**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q/A**

**Amendment No. 1 to Form 10-Q**

| x          | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------|------------|----------------------------------------------------------------------------------------------------------|
| ** ** |       | **For the quarterly period ended December 31,  2005.**                                              |
| o          | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**CommissionFile Number 333-117473**

----

**MUELLER GROUP, LLC**

(Exact name of registrantas specified in its charter)

| **Delaware**                                                                                 |   | **37-1387813**                        |
|----------------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or                                            |   | (I.R.S. Employer  identification No.) |
| organization)                                                                                |   | ** **                            |
| **500 West Eldorado Street  Decatur, IL 62522-1808**(Address of principal executive offices) |

 

**(217) 423-4417**

(Registrant’s telephonenumber, including area code)

Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days. Yes xNo o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer” and “large accelerated filer” in Rule 12b-2of the Exchange Act.

Large Accelerated Filer oAccelerated Filer o Non-acceleratedFiler x

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Act). o Yes  x No

None of the Registrant’s voting stock was held bynon-affiliates as of February 21, 2006. As of February 21, 2006,Mueller Group, LLC had 1 unit outstanding.

 

----

**Explanatory Note**

The purpose of this Amendment No. 1 to theQuarterly Report on Form 10-Q of Mueller Group, LLC (the “Company”)is to restate the Company’s consolidated financial statements for the threemonths ended December 31, 2004 as determined on March 14, 2006 by theCompany’s management and the Audit Committee of the Board of Directors.

The restatement reflects adjustments to correct theclassification of certain prior-period shipping and handling costs incompliance with EITF 00-10:  “Accountingfor Shipping and Handling Fees and Costs” for the U.S. Pipe segment for thethree months ended December 31, 2004. The impact of the restatement is toincrease consolidated sales and cost of sales by $10.9 million for the quarterended December 31, 2004. The restatement had no impact on the Company’sConsolidated Balance Sheets, the Consolidated Statement of Shareholder’s Equity(Deficit), the Consolidated Statements of Cash Flows, consolidated grossprofit, consolidated loss from operations, or consolidated net loss. The natureand impact of the adjustment is described in Note 2: “Restatement” in this Form 10-Q/A.

For the convenienceof the reader, this Form 10-Q/A sets forth the original Form 10-Qin its entirety. Except for the revision of management’s conclusion regardingthe effectiveness of the Company’s disclosure controls and procedures as of December 31,2005 presented under Part 1, Item 4, the Company has not modified orupdated other disclosures presented in the original report on Form 10-Qexcept for the required effects of the restatement. Accordingly, other than theitems indicated above, this Form 10-Q/A does not reflect eventsoccurring after the filing of the original Form 10-Q or modify orupdate those disclosures. Information not affected by the restatement isunchanged and reflects the disclosure made at the time of the original filingof the Form 10-Q with the Securities and Exchange Commission on February 22,2006. Accordingly, this Form 10-Q/A should be read in conjunctionwith the Company’s filings made with the Securities and Exchange Commissionsubsequent to the filing of the original Form 10-Q. The followingitems have been amended as a result of the restatement:

·       Part I—Item1. Unaudited Financial Statements

·       Part I—Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations

·       Part I—Item4. Controls and Procedures; and

·       Part II—Item6. Exhibits

The accompanying notes are an integral part of the consolidated financial statements.

1

----

**PART I.**   FINANCIALINFORMATION

**ITEM 1.**   FINANCIALSTATEMENTS

**MUELLER GROUP, LLC**

**UNAUDITEDCONSOLIDATED BALANCE SHEETS**

| ** **                                                                                                                                                      | ** ** | **December 31,**               | ** ** | **September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|------------------------|------------|
| ** **                                                                                                                                                      | ** ** | **2005**                            | ** ** | **2005**               | ** ** |
| ** **                                                                                                                                                      | ** ** | **(unaudited) **               | ** ** | ** **             | ** ** |
| ** **                                                                                                                                                      | ** ** | **(dollars in millions)** | ** ** |
| **Assets**                                                                                                                                                      |       |                                |       |                   |       |   |   |   |   |
| Cash and cash  equivalents                                                                                                                                      |       |                                | $          | 63.5                   |       |   |   | $ | — |   |   |
| Receivables, net  of allowance for doubtful accounts of $6.4 million and $0.9 million at  December 31, 2005 and September 30, 2005, respectively |       |                                | 267.0      |                   |       |   | 118.5 |   |   |
| Inventories                                                                                                                                                     |       |                                | 429.1      |                   |       |   | 147.2 |   |   |
| Deferred income  taxes                                                                                                                                          |       |                                | 58.8       |                   |       |   | 11.1 |   |   |
| Prepaid expenses                                                                                                                                                |       |                                | 32.1       |                   |       |   | 1.5 |   |   |
| Total current assets                                                                                                                                            |       |                                | 850.5      |                   |       |   | 278.3 |   |   |
| Property, plant  and equipment, net                                                                                                                             |       |                                | 344.8      |                   |       |   | 149.2 |   |   |
| Deferred  financing fees, net                                                                                                                                   |       |                                | 28.8       |                   |       |   | — |   |   |
| Deferred income  taxes                                                                                                                                          |       |                                | —     |                   |       |   | 9.5 |   |   |
| Due from Walter  affiliate                                                                                                                                      |       |                                | 20.0       |                   |       |   | — |   |   |
| Intangible assets, net                                                                                                                                          |       |                                | 849.3      |                   |       |   | — |   |   |
| Goodwill                                                                                                                                                        |       |                                | 718.5      |                   |       |   | 58.4 |   |   |
| Total assets                                                                                                                                                    |       |                                | $          | 2,811.9                |       |   |   | $ | 495.4 |   |   |
| **Liabilities**                                                                                                                                                 |       |                                |       |                   |       |   |   |   |   |
| Current portion  of long-term debt                                                                                                                              |       |                                | $          | 11.5                   |       |   |   | $ | — |   |   |
| Accounts payable                                                                                                                                                |       |                                | 105.9      |                   |       |   | 52.5 |   |   |
| Accrued expenses  and other liabilities                                                                                                                         |       |                                | 105.1      |                   |       |   | 34.7 |   |   |
| Payable to  affiliate, Sloss Industries                                                                                                                         |       |                                | —     |                   |       |   | 2.5 |   |   |
| Total current liabilities                                                                                                                                       |       |                                | 222.5      |                   |       |   | 89.7 |   |   |
| Long-term  debt                                                                                                                                                 |       |                                | 1,371.4    |                   |       |   | — |   |   |
| Payable to  parent, Walter Industries                                                                                                                           |       |                                | 2.6        |                   |       |   | 443.6 |   |   |
| Accrued pension  liability, net                                                                                                                                 |       |                                | 97.2       |                   |       |   | 53.6 |   |   |
| Accumulated  postretirement benefits obligation                                                                                                                 |       |                                | 52.8       |                   |       |   | 51.1 |   |   |
| Deferred income  taxes                                                                                                                                          |       |                                | 312.0      |                   |       |   | — |   |   |
| Other long-term  liabilities                                                                                                                                    |       |                                | 20.2       |                   |       |   | 12.6 |   |   |
| Total liabilities                                                                                                                                               |       |                                | 2,078.7    |                   |       |   | 650.6 |   |   |
| **Shareholder’s equity (deficit):**                                                                                                                        |       |                                |       |                   |       |   |   |   |   |
| Membership unit:                                                                                                                                                |       |                                |       |                   |       |   |   |   |   |
| (1 unit outstanding at December 31, 2005 and  September 30, 2005)                                                                                     |       |                                | —     |                   |       |   | — |   |   |
| Capital in excess  of par value                                                                                                                                 |       |                                | 998.8      |                   |       |   | 68.3 |   |   |
| Accumulated  deficit                                                                                                                                            |       |                                | (219.0     | )                      |       |   | (178.1 | ) |   |
| Accumulated other  comprehensive loss                                                                                                                           |       |                                | (46.6      | )                      |       |   | (45.4 | ) |   |
| Total  shareholder’s equity (deficit)                                                                                                                      |       |                                | 733.2      |                   |       |   | (155.2 | ) |   |
| Total liabilities and  shareholder’s equity (deficit)                                                                                                      |       |                                | $          | 2,811.9                |       |   |   | $ | 495.4 |   |   |

 

The accompanying notes are an integral part of the consolidated financial statements.

2

----

**MUELLER GROUP, LLC**

**UNAUDITEDCONSOLIDATED STATEMENTS OF OPERATIONS**

| ** **                                                                | ** ** | **Three months ended**    | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                | ** ** | **December 31, 2005**     | ** ** | **December 31, 2004** | ** ** |
| ** **                                                                | ** ** | ** **                          | ** ** | ** ** | ** ** | **(restated)** | ** ** |
| ** **                                                                | ** ** | **(dollars in millions)** | ** ** |
| Net sales                                                                 |       |                                | $          | 480.4 |   |   |   | $ | 141.2 |   |   |
| Cost of sales                                                             |       |                                | 436.9      |   |   |   | 128.5 |   |   |
| Gross profit                                                              |       |                                | 43.5       |   |   |   | 12.7 |   |   |
| Operating expenses:                                                       |       |                                |       |   |   |   |   |   |   |
| Selling, general and administrative                                       |       |                                | 57.1       |   |   |   | 13.2 |   |   |
| Related party corporate charges                                           |       |                                | 1.8        |   |   |   | 1.9 |   |   |
| Facility rationalization, restructuring and related  costs                |       |                                | 24.1       |   |   |   | — |   |   |
| Total operating expenses                                                  |       |                                | 83.0       |   |   |   | 15.1 |   |   |
| Loss from  operations                                                     |       |                                | (39.5      | ) |   |   | (2.4 | ) |   |
| Interest expense  arising from related party payable to Walter Industries |       |                                | —     |   |   |   | (5.9 | ) |   |
| Interest expense,  net of interest income                                 |       |                                | (28.1      | ) |   |   | (0.1 | ) |   |
| Loss before income taxes                                                  |       |                                | (67.6      | ) |   |   | (8.4 | ) |   |
| Income tax  expense (benefit)                                             |       |                                | (26.7      | ) |   |   | 1.1 |   |   |
| Net loss                                                                  |       |                                | $          | (40.9 | ) |   |   | $ | (9.5 | ) |   |

.

 

The accompanying notes are an integral part of the consolidated financial statements.

3

----

**MUELLER GROUP, LLC**

**UNAUDITEDCONSOLIDATED STATEMENT OF SHAREHOLDER’S EQUITY (DEFICIT)FOR THE THREE MONTHS ENDED DECEMBER 31, 2005**

| ** **                                         | ** ** | **Capital in  Excess of  Par Value** | ** ** | **Accumulated  Deficit** | ** ** | **Comprehensive  Income  (Loss)** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Total** | ** ** |
|----------------------------------------------------|------------|-----------------------------------------------------|------------|--------------------------|------------|-----------------------------------|------------|---------------------------------------------|------------|-----------|------------|
| Balance at  September 30, 2005                |       |                                                | $          | 68.3                     |       |                              |       | $                                           | (178.1     | )         |       |   |   |   |   |   | $ | (45.4 | ) |   | $ | (155.2 | ) |
| Walter’s  investment in subsidiary            |       |                                                | 943.4      |                     |       |                              | —     |                                        |       |      |       |   |   |   | — |   |   | 943.4 |   |
| Dividend to  Walter                                |       |                                                | (444.5     | )                        |       |                              | —     |                                        |       |      |       |   |   |   | — |   |   | (444.5 | ) |
| Dividend to  Walter for acquisition costs          |       |                                                | (12.0      | )                        |       |                              | —     |                                        |       |      |       |   |   |   | — |   |   | (12.0 | ) |
| Forgiveness of  U.S. Pipe payable to Walter   |       |                                                | 443.6      |                     |       |                              | —     |                                        |       |      |       |   |   |   | — |   |   | 443.6 |   |
| Comprehensive  loss                                |       |                                                |       |                     |       |                              |       |                                        |       |      |       |   |   |   |   |   |   |   |   |
| Net loss                                           |       |                                                | —     |                     |       |                              | (40.9      | )                                           |       |      | (40.9      | ) |   |   | — |   |   | (40.9 | ) |
| Unrealized loss on interest rate swaps, net of tax |       |                                                | —     |                     |       |                              | —     |                                        |       |      | (1.1       | ) |   |   | (1.1 | ) |   | (1.1 | ) |
| Foreign currency translation adjustments           |       |                                                | —     |                     |       |                              | —     |                                        |       |      | (0.1       | ) |   |   | (0.1 | ) |   | (0.1 | ) |
| Comprehensive  loss                                |       |                                                |       |                     |       |                              |       |                                        |       |      | $          | (42.1 | ) |   |   |   |   |   |   |   |
| Balance at  December 31, 2005                 |       |                                                | $          | 998.8                    |       |                              |       | $                                           | (219.0     | )         |       |   |   |   |   |   | $ | (46.6 | ) |   | $ | 733.2 |   |
|                                                    |            |                                                     |            |                          |            |                                   |            |                                             |            |           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The accompanying notes are an integral part of the consolidated financial statements.

4

----

**MUELLER GROUP, LLC UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS**

| ** **                                                                                          | ** ** | **Three months ended**    | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                          | ** ** | **December 31,  2005**         | ** ** | **December 31,  2004** | ** ** |
| ** **                                                                                          | ** ** | **(dollars in millions)** | ** ** |
| **Cash flows from operating activities**                                                            |       |                                |       |   |   |   |   |   |   |
| Net loss                                                                                            |       |                                | $          | (40.9 | ) |   |   | $ | (9.5 | ) |   |
| Adjustments to reconcile net income (loss) to net  cash provided by (used in) operating activities: |       |                                |       |   |   |   |   |   |   |
| Depreciation                                                                                        |       |                                | 17.1       |   |   |   | 6.5 |   |   |
| Amortization of  intangibles                                                                        |       |                                | 6.6        |   |   |   | — |   |   |
| Amortization of deferred  financing fees                                                            |       |                                | 1.1        |   |   |   | — |   |   |
| Amortization of tooling                                                                             |       |                                | 0.1        |   |   |   | — |   |   |
| Accretion resulting from  valuing acquired debt at fair value                                       |       |                                | (0.8       | ) |   |   | — |   |   |
| Gain on disposal of  property, plant and equipment                                                  |       |                                | (0.4       | ) |   |   | 0.7 |   |   |
| Impairments of property,  plant and equipment                                                       |       |                                | 19.2       |   |   |   | — |   |   |
| Provision for deferred  income taxes                                                                |       |                                | (25.7      | ) |   |   | — |   |   |
| Gain on interest rate  swaps                                                                        |       |                                | (0.4       | ) |   |   | — |   |   |
| Changes in assets and liabilities, net of the  effects of acquisitions:                             |       |                                |       |   |   |   |   |   |   |
| Receivables                                                                                         |       |                                | 28.9       |   |   |   | 16.5 |   |   |
| Inventories                                                                                         |       |                                | 91.2       |   |   |   | (4.2 | ) |   |
| Income taxes payable                                                                                |       |                                | —     |   |   |   | 10.7 |   |   |
| Prepaid expenses and  other current assets                                                          |       |                                | 1.0        |   |   |   | 0.4 |   |   |
| Pension and other  long-term liabilities                                                            |       |                                | (4.4       | ) |   |   | 2.5 |   |   |
| Accounts payable,  accrued expenses and other current liabilities                                   |       |                                | (17.7      | ) |   |   | (2.3 | ) |   |
| Other, net                                                                                          |       |                                | —     |   |   |   | 0.2 |   |   |
| Net cash provided by  operating activities                                                          |       |                                | 74.9       |   |   |   | 21.5 |   |   |
| **Cash flows from investing activities**                                                            |       |                                |       |   |   |   |   |   |   |
| Purchase of property,  plant and equipment                                                          |       |                                | (16.0      | ) |   |   | (7.9 | ) |   |
| Increase in amounts due  from Walter                                                                |       |                                | (20.0      | ) |   |   | (12.5 | ) |   |
| Net cash used in  investing activities                                                              |       |                                | (36.0      | ) |   |   | (20.4 | ) |   |
| **Cash flows from financing activities**                                                            |       |                                |       |   |   |   |   |   |   |
| Book cash overdrafts                                                                                |       |                                | 0.6        |   |   |   | (1.2 | ) |   |
| Proceeds from short-term  borrowings                                                                |       |                                | 55.9       |   |   |   | — |   |   |
| Retirement of short-term  debt                                                                      |       |                                | (55.9      | ) |   |   |   |   |   |
| Proceeds from long-term  debt                                                                       |       |                                | 1,050.0    |   |   |   | — |   |   |
| Retirement of long-term  debt, including capital lease obligations                                  |       |                                | (615.3     | ) |   |   | — |   |   |
| Payment of deferred  financing fees                                                                 |       |                                | (21.6      | ) |   |   | — |   |   |
| Dividend paid to Walter                                                                             |       |                                | (444.5     | ) |   |   | — |   |   |
| Dividend to Walter for  acquisition costs                                                           |       |                                | (12.0      | ) |   |   | — |   |   |
| Walter contribution of  Predecessor Mueller’s cash                                             |       |                                | 67.4       |   |   |   | — |   |   |
| Net cash used in  financing activities                                                              |       |                                | 24.6       |   |   |   | (1.2 | ) |   |
| Increase (decrease) in  cash and cash equivalents                                                   |       |                                | 63.5       |   |   |   | (0.1 | ) |   |
| **Cash and cash equivalents**                                                                       |       |                                |       |   |   |   |   |   |   |
| Beginning of period                                                                                 |       |                                | —     |   |   |   | 0.1 |   |   |
| End of period                                                                                       |       |                                | $          | 63.5 |   |   |   | $ | — |   |   |

 

5

----

**MUELLER GROUP, LLC UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)**

Schedule of non-cash investing and financingactivities:

On October 3, theCompany’s parent, Walter Industries, purchased all of the outstanding commonstock of Predecessor Mueller. This stock was contributed to the Company byWalter as further described in Note 3.

| ** **                                     | ** ** | **(dollars in millions)** | ** ** |
|------------------------------------------------|------------|-------------------------------------|------------|
| Contribution of  Predecessor Mueller by Walter |       |                                | $          | 943.4 |   |   |
| Less: Cash of  Predecessor Mueller received    |       |                                | (67.4      | ) |   |
| Total net assets  received, excluding cash     |       |                                | $          | 876.0 |   |   |

 

Subsequent to the Acquisition, the Company’s parent,Walter Industries, forgave an intercompany receivable with U.S. Pipe of$443.6 million.

The accompanying notes are an integral part of the consolidated financial statements.

6

----

**MUELLER GROUP, LLCNOTES TO CONSOLIDATED FINANCIAL STATEMENTSAS OF AND FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND DECEMBER 31,2004(UNAUDITED)**

**Note 1.**   Organization

Mueller Group, LLC (the “Company”) is a wholly-ownedsubsidiary of Mueller Water Products, Inc. (“Mueller Water”), a Delawarecorporation. Mueller Water is the surviving corporation of the merger on February 2,2006 of Mueller Water Products, LLC (Commission File Number:  333-116590) and Mueller Water ProductsCo-Issuer, Inc. with and into Mueller Holding Company, Inc., aDelaware corporation. See Note 16 for a detailed description of the merger.

On October 3, 2005, through a series oftransactions (the “Acquisition”), Walter Industries, Inc. (“Walter”),through a wholly-owned subsidiary, acquired all outstanding shares of capitalstock of our parent company, Mueller Water Products, Inc. (“PredecessorMueller Water”), which immediately was converted into Mueller Water Products,LLC, a Delaware limited liability company and contributed United States Pipeand Foundry Company, LLC, (“U.S. Pipe”), owned by Walter since 1969, to theacquired company’s wholly-owned subsidiary, Mueller Group, LLC (“PredecessorMueller Group”). In accordance with generally accepted accounting principles,for accounting purposes U.S. Pipe is treated as the acquirer of PredecessorMueller Group. Accordingly, effective October 3, 2005, U.S. Pipe’s basisof accounting is used for the Company and all financial data for periods priorto October 3, 2005 of the Company included in this report on Form 10-Q,is that of U.S. Pipe. The results of operations of Predecessor Mueller Groupare included in the Consolidated Statements of Operations beginning October 3,2005.

The Company was originally organized as United StatesPipe and Foundry Company, Inc. (“Inc.”) and was a wholly-owned subsidiaryof Walter Industries, Inc., a diversified New York Stock Exchange tradedcompany (NYSE: WLT). On September 23, 2005, Inc. was dissolved andUnited States Pipe and Foundry Company, LLC was organized in the state ofAlabama, and the operations of Inc. were conducted under the form of a limitedliability company.

In December 2005, U.S. Pipe changed its fiscalyear-end to September 30, which coincides with the fiscal year end ofPredecessor Mueller Group. Beginning with the quarter ended December 31,2005, the Company has three operating segments which are named after itsleading brands in each segment: Mueller, U.S. Pipe, and Anvil.

The consolidated financial statements are prepared inconformity with accounting principles generally accepted in the United Statesof America, which requires management to make certain estimates and assumptionsthat affect the reported amounts of assets, liabilities, sales and expenses forthe reporting periods. Actual results for future periods could differ fromthose estimates used by management. In the opinion of management, all normaland recurring adjustments that are considered necessary for a fair financialstatement presentation have been made.

Certain amounts in theprior period’s consolidated financial statements have been reclassified toconform to the current-period presentation. On the Consolidated Balance Sheetas of September 30, 2005, prepaid pension cost of $19.3 million has beennetted against accrued pension liability of $72.9 million and is presented asaccrued pension liability, net of $53.6 million.

