks, and the marketability of the coal combustion products, building products, cleaned coal, hydrogen peroxide, catalysts, and the availability of tax credits, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding future events and our future results that are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and

-

of such words and similar expressions, or the negative of such terms, are intended to help identify such forward-looking statements. Any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and

addition to matters affecting the coal combustion products, building products, and energy industries or the economy generally, factors that could cause actual results to differ from expectations stated in forward-looking statements include, among others, the

Report on Form 10-K for the fiscal year ended September 30, 2008, Quarterly Reports on Form 10-Q, and other periodic filings and prospectuses.

Although Headwaters believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no

Unless legally required, we undertake no obligation to revise or update any forward-

on these forward-looking statements, which speak only as of the date of this press release. Our internet address is www.headwaters.com. There we make available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our reports can be accessed through the investor relations section of our web site.

Sharon Madden

Phone: (801) 984-9400Fax: (801)984-9410smadden@headwaters.com orFinancial Relations BoardTricia Rosstross@financialrelationsboard.comPhone: (617) 520-7064

American Stock Transfer6201 15th Ave

Brooklyn, NY 11219Phone: (718) 921-8208

Fax: (718) 921-8335