**Note 2.**   Restatement

The Company has restated its consolidated financialstatements to correct the classification of certain prior-period shipping andhandling costs in accordance with Emerging Issues Task Force (“EITF’’) 

7

----

Consensus No. 00-10,“Accounting for Shipping and Handling Fees and Costs,’’ at its U.S. Pipesegment. EITF 00-10 does not allow shipping and handling costs to be shownas a deduction from net sales.

The Company’s prior method of accounting for the costto deliver products to the customer’s designated location was to include thesecosts as a deduction from net sales and revenues. Such costs are now includedin cost of sales. The impact of the restatement was to increase net sales andcost of sales by $10.9 million in the three months ended December 31,2004. The restatement had no impact on operating income or net income for thethree months ended December 31, 2004.

The following tables setforth the effects of the restatement discussed above on the financialstatements for the three months ended December 31, 2004 as follows:

**ConsolidatedStatement of Operations**

| ** **    | ** ** | **For the three   months ended  December 31, 2004** | ** ** |
|---------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **    | ** ** | **(dollars in millions)**                                               | ** ** |
| ** **    | ** ** | **(unaudited)**                                                                   | ** ** |
| ** **    | ** ** | **As  Reported**                                                                  | ** ** | **As  Restated** | ** ** |
| Net sales     |       |                                                                              | $          | 130.3 |   |   |   | $ | 141.2 |   |   |
| Cost of sales |       |                                                                              | $          | 117.6 |   |   |   | $ | 128.5 |   |   |

 

**Segment Information**

| ** **      | ** ** | **For the three  months ended  December 31, 2004:** | ** ** |
|-----------------|------------|------------------------------------------------------------------------------|------------|
| ** **      | ** ** | **As**                                                                       | ** ** | **As** | ** ** |
| ** **      | ** ** | **Reported**                                                                 | ** ** | **Restated** | ** ** |
| ** **      | ** ** | **(dollars in millions)**                                          | ** ** |
| ** **      | ** ** | **(unaudited)**                                                              | ** ** |
| Net sales:      |       |                                                                         |       |   |   |   |   |   |   |
| Mueller         |       |                                                                         | $          | — |   |   |   | $ | — |   |   |
| U.S. Pipe       |       |                                                                         | 130.3      |   |   |   | 141.2 |   |   |
| Anvil           |       |                                                                         | —     |   |   |   | — |   |   |
| Consolidated    |       |                                                                         | $          | 130.3 |   |   |   | $ | 141.2 |   |   |
| Net sales:      |       |                                                                         |       |   |   |   |   |   |   |
| United States   |       |                                                                         | $          | 126.8 |   |   |   | $ | 137.7 |   |   |
| Canada          |       |                                                                         | —     |   |   |   | — |   |   |
| Other countries |       |                                                                         | 3.5        |   |   |   | 3.5 |   |   |
|            |       |                                                                         | $          | 130.3 |   |   |   | $ | 141.2 |   |   |

 

**Note 3.**   Summaryof Significant Accounting Policies

*Revenue Recognition*—TheCompany recognizes revenue based on the recognition criteria set forth in theSecurities and Exchange Commission’s Staff Accounting Bulletin 104 “RevenueRecognition in Financial Statements”, which is when delivery of product hasoccurred or services have been rendered and there is persuasive evidence of asales arrangement, selling prices are fixed or determinable, and collectibilityfrom the customer is reasonably assured. Revenue from the sale of products viarail or truck is recognized when title passes upon delivery to the customer.Revenue earned for shipments via ocean vessel is recognized under internationalshipping standards as defined by Incoterms 2000 when title and risk of loss transferto the customer. Sales are recorded net of estimated cash discounts andrebates.

8

----

*Shipping andHandling*—Costs to shipproducts to customers are included in cost of sales in the ConsolidatedStatements of Operations. Amounts billed to customers, if any, to covershipping and handling costs are included in net sales.

*Customer Rebates*—Customerrebates are applied against net sales at the time the sales are recorded basedon estimates with respect to the deductions to be taken.

*Cash and Cash Equivalents*—TheCompany considers all highly liquid investments with original maturities ofninety days or less when purchased to be cash equivalents. Outstanding checksare netted against cash when there is a sufficient balance of cash available inthe Company’s accounts at the bank to cover the outstanding amount and theright of offset exists. Where there is no right of offset against cashbalances, outstanding checks are classified along with accounts payable. At December 31,2005 and September 30, 2005 checks issued but not yet presented to thebanks for payment (i.e. book cash overdrafts) were $0.6 million and zero,respectively, and were recorded in accounts payable.

*Receivables*—Receivables relate primarily to amounts due fromcustomers located in North America. To reduce credit risk, creditinvestigations are performed prior to accepting an order and, when necessary,letters of credit are required to ensure payment.

The estimated allowance for doubtful accountsreceivable is based, in large part, upon judgments and estimates of expectedlosses and specific identification of problem trade accounts. Significantlyweaker than anticipated industry or economic conditions could impact customers’ability to pay such that actual losses may be greater than the amounts providedfor in these allowances. The periodic evaluation of the adequacy of theallowance for doubtful accounts is based on an analysis of prior collectionexperience, specific customer creditworthiness and current economic trendswithin the industries served. In circumstances where a specific customer’sinability to meet its financial obligation is known to the Company (e.g.,bankruptcy filings or substantial downgrading of credit ratings), the Companyrecords a specific allowance to reduce the receivable to the amount the Companyreasonably believes will be collected.

*Inventories*—Inventories arerecorded at the lower of cost (first-in, first-out) or market value.Additionally, the Company evaluates its inventory in terms of excess andobsolete exposures. This evaluation includes such factors as anticipated usage,inventory turnover, inventory levels and ultimate product sales value.Inventory cost includes an overhead component that can be affected by levels ofproduction and actual costs incurred. Management periodically evaluates theeffects of production levels and actual costs incurred on the costs capitalizedas part of inventory.

*Property, plant and equipment*—Property,plant and equipment is recorded at cost, less accumulated depreciation andamortization. Depreciation is recorded on the straight-line method over theestimated useful lives of the assets. Leasehold improvements are amortized onthe straight-line method over the lesser of the useful life of the improvementor the remaining lease term. Estimated useful lives used in computingdepreciation expense are 2 to 20 years for machinery and equipment and 3to 50 years for land improvements and buildings. Gains and losses upondisposition are reflected in the Consolidated Statements of Operations in theperiod of disposition.

Direct internal and external costs to implementcomputer systems and software are capitalized as incurred. Capitalized costsare amortized over the estimated useful life of the system or software,beginning when site installations or module development is complete and readyfor its intended use, which generally is 3 to 5 years.

The Company accounts for its asset retirementobligations related to plant and landfill closures in accordance with Statementof Financial Accounting Standards No. 143 (“SFAS 143”). UnderSFAS 143, liabilities are recognized at fair value for an asset retirementobligation in the period in which it is incurred and the carrying amount of therelated long-lived asset is correspondingly increased. Over time, the 

9

----

liability is accreted toits future value. The corresponding asset capitalized at inception isdepreciated over the useful life of the asset.

*Tooling*—Prepaidexpenses include maintenance and tooling inventory costs. Perishable tools andmaintenance items are expensed when put into service. More durable items areamortized over their estimated useful lives, ranging from 4 to 10 years.

*Environmental Expenditures*—TheCompany capitalizes environmental expenditures that increase the life orefficiency of property or that reduce or prevent environmental contamination.The Company accrues for environmental expenses resulting from existingconditions that relate to past operations when the costs are probable andreasonably estimable. The Company is indemnified by Tyco for all environmentalliabilities associated with Predecessor Mueller as it existed as of August 16,1999, whether known or not.

*Accounting for the Impairment ofLong-Lived Assets*—Long-lived assets are reviewed forimpairment whenever events or changes in circumstances indicate that the bookvalue of the asset may not be recoverable. Goodwill and intangible assets thathave an indefinite life are not amortized, but instead are tested forimpairment annually (or more frequently if events or circumstances indicatepossible impairments) using both a discounted cash flow method and a marketcomparable method.

*Workers’ Compensation*—The Company isself-insured for workers’ compensation benefits for work related injuries.Liabilities, including those related to claims incurred but not reported, arerecorded principally using annual valuations based on discounted futureexpected payments and using historical data of the Company or insuranceindustry data when historical data is limited. The Company is indemnified byTyco for all liabilities associated with Predecessor Mueller that occurredprior to August 16, 1999. Workers’ compensation liabilities were asfollows (in millions):

| ** **                                                           | ** ** | **December 31,  2005** | ** ** | **September 30,  2005** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| Undiscounted  aggregated estimated claims to be paid                 |       |                        | $          | 27.0                         |       |   |   | $ | 14.4 |   |   |
| Workers’ compensation  liability recorded on a discounted basis |       |                        | $          | 22.8                         |       |   |   | $ | 11.9 |   |   |

 

The Company applies a discount rate at a risk-freeinterest rate, generally a U.S. Treasury bill rate, for each policy year. Therate used is one with a duration that corresponds to the weighted averageexpected payout period for each policy year. Once a discount rate is applied toa policy year, it remains the discount rate for that policy year until allclaims are paid. The use of this method decreases the volatility of theliability related solely to changes in the discount rate. The weighted averagerate used for discounting the liability at December 31, 2005 and September 30,2005 was 4.6%. At December 31, 2005, a one-percentage-point increase inthe discount rate on the discounted claims liability would decrease theliability by $0.1 million, while a one-percentage-point decrease in thediscount rate would increase the liability by $0.1 million.

*Warranty Costs*—TheCompany accrues for U.S. Pipe segment warranty expenses that include customercosts of repair and/or replacement, including labor, materials, equipment,freight and reasonable overhead costs, determined on a case-by-case basis,whenever the Company’s products and/or services fail to comply with publishedindustry standards or mutually agreed upon customer requirements.

The Company accrues for the estimated cost of productwarranties of the Mueller and Anvil segments at the time of sale based onhistorical experience. Adjustments to obligations for warranties are made aschanges in the obligations become reasonably estimable.

10

----

Activityin accrued warranty, included in the caption accrued expenses in theaccompanying Consolidated Balance Sheets, was as follows (in millions):

| ** **                               | ** ** | **Three months ended  December 31,** | ** ** |
|------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                               | ** ** | **2005**                                            | ** ** | **2004** | ** ** |
| Accrued balance  at beginning of period  |       |                                                | $          | 4.7 |   |   |   | $ | 1.8 |   |   |
| Accrued warranty  of Predecessor Mueller |       |                                                | 1.6        |   |   |   | — |   |   |
| Warranty expense                         |       |                                                | 0.4        |   |   |   | 0.8 |   |   |
| Settlement of  warranty claims           |       |                                                | (1.7       | ) |   |   | (0.9 | ) |   |
| Balance at end of period                 |       |                                                | $          | 5.0 |   |   |   | $ | 1.7 |   |   |

 

*Deferred Financing Fees*—Costsof debt financing included in other non-current assets are amortized over thelife of the related loan agreements, which range from five to eight years. Suchcosts are reassessed when amendments occur, in accordance with Emerging IssuesTask Force (EITF) 96-19, “Debtors Accounting for a Modification orExchange of Debt Instruments.”

*Income Taxes*—Deferredtax liabilities and assets are recognized for the expected future taxconsequences of events that have been included in the financial statements ortax returns. Deferred tax liabilities and assets are determined based on thedifferences between the financial statements and the tax basis of assets andliabilities, using tax rates in effect for the years in which the differencesare expected to reverse. A valuation allowance is provided to offset any netdeferred tax assets if, based upon the available evidence, it is more likelythan not that some or all of the deferred tax assets will not be realized.

*Research and Development*—Researchand development expenditures are expensed when incurred.

*Advertising*—Advertisingcosts are expensed when incurred.

*Translation of Foreign Currency*—Assets and liabilities of the Company’s businessesoperating outside of the United States of America which maintains accounts in afunctional currency other than U.S. dollars are translated into U.S. dollarsusing year-end exchange rates. Revenues and expenses are translated at theaverage exchange rates effective during the year. Foreign currency translationgains and losses are included as a separate component of stockholders’ equity.Gains and losses resulting from foreign currency transactions, the amounts ofwhich are not material, are included in cost of sales.

*Derivative Instruments and Hedging Activities*—The Company currently uses interest rate swaps asrequired in the 2005 Mueller Credit Agreement to reduce the risk of interestrate volatility. The amount to be paid or received from interest rate swaps ischarged or credited to interest expense over the lives of the interest rateswap agreements. Changes in the fair value of derivatives are recorded eachperiod in earnings or Accumulated Other Comprehensive Income (Loss), dependingon whether or not a derivative is designated and effective as part of a hedgetransaction and meets the applicable requirements associated with Statement ofFinancial Accounting Standards No. 133 (“SFAS 133”) (see Note 7).

Additionally, the Companyutilizes forward contracts to mitigate its exposure to changes in foreigncurrency exchange rates from third party and intercompany forecastedtransactions. The primary currency to which the Company is exposed and to whichit hedges the exposure is the Canadian Dollar. The effective portion of unrealizedgains and losses associated with forward contracts are deferred as a componentof Accumulated Other Comprehensive Income (Loss) until the underlying hedgedtransactions are reported in the Company’s Consolidated Statements ofOperations.

*Related Party Transactions*—TheCompany purchases foundry coke from an affiliate, Sloss Industries, Inc.for an amount that approximates the market value of comparable transactions.Costs included in cost of sales related to purchases from Sloss Industries, Inc.were $5.7 million and $3.6 million for the three months ended December 31,2005 and 2004, respectively.

Other services that SlossIndustries, Inc. provides to the Company include the delivery ofelectrical power to one of the Company’s facilities, rail car switching and theleasing of a distribution facility. The total of these other services includedin the Company’s operating expenses were $0.4 million and$0.4 million for the three months ended December 31, 2005 and 2004,respectively.

11

----

*Related Party Allocations***—**Certaincosts incurred by Walter such as insurance, executive salaries, professionalservice fees, human resources, transportation, healthcare and other centralizedbusiness functions are allocated to its subsidiaries. Certain costs that wereconsidered directly related to the U.S. Pipe segment were charged to theCompany and included in selling, general and administrative expenses. Thesecosts were approximately $0.5 million and $0.3 million for the threemonths ended December 31, 2005 and 2004, respectively. Costs incurred byWalter that cannot be directly attributed to its subsidiaries are allocated tothem based on estimated annual revenues. Such costs were allocated to theCompany and are recorded in the caption, related party corporate charges, inthe accompanying Consolidated Statements of Operations and were approximately$1.8 million and $1.9 million for the three months endedDecember 31, 2005 and 2004, respectively.

While the Companyconsiders the allocation of such costs to be reasonable, in the event theCompany was not affiliated with Walter, these costs may increase or decrease.

**Note4.**   Acquisition of Predecessor Mueller byWalter Industries

On October 3, 2005,pursuant to the agreement dated June 17, 2005, Walter acquired all of theoutstanding common stock of Predecessor Mueller Water for $943.4 million andassumed $1.05 billion of indebtedness. Predecessor Mueller Water was convertedinto a limited liability company on October 3, 2005 and was merged withand into our parent, Mueller Water, on February 2, 2006. Transaction costsincluded in the acquisition price were $14.8 million. In conjunction with theacquisition, U.S. Pipe was contributed in a series of transactions to theCompany, a wholly-owned subsidiary of Mueller Water, on October 3, 2005.

Walter’s acquisition ofPredecessor Mueller Water has been accounted for as a business combination withU.S. Pipe considered the acquirer for accounting purposes. Assets acquired andliabilities assumed were recorded at their fair values as of October 3,2005. The total purchase price of $943.4 million is comprised of (dollars inmillions):

| Acquisition of  the outstanding common stock of Predecessor Mueller Water |   | $    | 928.6  |   |
|---------------------------------------------------------------------------|--------|------|--------|--------|
| Acquisition-related  transaction costs                                    |   | 14.8 |   |
| Total purchase  price                                                     |   | $    | 943.4  |   |

 

Acquisition-relatedtransaction costs include investment banking, legal and accounting fees andother external costs directly related to the Acquisition.

Underbusiness combination accounting, the purchase price was allocated toPredecessor Mueller Water’s net tangible and identifiable intangible assetsbased on their fair values as of October 3, 2005. The excess of thepurchase price over the net tangible and identifiable intangible assets isrecorded as goodwill. Based on current fair values, the purchase price wasallocated as follows (dollars in millions):

| Receivables, net                 |   | $        | 177.4  |   |
|----------------------------------|--------|----------|--------|--------|
| Inventory                        |   | 373.2    |   |
| Property, plant  and equipment   |   | 215.5    |   |
| Identifiable  intangible assets  |   | 855.9    |   |
| Goodwill                         |   | 650.3    |   |
| Net other assets                 |   | 444.5    |   |
| Net deferred tax  liabilities    |   | (333.7   | )      |
| Debt                             |   | (1,411.1 | )      |
| Total purchase  price allocation |   | $        | 972.0  |   |

 

12

----

The purchase priceallocation is preliminary and is subject to future adjustments to goodwill forthe execution of certain restructuring plans identified by Walter prior to theacquisition date primarily related to Predecessor Mueller Group facilityrationalization actions. Any adjustments to goodwill related to such facilityrationalization costs will be recorded no later than October 3, 2006.

Receivables are short-termtrade receivables and their net book value approximates current fair value.

Finished goods inventoryis valued at estimated selling price less cost of disposal and reasonableprofit allowance for the selling effort. Work in process inventory is valued atestimated selling price of finished goods less costs to complete, cost ofdisposal and a reasonable profit allowance for the completing and sellingeffort. Raw materials are valued at book value, which approximates currentreplacement cost. The carrying value of inventories include $70.2 million inexcess of Predecessor Mueller’s carrying value, of which $58.4 million wascharged to cost of sales during the three months ended December 31, 2005.

Property, plant andequipment are valued at the current replacement cost as follows (in millions):

| ** **                           | ** ** | ** ** | ** ** | **Depreciation  Period** | ** ** |
|--------------------------------------|------------|------------|------------|--------------------------|------------|
| Land                                 |       | $          | 14.1       |                     | Indefinite |   |
| Buildings                            |       | 51.8       |       | 5 to  14 years           |       |
| Machinery and  equipment             |       | 136.4      |       | 3 to  5 years            |       |
| Other                                |       | 13.2       |       | 3  years                 |       |
| Total property,  plant and equipment |       | $          | 215.5      |                     |       |   |

 

Identifiable intangibleassets acquired consist of trade name, trademark, technology and customerrelationships and were valued at their current fair value. Trade name andtrademark relate to Mueller®, Anvil® , HerseyTM, Henry PrattTM and James JonesTM.Technology represents processes related to the design and development ofproducts. Customer relationships represent the recurring nature of sales tocurrent distributors, municipalities, contractors and other end customersregardless of their contractual nature.

Identifiableintangible assets were as follows (dollars in millions):

| ** **                            | ** ** | ** ** | ** ** | **Amortization  Period** | ** ** |
|---------------------------------------|------------|------------|------------|--------------------------|------------|
| Trade name and  trademark             |       | $          | 403.0      |                     | Indefinite |   |
| Technology                            |       | 56.3       |       | 10 years                 |       |
| Customer  relationships               |       | 396.6      |       | 19 years                 |       |
| Total  identifiable intangible assets |       | $          | 855.9      |                     |       |   |

 

Goodwill represents theexcess of the purchase price over the fair value of tangible and identifiableintangible assets acquired. Goodwill is not amortized, but rather is tested forimpairment at least annually. In the event that we determine the book value ofgoodwill has become impaired, we will incur an accounting charge for the amountof impairment during the fiscal quarter in which such determination is made.The Company’s goodwill is not tax deductible.

Net other assets includecash, prepaid expenses, deferred financing fees, accounts payable, accruedexpenses and accrued pension liability and were valued at their approximatecurrent fair value. After the purchase price allocation Predecessor MuellerGroup paid a $444.5 million dividend to Walter.

Net deferred taxliabilities include the tax effects of fair value adjustments related toidentifiable intangible assets and net tangible assets.

Debt is valued at fairmarket value as of October 3, 2005.

13

----

The following table ofunaudited pro forma results of operations of Predecessor Mueller Group and U.S.Pipe for the three months ended December 31, 2004 is presented as if theAcquisition and borrowings under the 2005 Mueller Credit Agreement had takenplace on October 1, 2004 and were carried forward through December 31,2004.

The unaudited pro formaamounts are not intended to represent or be indicative of the consolidatedresults of operations that would have been reported had the Acquisition andborrowings under the 2005 Mueller Credit Agreement been completed as of thedates presented, and should not be taken as representative of the futureconsolidated results of operations of the Company.

| ** ** | ** ** | **Three months ended  December 31, 2004** | ** ** |
|------------|------------|---------------------------------------------------------------|------------|
| ** ** | ** ** | **(dollars in millions)  (unaudited)**              | ** ** |
| Net sales  |       |                                                          | $          | 397.3 |   |   |
| Net loss   |       |                                                          | $          | (8.4 | ) |   |

 

The pro forma amounts arebased on the historical results of operations and are adjusted for amortizationof definite-lived intangibles of $6.6 million, depreciation of property, plantand equipment of ($0.2) million, interest expense of $7.4 million andamortization of financing fees related to the 2005 Mueller Credit Agreement of$2.4 million.

**Note5.**   Facility Rationalization, Restructuringand Related Costs

On October 26,2005, Walter announced plans to close U.S. Pipe’s Chattanooga, Tennessee plantand transfer the valve and hydrant production of that plant to Mueller’sChattanooga, Tennessee and Albertville, Alabama plants. The eventual closure ofthe U.S. Pipe Chattanooga plant is expected to occur in calendar 2006,resulting in the termination of approximately 340 employees. Total estimatedrestructuring and impairment charges related to this closure are $29.3 million,of which $24.1 million was expensed during the three months ended December 31,2005. Restructuring costs recognized in the Consolidated Statement ofOperations associated with this plant closure were as follows:

| ** **                                         | ** ** | ** **                                     | ** ** | **Restructuring & impairment  charges expensed**         | ** ** |
|----------------------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                                         | ** ** | **Total Estimated  Restructuring  Costs** | ** ** | **For the three  months ended  December 31, 2005** | ** ** |
| ** **                                         | ** ** | **(dollars in millions)**            | ** ** |
| Termination  benefits                              |       |                                           | $          | 3.6                                                                         |       |   |   | $ | 3.0 |   |   |
| Other  employee-related costs                      |       |                                           | 3.3        |                                                                        |       |   | — |   |   |
| Other associated  costs                            |       |                                           | 3.4        |                                                                        |       |   | 2.1 |   |   |
| Impairment of  property, plant and equipment  |       |                                           | 19.0       |                                                                        |       |   | 19.0 |   |   |
| Total                                              |       |                                           | $          | 29.3                                                                        |       |   |   | $ | 24.1 |   |   |

 

Termination benefitsrelating to the U.S. Pipe Chattanooga plant closure of $3.0 million consistprimarily of severance related to staff reductions of hourly and salariedpersonnel. The Company expects to recognize an additional $0.6 million forseverance expense during the remainder of fiscal 2006. In addition, the Companyexpects to recognize other employee-related costs of approximately $3.3 millionrelated to pension and other postretirement benefit obligations during thefirst quarter of Walter’s pension benefit measurement period, which begins on January 1,2006.

Other associated costs of$2.1 million principally include an increase to the estimated asset retirementobligation. The Company expects to recognize an additional $1.3 million ofenvironmental-related costs, as those costs are incurred during fiscal 2006.

14

----

Fixed asset impairmentcharges of $19.0 million were recorded during the three months ended December 31,2005. These assets have a net book value of $3.9 million at December 31,2005.

Activityin accrued restructuring was as follows:

| ** **                          | ** ** | **For the three  months ended** | ** ** |
|-------------------------------------|------------|------------------------------------------------|------------|
| ** **                          | ** ** | **December 31, 2005**                | ** ** |
| ** **                          | ** ** | **(dollars in millions)**            | ** ** |
| Beginning balance                   |       |                                           | $          | — |   |   |
| Restructuring  expenses accrued     |       |                                           | 5.1        |   |   |
| Restructuring  payments and charges |       |                                           | (1.3       | ) |   |
| Ending balance                      |       |                                           | $          | 3.8 |   |   |

 

In addition totransferring production to Mueller facilities, the sales responsibility forU.S. Pipe valve and hydrant products was transferred to the Mueller segment.Through this transfer, it was determined that certain U.S. Pipe inventory wouldnot ultimately be sold. As a result, inventory obsolescence charges relating toU.S. Pipe valve and hydrant inventory of $10.7 million were recorded to cost ofsales during the three months ended December 31, 2005.

In addition, currentperiod actual production output at U.S. Pipe Chattanooga was significantlylower than normal capacity, resulting in additional facility expenses of $5.2million charged to cost of sales during the three months ended December 31,2005.

**Note6.**   Borrowing Arrangements

*Long-Term Debt—Long-term***debt consists of thefollowing obligations:

| ** **                        | ** ** | **December 31,  2005**         | ** ** | **September 30,  2005** | ** ** |
|-----------------------------------|------------|-------------------------------------|------------|------------------------------|------------|
| ** **                        | ** ** | **(dollars in millions)** | ** ** |
| 2005 Mueller  Credit Agreement    |       |                                | $          | 1,047.4                      |       |   |   | $ | — |   |   |
| 10% senior  subordinated notes(1) |       |                                | 333.2      |                         |       |   | — |   |   |
| Capital lease  obligations        |       |                                | 2.3        |                         |       |   | — |   |   |
|                              |       |                                | 1,382.9    |                         |       |   | — |   |   |
| Less current  portion             |       |                                | (11.5      | )                            |       |   | — |   |   |
|                              |       |                                | $          | 1,371.41                     |       |   |   | $ | — |   |   |

----

*1)**              **The value of the 10% seniorsubordinated notes  were recorded at fairvalue at October 3, 2005 which was an increase of $18.9 million overPredecessor Mueller. This amount is amortized over the life of the notes as areduction to interest expense. As of December 31, 2005, the unamortizedfair value adjustment was $18.2 million.*

*2005 Mueller CreditAgreement:**  *On October 3,2005, the Company entered into a credit agreement (the “2005 Mueller CreditAgreement”) consisting of a $145 million senior secured revolving creditfacility maturing in October 2010 (the “2005 Mueller Revolving CreditFacility”) and a $1,050 million senior secured term loan maturing in October 2012(the “2005 Mueller Term Loan”). The 2005 Mueller Credit Agreement is a securedobligation of the Company and substantially all of its wholly-owned domesticsubsidiaries, including U.S. Pipe. The 2005 Mueller Term Loan requiresquarterly principal payments of $2.6 million through October 3, 2012, atwhich point in time the remaining principal outstanding is due. The commitmentfee on the unused portion of the 2005 Mueller Revolving Credit Facility is0.50% and the interest rate is a floating interest rate of 2.5% over LIBOR. The2005 Mueller Term Loan carries a floating interest rate of 2.25% over LIBOR.

15

----

Proceeds from the 2005Mueller Credit Agreement were $1,053.4 million, net of $21.6 million of underwritingfees and expenses which will be amortized over the life of the loans. Theproceeds were used to finance the acquisition of our parent, PredecessorMueller Water, by Walter and to refinance existing indebtedness.

The 2005 Mueller CreditAgreement contains customary events of default and covenants, includingcovenants that restrict the ability of the Company and certain of itssubsidiaries to incur certain additional indebtedness, pay dividends, create orpermit liens on assets, engage in mergers or consolidations, and certainrestrictive financial covenants.

On January 24, 2006,the Company entered into an Amendment No. 1 (the “First Amendment”) to the2005 Credit Agreement. The First Amendment removes the requirement that theCompany and its subsidiaries change their fiscal year end to December 31and, in the event of an initial public offering of Mueller Water, provides theability for the Company to pay up to $8.5 million in cash dividends to MuellerWater for further distribution to Mueller Water’s shareholders. Mueller Wateris a wholly-owned subsidiary of Walter.

The debt instrumentsdescribed below were liabilities of Predecessor Mueller Group prior to theAcquisition on October 3, 2005 and continue as liabilities of the Companysubsequent to the Acquisition.

*10% Senior SubordinatedNotes:*   OnApril 23, 2004, the Company issued $315 million principal face amount of10% senior subordinated notes due 2012. The senior subordinated notes areguaranteed by each of the Company’s existing domestic restricted subsidiaries.The subordinated notes contain customary covenants and events of default,including covenants that limit the Company’s ability to incur debt, paydividends and make investments.

On October 4, 2005,the Company notified the holders of the subordinated notes that the Acquisitionwas a change in control and that, as a result, the holders had a right to causethe Company to repurchase their senior subordinated notes on or before 5:00 p.m.eastern standard time, on November 4, 2005 at a price of 101% of theprincipal face amount of such notes. The change of control offer expired at5:00 p.m. eastern standard time, on November 6, 2005, with nosubordinated notes being validly tendered and not withdrawn and, accordingly,no subordinated notes were purchased pursuant to the change of control offer.

*Capital Leases—The*Company leases automobiles under capital leasearrangements that expire over the next four years.

**Interest Rate Swaps****—**These hedges are described in Note 7 and comply withcovenants contained in the 2005 Mueller Credit Agreement.

**Distributions to MuellerWater****—Mueller Water** has no materialassets other than its ownership of the Company’s capital stock and accordinglydepends upon distributions from the Company to satisfy its cash needs. MuellerWater’s principal cash needs will be debt service on its senior discount notesdue 2014. These senior discount notes do not require cash interest paymentsuntil 2009 and contain restrictive covenants that will, among other things,limit the ability of Mueller Water and its subsidiaries (including the Company)to incur debt, pay dividends and make investments. Neither the Company nor anyof its subsidiaries guarantee these notes. Mueller Water, however, is a holdingcompany and its ability to pay interest on the notes will be dependent upon thereceipt of dividends from its subsidiaries. The Company is Mueller Water’s onlydirect subsidiary. However, the terms of the Company’s borrowing arrangementssignificantly restrict its ability to pay dividends to Mueller Water.

**Note7.**   Derivative Financial Instruments

*Interest Rate Swaps—*On October 27, 2005, the Company entered intosix interest rate hedge transactions with a cumulative notional amount of $350million. The swap terms are between one and 

16

----

*sevenyears with five separate counter-parties. The objective of the hedges is toprotect the Company against rising LIBOR interest rates that would have anegative effect on the Company’s cash flows due to changes in interest paymentson its 2005 Mueller Term Loan. The structure of the hedges are a one-year4.617% LIBOR swap of $25 million, a three-year 4.740% LIBOR swap of $50million, a four-year 4.800% LIBOR swap of $50 million, a five-year 4.814%LIBOR swap of $100 million, a six-year 4.915% LIBOR swap of $50 million, and aseven year 4.960% LIBOR swap of $75 million. These swap agreements call for theCompany to make fixed rate payments over the term at each swap’s stated fixedrate and to receive payments based on three month LIBOR from thecounter-parties. These swaps will be settled quarterly over their lives andwill be accounted for as cash flow hedges. As such, changes in the fair valueof these swaps that take place through the date of maturity will be recorded inAccumulated Other Comprehensive Income (Loss). These hedges comply withcovenants contained in the 2005 Mueller Credit Agreement.*

The Company also has twointerest rate hedge agreements that existed as of October 3, 2005: atwo-year 3.928% LIBOR swap that matures in May 2007 and a two-year 4.249%LIBOR swap that matures in April 2007. The changes in fair value of thesetwo swaps were recorded as interest expense in the Statements of Operationsuntil achieving hedge effectiveness in October 2005 and November 2005,respectively, at which times such changes in fair value were recorded inAccumulated Other Comprehensive Income (Loss).

The Company recorded anunrealized loss from its swap contracts, net of tax, of $1.1 million at December 31,2005 in Accumulated Other Comprehensive Income (Loss).

*Forward Foreign Currency Exchange Contracts*

The Company entered intoforward exchange contracts primarily to hedge currency fluctuations fromtransactions (primarily anticipated inventory purchases) denominated in foreigncurrencies, thereby limiting the risk that would otherwise result from changesin foreign currency exchange rates. The majority of the Company’s exposure tocurrency movements is in Canada. All of the foreign currency exchange contractshave maturity dates in 2006. Gains and losses on the forward foreign currencyexchange contracts are expected to be offset by losses / gains in recognizednet underlying foreign currency exchange transactions. As of December 31,2005, the Company had entered into one forward contract at a notional amount ofless than $0.1 million, selling U.S. dollars and purchasing euros at anexchange rate of $1.3635.

Subsequent to December 31,2005, the Company entered into forward foreign currency exchange contracts at anotional amount of $9.1 million primarily to protect anticipated inventorypurchases by its Canadian operations. With these hedges, the Company purchasesU.S. dollars and sells Canadian dollars at an average exchange rate of $0.867.

*Natural Gas Swap*

On January 12, 2006,the Company entered into a swap contract to hedge anticipated purchases ofnatural gas from February 2006 through March 2006 totaling 0.4million mmbtu, or approximately 80% of expected natural gas consumption, at aprice of $9.41 per mmbtu. This swap contract effectively converts a portion of forecastedpurchases at market prices to a fixed price basis. Any change in the fair valueof this swap contract will be recorded in Accumulated Other ComprehensiveIncome (Loss).

**Note8.**   Interest Expense Arising from RelatedParty Payable to Walter Industries

Interest expenseassociated with the outstanding debt payable to Walter was allocated to theCompany up to the date of the Acquisition based upon the outstanding balance ofthe intercompany note. An intercompany note to Walter of $443.6 millionwas forgiven and contributed to capital. Intercompany interest expense was zeroand $5.9 million for the three months ended December 31, 2005 and 2004,respectively.

17

----

**Note 9.**   Pensionand Other Postretirement Benefits

Thecomponents of net periodic benefit cost for pension and postretirement benefitsfor the three months ended December 31, 2005 and December 31, 2004are as follows:

| ** **                                | ** ** | **Pension  Benefits**                                                   | ** ** | **Other  Benefits**                                               | ** ** |
|-------------------------------------------|------------|-------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                | ** ** | **For the three   months ended  December 31,** | ** ** | **For the three  months ended  December 31,** | ** ** |
| ** **                                | ** ** | **2005**                                                                | ** ** | **2004**                                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                | ** ** | **(dollars in millions)**                                     | ** ** |
| Components of net  periodic benefit cost: |       |                                                                    |       |                                                              |       |   |   |   |   |
| Service cost                              |       | $                                                                       | 2.0        |                                                              | $          | 1.1 |   | $ | 0.2 |   | $ | 0.1 |   |
| Interest cost                             |       | 4.7                                                                     |       | 3.2                                                               |       | 0.3 |   | 0.4 |   |
| Expected return on plan assets            |       | (4.9                                                                    | )          | (3.1                                                              | )          | — |   | — |   |
| Amortization of prior service cost        |       | 0.1                                                                     |       | 0.1                                                               |       | (0.6 | ) | (0.7 | ) |
| Amortization of net loss (gain)           |       | 1.9                                                                     |       | 0.8                                                               |       | (0.2 | ) | (0.2 | ) |
| Curtailment settlement loss               |       | —                                                                  |       | —                                                            |       | — |   | 0.3 |   |
| Net periodic  benefit cost                |       | $                                                                       | 3.8        |                                                              | $          | 2.1 |   | $ | (0.3 | ) | $ | (0.1 | ) |

 

For the three months endedDecember 31, 2005, the Company had no contributions to its pension plans.The Company presently anticipates contributing approximately $0.5 millionto fund its pension plans in fiscal 2006 and may make further discretionarypayments.

**Note 10.**   Goodwill and Identifiable Intangibles

Goodwill and intangible assets that have an indefinitelife are not amortized, but instead are tested for impairment annually (or morefrequently if events or circumstances indicate possible impairments) using botha discounted cash flow method and a market comparable method. Definite-livedintangible assets are amortized over their respective estimated useful livesand reviewed for impairment if events or circumstances indicate possibleimpairment. The Company uses an estimate of future undiscounted net cash flowsof the related asset or asset grouping over the remaining life in measuringwhether the assets are recoverable.

Identifiable intangibleassets consist of the following:

| ** **                              | ** ** | **December 31, 2005**     | ** ** |
|-----------------------------------------|------------|-------------------------------------|------------|
| ** **                              | ** ** | **Cost**                            | ** ** | **Accumulated  Amortization** | ** ** |
| ** **                              | ** ** | **(dollars in millions)** | ** ** |
| **Definite-lived intangible  assets**   |       |                                |       |   |   |   |   |
| Technology                              |       | $                                   | 56.3       |   |   | $ | 1.4 |   |   |
| Customer  relationships                 |       | 396.6                               |       |   | 5.2 |   |   |
|                                    |       | 452.9                               |       |   | 6.6 |   |   |
| **Indefinite lived intangible  assets** |       |                                |       |   |   |   |   |
| Trade name and  trademarks              |       | 403.0                               |       |   | — |   |   |
|                                    |       | $                                   | 855.9      |   |   | $ | 6.6 |   |   |

 

Goodwill was $718.5million at December 31, 2005, compared to $58.4 million at September 30,2005. The increase of $660.1 million represents goodwill identified during theallocation of the purchase price of the Acquisition. Goodwill is expected toincrease over the next twelve months as the Company implements facilityrationalizations that were formally identified prior to the Acquisition.Certain facility rationalization costs, primarily related to severance, will berecorded as a liability at the time identified as 

18

----

permittedunder accounting principles generally accepted in the United States of America,with a corresponding increase in goodwill. All closure costs related to theshut-down of the U.S. Pipe Chattanooga facility (as described in Note 4) havebeen charged to operating expenses and not reflected as a component ofgoodwill.

**Note 11.**   Supplementary Balance Sheet Information

Selected supplementary balance sheet information ispresented below:

| ** **                                  | ** ** | **December 31,  2005**         | ** ** | **September 30,  2005** | ** ** |
|---------------------------------------------|------------|-------------------------------------|------------|------------------------------|------------|
| ** **                                  | ** ** | **(dollars in millions)** | ** ** |
| **Inventories**                             |       |                                |       |                         |       |   |   |   |   |
| Purchased  materials and manufactured parts |       |                                | $          | 74.9                         |       |   |   | $ | 30.6 |   |   |
| Work in process                             |       |                                | 111.3      |                         |       |   | 15.5 |   |   |
| Finished goods                              |       |                                | 242.9      |                         |       |   | 101.1 |   |   |
|                                        |       |                                | $          | 429.1                        |       |   |   | $ | 147.2 |   |   |

 

| ** **                         | ** ** | **December 31,  2005**         | ** ** | **September 30,  2005** | ** ** |
|------------------------------------|------------|-------------------------------------|------------|------------------------------|------------|
| ** **                         | ** ** | **(dollars in millions)** | ** ** |
| **Property,  plant and equipment** |       |                                |       |                         |       |   |   |   |   |
| Land                               |       |                                | $          | 25.5                         |       |   |   | $ | 11.3 |   |   |
| Buildings                          |       |                                | 86.0       |                         |       |   | 33.8 |   |   |
| Machinery and  equipment           |       |                                | 540.0      |                         |       |   | 401.7 |   |   |
| Other                              |       |                                | 20.5       |                         |       |   | 16.2 |   |   |
| Accumulated  depreciation          |       |                                | (327.2     | )                            |       |   | (313.8 | ) |   |
|                               |       |                                | $          | 344.8                        |       |   |   | $ | 149.2 |   |   |

 

| ** **                                              | ** ** | **December 31,  2005**         | ** ** | **September 30,  2005** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------|------------|------------------------------|------------|
| ** **                                              | ** ** | **(dollars in millions)** | ** ** |
| **Accrued  expenses and other liabilities**             |       |                                |       |                         |       |   |   |   |   |
| Vacations and  holidays                                 |       |                                | $          | 14.3                         |       |   |   | $ | 4.5 |   |   |
| Workers’  compensation and comprehensive liability |       |                                | 6.3        |                         |       |   | 2.9 |   |   |
| Accrued payroll  and bonus                              |       |                                | 10.9       |                         |       |   | 3.9 |   |   |
| Accrued sales  commissions                              |       |                                | 3.3        |                         |       |   | 1.0 |   |   |
| Accrued other  taxes                                    |       |                                | 6.1        |                         |       |   | 2.1 |   |   |
| Accrued warranty  claims                                |       |                                | 5.0        |                         |       |   | 4.7 |   |   |
| Accrued  environmental claims                           |       |                                | 4.0        |                         |       |   | 4.0 |   |   |
| Accrued income  taxes                                   |       |                                | (1.1       | )                            |       |   | 5.5 |   |   |
| Accrued cash discounts  and rebates                     |       |                                | 24.2       |                         |       |   | 4.8 |   |   |
| Accrued interest                                        |       |                                | 12.2       |                         |       |   | — |   |   |
| Other                                                   |       |                                | 19.9       |                         |       |   | 1.3 |   |   |
|                                                    |       |                                | $          | 105.1                        |       |   |   | $ | 34.7 |   |   |

 

19

----

**Note 12.**   Supplementary Income StatementInformation

Thecomponents of interest expense, net of interest income are presented below:

| ** **                                      | ** ** | **Three months ended**    | ** ** |
|-------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                      | ** ** | **December 31,  2005**         | ** ** | **December 31,  2004** | ** ** |
| ** **                                      | ** ** | **(dollars in millions)** | ** ** |
| **Interest  expense, net of interest income:**  |       |                                |       |   |   |   |   |   |   |
| Contractual interest expense                    |       |                                | $          | 25.2 |   |   |   | $ | 0.1 |   |   |
| Deferred financing fee amortization             |       |                                | 1.1        |   |   |   | — |   |   |
| Write off of bridge loan commitment fees        |       |                                | 2.5        |   |   |   | — |   |   |
| Interest rate swap gains                        |       |                                | (0.4       | ) |   |   | — |   |   |
| Interest expense                                |       |                                | 28.4       |   |   |   | 0.1 |   |   |
| Interest income                                 |       |                                | (0.3       | ) |   |   | — |   |   |
| Total interest expense,  net of interest income |       |                                | $          | 28.1 |   |   |   | $ | 0.1 |   |   |

 

The bridge loan commitmentfees represent fees paid to lenders to make available to the Company a bridgeloan facility to repurchase the 10% senior subordinated notes from the holdersof such notes under the terms of the change of control provisions of theindentures, as described in Note 5. No notes were tendered under the offer andthe bridge loan was not used. The related commitment fees were charged tointerest expense during the three months ended December 31, 2005.

**Note 13.**   Income Taxes

The Company files a consolidated federal income taxreturn with Walter. The tax provision has been determined under FAS 109 “Accountingfor Income Taxes” taking into account the intercompany tax sharing agreement.

Thecomponents of pretax earnings are as follows (dollars in millions):

| ** **    | ** ** | **For the  quarter ended  December 31,** | ** ** |
|---------------|------------|---------------------------------------------------------|------------|
| ** **    | ** ** | **2005**                                                | ** ** | **2004** | ** ** |
| United States |       | $                                                       | (70.4      | ) | $ | (8.5 | ) |
| Foreign       |       | $                                                       | 2.8        |   | — |   |
|               |            |                                                         |            |  |  |  |  |

 

Incometax expense (benefit) applicable to continuing operations consists of thefollowing components (dollars in millions):

| ** **      | ** ** | **12/31/05** | ** ** | **12/31/04** | ** ** |
|-----------------|------------|--------------|------------|--------------|------------|
| ** **      | ** ** | **Current**  | ** ** | **Deferred** | ** ** | **Total** | ** ** | **Current** | ** ** | **Deferred** | ** ** | **Total** | ** ** |
| Federal         |       |         | $          | (3.9         | )          |   |   | $ | (20.0 | ) |   | $ | (24.2 | ) |   | $ | (3.6 | ) |   |   | $ | (0.1 | ) |   | $ | (3.7 | ) |
| State and local |       |         | 2.1        |         |       |   | (5.6 | ) |   | (3.5 | ) |   | (0.6 | ) |   |   | 5.4 |   |   | 4.8 |   |
| Foreign         |       |         | 1.1        |         |       |   | (0.1 | ) |   | 1.0 |   |   | — |   |   |   | — |   |   | — |   |
| Total           |       |         | $          | (1.0         | )          |   |   | $ | (25.7 | ) |   | $ | (26.7 | ) |   | $ | (4.2 | ) |   |   | $ | 5.3 |   |   | $ | 1.1 |   |

 

The company estimates its annual effective tax rate inaccordance with APB Opinion 28 “Interim Financial Reporting”. Theestimated effective tax rate differs from the statutory rate is due to nondeductible interest and on state income taxes.

The reduction in valuation allowance from$9.0 million to zero during the three months ended December 31, 2005consists of $7.5 million of state income tax benefits at U.S. Pipe forwhich the Company 

20

----

believes is more likelythan not to be realized and $1.5 million of assets that expired during thecurrent period due to the passage of time or as a result of the Acquisition.These valuation allowance reductions were not recorded as a component of incometax expense.

The Company has gross deferred tax assets of $113.7million and gross deferred tax liabilities of $366.9 million as of December 31,2005.

The Company has Federal and State net operating losscarryforwards of approximately $8.1 million and $77.0 millionrespectively that expire in 2024. If certain changes in ownership occur,utilization of the net carryforwards may be limited.

Undistributed earnings of the company’s foreignsubsidiaries amounted to approximately $80.2 million at December 31,2005. Deferred taxes have not been provided on the foreign earnings because theCompany intends to reinvest those earnings indefinitely.

A controversy exists withregard to federal income taxes allegedly owned by the Walter consolidatedgroup, which includes the Company, for fiscal years 1980 through 1994. It isestimated that the amount of tax presently claimed by the IRS is approximately$34.0 million for issues currently in dispute in bankruptcy court formatters unrelated to the Company. This amount is subject to interest andpenalties. Under tax law, the Company is jointly and severally liable for anyfinal tax determination. However, Walter and its affiliates believe that theirtax filing positions have substantial merit and intend to defend vigorously anyclaims asserted. Walter believes that it has sufficient accruals to address anyclaims, including interest and penalties and furthermore these matters do notrelate to the Company. There are no changes or accruals into the Company’saccounts related to these issues since these matters do not relate to theoperations of the Company.

**Note 14.**   Segment Information

Prior to the Acquisition on October 3, 2005, theCompany had one segment—U.S. Pipe. As of December 31, 2005, the Company’soperations consisted of three operating segments: Mueller, U.S. Pipe and Anvil.These segments are organized based on products and are consistent with how theoperating segments are managed, how resources are allocated, and howinformation is used by the chief operating decision maker. The Mueller segmentis a manufacturer of valves, fire hydrants and other related products utilizedin the distribution of water and gas and in water and wastewater treatmentfacilities. The U.S. Pipe segment is a manufacturer of ductile iron pressurepipe, fittings and other cast iron products used primarily for major water andwastewater transmission and collection systems. The Anvil segment is amanufacturer of cast iron and malleable iron pipe fittings, ductile ironcouplings and fittings, pipe hangers and other related products for the fireprotection, plumbing, heating, mechanical, construction, retail hardware andother related industries. The accounting policies of the segments are the sameas those described in the summary of significant accounting policies.

Intersegment sales and transfers are made atestablished intersegment selling prices generally intended to cover costs. Ourdetermination of segment earnings does not reflect allocations of certaincorporate expenses not directly attributable to segment operations andintersegment eliminations, which we designate as Corporate in the segmentpresentation, and is before interest expense, net of interest income, andincome taxes. Corporate expenses include those costs incurred by Mueller’scorporate function and do not include any allocated costs from Walter.Corporate costs include those costs related to financial and administrativematters, treasury, risk management, human resources, legal counsel, and taxfunctions. Corporate assets include cash, deferred tax assets and deferredfinancing fees. These assets have not been pushed down to our segments and aremaintained as Corporate items. Therefore, segment earnings are not reflectiveof results on a stand-alone basis. See also Note 2 regarding RelatedParty Allocations from Walter which are reflected in the Company’s SG&Aexpenses.

21

----

Segmentassets consist primarily of accounts receivable, inventories, property, plantand equipment, goodwill, and identifiable intangibles. Summarized financialinformation for our segments follows:

| ** **                              | ** ** | **For the three months ended:** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                              | ** ** | **December 31,  2005**                         | ** ** | **December 31,  2004** | ** ** |
| ** **                              | ** ** | ** **                                          | ** ** | **(restated)** | ** ** |
| ** **                              | ** ** | **(dollars in millions)**                 | ** ** |
| Net sales:                              |       |                                                |       |   |   |   |   |   |   |
| Mueller                                 |       |                                                | $          | 176.7 |   |   |   | $ | — |   |   |
| U.S. Pipe                               |       |                                                | 171.1      |   |   |   | 141.2 |   |   |
| Anvil                                   |       |                                                | 132.6      |   |   |   | — |   |   |
| Consolidated                            |       |                                                | $          | 480.4 |   |   |   | $ | 141.2 |   |   |
| Loss from  operations:                  |       |                                                |       |   |   |   |   |   |   |
| Mueller                                 |       |                                                | $          | (3.8 | ) |   |   | $ | — |   |   |
| U.S. Pipe                               |       |                                                | (27.8      | ) |   |   | (2.4 | ) |   |
| Anvil                                   |       |                                                | (1.5       | ) |   |   | — |   |   |
| Corporate expense(1)                    |       |                                                | (6.4       | ) |   |   | — |   |   |
| Consolidated                            |       |                                                | $          | (39.5 | ) |   |   | $ | (2.4 | ) |   |
| Depreciation and  amortization expense: |       |                                                |       |   |   |   |   |   |   |
| Mueller                                 |       |                                                | $          | 12.0 |   |   |   | $ | — |   |   |
| U.S. Pipe                               |       |                                                | 6.3        |   |   |   | 6.5 |   |   |
| Anvil                                   |       |                                                | 5.4        |   |   |   | — |   |   |
| Corporate                               |       |                                                | 0.1        |   |   |   | — |   |   |
| Consolidated                            |       |                                                | $          | 23.8 |   |   |   | $ | 6.5 |   |   |
| Capital  expenditures:                  |       |                                                |       |   |   |   |   |   |   |
| Mueller                                 |       |                                                | $          | 6.0 |   |   |   | $ | — |   |   |
| U.S. Pipe                               |       |                                                | 7.4        |   |   |   | 7.9 |   |   |
| Anvil                                   |       |                                                | 2.5        |   |   |   | — |   |   |
| Corporate                               |       |                                                | 0.1        |   |   |   | — |   |   |
| Consolidated                            |       |                                                | $          | 16.0 |   |   |   | $ | 7.9 |   |   |

----

(1)          Includes certainexpenses not allocated to segments.

22

----

| ** **                 | ** ** | **December 31,  2005**         | ** ** | **September 30,  2005** | ** ** |
|----------------------------|------------|-------------------------------------|------------|------------------------------|------------|
| ** **                 | ** ** | **(dollars in millions)** | ** ** |
| Total assets:              |       |                                |       |                         |       |   |   |   |   |
| Mueller                    |       |                                | $          | 1,741.3                      |       |   |   | $ | — |   |   |
| U.S. Pipe                  |       |                                | 431.8      |                         |       |   | 495.4 |   |   |
| Anvil                      |       |                                | 472.8      |                         |       |   | — |   |   |
| Corporate                  |       |                                | 166.0      |                         |       |   | — |   |   |
| Consolidated               |       |                                | $          | 2,811.9                      |       |   |   | $ | 495.4 |   |   |
| Goodwill:                  |       |                                |       |                         |       |   |   |   |   |
| Mueller                    |       |                                | $          | 587.5                        |       |   |   | $ | — |   |   |
| U.S. Pipe                  |       |                                | 58.4       |                         |       |   | 58.4 |   |   |
| Anvil                      |       |                                | 72.6       |                         |       |   | — |   |   |
| Consolidated               |       |                                | $          | 718.5                        |       |   |   | $ | 58.4 |   |   |
| Identifiable  intangibles: |       |                                |       |                         |       |   |   |   |   |
| Mueller                    |       |                                | $          | 759.6                        |       |   |   | $ | — |   |   |
| U.S. Pipe                  |       |                                | —     |                         |       |   | — |   |   |
| Anvil                      |       |                                | 89.7       |                         |       |   | — |   |   |
| Consolidated               |       |                                | $          | 849.3                        |       |   |   | $ | — |   |   |

 

Geographicalarea information with respect to net sales, as determined by the location ofthe customer invoiced, and property, plant and equipment—net, as determined bythe physical location of the assets, were as follows:

| ** **      | ** ** | **For the three months ended:** | ** ** |
|-----------------|------------|-----------------------------------------------------|------------|
| ** **      | ** ** | **December 31,  2005**                         | ** ** | **December 31,  2004** | ** ** |
| ** **      | ** ** | ** **                                          | ** ** | **(restated)** | ** ** |
| ** **      | ** ** | **(dollars in millions)**                 | ** ** |
| Net sales:      |       |                                                |       |   |   |   |   |   |   |
| United States   |       |                                                | $          | 430.1 |   |   |   | $ | 137.7 |   |   |
| Canada          |       |                                                | 48.1       |   |   |   | — |   |   |
| Other Countries |       |                                                | 2.2        |   |   |   | 3.5 |   |   |
|            |       |                                                | $          | 480.4 |   |   |   | $ | 141.2 |   |   |

 

| ** **                           | ** ** | **December 31,  2005**         | ** ** | **September 30,  2005** | ** ** |
|--------------------------------------|------------|-------------------------------------|------------|------------------------------|------------|
| ** **                           | ** ** | **(dollars in millions)** | ** ** |
| Property, plant  and equipment, net: |       |                                |       |                         |       |   |   |   |   |
| United States                        |       |                                | $          | 325.7                        |       |   |   | $ | 149.2 |   |   |
| Canada                               |       |                                | 17.6       |                         |       |   | — |   |   |
| Other Countries                      |       |                                | 1.5        |                         |       |   | — |   |   |
|                                 |       |                                | $          | 344.8                        |       |   |   | $ | 149.2 |   |   |

 

**Note 15.**   Commitments and Contingencies

**Income TaxLitigation**

A controversy exists withregard to federal income taxes allegedly owed by the Walter consolidated group,which includes the U.S. Pipe segment, for fiscal years 1980 through 1994. It isestimated that the amount of tax presently claimed by the IRS is approximately$34.0 million for issues currently in dispute in bankruptcy court formatters unrelated to the Company. This amount is subject to interest andpenalties. In addition, the Internal Revenue Service has issued a Notice of ProposedDeficiency assessing additional 

23

----

tax of$80.4 million for the fiscal years ended May 31, 2000, December 31,2000, and December 31, 2001. The proposed adjustments relate primarily toWalter’s method of recognizing revenue on the sale of homes and related interestincome on the instalment notes receivable. Under tax law, the Company isjointly and severally liable for any final tax determination. However, Walterand its affiliates believe that their tax filing positions have substantialmerit and intend to defend vigorously any claims asserted. Walter believes thatit has an accrual sufficient to cover the estimated probable loss, includinginterest and penalties. There are no charges or accruals in the Company’saccounts related to these issues since these matters do not relate to theoperations of the Company.

**EnvironmentalMatters**

The Company issubject to a wide variety of laws and regulations concerning the protection ofthe environment, both with respect to the construction and operation of many ofits plants and with respect to remediating environmental conditions that mayexist at its own and other properties. The Company believes that it is insubstantial compliance with federal, state and local environmental laws andregulations. The Company accrues for environmental expenses resulting fromexisting conditions that relate to past operations when the costs are probableand reasonably estimable. Expenses charged to the statement of operations forcompliance of ongoing operations and for remediation of environmentalconditions arising from past operations in the three months ended December 31,2005 and 2004 were approximately $0.4 million and $0.2 million, respectively.Because environmental laws and regulations continue to evolve and becauseconditions giving rise to obligations and liabilities under environmental lawsare in some circumstances not readily identifiable, it is difficult to forecastthe amount of such future environmental expenditures or the effects of changingstandards on future business operations or results. Consequently, the Companycan give no assurance that such expenditures will not be material in thefuture. The Company capitalizes environmental expenditures that increase thelife or efficiency of property or that reduces or prevents environmentalcontamination. Capital expenditures for environmental requirements areanticipated to average approximately $2.0 million per year in the next fiveyears. Capital expenditures for the three months ended December 31, 2005and 2004 for environmental requirements were approximately $0.6 million and$1.2 million, respectively.

The Company hasimplemented an Administrative Consent Order (“ACO”) for its Burlington, NewJersey plant that was required under the New Jersey Environmental CleanupResponsibility Act (now known as the Industrial Site Recovery Act). The ACOrequired soil and ground water cleanup, and the Company has completed, and hasreceived final approval on, the soil cleanup required by the ACO. U. S. Pipe iscontinuing to address ground water issues at this site. Further remediationcould be required. These remediation costs are expected to be minimal.Long-term ground water monitoring will be required to verify naturalattenuation. It is not known how long ground water monitoring will be required.Management does not believe monitoring or further cleanup costs, if any, willhave a material adverse effect on the financial condition or results ofoperations of the Company.

The FederalComprehensive Environmental Response, Compensation and Liability Act (“CERCLA”)generally imposes liability, which may be joint and several and is withoutregard to fault or the legality of waste generation or disposal, on certainclasses of persons, including owners and operators of sites at which hazardoussubstances are released into the environment (or pose a threat of suchrelease), persons that disposed or arranged for the disposal of hazardoussubstances at such sites, and persons who owned or operated such sites at thetime of such disposal. CERCLA authorizes the EPA, the States and, in somecircumstances, private entities to take actions in response to public health orenvironmental threats and to seek to recover the costs they incur from the sameclasses of persons. Certain governmental authorities can also seek recovery fordamages to natural resources. Currently, U.S. Pipe has been identified as apotentially responsible party (“PRP”) by the EPA under CERCLA with respect tocleanup of hazardous substances. U.S. Pipe is among many PRP’s at the site anda significant number of the PRP’s 

24

----

are substantial companies. With respect to the site located inAnniston, Alabama, the PRP’s have negotiated an administrative consent orderwith the EPA. Based on these negotiations, management estimates the Company’sshare of liability for cleanup, after allocation among several PRP’s, will beapproximately $4.0 million, which was accrued in 2004. Civil litigation inrespect of the site is also ongoing as follows: a suit for contribution byanother Anniston PRP and a putative class action lawsuit against 18 foundriesin the Anniston, Alabama area alleging state law tort claims in the creationand disposal of foundry sand alledged to contain lead and PCB’s and seekingdamages for personal injury and property damage. Management believes that thelikelihood of liability in the contribution litigation is remote, andmanagement has not yet formed a view with respect to the probability ofliability in the putative class action matter.

The Company’ssegment entered into a Consent Order with Georgia Department of NaturalResources regarding alleged hazardous waste violations at Anvil’s formerfoundry facility in Statesboro, Georgia. Pursuant to the Consent Order, Anvilagreed to pay a settlement of $50,000 and perform a supplemental environmentalproject. Anvil has also agreed to perform various investigatory and remedialactions at the foundry and its landfill. The total costs are estimated to bebetween $1.2 million and $1.4 million. The Company maintains an adequatereserve to cover these estimated costs.

Over the next twoyears, the Company could potentially incur between $8.5 million and$12.5 million of capital costs at its iron foundries to comply with theUnited States Environmental Protection Agency’s National Emissions Standardsfor Hazardous Air Pollutants which were issued April 22, 2004. The Companyis in the process of analyzing the impact of this standard and the costsassociated with compliance.

Although noassurances can be given that the Company will not be required in the future tomake material expenditures relating to these or other sites, management doesnot believe at this time that the cleanup costs, if any, associated with theseor other sites will have a material adverse effect on the financial conditionor results of operations of the Company, but such cleanup costs could bematerial to results of operations in a reporting period.

In 2004, theCompany entered into a settlement and release agreement with a former insurerwhereby the former insurer paid $1.9 million, net of legal fees, to theCompany for historical insurance claims, previously expensed as incurred by theCompany. Such claims had not previously been submitted to the insurance companyfor reimbursement. The Company released the insurer of both past and futureclaims, and recorded a $1.9 million reduction to selling, general andadministrative expenses in 2004.

In 2005, theCompany entered into a settlement and release agreement with a former insurerwhereby the former insurer agreed to pay $5.1 million, net of legal fees,to the Company for historical insurance claims previously expensed as incurredby the Company. Such claims had not previously been submitted to the insurancecompany for reimbursement. The Company released the insurer of both past andfuture claims. During 2005, the Company received $2.8 million in cash andthe remainder is expected to be received in the second quarter of fiscal 2006.The Company recorded a $5.1 million reduction to selling, general andadministrative expenses in 2005.

Under the terms of the agreement whereby Tyco International soldthe Company in August 1999 to our prior owners (the “August 1999 TycoTransaction”), Tyco agreed to indemnify Predecessor Mueller Water and itsaffiliates for all “Excluded Liabilities”. Excluded Liabilities include, amongother things, substantially all environmental liabilities relating to the timeprior to the August 1999 Tyco Transaction. The indemnity survivesindefinitely, is not subject to any deductibles or caps, and continues with respectto our current operations, other than those operations acquired since the August 1999Tyco Transaction, including the operations of our U.S. Pipe segment. If Tycoever becomes financially unable to, or otherwise fails to comply with the termsof the indemnity, we may be responsible for the Tyco-indemnified obligations.In addition, Tyco’s indemnity does not cover environmental liabilities to theextent caused by 

25

----

us or Predecessor Mueller or the operationof the Predecessor Mueller business after the August 1999 TycoTransaction, nor does it cover environmental liabilities arising with respectto businesses or sites acquired after the August 1999 Tyco Transaction,which would include the U.S. Pipe business and facilities.

**MiscellaneousLitigation**

In 2003, theCompany increased its accruals for outstanding litigation by approximately$6.5 million, principally related to the settlement of a class actionemployment matter. The settlement was finalized in May 2004 for an amountapproximating the accrual.

In the purchaseagreement relating to the August 1999 sale by Tyco of the PredecessorMueller Group business to our prior owners, Tyco agreed to indemnifyPredecessor Mueller and its affiliates for all “Excluded Liabilities.” ExcludedLiabilities include, among other things, substantially all liabilities relatingto the time prior to the August 1999 Tyco sale. The indemnity survivesindefinitely and is not subject to any deductibles or caps. However, we may beresponsible for these liabilities in the event that Tyco (or any successorentity) ever becomes financially unable or fails to comply with, the terms ofthe indemnity. In addition, Tyco’s indemnity does not cover environmentalliabilities to the extent caused by us or Predecessor Mueller or the operationof the Predecessor Mueller business after the August 1999 Tyco sale, nordoes it cover environmental liabilities arising with respect to businesses orsites acquired after the August 1999 Tyco sale, which would include theU.S. Pipe business and facilities.

Our subsidiary,James Jones Company, and its former parent company are defendants in a falseclaims lawsuit in which a former James Jones Company employee is suing onbehalf of cities, water districts and municipalities. The employee alleges thatthe defendants sold allegedly non-conforming public water system parts tovarious government entities. The lawsuit seeks consequential damages, penaltiesand punitive damages. Our subsidiary, Mueller Co., which had also been named asa defendant, brought a summary judgment motion and was dismissed from thislitigation in January 2004. On September 15, 2004, the trial courtruled against the intervention of approximately 30 municipalities that hadfailed to intervene within the time deadlines previously specified by theCourt. The trial court also ruled that the majority of municipalities that hadpurchased James Jones products from contractors or distributors, were not inprivity with the James Jones Company and were not entitled to punitive damages.Following the Court’s ruling, the water districts and municipalities filed anew action against the James Jones Company, Mueller Co. and Watts (formerparent company of James Jones Company), alleging fraud and intentionalmisrepresentation. This lawsuit is based on the same underlying facts as thefalse claims lawsuit. Any liability associated with these lawsuits is coveredby the Tyco indemnity, and the defense is being paid for and conducted by Tyco.

Some of oursubsidiaries have been named as defendants in a small number of asbestos-relatedlawsuits. We do not believe these lawsuits, either individually or in theaggregate, are material to our financial position or results of operations.

The Company is a party to a number of other lawsuits arising inthe ordinary course of business. The Company provides for costs relating tothese matters when a loss is probable and the amount is reasonably estimable.The effect of the outcome of these matters on the Company’s future results ofoperations cannot be predicted with certainty as any such effect depends onfuture results of operations and the amount and timing of the resolution ofsuch matters. While the results of litigation cannot be predicted withcertainty, the Company believes that the final outcome of such other litigationwill not have a materially adverse effect on the Company’s financialstatements.

26

----

**Note 16.**   Subsequent Events

In January 2006,the Company’s Mueller segment completed two acquisitions. On January 4,2006, the Company acquired Hunt Industries, Inc. (“Hunt”) for$6.8 million in cash. Hunt is a manufacturer of meter pits and meteryokes, based in Murfreesboro, Tennessee, which are sold by our Mueller segment.On January 27, 2006, the Company acquired the operating assets of CCNE,L.L.C., a Connecticut-based manufacturer of check valves for sale to the waterand wastewater treatment markets, for $8.8 million in cash. The CCNEassets will be operated by our Milliken Valve Company and Henry Pratt Companysubsidiaries.On January 26, 2006, the Company announced plans to close itsHenry Pratt valve manufacturing facility in Dixon, Illinois by the end of 2006.The process of transferring the Dixon plant’s operations to other Henry Prattfacilities has begun.

On January 31, 2006, Mueller Holding Company, Inc.,a Delaware corporation (“Holdco”), Mueller Water Products, LLC, a Delawarelimited liability company (“Mueller LLC”), and Mueller Water Products Co-Issuer, Inc.,a Delaware corporation (“Co-Issuer”), entered into an Agreement and Plan ofMerger (the “Merger Agreement”). On February 2, 2006, pursuant to theterms of the Merger Agreement, Mueller LLC and Co-Issuer merged (the “Merger”)with and into Holdco, which was the surviving corporation and which changed itsname, upon merger, to Mueller Water Products, Inc. In the Merger, eachlimited liability company interest of Mueller LLC and each share of commonstock of Co-Issuer outstanding immediately prior to the Merger was cancelledand retired and ceased to exist, and each share of common stock of Holdcoremained unchanged and continued to remain outstanding after the Merger.

On February 3, 2006,Mueller Water filed with the Securities and Exchange Commission a registrationstatement on Form S-1 (Registration No. 333-131536)relating to a proposed initial public offering of Mueller Water’s Series Acommon stock.

**Note 17.**   New Accounting Pronouncements

In November 2004, the Financial AccountingStandards Board issued SFAS No. 151, “Inventory Costs,” which clarifiesthe accounting for abnormal amounts of idle facility expense, freight, handlingcosts, and wasted material. This Statement requires that those items berecognized as current-period charges regardless of whether they meet thecriterion of “so abnormal.” In addition, this Statement requires thatallocation of fixed production overheads to the costs of conversion be based onthe normal capacity of the production facilities. The Company adopted SFAS No. 151on October 1, 2005, the beginning of its 2006 fiscal year. The impact ofthe adoption of SFAS No. 151 on the Company’s financial statements mayhave a material impact on our operating income in the event actual productionoutput is significantly higher or lower than normal capacity. In the eventactual production capacity is significantly different than normal capacity, theCompany may be required to recognize certain amounts of facility expense, freight,handling costs or wasted materials as a current period expense.

In March 2005, the FASB issued FASBInterpretation No. 47, “Accounting for Conditional Asset RetirementObligations” (“FIN 47”), which is an interpretation of FASB No. 143, “Accountingfor Asset Retirement Obligations” (“SFAS 143”). This interpretationclarifies terminology within SFAS 143 and requires companies to recognizea liability for the fair value of a conditional asset retirement obligationwhen incurred if the liability’s fair value can be reasonably estimated. FIN 47is effective for fiscal years beginning after December 15, 2005. Thisstandard is not expected to have a material impact on the Company’s financialcondition or results of operations.

In June 2005, theFASB issued FASB No. 154, “Accounting Changes and Error Corrections”,which changes the requirements for accounting for and reporting of a change inaccounting principle. SFAS 154 requires retrospective application to priorperiods’ financial statements of a voluntary change in accounting principleunless it is impracticable. SFAS 154 also requires that a change in methodof depreciation, amortization or depletion for long-lived, nonfinancial assetsbe accounted for as a change in accounting 

27

----

estimatethat is affected by a change in accounting principle. SFAS 154 iseffective for accounting changes made in fiscal years beginning after December 15,2005. The adoption of SFAS 154 is not expected to have a material impacton the Company’s financial condition or results of operations.

**Note 18.**   Consolidating Guarantor andNon-Guarantor Financial Information

The following information is included as a result ofthe guarantee by certain of the Company’s wholly owned U.S. subsidiaries (“GuarantorCompanies”) of the senior subordinated notes issued by Predecessor MuellerGroup prior to the Acquisition on October 3, 2005 that have continued tobe liabilities of the Company subsequent to the Acquisition. None of theCompany’s other subsidiaries guarantee the debt. Each of the guarantees isjoint and several and full and unconditional. “Mueller Group, LLC” (“Issuer”)includes the consolidated financial results of Mueller Group, LLC with allof its wholly-owned subsidiaries accounted for under the equity method.

Prior to the Acquisition on October 3, 2005, U.S.Pipe was not a Guarantor Company of the senior subordinated notes issued byPredecessor Mueller Group. See Note 18 for further discussion of PredecessorMueller Group. The Consolidating Statements of Operations and Cash Flows forthe three-month period ended December 31, 2005 and the ConsolidatingBalance Sheet as of December 31, 2005 reflect the results of the Company,including U.S. Pipe.

28

----

**Consolidating Statement of Operations**

**For Mueller Group,LLC**

**Forthe Three Months Ended December 31, 2005**

| ** **                                                 | ** ** | **Issuer**                          | ** ** | **Guarantor  Companies(1)** | ** ** | **Non-Guarantor  Companies** | ** ** | **Consolidating  Eliminating** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------|------------|------------------------------|------------|--------------------------------|------------|------------------|------------|
| ** **                                                 | ** ** | **(dollars in millions)** | ** ** |
| Net sales                                                  |       | $                                   | —     |                        |       | $                            | 425.7      |                           |       |             | $          | 54.7 |   |   |   | $ | — |   |   |   | $ | 480.4 |   |   |
| Cost of sales                                              |       | —                              |       |                        | 392.6      |                         |       |                           | 44.3       |             |       |   | — |   |   |   | 436.9 |   |   |
| Gross profit                                               |       | —                              |       |                        | 33.1       |                         |       |                           | 10.4       |             |       |   | — |   |   |   | 43.5 |   |   |
| Selling, general  and administrative                       |       | —                              |       |                        | 49.2       |                         |       |                           | 7.9        |             |       |   | — |   |   |   | 57.1 |   |   |
| Related party  corporate charges                           |       | —                              |       |                        | 1.8        |                         |       |                           | —     |             |       |   | — |   |   |   | 1.8 |   |   |
| Facility  rationalization, restructuring and related costs |       | —                              |       |                        | 24.1       |                         |       |                           | —     |             |       |   | — |   |   |   | 24.1 |   |   |
| Income (loss)  from operations                             |       | —                              |       |                        | (42.0      | )                            |       |                           | 2.5        |             |       |   | — |   |   |   | (39.5 | ) |   |
| Interest expense,  net of interest income                  |       | (28.3                               | )          |                        | —     |                         |       |                           | 0.2        |             |       |   | — |   |   |   | (28.1 | ) |   |
| Income (loss)  before income tax expense (benefit)         |       | (28.3                               | )          |                        | (42.0      | )                            |       |                           | 2.7        |             |       |   | — |   |   |   | (67.6 | ) |   |
| Income tax  expense (benefit)                              |       | (11.1                               | )          |                        | (16.6      | )                            |       |                           | 1.0        |             |       |   | — |   |   |   | (26.7 | ) |   |
| Equity income  from subsidiaries                           |       | (23.7                               | )          |                        | 1.7        |                         |       |                           | —     |             |       |   | 22.0 |   |   |   | — |   |   |
| Net income                                                 |       | $                                   | (40.9      | )                           |       | $                            | (23.7      | )                              |       |             | $          | 1.7 |   |   |   | $ | 22.0 |   |   |   | $ | (40.9 | ) |   |

 

29

----

**Consolidating Balance Sheet**

**For Mueller Group,LLC**

**December 31,2005**

| ** **                                                 | ** ** | **Issuer**                          | ** ** | **Guarantor  Companies(1)** | ** ** | **Non-Guarantor  Companies** | ** ** | **Consolidating  Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------|------------|------------------------------|------------|---------------------------------|------------|------------------|------------|
| ** **                                                 | ** ** | **(dollars in millions)** | ** ** |
| **Assets**                                                 |       |                                |       |                        |       |                         |       |                            |       |             |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                                 |       | $                                   | 24.6       |                        |       | $                            | 10.8       |                            |       |             | $          | 28.1 |   |   |   | $ | — |   |   |   | $ | 63.5 |   |   |
| Receivables, net                                           |       | —                              |       |                        | 239.9      |                         |       |                            | 27.1       |             |       |   | — |   |   |   | 267.0 |   |   |
| Inventories                                                |       | —                              |       |                        | 375.0      |                         |       |                            | 54.1       |             |       |   | — |   |   |   | 429.1 |   |   |
| Deferred income  taxes                                     |       | —                              |       |                        | 58.8       |                         |       |                            | —     |             |       |   | — |   |   |   | 58.8 |   |   |
| Prepaid expenses                                           |       | —                              |       |                        | 29.9       |                         |       |                            | 2.2        |             |       |   | — |   |   |   | 32.1 |   |   |
| Total current  assets                                      |       | 24.6                                |       |                        | 714.4      |                         |       |                            | 111.5      |             |       |   | — |   |   |   | 850.5 |   |   |
| Property, plant  and  equipment, net                       |       | 2.8                                 |       |                        | 329.0      |                         |       |                            | 13.0       |             |       |   | — |   |   |   | 344.8 |   |   |
| Deferred  financing fees, net                              |       | 28.8                                |       |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | 28.8 |   |   |
| Due from Walter  affiliates                                |       | —                              |       |                        | 20.0       |                         |       |                            | —     |             |       |   | — |   |   |   | 20.0 |   |   |
| Identifiable  intangibles, net                             |       | —                              |       |                        | 849.3      |                         |       |                            | —     |             |       |   | — |   |   |   | 849.3 |   |   |
| Goodwill                                                   |       | —                              |       |                        | 718.5      |                         |       |                            | —     |             |       |   | — |   |   |   | 718.5 |   |   |
| Investment in  subsidiaries                                |       | 2,556.2                             |       |                        | 42.7       |                         |       |                            | —     |             |       |   | (2,598.9 | ) |   |   | — |   |   |
| Total assets                                               |       | $                                   | 2,612.4    |                        |       | $                            | 2,673.9    |                            |       |             | $          | 124.5 |   |   |   | $ | (2,598.9 | ) |   |   | $ | 2,811.9 |   |   |
| **Liabilities**                                            |       |                                |       |                        |       |                         |       |                            |       |             |       |   |   |   |   |   |   |   |   |
| Accounts payable                                           |       | $                                   | 1.5        |                        |       | $                            | 93.9       |                            |       |             | $          | 10.5 |   |   |   | $ | — |   |   |   | $ | 105.9 |   |   |
| Current portion  of long-term debt                         |       | 10.5                                |       |                        | 1.0        |                         |       |                            | —     |             |       |   | — |   |   |   | 11.5 |   |   |
| Accrued expenses                                           |       | 12.2                                |       |                        | 88.2       |                         |       |                            | 4.7        |             |       |   | — |   |   |   | 105.1 |   |   |
| Total current  liabilities                                 |       | 24.2                                |       |                        | 183.1      |                         |       |                            | 15.2       |             |       |   | — |   |   |   | 222.5 |   |   |
| Intercompany  accounts                                     |       | 484.9                               |       |                        | (550.0     | )                            |       |                            | 65.1       |             |       |   | — |   |   |   | — |   |   |
| Long-term  debt                                            |       | 1,370.1                             |       |                        | 1.3        |                         |       |                            | —     |             |       |   | — |   |   |   | 1,371.4 |   |   |
| Payable to  parent,  Walter Industries                     |       | —                              |       |                        | 2.6        |                         |       |                            | —     |             |       |   | — |   |   |   | 2.6 |   |   |
| Accrued pension  liability                                 |       | —                              |       |                        | 97.9       |                         |       |                            | (0.7       | )                |       |   | — |   |   |   | 97.2 |   |   |
| Accumulated  postretirement benefits obligation            |       | —                              |       |                        | 52.8       |                         |       |                            | —     |             |       |   | — |   |   |   | 52.8 |   |   |
| Deferred income  taxes                                     |       | —                              |       |                        | 309.8      |                         |       |                            | —     |             |       |   | — |   |   |   | 312.0 |   |   |
| Other long-term  liabilities                               |       | —                              |       |                        | 20.2       |                         |       |                            | 2.2        |             |       |   | — |   |   |   | 20.2 |   |   |
| Total liabilities                                          |       | 1,879.2                             |       |                        | 117.7      |                         |       |                            | 81.8       |             |       |   | — |   |   |   | 2,078.7 |   |   |
| **Shareholder’s  equity (deficit)**                   |       |                                |       |                        |       |                         |       |                            |       |             |       |   |   |   |   |   |   |   |   |
| Total  shareholder’s  equity (deficit)                |       | 733.2                               |       |                        | 2,556.2    |                         |       |                            | 42.7       |             |       |   | (2,598.9 | ) |   |   | 733.2 |   |   |
| Total liabilities and  shareholder’s equity (deficit) |       | $                                   | 2,612.4    |                        |       | $                            | 2,673.9    |                            |       |             | $          | 124.5 |   |   |   | $ | (2,598.9 | ) |   |   | $ | 2,811.9 |   |   |

 

30

----

**Consolidating Statement of Cash Flows**

**For Mueller Group,LLC**

**Forthe Three Months Ended December 31, 2005**

| ** **                                                         | ** ** | **Issuer**                          | ** ** | **Guarantor  Companies(1)** | ** ** | **Non-Guarantor  Companies** | ** ** | **Consolidating  Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------|------------|------------------------------|------------|---------------------------------|------------|------------------|------------|
| ** **                                                         | ** ** | **(dollars in millions)** | ** ** |
| Net cash provided by (used  in) operating activities               |       | $                                   | (4.9       | )                           |       | $                            | 144.0      |                            |       |             | $          | (64.2 | ) |   |   | — |   |   |   | $ | 74.9 |   |   |
| **Cash flows from investing activities**                           |       |                                |       |                        |       |                         |       |                            |       |             |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                               |       | —                              |       |                        | (14.8      | )                            |       |                            | (1.2       | )                |       |   | — |   |   |   | (16.0 | ) |   |
| Increase in amounts due  from Walter                               |       | —                              |       |                        | (20.0      | )                            |       |                            | —     |             |       |   | — |   |   |   | (20.0 | ) |   |
| Acquisition of businesses                                          |       |                                |       |                        |       |                         |       |                            | —     |             |       |   | — |   |   |   | 0.0 |   |   |
| Increase (decrease) in  equity investment                          |       |                                |       |                        |       |                         |       |                            | —     |             |       |   |   |   |   |   | — |   |   |
| Net cash provided by  (used in) investing activities               |       |                                |       |                        | (34.8      | )                            |       |                            | (1.2       | )                |       |   |   |   |   |   | (36.0 | ) |   |
| **Cash flows from financing activities**                           |       |                                |       |                        |       |                         |       |                            |       |             |       |   |   |   |   |   |   |   |   |
| Book cash overdrafts                                               |       | 0.6                                 |       |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | 0.6 |   |   |
| Intercompany change                                                |       | (6.9                                | )          |                        | (86.6      | )                            |       |                            | 93.5       |             |       |   |   |   |   |   | — |   |   |
| Proceeds from short-term  borrowings                               |       | 55.9                                |       |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | 55.9 |   |   |
| Retirement of short-term  debt                                     |       | (55.9                               | )          |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | (55.9 | ) |   |
| Proceeds from long-term  debt                                      |       | 1,050.0                             |       |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | 1,050.0 |   |   |
| Retirement of long-term  debt, including capital lease obligations |       | (615.5                              | )          |                        | 0.2        |                         |       |                            | —     |             |       |   | — |   |   |   | (615.3 | ) |   |
| Payment of deferred  financing fees                                |       | (21.6                               | )          |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | (21.6 | ) |   |
| Dividend paid to Walter                                            |       | (444.5                              | )          |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | (444.5 | ) |   |
| Dividend to Walter for  acquisition costs                          |       | —                              |       |                        | (12.0      | )                            |       |                            | —     |             |       |   | — |   |   |   | (12.0 | ) |   |
| Walter contribution of  Predecessor Mueller’s cash            |       | 67.4                                |       |                        |       |                         |       |                            | —     |             |       |   | — |   |   |   | 67.4 |   |   |
| Net cash provided by  (used in) financing activities               |       | 29.5                                |       |                        | (98.4      | )                            |       |                            | 93.5       |             |       |   |   |   |   |   | 24.6 |   |   |
| Effect of exchange rate  changes on cash                           |       | —                              |       |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | — |   |   |
| Increase in cash                                                   |       | 24.6                                |       |                        | 10.8       |                         |       |                            | 28.1       |             |       |   | — |   |   |   | 63.5 |   |   |
| **Cash and cash equivalents**                                      |       |                                |       |                        |       |                         |       |                            |       |             |       |   |   |   |   |   |   |   |   |
| Beginning of period                                                |       | —                              |       |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | — |   |   |
| End of period                                                      |       | $                                   | 24.6       |                        |       | $                            | 10.8       |                            |       |             | $          | 28.1 |   |   |   | — |   |   |   | $ | 63.5 |   |   |

----

(1)           Guarantors include the accounts of thefollowing direct and indirect subsidiaries of Mueller Group, LLC:

| **Name**                                     | ** ** | **State of Incorporation** | ** ** |
|----------------------------------------------|------------|--------------------------------------|------------|
| AnvilStar, LLC                               |       | Delaware                             |       |
| Anvil International, Inc.               |       | Delaware                             |       |
| Henry Pratt Company                          |       | Delaware                             |       |
| Henry Pratt  International Ltd               |       | Delaware                             |       |
| Hersey Meters Co.                            |       | Delaware                             |       |
| Hydro Gate Acquisition  Corp.                |       | Delaware                             |       |
| James Jones Company                          |       | California                           |       |
| J.B. Smith Mfg. Co.                          |       | Oklahoma                             |       |
| Mueller Co.                                  |       | Illinois                             |       |
| Mueller Service Co.                          |       | Delaware                             |       |
| Milliken Acquisition  Corp.                  |       | Delaware                             |       |
| Mueller  International, Inc.            |       | Delaware                             |       |
| Mueller International,  LLC                  |       | Delaware                             |       |
| Mueller International  Finance, Inc.    |       | Delaware                             |       |
| Mueller International  Finance, LLC          |       | Delaware                             |       |
| *United States Pipe and Foundry Company, LLC |       | Alabama                              |       |

----

*                    Applicableonly for periods beginning October 3, 2005.

31

----

**Note 19.**   SupplementalData—Predecessor Mueller Group Financial Statements

Prior to the October 3,2005 Acquisition, Predecessor Mueller Group was a registrant filing reportswith the U.S. Securities and Exchange Commission (“SEC”). The followingfinancial statements were derived from reports previously filed with the SEC(Commission File Number 333-117473). The unaudited ConsolidatedStatements of Operations and Cash Flows for the three months ended January 1,2005 shown below are derived from the Quarterly Report on Form 10-Q/Aof Mueller Group, LLC (formerly known as Mueller Group, Inc.) for thequarterly period ended January 1, 2005, as filed with the SEC on February 3,2006. The audited Consolidated Balance Sheet as of September 30, 2005shown below is derived from the Annual Report on Form 10-K ofMueller Group, LLC (formerly known as Mueller Group, Inc.) for the fiscalyear ended September 30, 2005, as filed with the SEC on December 19,2005. This information is presented as supplemental data in this Form 10-Qto support the prior period Predecessor Mueller Group Guarantor FinancialStatements. In this footnote, each of theterms “Group,” the “Company,” “we,” “us” or “our” refers to Predecessor MuellerGroup, LLC and its subsidiaries, except where the context makes clear that thereference is only to Predecessor Mueller Group itself, and is not inclusive ofits subsidiaries.

32

----

**PREDECESSOR MUELLER GROUPUNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS**

| ** **                                                                         | ** ** | **Three months ended  January 1, 2005** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **(dollars in millions)**                         | ** ** |
| Net sales                                                                          |       |                                                        | $          | 256.1 |   |   |
| Cost of sales                                                                      |       |                                                        | 181.9      |   |   |
| Gross profit                                                                       |       |                                                        | 74.2       |   |   |
| Selling, general  and administrative expense, including stock compensation expense |       |                                                        | 41.8       |   |   |
| Facility  rationalization, restructuring and related costs                         |       |                                                        | 0.1        |   |   |
| Operating income                                                                   |       |                                                        | 32.3       |   |   |
| Interest expense,  net of interest income                                          |       |                                                        | (16.1      | ) |   |
| Income before  income taxes                                                        |       |                                                        | 16.2       |   |   |
| Income tax  expense                                                                |       |                                                        | 6.3        |   |   |
| Net income                                                                         |       |                                                        | $          | 9.9 |   |   |

 

33

----

**PREDECESSOR MUELLER GROUP**

**CONSOLIDATEDBALANCE SHEET**

| ** **                                                            | ** ** | **September 30,  2005**        | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                            | ** ** | **(dollars in millions)** | ** ** |
| **Assets**                                                            |       |                                |       |   |   |
| Cash and cash  equivalents                                            |       |                                | $          | 112.8 |   |   |
| Receivables, net                                                      |       |                                | 177.4      |   |   |
| Inventories                                                           |       |                                | 303.0      |   |   |
| Income tax  receivable                                                |       |                                | —     |   |   |
| Deferred income  taxes                                                |       |                                | 27.7       |   |   |
| Prepaid expenses                                                      |       |                                | 31.1       |   |   |
| Total current assets                                                  |       |                                | 652.0      |   |   |
| Property, plant  and equipment, net                                   |       |                                | 168.0      |   |   |
| Deferred  financing fees, net                                         |       |                                | 29.0       |   |   |
| Deferred income  taxes                                                |       |                                | 10.9       |   |   |
| Other long-term  assets                                               |       |                                | 1.5        |   |   |
| Identifiable  intangibles, net                                        |       |                                | 52.4       |   |   |
| Goodwill                                                              |       |                                | 163.2      |   |   |
| Total assets                                                          |       |                                | $          | 1,077.0 |   |   |
| **Liabilities**                                                       |       |                                |       |   |   |
| Accounts payable                                                      |       |                                | $          | 63.3 |   |   |
| Current portion  of long-term debt                                    |       |                                | 3.8        |   |   |
| Accrued expenses                                                      |       |                                | 103.0      |   |   |
| Total current liabilities                                        |       |                                | 170.1      |   |   |
| Long-term  debt                                                       |       |                                | 926.2      |   |   |
| Accrued pension  liability                                            |       |                                | 37.7       |   |   |
| Other long-term  liabilities                                          |       |                                | 1.5        |   |   |
| Total liabilities                                                     |       |                                | 1,135.5    |   |   |
| Commitments and  contingencies (Note 9)                               |       |                                | —     |   |   |
| **Shareholders’  deficit:**                                      |       |                                |       |   |   |
| Common  stock—$0.01 par value (100 shares authorized and issued) |       |                                | —     |   |   |
| Accumulated  deficit                                                  |       |                                | (48.9      | ) |   |
| Accumulated other  comprehensive loss                                 |       |                                | (9.6       | ) |   |
| Total shareholders’ deficit                                      |       |                                | (58.5      | ) |   |
| Total liabilities  and shareholders’ deficit                     |       |                                | $          | 1,077.0 |   |   |

 

34

----

**PREDECESSOR MUELLER GROUP**

**UNAUDITEDCONSOLIDATED STATEMENT OF CASH FLOWS**

| ** **                                                                                   | ** ** | **Three months ended**    | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                   | ** ** | **January 1,  2005**           | ** ** |
| ** **                                                                                   | ** ** | **(dollars in millions)** | ** ** |
| ** **                                                                                   | ** ** |                                | ** ** | ** ** |   |
| **Cash flows from operating  activities**                                                    |       |                                |       |   |   |
| Net income                                                                                   |       |                                | $          | 9.9 |   |   |
| Adjustments to reconcile  net income to net cash provided by (used in) operating activities: |       |                                |       |   |   |
| Depreciation                                                                                 |       |                                | 11.2       |   |   |
| Amortization of intangibles                                                                  |       |                                | 0.8        |   |   |
| Amortization of deferred financing fees                                                      |       |                                | 1.1        |   |   |
| Amortization of tooling                                                                      |       |                                | 0.6        |   |   |
| Write off of deferred financing fees                                                         |       |                                | —     |   |   |
| (Gain) loss on disposal of property, plant and  equipment                                    |       |                                | 0.1        |   |   |
| Deferred income taxes                                                                        |       |                                | 0.6        |   |   |
| Stock compensation (non-cash amounts)                                                        |       |                                | —     |   |   |
| Unrealized gain on interest rate swaps                                                       |       |                                | (2.3       | ) |   |
| Changes in assets and  liabilities, net of the effects of acquisitions:                      |       |                                |       |   |   |
| Receivables                                                                                  |       |                                | 22.2       |   |   |
| Inventories                                                                                  |       |                                | (25.5      | ) |   |
| Income taxes receivable                                                                      |       |                                | 3.7        |   |   |
| Prepaid expenses and other current assets                                                    |       |                                | (0.6       | ) |   |
| Pension, net                                                                                 |       |                                | 1.6        |   |   |
| Accounts payable, accrued expenses and other current  liabilities                            |       |                                | (22.6      | ) |   |
| Other, net                                                                                   |       |                                | (0.3       | ) |   |
| Net cash provided  by (used in) operating activities                                         |       |                                | 0.5        |   |   |
| **Cash  flows from investing activities**                                                    |       |                                |       |   |   |
| Purchase of  property, plant and equipment                                                   |       |                                | (4.7       | ) |   |
| Net cash used in  investing activities                                                       |       |                                | (4.7       | ) |   |
| **Cash  flows from financing activities**                                                    |       |                                |       |   |   |
| Book overdrafts                                                                              |       |                                | (0.7       | ) |   |
| Payment of long-term  debt                                                                   |       |                                | —     |   |   |
| Payment of  deferred financing fees                                                          |       |                                | —     |   |   |
| Financing of  assets through capital leases                                                  |       |                                | (0.3       | ) |   |
| Net cash used in  financing activities                                                       |       |                                | (1.0       | ) |   |
| Effect of  exchange rate changes on cash                                                     |       |                                | 0.9        |   |   |
| Decrease in cash  and cash equivalents                                                       |       |                                | (4.3       | ) |   |
| **Cash  and cash equivalents**                                                               |       |                                |       |   |   |
| Beginning of  period                                                                         |       |                                | 60.5       |   |   |
| End of period                                                                                |       |                                | $          | 56.2 |   |   |

 

35

----

**PREDECESSOR MUELLER GROUP**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**Organization**

Mueller Group, LLC (formerly Mueller Group, Inc.)(“Group” or the “Company”) is a wholly-owned subsidiary of Mueller WaterProducts, LLC (formerly Mueller Water Products, Inc.) (“Mueller Water”).As of September 30, 2005, the Company has two reporting and operatingsegments, Mueller and Anvil. Our Mueller segment (formerly called “Waterinfrastructure”) is a manufacturer of valves, fire hydrants and other relatedproducts utilized in the distribution of water and gas and in water andwastewater treatment facilities. Our Anvil segment segment (formerly called “Pipingsystems”) is a manufacturer of cast iron and malleable iron pipe fittings,ductile iron couplings and fittings, pipe hangers and other related productsfor the plumbing, heating, mechanical, construction retail hardware and otherrelated industries. Both segments have operations in the United States andCanada.

*Fiscal Year End**—The*fiscal year ofthe Company ends on September 30.

**Segment Information**

As of September 30, 2005, the Company’soperations consisted of two operating segments: Mueller and Anvil. Thesesegments are organized around differences in products and are consistent withhow the operating entities are managed, how resources are allocated, and howinformation is used by the chief operating decision maker. The Mueller segmentis a manufacturer of valves, fire hydrants and other related products utilizedin the distribution of water and gas and in water and wastewater treatmentfacilities. The Anvil segment is a manufacturer of cast iron and malleable ironpipe fittings, ductile iron couplings and fittings, pipe hangers and otherrelated products for the plumbing, heating, mechanical, construction retail hardwareand other related industries. Both segments have operations in the UnitedStates and Canada.

Intersegment sales and transfers are made atestablished intersegment selling prices generally intended to cover costs. Ourdetermination of segment earnings does not reflect allocations of certaincorporate expenses not directly attributable to segment operations andintersegment eliminations, which we designate as Corporate in the segmentpresentation, and is before interest expense, net, and income taxes. Corporateexpenses include costs related to financial and administrative matters,treasury, risk management, human resources, legal counsel, and tax functions.Corporate assets include items recorded at the date of the Company’s inceptionin 1999 related to purchase accounting valuation adjustments associated withproperty, plant and equipment and non-compete agreements with the predecessorparent company, as well as intangibles associated with intellectual property.These assets and any related depreciation or amortization expense have not beenpushed down to our segments and are maintained as Corporate items. Therefore,segment earnings are not reflective of results on a stand-alone basis.

36

----

Segment assets consist primarily of accountsreceivable, inventories, property, plant and equipment, net, goodwill, andidentifiable intangibles, net. Summarized financial information for oursegments follows:

| ** **                              | ** ** | **Three months**               | ** ** |
|-----------------------------------------|------------|-------------------------------------|------------|
| ** **                              | ** ** | **ended**                           | ** ** |
| ** **                              | ** ** | **January 1, 2005**       | ** ** |
| ** **                              | ** ** | **(dollars in millions)** | ** ** |
| Net Sales:                              | ** ** |                                | ** ** | ** ** |   |
| Mueller segment                         |       |                                | $          | 138.6 |   |   |
| Anvil segment                           |       |                                | 117.5      |   |   |
| Consolidated                            |       |                                | $          | 256.1 |   |   |
| Intersegment  sales:                    |       |                                |       |   |   |
| Mueller segment                         |       |                                | $          | 3.4 |   |   |
| Anvil segment                           |       |                                | 0.2        |   |   |
| Consolidated                            |       |                                | $          | 3.6 |   |   |
| Operating income  (expense):            |       |                                |       |   |   |
| Mueller segment                         |       |                                | $          | 28.8 |   |   |
| Anvil segment                           |       |                                | 11.8       |   |   |
| Corporate expense(1)                    |       |                                | (8.3       | ) |   |
| Consolidated                            |       |                                | $          | 32.3 |   |   |
| Depreciation and  amortization expense: |       |                                |       |   |   |
| Mueller segment                         |       |                                | $          | 6.0 |   |   |
| Anvil segment                           |       |                                | 4.3        |   |   |
| Corporate                               |       |                                | 2.3        |   |   |
| Consolidated                            |       |                                | $          | 12.6 |   |   |
| Capital  expenditures:                  |       |                                |       |   |   |
| Mueller segment                         |       |                                | $          | 2.8 |   |   |
| Anvil segment                           |       |                                | 1.8        |   |   |
| Corporate                               |       |                                | 0.1        |   |   |
| Consolidated                            |       |                                | $          | 4.7 |   |   |

----

(1)          Includes certainexpenses not allocated to segments.

| ** **                 | ** ** | **At September 30,**      | ** ** |
|----------------------------|------------|-------------------------------------|------------|
| ** **                 | ** ** | **2005**                            | ** ** |
| ** **                 | ** ** | **(dollars in millions)** | ** ** |
| Total assets:              |       |                                |       |   |   |
| Mueller segment            |       |                                | $          | 516.6 |   |   |
| Anvil segment              |       |                                | 303.6      |   |   |
| Corporate                  |       |                                | 256.8      |   |   |
| Consolidated               |       |                                | $          | 1,077.0 |   |   |
| Goodwill:                  |       |                                |       |   |   |
| Mueller segment            |       |                                | $          | 149.1 |   |   |
| Anvil segment              |       |                                | 14.1       |   |   |
| Consolidated               |       |                                | $          | 163.2 |   |   |
| Identifiable  intangibles: |       |                                |       |   |   |
| Mueller segment            |       |                                | $          | 4.4 |   |   |
| Anvil segment              |       |                                | 5.3        |   |   |
| Corporate                  |       |                                | 42.7       |   |   |
| Consolidated               |       |                                | $          | 52.4 |   |   |

 

37

----

Geographicalarea information with respect to net sales, as determined by the location ofthe customer invoiced, and property, plant and equipment—net, as determined bythe physical location of the assets, were as follows for the three months endedJanuary 1, 2005:

| ** **      | ** ** | **Three months ended**    | ** ** |
|-----------------|------------|-------------------------------------|------------|
| ** **      | ** ** | **January 1, 2005**       | ** ** |
| ** **      | ** ** | **(dollars in millions)** | ** ** |
| Net sales:      |       |                                |       |   |   |
| United States   |       |                                | $          | 210.4 |   |   |
| Canada          |       |                                | 44.4       |   |   |
| Other Countries |       |                                | 1.3        |   |   |
|            |       |                                | $          | 256.1 |   |   |

 

| ** **                           | ** ** | **At September 30, 2005** | ** ** |
|--------------------------------------|------------|------------------------------------------|------------|
| ** **                           | ** ** | **(dollars in millions)**      | ** ** |
| Property, plant  and equipment, net: |       |                                     |       |   |   |
| United States                        |       |                                     | $          | 152.8 |   |   |
| Canada                               |       |                                     | 12.6       |   |   |
| Other Countries                      |       |                                     | 2.6        |   |   |
|                                 |       |                                     | $          | 168.0 |   |   |

 

**Summaryof Significant Accounting Policies**

Fiscal Year—The Company’s fiscal year ends on September 30.The Company’s first quarter ends on the Saturday closest to December 31.

Inventory—Inventories are recorded at the lower ofcost (first-in, first-out) or market value. Additionally, the Company evaluatesits inventory reserves in terms of excess and obsolete exposures. This evaluationincludes such factors as anticipated usage, inventory turnover, inventorylevels and ultimate product sales value. As such, these factors may change overtime causing the reserve level to adjust accordingly.

Warranty Costs—The Company accrues for the estimatedcost of product warranties at the time of sale based on historical experience.Adjustments to obligations for warranties are made as changes in theobligations become reasonably estimable. The following table summarizesinformation concerning the Company’s product warranty:

| ** **                      | ** ** | **Three months ended**    | ** ** |
|---------------------------------|------------|-------------------------------------|------------|
| ** **                      | ** ** | **January 1, 2005**       | ** ** |
| ** **                      | ** ** | **(dollars in millions)** | ** ** |
| Balance at  beginning of period |       |                                | $          | 1.6 |   |   |
| Accruals for  warranties        |       |                                | 0.6        |   |   |
| Settlement of  warranty claims  |       |                                | (0.9       | ) |   |
| Balance at end of period        |       |                                | $          | 1.3 |   |   |

 

Comprehensive Income—The Company’s comprehensiveincome for the three months ended January 1, 2005 includes foreigncurrency translation adjustments of $4.0 million.

Related Party Transactions—TheCompany paid $0.1 million to Credit Suisse First Boston for the threemonths ended January 1, 2005 for management advisory services.

38

----

**BorrowingArrangements**

*Long-Term Debt**—Long-term*debtconsists of the following obligations:

| ** **                                          | ** ** | **September 30,**              | ** ** |
|-----------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                          | ** ** | **2005**                            | ** ** |
| ** **                                          | ** ** | **(dollars in millions)** | ** ** |
| Senior credit  facility term loans                  |       |                                | $          | 512.8 |   |   |
| Second priority  senior secured floating rate notes |       |                                | 100.0      |   |   |
| 10% senior  subordinated notes                      |       |                                | 315.0      |   |   |
| Capital lease  obligations                          |       |                                | 2.2        |   |   |
|                                                |       |                                | 930.0      |   |   |
| Less current  portion                               |       |                                | (3.8       | ) |   |
|                                                |       |                                | $926.2     |   |   |

 

Aschedule of debt maturities as of September 30, 2005 is as follows:

| ** **                            | ** ** | **Less than  1 year**     | ** ** | **1–3  years** | ** ** | **4–5  years** | ** ** | **After  5 years** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|-------------------------------------|------------|---------------------|------------|---------------------|------------|-------------------------|------------|-----------|------------|
| ** **                            | ** ** | **(dollars in millions)** | ** ** |
| Senior credit  facility term loans    |       |                                | $          | 2.9                 |       |                |       | $                       | 5.8        |      |       |   | $ | 5.8 |   |   | $ | 498.3 |   | $ | 512.8 |   |
| Second Priority  Senior Secured Notes |       |                                | —     |                |       |                | —     |                    |       |      | —     |   |   | 100.0 |   | 100.0 |   |
| 10% Senior  Subordinated Notes        |       |                                | —     |                |       |                | —     |                    |       |      | —     |   |   | 315.0 |   | 315.0 |   |
| Capital lease  obligations            |       |                                | 0.9        |                |       |                | 1.2        |                    |       |      | 0.1        |   |   | — |   | 2.2 |   |
| Total debt  maturities                |       |                                | $          | 3.8                 |       |                |       | $                       | 7.0        |      |       |   | $ | 5.9 |   |   | $ | 913.3 |   | $ | 930.0 |   |

 

*2004 Mueller CreditFacility:*   The Company entered into a seniorcredit facility, which includes a $545 million amortizing senior creditfacility term loan ($32.2 million of which has since been repaid) maturingseven years after closing and an $80.0 million revolving credit facilitythat will terminate five years after closing. The revolving credit facilityand/or the term loan facility are subject to a potential, although uncommitted,increase of up to an aggregate of $50.0 million at the Company’s requestat any time prior to maturity. In addition, although uncommitted, a foreigncurrency sub-facility may be made available to one or more of the Company’srestricted foreign subsidiaries in an aggregate principal amount of up to theU.S. dollar equivalent of $30.0 million. This increase and the additionalforeign currency sub-facility will only be available if one or more financialinstitutions agree to provide them. The Company had no borrowings under therevolving credit facility at September 30, 2005.

Borrowings 2004Mueller Credit Facility bore interest based on a margin over, at the Company’soption, the base rate or LIBOR. The applicable margin was 2.75% over LIBOR and1.50% over the base rate for term loans. The applicable margin under therevolving senior credit facility was a range of 2.25% to 3.25% over LIBOR and arange of 1.00% to 2.00% over the base rate, depending on our ratio ofconsolidated debt to EBITDA as defined in the senior credit facility. At September 30,2005 the applicable margin on the revolving senior credit facility was 2.75%over LIBOR and 1.50% over the base rate. The Company’s obligations under thesenior credit facility are guaranteed by Mueller Water and all of the Company’sexisting or future domestic restricted subsidiaries and is secured bysubstantially all of the assets of the Company and its subsidiary guarantors,including a pledge of the capital stock of all of the Company’s existing andfuture domestic subsidiaries, a pledge of no more than 65.0% of the votingstock of any of the Company’s foreign subsidiaries, a pledge of allintercompany indebtedness in favor of the Company and its domestic restrictedsubsidiaries, and a pledge of its capital stock by Mueller Water. The 2004Mueller Credit Facility contained customary covenants, including covenants thatlimit the Company’s ability to incur debt and liens, pay dividends and makeinvestments and capital expenditures, and events of default. Mueller Group waspermitted to make payments of up to $2.0 million in any fiscal year toMueller Water Products to pay overhead expenses of Mueller Water Products.These restrictions expired October 3, 2005 in connection with theacquisition by Walter.

39

----

*Second Priority SeniorSecured Floating Rate Notes:*   The Company issued$100 million of such notes. Interest on the secured notes is payable at arate equal to the three-month reserve-adjusted London-interbankoffered rate, or LIBOR, which is reset quarterly, plus 4.75% onFebruary 1, May 1, August 1 and November 1 of each year,beginning on August 1, 2004. The interest rate for the interest periodbeginning August 1, 2005 is 8.44% per annum. The secured notes mature in2011 and are guaranteed by each of the existing domestic restrictedsubsidiaries and secured by second-priority liens on the assets securingthe senior credit facility (other than certain subsidiary stock and assets ofWater). The secured notes contain customary covenants and events of default,including covenants that limit the Company’s ability to incur debt, paydividends and make investments and also include a maintenance covenant limitingthe Company’s senior total leverage as a multiple of EBITDA, as defined in theindenture.

*10% Senior SubordinatedNotes:*   The Company issued $315 million ofsuch notes. Interest on the subordinated notes is payable at an annual rate of10% on May 1 and November 1 of each year, beginning onNovember 1, 2004. The subordinated notes mature in 2012 and are guaranteedby each of the Company’s existing domestic restricted subsidiaries. Thesubordinated notes contain customary covenants and events of default, includingcovenants that limit the Company’s ability to incur debt, pay dividends andmake investments. Generally, the notes only permit us to pay dividends if thereis no default or event of default and our fixed charge ratio (as defined) is atleast 2.5 to 1, and the maximum amount we may pay cannot exceed 50%of our cumulative net income (as defined) since January 1, 2004, subjectto specified exceptions. The Company is permitted to make dividends or loans toMueller Water of up to $2 million in any fiscal year for costs and expensesincurred by Mueller Water in its capacity as a holding company for servicesrendered on behalf of the Company.

*Capital Leases**—The*Company leases automobiles under capital leasearrangements that expire over the next four years.

Futureminimum lease payments under scheduled capital leases that have initial orremaining non-cancelable terms in excess of one year are as follows:

| ** **                       | ** ** | **(dollars in millions)** | ** ** |
|----------------------------------|------------|-------------------------------------|------------|
| Fiscal 2006                      |       |                                | $          | 1.1 |   |   |
| Fiscal 2007                      |       |                                | 0.9        |   |   |
| Fiscal 2008                      |       |                                | 0.5        |   |   |
| Fiscal 2009                      |       |                                | 0.1        |   |   |
| Total minimum lease payments     |       |                                | 2.6        |   |   |
| Amount representing interest     |       |                                | (0.4       | ) |   |
| Obligations under capital leases |       |                                | 2.2        |   |   |
| Obligations due within one year  |       |                                | (0.9       | ) |   |
| Long term  obligations           |       |                                | $          | 1.3 |   |   |

 

**Interest Rate Swap****—The** Company hasentered into interest rate swap agreements in order to reduce interest raterisks and manage interest expense. As of September 30, 2005, a notionalprincipal amount of $100 million in swap agreements is still outstandingand scheduled to mature in April 2007 and May 2007. At September 30,2005, the fair value of interest rate swaps was an asset of $0.5 million. Theswap agreements effectively convert floating-rate debt into fixed-rate debt andcarry an average fixed interest rate of 4.09% at September 30, 2005.Interest differentials to be paid or received because of swap agreements arereflected as an adjustment to interest expense over the related debt period.For the three months ended January 1, 2005 Group recorded gains oninterest rate swaps of $2.3 million. While Group is 

40

----

exposed to creditloss on its interest rate swaps in the event of non-performance by thecounterparties to such swaps, management believes such nonperformance isunlikely to occur given the financial resources of the counterparties.

**Distributions to Water****—Mueller** Water hasno material assets other than its ownership of the Company’s capital stock andaccordingly depends upon distributions from the Company to satisfy its cashneeds. Mueller Water’s principal cash needs will be debt service on its SeniorDiscount Notes due 2014. These notes do not require cash interest paymentsuntil 2009 and contain restrictive covenants that will, among other things,limit the ability of Mueller Water and its subsidiaries (including the Company)to incur debt, pay dividends and make investments. Neither the Company nor anyof its subsidiaries guarantee these notes. Mueller Water, however, is a holdingcompany and its ability to pay interest on the notes will be dependent upon thereceipt of dividends from its subsidiaries. The Company is Mueller Water’s onlydirect subsidiary. However, the terms of the Company’s borrowing arrangementssignificantly restrict its ability to pay dividends to Mueller Water.

**Fair Value of Debt****—Based**on the levelof interest rates prevailing at September 30, 2005, the fair value of theCompany’s fixed-rate debt exceeded its carrying value by approximately$18.9 million. Unrealized gains or losses on debt do not result in therealization or expenditure of cash and generally are not recognized forfinancial reporting purposes unless the debt is retired prior to its maturity.

**NetPeriodic Benefit Cost—Defined Benefit Plans**

For a detailed disclosureon the Company’s pension and employee benefits plans, please refer toNote 10 of the Company’s Audited Consolidated Financial Statements for theyear ended September 30, 2005, as found on Form 10-K (File No. 333-117473).

Thefollowing sets forth the components of net periodic benefit cost of thedomestic non-contributory defined benefit plans for the three months ended January 1,2005:

| ** **                         | ** ** | **Three months ended**    | ** ** |
|------------------------------------|------------|-------------------------------------|------------|
| ** **                         | ** ** | **January 1,**                 | ** ** |
| ** **                         | ** ** | **2005**                            | ** ** |
| ** **                         | ** ** | **(dollars in millions)** | ** ** |
| Service cost                       |       |                                | $          | 0.8 |   |   |
| Interest cost                      |       |                                | 1.3        |   |   |
| Expected return on plan assets     |       |                                | (1.3       | ) |   |
| Amortization of prior service cost |       |                                | 0.1        |   |   |
| Amortization of net actuarial loss |       |                                | 0.7        |   |   |
| Net periodic  benefit cost         |       |                                | 1.6        |   |   |

 

No contributions were madeduring the three months ended January 1, 2005. The Company presentlyanticipates contributing $0.1 million to fund its pension plans in 2005and may make further discretionary payments.

41

----

**SupplementaryBalance Sheet Information**

Selectedsupplementary balance sheet information is presented below:

| ** **                                 | ** ** | **September 30,**              | ** ** |
|--------------------------------------------|------------|-------------------------------------|------------|
| ** **                                 | ** ** | **2005**                            | ** ** |
| ** **                                 | ** ** | **(dollars in millions)** | ** ** |
| **Inventories**                            |       |                                |       |   |   |
| Purchased materials and manufactured parts |       |                                | $          | 33.5 |   |   |
| Work in process                            |       |                                | 90.6       |   |   |
| Finished goods                             |       |                                | 178.9      |   |   |
|                                       |       |                                | $          | 303.0 |   |   |
| **Property, plant and equipment**          |       |                                |       |   |   |
| Land                                       |       |                                | $          | 9.2 |   |   |
| Buildings                                  |       |                                | 63.0       |   |   |
| Machinery and equipment                    |       |                                | 300.0      |   |   |
| Other                                      |       |                                | 14.9       |   |   |
| Accumulated depreciation                   |       |                                | (219.1     | ) |   |
|                                       |       |                                | $          | 168.0 |   |   |
| **Accrued expenses and other liabilities** |       |                                |       |   |   |
| Vacations and holidays                     |       |                                | $          | 9.7 |   |   |
| Workers compensation                       |       |                                | 8.8        |   |   |
| Accrued interest                           |       |                                | 15.2       |   |   |
| Accrued payroll and bonus                  |       |                                | 20.0       |   |   |
| Accrued sales commissions                  |       |                                | 3.8        |   |   |
| Accrued cash discounts and rebates         |       |                                | 15.8       |   |   |
| Accrued federal and state income taxes     |       |                                | 4.4        |   |   |
| Accrued other taxes                        |       |                                | 4.1        |   |   |
| Accrued medical claims                     |       |                                | 4.0        |   |   |
| Other                                      |       |                                | 17.2       |   |   |
|                                       |       |                                | $          | 103.0 |   |   |

 

42

----

**SupplementaryIncome Statement Information**

Thecomponents of interest expense are presented below:

| ** **                                      | ** ** | **Three months ended**    | ** ** |
|-------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                      | ** ** | **January 1, 2005**       | ** ** |
| ** **                                      | ** ** | **(dollars in millions)** | ** ** |
| Interest expense, net of interest income:       |       |                                |       |   |   |
| Contractual interest expense                    |       |                                | $          | 17.7 |   |   |
| Deferred financing fee amortization             |       |                                | 1.1        |   |   |
| Interest rate swap gains                        |       |                                | (2.3       | ) |   |
| Interest expense                                |       |                                | 16.5       |   |   |
| Interest income                                 |       |                                | (0.4       | ) |   |
| Total interest  expense, net of interest income |       |                                | $          | 16.1 |   |   |

 

**FacilityRationalization, Restructuring and Related Costs**

In the first quarter offiscal 2005, the Company announced that it will cease manufacturing and beginoutsourcing a product line it currently produces at its water infrastructureplant in Colorado. A restructuring charge of $0.1 million related toseverance was reflected in the first quarter of fiscal 2005. An additionalcharge of $1.5 million is related primarily to the termination ofoperating leases for the building and machinery and will be reflected in the secondquarter of fiscal 2005.

**ConsolidatingGuarantor and Non-Guarantor Financial Information**

The following tables setforth the consolidating statements of operations and cash flows for each of thethree-month periods ended December 27, 2003 and January 1, 2005and the consolidating balance sheets as of September 30, 2004 and January 1,2005. Amounts have been restated to reflect the impact of items discussed inNote 2. The following information is included as a result of the guaranteeby certain of the Company’s wholly owned U.S. subsidiaries (“GuarantorCompanies”) of the second priority senior secured notes and senior subordinatednotes issued by the Company. None of the Company’s other subsidiaries guaranteethe debt. Each of the guarantees is joint and several and full andunconditional. “Mueller Group, Inc.” (“Issuer”) includes the consolidatedfinancial results of Mueller Group, Inc. with all of its wholly-ownedsubsidiaries accounted for under the equity method.

43

----

**Consolidating Statement of OperationsFor Predecessor Mueller GroupFor the Three Months Ended January 1, 2005**

| ** **                                                 | ** ** | **Issuer**                          | ** ** | **Guarantor  Companies(1)** | ** ** | **Non-Guarantor  Companies** | ** ** | **Consolidating  Eliminating** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------|------------|------------------------------|------------|--------------------------------|------------|------------------|------------|
| ** **                                                 | ** ** | **(dollars in millions)** | ** ** |
| Net sales                                                  |       | $                                   | —     |                        |       | $                            | 202.7      |                           |       |             | $          | 53.4 |   |   |   | $ | — |   |   |   | $ | 256.1 |   |   |
| Cost of sales                                              |       | —                              |       |                        | 139.6      |                         |       |                           | 42.3       |             |       |   | — |   |   |   | 181.9 |   |   |
| Gross profit                                               |       | —                              |       |                        | 63.1       |                         |       |                           | 11.1       |             |       |   | — |   |   |   | 74.2 |   |   |
| Selling, general  and administrative                       |       | 2.9                                 |       |                        | 31.4       |                         |       |                           | 7.5        |             |       |   | — |   |   |   | 41.8 |   |   |
| Facility  rationalization, restructuring and related costs |       | —                              |       |                        | 0.1        |                         |       |                           | —     |             |       |   | — |   |   |   | 0.1 |   |   |
| Operating income  (loss)                                   |       | (2.9                                | )          |                        | 31.6       |                         |       |                           | 3.6        |             |       |   | — |   |   |   | 32.3 |   |   |
| Interest expense,  net of interest income                  |       | (16.2                               | )          |                        | —     |                         |       |                           | 0.1        |             |       |   | — |   |   |   | (16.1 | ) |   |
| Income (loss)  before income taxes                         |       | (19.1                               | )          |                        | 31.6       |                         |       |                           | 3.7        |             |       |   | — |   |   |   | 16.2 |   |   |
| Income tax  expense (benefit)                              |       | (7.4                                | )          |                        | 12.4       |                         |       |                           | 1.3        |             |       |   | — |   |   |   | 6.3 |   |   |
| Equity income  from subsidiaries                           |       | 21.6                                |       |                        | 2.4        |                         |       |                           | —     |             |       |   | (24.0 | ) |   |   | — |   |   |
| Net income                                                 |       | $                                   | 9.9        |                        |       | $                            | 21.6       |                           |       |             | $          | 2.4 |   |   |   | $ | (24.0 | ) |   |   | $ | 9.9 |   |   |

 

44

----

**Consolidating Balance SheetFor Predecessor Mueller GroupSeptember 30, 2005**

| ** **                                                 | ** ** | **Issuer**                          | ** ** | **Guarantor  Companies(1)** | ** ** | **Non-  Guarantor  Companies** | ** ** | **Consolidating  Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------|------------|--------------------------------|------------|---------------------------------|------------|------------------|------------|
| ** **                                                 | ** ** | **(dollars in millions)** | ** ** |
| **Assets**                                                 |       |                                |       |                        |       |                           |       |                            |       |             |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                                 |       | $                                   | 94.5       |                        |       | $                              | (11.4      | )                               |       |             | $          | 29.7 |   |   |   | $ | — |   |   |   | $ | 112.8 |   |   |
| Receivables, net                                           |       | —                              |       |                        | 143.6      |                           |       |                            | 33.8       |             |       |   | — |   |   |   | 177.4 |   |   |
| Inventories                                                |       | —                              |       |                        | 247.1      |                           |       |                            | 55.9       |             |       |   | — |   |   |   | 303.0 |   |   |
| Deferred income  taxes                                     |       | —                              |       |                        | 27.7       |                           |       |                            | —     |             |       |   | — |   |   |   | 27.7 |   |   |
| Prepaid expenses                                           |       | —                              |       |                        | 28.7       |                           |       |                            | 2.4        |             |       |   | — |   |   |   | 31.1 |   |   |
| Total current  assets                                      |       | 94.5                                |       |                        | 435.7      |                           |       |                            | 121.8      |             |       |   | — |   |   |   | 652.0 |   |   |
| Property, plant  and equipment, net                        |       | —                              |       |                        | 153.9      |                           |       |                            | 14.1       |             |       |   | — |   |   |   | 168.0 |   |   |
| Deferred  financing fees, net                              |       | 29.0                                |       |                        | —     |                           |       |                            | —     |             |       |   | — |   |   |   | 29.0 |   |   |
| Deferred income  taxes                                     |       | (4.1                                | )          |                        | 15.6       |                           |       |                            | (0.6       | )                |       |   | — |   |   |   | 10.9 |   |   |
| Other long-term  assets                                    |       | 0.5                                 |       |                        | 1.0        |                           |       |                            | —     |             |       |   | — |   |   |   | 1.5 |   |   |
| Identifiable  intangibles, net                             |       | —                              |       |                        | 52.4       |                           |       |                            | —     |             |       |   | — |   |   |   | 52.4 |   |   |
| Goodwill                                                   |       | —                              |       |                        | 163.2      |                           |       |                            | —     |             |       |   | — |   |   |   | 163.2 |   |   |
| Investment in  subsidiaires                                |       | 1,190.1                             |       |                        | 42.4       |                           |       |                            | —     |             |       |   | (1,232.5 | ) |   |   | — |   |   |
| Total assets                                               |       | $                                   | 1,310.0    |                        |       | $                              | 864.2      |                            |       |             | $          | 135.3 |   |   |   | $ | (1,232.5 | ) |   |   | $ | 1,077.0 |   |   |
| **Liabilities**                                            |       |                                |       |                        |       |                           |       |                            |       |             |       |   |   |   |   |   |   |   |   |
| Accounts payable                                           |       | $                                   | 10.0       |                        |       | $                              | 37.2       |                            |       |             | $          | 16.1 |   |   |   | $ | — |   |   |   | $ | 63.3 |   |   |
| Current portion  of long-term debt                         |       | 2.8                                 |       |                        | 1.0        |                           |       |                            | —     |             |       |   | — |   |   |   | 3.8 |   |   |
| Accrued expenses                                           |       | 18.3                                |       |                        | 74.6       |                           |       |                            | 10.1       |             |       |   | — |   |   |   | 103.0 |   |   |
| Total current  liabilities                                 |       | 31.1                                |       |                        | 112.8      |                           |       |                            | 26.2       |             |       |   | — |   |   |   | 170.1 |   |   |
| Intercompany  accounts                                     |       | 410.9                               |       |                        | (478.1     | )                              |       |                            | 67.2       |             |       |   | — |   |   |   | — |   |   |
| Long-term  debt                                            |       | 925.0                               |       |                        | 1.2        |                           |       |                            | —     |             |       |   | — |   |   |   | 926.2 |   |   |
| Accrued pension  liability                                 |       | —                              |       |                        | —     |                           |       |                            | —     |             |       |   | — |   |   |   | 37.7 |   |   |
| Other long-term  liabilities                               |       | 1.5                                 |       |                        | 38.2       |                           |       |                            | (0.5       | )                |       |   | — |   |   |   | 1.5 |   |   |
| Total liabilities                                          |       | 1,368.5                             |       |                        | (325.9     | )                              |       |                            | 92.9       |             |       |   | — |   |   |   | 1,135.5 |   |   |
| **Shareholders’  equity**                             |       |                                |       |                        |       |                           |       |                            |       |             |       |   |   |   |   |   |   |   |   |
| Total  shareholders’ equity (deficit)                 |       | (58.5                               | )          |                        | 1,190.1    |                           |       |                            | 42.4       |             |       |   | (1,232.5 | ) |   |   | (58.5 | ) |   |
| Total liabilities and  shareholders’ equity (deficit) |       | $                                   | 1,310.0    |                        |       | $                              | 864.2      |                            |       |             | $          | 135.3 |   |   |   | $ | (1,232.5 | ) |   |   | $ | 1,077.0 |   |   |

 

45

----

**Consolidating Statement of Cash FlowsFor Predecessor Mueller GroupFor the Three Months Ended January 1, 2005**

| ** **                                              | ** ** | **Issuer**                          | ** ** | **Guarantor  Companies(1)** | ** ** | **Non-  Guarantor  Companies** | ** ** | **Consolidating  Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------|------------|--------------------------------|------------|---------------------------------|------------|------------------|------------|
| ** **                                              | ** ** | **(dollars in millions)** | ** ** |
| Net cash provided  by (used in) operating activities    |       | $                                   | (11.9      | )                           |       | $                              | 17.2       |                            |       |             | $          | (4.8 | ) |   |   | — |   |   |   | $ | 0.5 |   |   |
| **Cash  flows from investing activities**               |       |                                |       |                        |       |                           |       |                            |       |             |       |   |   |   |   |   |   |   |   |
| Capital  expenditures                                   |       | —                              |       |                        | (4.2       | )                              |       |                            | (0.5       | )                |       |   | — |   |   |   | (4.7 | ) |   |
| Net cash used in  investing activities                  |       | —                              |       |                        | (4.2       | )                              |       |                            | (0.5       | )                |       |   | — |   |   |   | (4.7 | ) |   |
| **Cash  flows from financing activities**               |       |                                |       |                        |       |                           |       |                            |       |             |       |   |   |   |   |   |   |   |   |
| Book overdrafts                                         |       | (0.7                                | )          |                        | —     |                           |       |                            | —     |             |       |   | — |   |   |   | (0.7 | ) |   |
| Intercompany  change                                    |       | 10.0                                |       |                        | (10.5      | )                              |       |                            | 0.5        |             |       |   | — |   |   |   | — |   |   |
| Retirement of  long-term debt, including capital leases |       | —                              |       |                        | (0.3       | )                              |       |                            | —     |             |       |   | — |   |   |   | (0.3 | ) |   |
| Net cash provided  by (used in) financing activities    |       | 9.3                                 |       |                        | (10.8      | )                              |       |                            | 0.5        |             |       |   | — |   |   |   | (1.0 | ) |   |
| Effect of  exchange rate changes on cash                |       | —                              |       |                        | —     |                           |       |                            | 0.9        |             |       |   | — |   |   |   | 0.9 |   |   |
| Increase  (decrease) in cash                            |       | (2.6                                | )          |                        | 2.2        |                           |       |                            | (3.9       | )                |       |   | — |   |   |   | (4.3 | ) |   |
| **Cash  and cash equivalents**                          |       |                                |       |                        |       |                           |       |                            |       |             |       |   |   |   |   |   |   |   |   |
| Beginning of  period                                    |       | 49.8                                |       |                        | (7.9       | )                              |       |                            | 18.6       |             |       |   | — |   |   |   | 60.5 |   |   |
| End of period                                           |       | $                                   | 47.2       |                        |       | $                              | (5.7       | )                               |       |             | $          | 14.7 |   |   |   | — |   |   |   | $ | 56.2 |   |   |

----

(1)          Guarantorsinclude the accounts of the following direct and indirect subsidiaries ofMueller Group, LLC:

| **Name**                                  | ** ** | ** ** | ** ** | **State of Incorporation** | ** ** |
|-------------------------------------------|------------|------------|------------|--------------------------------------|------------|
| AnvilStar, LLC                            |       | Delaware   |       |
| Anvil  International, Inc.           |       | Delaware   |       |
| Henry Pratt  Company                      |       | Delaware   |       |
| Henry Pratt  International Ltd            |       | Delaware   |       |
| Hersey Meters Co.                         |       | Delaware   |       |
| Hydro Gate  Acquisition Corp.             |       | Delaware   |       |
| James Jones  Company                      |       | California |       |
| J.B. Smith Mfg.  Co.                      |       | Oklahoma   |       |
| Mueller Co.                               |       | Illinois   |       |
| Mueller Service  Co.                      |       | Delaware   |       |
| Milliken  Acquisition Corp.               |       | Delaware   |       |
| Mueller  International, Inc.         |       | Delaware   |       |
| Mueller  International, LLC               |       | Delaware   |       |
| Mueller  International Finance, Inc. |       | Delaware   |       |
| Mueller International  Finance, LLC       |       | Delaware   |       |

 

46

----

**ITEM 2.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In this report, each ofthe terms “Group,” the “Company,” “we,” “us” or “our” refers to Mueller Group,LLC and its subsidiaries, except where the context makes clear that thereference is only to Mueller Group, LLC itself, and is not inclusive of itssubsidiaries.

Except as otherwise noted, we present all financialand operating data on a fiscal year and fiscal quarter basis. Our fiscal yearends on September 30, and our first fiscal quarter ends on December 31.

**Overview**

*Organization*

Mueller Group, LLC, (the “Company”)is a wholly-owned subsidiary of Mueller Water Products, Inc. (“MuellerWater”), a Delaware corporation. Mueller Water is the surviving corporation ofthe merger on February 2, 2006 of Mueller Water Products, LLC (CommissionFile Number:  333-116590) andMueller Water Products Co-Issuer, Inc. with and into Mueller HoldingCompany, Inc., a Delaware corporation.

On October 3, 2005,through a series of transactions (the “Acquisition”), Walter Industries, Inc.(“Walter”), through a wholly-owned subsidiary, acquired all outstanding sharesof capital stock of our parent company, Mueller Water Products, Inc. (“PredecessorMueller Water”), which immediately was converted into Mueller Water Products,LLC, a Delaware limited liability company and contributed United States Pipeand Foundry Company, LLC, (“U.S. Pipe”), owned by Walter since 1969, to theacquired company’s wholly-owned subsidiary, Mueller Group, LLC (“PredecessorMueller Group”). In accordance with generally accepted accounting principles,for accounting purposes U.S. Pipe is treated as the acquirer of PredecessorMueller Group. Accordingly, effective October 3, 2005, U.S. Pipe’s basisof accounting is used for the Company and all historical financial data of theCompany included in this report on Form 10-Q, is that of U.S. Pipe.The results of operations of Predecessor Mueller Group are included in theConsolidated Statements of Operations beginning October 3, 2005.

The Company was originallyorganized as United States Pipe and Foundry Company, Inc. (“Inc.”) and wasa wholly-owned subsidiary of Walter Industries, Inc., a diversified NewYork Stock Exchange traded company (NYSE: WLT). On September 23, 2005, Inc.was dissolved and United States Pipe and Foundry Company, LLC was organized inthe state of Alabama, and the operations of Inc. were conducted under the formof a limited liability company.

In December 2005,U.S. Pipe changed its fiscal year-end to September 30, which coincideswith the fiscal year end of Predecessor Mueller Group. Beginning with thequarter ended December 31, 2005, the Company has three operating segmentswhich are named after our leading brands in each segment: Mueller, U.S. Pipe,and Anvil.

Consistent with generallyaccepted accounting principles, the discussion of the Company’s results ofoperations for the three months ended December 31, 2005 includes thefinancial results of Predecessor Mueller Group for all but the first two daysof the period. The inclusion of these results, plus the continuing integrationprocess, may render direct comparison with the results for prior periods lessmeaningful. Accordingly, the discussion below addresses, where appropriate,trends that we believe are significant, separate and apart from the impact ofthe Acquisition. Supplemental information with comparisons of the three monthsended December 31, 2005 Statement of Operations data to the pro formathree months ended December 31, 2004 Statement of Operations data isprovided below under the subheading “Supplemental Information—Results ofOperations for the Three Months Ended December 31, 2005 Compared to ProForma Results of Operations for the Three Months Ended December 31, 2004.”

47

----

*Business*

We are a leading North Americanmanufacturer of a broad range of water infrastructure and flow control productsfor use in water distribution networks, water and wastewater treatmentfacilities, gas distribution and piping systems. We manage our business and reportoperations through three operating segments, based largely on the products theysell and the markets they serve. Our segments are named after lead brands ineach segment:

·       *Mueller*.   The Mueller segment produces and sells hydrants, valvesand related products primarily to the water and wastewater infrastructuremarkets. Sales of our Mueller segment products are driven principally byspending on water and wastewater infrastructure upgrade, repair and replacementand new water and wastewater infrastructure. Subsequent to the Acquisition,U.S. Pipe transferred its valve and hydrant business to our Mueller segment.Mueller segment sales are estimated to be approximately 50% for newinfrastructure, with the remainder for upgrade, repair and replacement. A significantportion of Mueller’s sales are made through its broad distributor network. Formost of our Mueller segment products, which are sold through independentdistributors, end-users choose the brand or establish product specifications.We believe our reputation for quality, extensive distributor relationships,installed base and coordinated marketing approach have helped our Muellersegment products to be “specified” as an approved product for use in most majormetropolitan areas throughout the United States.

·       *U.S. Pipe*.   The U.S. Pipe segment produces and sells ductile ironpressure pipe, restraint joints and fittings and related products to the waterinfrastructure market. U.S. Pipe products are sold primarily to water worksdistributors, contractors, municipalities, private utilities and othergovernmental agencies. A substantial percentage of ductile iron pressure pipeorders result from contracts that are bid by contractors or directly issued bymunicipalities or private utilities. To support our customers’ inventory anddelivery requirements, U.S. Pipe utilizes numerous storage depots throughoutthe country.

·       *Anvil*.   The Anvil segment produces, sources and sells pipefittings, pipe hangers and pipe nipples and a variety of related productsprimarily to the commercial fire protection piping systems and HVACapplications market. Sales of our Anvil segment products are driven principallyby spending on non-residential construction projects.

*Developments and Trends*

The Acquisition of Predecessor MuellerWater on October 3, 2005, as well as other developments, trends andfactors may impact our future results including the following:

·       We have implemented price increases for Mueller segment productseffective February 1, 2006, as planned.

·       As presented herein, the operating results from the Acquisition ofPredecessor Mueller Group will be consolidated with those of U.S. Pipe’sresults from October 3, 2005, the date of Acquisition.

·       In the quarter ended December 31, 2005, the Company, enteredinto the 2005 Mueller Credit Agreement. Proceeds of the 2005 Mueller CreditAgreement were approximately $1,053.4 million, net of approximately $21.6million of underwriting fees and expenses which will be amortized over the lifeof the loans. The proceeds were used to refinance Predecessor Mueller Group’s2004 Credit Facility (“2004 Mueller Credit Facility”), redeem PredecessorMueller Group’s second priority senior secured floating rate notes, and financethe acquisition of Predecessor Mueller Group by Walter Industries. During theperiod subsequent to September 30, 2005, and prior to Walter Industriesacquiring Predecessor Mueller Group on October 3, 2005, PredecessorMueller Group expensed $18.4 million of deferred financing fees related to the2004 Mueller Credit Facility and 

48

----

$2.4 million of deferred financing fees related to the secondpriority senior secured floating rate notes.

·       In the period subsequent to September 30, 2005 and prior toWalter Industries acquiring Predecessor Mueller Group on October 3, 2005,Predecessor Mueller Group expensed transaction fees of approximately $20.1million and transaction bonuses of $10.0 million. These fees were contingentupon completion of the sale of Predecessor Mueller Group to Walter Industries.Non-contingent fees and expenses of approximately $3.1 million were expensed byPredecessor Mueller Group during the fiscal year ended September 30, 2005.

·       We have initiated a synergy plan designed to streamline ourmanufacturing operations, add incremental volume through combining salesefforts for complementary products and create savings through a coordinatedpurchasing plan to reduce raw material and overall production costs. We expectthat the full implementation of our synergy plan by early fiscal 2008 willproduce approximately $25-$35 million of ongoing incremental annualoperating income. These benefits could be substantially higher if additionalproduction, purchasing and sales improvements are realized.

·       As part of the synergy plan, in October 2005 we announced andhave initiated the closure of the U.S. Pipe Chattanooga, Tennessee plant andthe transfer of the valve and hydrant production of that plant to our Muellersegment’s Chattanooga, Tennessee and Albertville, Alabama plants. The transferof valve and hydrant production was completed in December 2005. Theeventual closure of the U.S. Pipe Chattanooga, Tennessee plant will occursometime in fiscal 2006. Total costs related to this plant closure are expectedto be approximately $45.2 million, which will be expensed and included as acomponent of operating income in accordance with generally accepted accountingprinciples. Total costs recorded as components of operating income for thethree months ended December 31, 2005 were $15.9 million charged to cost ofsales related to inventory obsolescence and additional facility expenses and$24.1 million of restructuring costs primarily related to fixed assetimpairments, severance and environmental costs. Additional costs of $5.2million are expected to be expensed during the remainder of fiscal 2006 as aresult of closing this facility.

·       As part of the synergyplan, on January 26, 2006, the Company announced the closure of the HenryPratt (“Pratt”) valve manufacturing facility in Dixon, Illinois by the end offiscal 2006. The process of transferring the Dixon plant’s operations to otherPratt facilities has begun. Severance costs associated with this plant closureof approximately $1.5 million will be allocated to goodwill. Costs associatedwith relocating equipment will be expensed as incurred. The Company has otherplans that were formally identified prior to the Acquisition to rationalizefacilities and substantial cash expenditures in the form of severance and newequipment may be required to implement these plans. Although certainexpenditures related to future plant rationalizations are expected to qualifyfor purchase accounting treatment and are not expected to be charged tooperations, all costs of future facility rationalizations may not qualify forpurchase accounting treatment.

·       On February 3, 2006,Mueller Water filed a Registration Statement on Form S-1 withrespect to the initial public offering its Common Stock. The filing waspursuant to the October 21, 2005 announcement by Walter Industries toinitiate an initial public offering of equity securities and subsequentspin-off of Mueller Water.

·       In January 2005, the Company’s Mueller segment completed twoacquisitions. On January 4, 2006, the Company acquired HuntIndustries, Inc. (“Hunt”) for $6.8 million in cash. Hunt is a manufacturerof meter pits and meter yokes, based in Murfreesboro, Tennessee, which are soldby our Mueller segment. On January 27, 2006, the Company acquired theoperating assets of CCNE, L.L.C., a Connecticut-based manufacturer and sellerof check valves to the water and wastewater 

49

----

treatment markets, for$8.8 million in cash. The CCNE assets will be operated by our Milliken ValveCompany and Henry Pratt Company subsidiaries.

·       Mueller Water has announced its intention to enter into atax allocation agreement (“Tax Allocation Agreement”) with Walter Industries inconnection with the initial public offering of its Common Stock. Pursuant tothe Tax Allocation Agreement, we and Walter Industries will make payments toeach other such that, with respect to any period during which we are or were amember of the consolidated federal income tax group or any combined state or localincome tax group with Walter Industries or any Walter Industries subsidiaries,the amount of taxes to be paid by us, or the amount of tax benefit to berefunded to us by Walter Industries, subject to certain adjustments, will bedetermined as though we were to file separate federal, state and local incometax returns as the common parent of an affiliated group of corporations filingcombined, consolidated or unitary (as applicable) federal, state and localreturns rather than a consolidated subsidiary of Walter Industries with respectto federal, state and local income taxes. With respect to our tax assets, ourright to reimbursement from Walter Industries will be determined based on theusage of such tax assets by the Walter Industries consolidated federal incometax group or the combined, consolidated or unitary state or local income taxgroup. Walter Industries will continue to have all the rights of a parent of aconsolidated group (and similar rights provided for by applicable state andlocal law with respect to a parent of a combined, consolidated or unitarygroup), will be the sole and exclusive agent for us in any and all mattersrelating to the combined, consolidated orunitary federal, state and local income tax liabilities of us, will havesole and exclusive responsibility for the preparation and filing ofconsolidated federal income and consolidated or combined state and local taxreturns (or amended returns), and will have the power, in its sole discretion,to contest or compromise any asserted tax adjustment or deficiency and to file,litigate or compromise any claim for refund on behalf of us related to any suchcombined, consolidated or unitary (as applicable) federal, state or local taxreturn.

·       The Company has announced its intention to adopt a new 2006 stockincentive plan designed to promote our long-term growth and financialsuccess by providing incentives to our employees, directors and consultantsthrough grants of stock-based awards. The impact to net income for futuregrants has not yet been determined.

·       As of December 31,2005, scrap metal costs for our U.S. Pipe segment declined 16% from their peakin 2004. Recently scrap costs have increased and are expected to remainelevated at least through March 2006. In addition, the price of brassingot has increased by up to approximately 60% over the cost budgeted for brassingot for fiscal year 2006. If brass ingot pricing remains at current levels,production costs for our Mueller segment could increase, and there can be noassurance that any of this increase can be passed along to our customers.

**Restatement**

As more fully described inNote 2 of "Notes to Consolidated Financial Statements," theCompany restated its previously issued financial statements to correct theclassification of certain prior-period shipping and handling costs.  Accordingly, all prior period informationpresented herein has been restated to reflect these changes. These changes arereflected in the U.S. Pipe segment. The following discussion of operatingresults includes the impact of these restatements and, except for the impact ofthe aforementioned restatements, the following discussion of operating resultscontinues to describe conditions as of the Original Filing date and has notbeen updated to reflect events, results or developments that occurred after theOriginal Filing date.

50

----

**Forward-Looking Statements**

This report containscertain statements that may be deemed “forward-looking statements” within themeaning of Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historicalfact are statements that could be deemed forward looking statements. In thiscontext, forward-looking statements often address our future business andfinancial performance, and may be characterized by terminology such as “believe”,“anticipate”, “should”, “intend”, “plan”, “will”, “expects”, “estimates”, “projects”,“positioned”, “strategy”, and similar expressions. These statements are basedon assumptions and assessments made by the Company’s management in light of itsexperience and its perception of historical trends, current conditions,expected future developments and other factors it believes to be appropriate.These forward looking statements are subject to a number of risks anduncertainties, including but not limited to: the Company’s ability to continuelong-standing relationships with major customers; increased competition; demandfor and market acceptance of new and existing products in the markets we serve;adverse changes in currency exchange rates or raw material prices, specificallysteel scrap, steel pipe and brass ingot; unanticipated developments that couldoccur with respect to contingencies such as litigation, product liabilityexposures and environmental matters; the Company’s ability to integrateacquired businesses into its operations; and other risks and uncertainties thataffect the manufacturing sector generally including, but not limited to,economic, political, governmental and technological factors affecting theCompany’s operations, markets, products, services and prices. Any such forwardlooking statements are not guarantees of future performances and actualresults, developments and business decisions may differ from those envisaged bysuch forward looking statements. These forward looking statements speak only asof the date of this Quarterly Report. The Company disclaims any duty to updateany forward looking statement, all of which are expressly qualified by theforegoing Forward-Looking Statements.

51

----

**Results of Operations**

***Three Months Ended December 31,2005 As Compared to the Three Months Ended December 31, 2004***

| ** **                                                     | ** ** | **Three months ended**    | ** ** | ** **                            | ** ** | ** **                                  | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------|------------|---------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                     | ** ** | **December 31, 2005**     | ** ** | **December 31, 2004**       | ** ** | **FY06 Q1 vs. FY05 Q1** | ** ** |
| ** **                                                     | ** ** | ** **                          | ** ** | ** **                            | ** ** | **(restated)**                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | ** **                          | ** ** | **Percentage  of net  sales(1)** | ** ** | ** **                                  | ** ** | **Percentage  of net  sales(1)** | ** ** | **Increase/  (decrease)** | ** ** | **Percentage  increase/  (decrease)** | ** ** |
| ** **                                                     | ** ** | **(dollars in millions)** | ** ** |
| Net sales                                                      |       |                                |       |                                  |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                        |       |                                | $          | 176.7                                 |       |                                        |       | 36.8 | % |   | $ | — |   |   | — | % |   |   | $ | 176.7 |   |   |   |   |   |   |
| U.S. Pipe                                                      |       |                                | 171.1      |                                  |       |                                        | 35.6       |   |   | 141.2 |   |   | 100.0 |   |   |   | 29.9 |   |   |   | 21.2 | % |   |
| Anvil                                                          |       |                                | 132.6      |                                  |       |                                        | 27.6       |   |   | — |   |   | — |   |   |   | 132.6 |   |   |   |   |   |   |
| Consolidated                                                   |       |                                | $          | 480.4                                 |       |                                        |       | 100.0 |   |   | $ | 141.2 |   |   | 100.0 |   |   |   | $ | 339.2 |   |   |   |   |   |   |
| Gross profit                                                   |       |                                |       |                                  |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                        |       |                                | $          | 15.5                                  |       |                                        |       | 8.8 |   |   | $ | — |   |   | — |   |   |   | $ | 15.5 |   |   |   |   |   |   |
| U.S. Pipe                                                      |       |                                | 9.1        |                                  |       |                                        | 5.3        |   |   | 12.7 |   |   | 9.0 |   |   |   | (3.6 | ) |   |   | (28.3 | ) |   |
| Anvil                                                          |       |                                | 18.9       |                                  |       |                                        | 14.3       |   |   | — |   |   | — |   |   |   | 18.9 |   |   |   |   |   |   |
| Consolidated                                                   |       |                                | $          | 43.5                                  |       |                                        |       | 9.1 |   |   | $ | 12.7 |   |   | 9.0 |   |   |   | $ | 30.8 |   |   |   |   |   |   |
| Selling, general and administrative                            |       |                                |       |                                  |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                        |       |                                | $          | 19.3                                  |       |                                        |       | 10.9 |   |   | $ | — |   |   | — |   |   |   | $ | 19.3 |   |   |   |   |   |   |
| U.S. Pipe                                                      |       |                                | 11.0       |                                  |       |                                        | 6.4        |   |   | 13.2 |   |   | 9.3 |   |   |   | (2.2 | ) |   |   | (16.7 | ) |   |
| Anvil                                                          |       |                                | 20.4       |                                  |       |                                        | 15.4       |   |   | — |   |   | — |   |   |   | 20.4 |   |   |   |   |   |   |
| Corporate                                                      |       |                                | 6.4        |                                  |       |                                        | 1.3        |   |   | — |   |   | — |   |   |   | 6.4 |   |   |   |   |   |   |
| Consolidated                                                   |       |                                | $          | 57.1                                  |       |                                        |       | 11.9 |   |   | $ | 13.2 |   |   | 9.3 |   |   |   | $ | 43.9 |   |   |   |   |   |   |
| Related party corporate charges                                |       |                                |       |                                  |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                        |       |                                | $          | —                                |       |                                        |       | — |   |   | $ | — |   |   | — |   |   |   | $ | — |   |   |   |   |   |   |
| U.S. Pipe                                                      |       |                                | 1.8        |                                  |       |                                        | 1.1        |   |   | 1.9 |   |   | 1.3 |   |   |   | (0.1 | ) |   |   | (5.3 | ) |   |
| Anvil                                                          |       |                                | —     |                                  |       |                                        | —     |   |   | — |   |   | — |   |   |   | — |   |   |   |   |   |   |
| Consolidated                                                   |       |                                | $          | 1.8                                   |       |                                        |       | 0.4 |   |   | $ | 1.9 |   |   | 1.3 |   |   |   | $ | (0.1 | ) |   |   |   |   |   |
| Facility rationalization, restructuring and related  costs     |       |                                |       |                                  |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                        |       |                                | $          | —                                |       |                                        |       | — |   |   | $ | — |   |   | — |   |   |   | $ | — |   |   |   |   |   |   |
| U.S. Pipe                                                      |       |                                | 24.1       |                                  |       |                                        | 14.1       |   |   | — |   |   | — |   |   |   | 24.1 |   |   |   |   |   |   |
| Anvil                                                          |       |                                | —     |                                  |       |                                        | —     |   |   | — |   |   | — |   |   |   | — |   |   |   |   |   |   |
| Consolidated                                                   |       |                                | $          | 24.1                                  |       |                                        |       | 5.0 |   |   | $ | — |   |   | — |   |   |   | $ | 24.1 |   |   |   |   |   |   |
| Loss from operations                                           |       |                                |       |                                  |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                        |       |                                | $          | (3.8                                  | )          |                                        |       | (2.2 | ) |   | $ | — |   |   | — |   |   |   | $ | (3.8 | ) |   |   |   |   |   |
| U.S. Pipe                                                      |       |                                | (27.8      | )                                     |       |                                        | (16.2      | ) |   | (2.4 | ) |   | (1.7 | ) |   |   | (25.4 | ) |   |   |   |   |   |
| Anvil                                                          |       |                                | (1.5       | )                                     |       |                                        | (1.1       | ) |   | — |   |   | — |   |   |   | (1.5 | ) |   |   |   |   |   |
| Corporate                                                      |       |                                | (6.4       | )                                     |       |                                        | (1.3       | ) |   | — |   |   | — |   |   |   | (6.4 | ) |   |   |   |   |   |
| Consolidated                                                   |       |                                | $          | (39.5                                 | )          |                                        |       | (8.2 | ) |   | $ | (2.4 | ) |   | (1.7 | ) |   |   | $ | (37.1 | ) |   |   |   |   |   |
| Interest expense arising  from related party payable to Walter |       |                                | $          | —                                |       |                                        |       | — |   |   | $ | (5.9 | ) |   | (4.2 | ) |   |   | $ | 5.9 |   |   |   |   |   |   |
| Interest expense, net of  interest income                      |       |                                | (28.1      | )                                     |       |                                        | (5.8       | ) |   | (0.1 | ) |   | — |   |   |   | (28.0 | ) |   |   |   |   |   |
| Loss before income taxes                                       |       |                                | (67.6      | )                                     |       |                                        | (14.1      | ) |   | (8.4 | ) |   | (5.9 | ) |   |   | (59.2 | ) |   |   |   |   |   |
| Income tax expense  (benefit)                                  |       |                                | (26.7      | )                                     |       |                                        | (5.6       | ) |   | 1.1 |   |   | 0.8 |   |   |   | (27.8 | ) |   |   |   |   |   |
| Net loss                                                       |       |                                | $          | (40.9                                 | )          |                                        |       | (8.5 | ) |   | $ | (9.5 | ) |   | (6.7 | ) |   |   | $ | (31.4 | ) |   |   |   |   |   |

----

(1)          Percentages are bysegment, if applicable.

52

----

*NetSales.**  *Consolidatednet sales for the three months ended December 31, 2005 were$480.4 million, an increase of $339.2 million from$141.2 million in the prior year period. The increase was primarilyrelated to the October 3, 2005 Acquisition of Predecessor Mueller Group,which accounted for $309.3 million or approximately 91% of the overallincrease.

Mueller segment net sales for the three months ended December 31,2005 were $176.7 million.

U.S. Pipe segment net sales for the three months endedDecember 31, 2005 were $171.1 million, an increase of$29.9 million, or 21.2% from $141.2 million in the prior year period.This increase was driven primarily by improved volumes and pricing of ductileiron pipe sales.

Anvil segment net sales for the three months ended December 31,2005 were $132.6 million.

*GrossProfit.**  *Consolidatedgross profit for the three months ended December 31, 2005 was$43.5 million, an increase of $30.8 million compared to$12.7 million in the prior year period. The Acquisition of PredecessorMueller Group contributed $34.4 million of the increase. Included in costof sales for the three months ended December 31, 2005 was $59.0 millionof purchase accounting adjustments related to valuing inventory acquired in theAcquisition at fair value and $1.4 million of amortization expense relatedto intangible assets identified during the allocation of the Acquisitionpurchase price.

Mueller segment gross profit for the three monthsended December 31, 2005 was $15.5 million. Included in cost of salesfor the three months ended December 31, 2005 was $46.2 million ofpurchase accounting adjustments related to valuing inventory at fair value and$1.3 million of amortization expense related to intangible assets.

U.S. Pipe segment gross profit for the three months endedDecember 31, 2005 was $9.1 million, a decrease of $3.6 million,or 28.3%, compared to $12.7 million in the prior year period. Gross margindecreased to 5.3% in the current period compared to 9.0% in the prior yearperiod. On October 26, 2005 the Company announced that the U.S. PipeChattanooga plant would be closed during fiscal 2006 and that production of theU.S. Pipe valves and hydrants would be transferred to the Mueller manufacturingfacilities at Albertville, Alabama and Chattanooga, Tennessee. In addition totransferring production to Mueller facilities, the sales responsibility forU.S. Pipe valve and hydrant product sales was transferred to the Muellersegment. In conjunction with this transfer, it was determined that certain U.S.Pipe inventory would not ultimately be sold. As a result, inventoryobsolescence write-offs of $10.7 million were recorded to cost of salesduring the current period.

In addition, because of the plant closure process,current period actual production capacity at the U.S. Pipe Chattanooga facilitywas significantly lower than normal capacity, resulting in facility expenses of$5.2 million charged directly to cost of sales.

Excluding the charges for inventory write-offs of$10.7 million and facility expenses of $5.2 million, U.S. Pipe grossmargins would have been $250.0 million, or 14.6% for the current period,compared to 9.0 % in the prior year period. This increase is primarily due tohigher ductile iron pipe selling prices.

Anvil segment gross profit for the three months ended December 31,2005 was $18.9 million. Included in cost of sales for the three monthsended December 31, 2005 was $12.2 million of purchase accountingadjustments related to valuing inventory at fair value and $0.1 million ofamortization expense related to intangible assets.

*Selling,General & Administrative.**  *Consolidated expenses for the threemonths ended December 31, 2005 were $57.1 million, an increase of$43.9 million, compared to $13.2 million in the prior year period.The acquisition of Predecessor Mueller Group accounted for $46.1 millionof the increase. Expenses as a percentage of net sales increased to 11.9% inthe current period compared to 9.3% in the prior year period. Included incurrent period expenses were amortization expenses related to definite-livedintangibles of $5.2 million as a result of the Acquisition.

53

----

Mueller segment expenses for the three months ended December 31,2005 were $19.3 million, including $4.6 million of amortizationexpense of definite-lived intangibles.

U.S. Pipe segment expenses for the three months ended December 31,2005 were $11.0 million, compared to $13.2 million for the prior yearperiod. As a percentage of net sales, expenses improved to 6.4% in the currentperiod compared to 9.3% in the prior year period. Prior period costs included a$4.0 million environmental charge related to the Anniston, Alabama site(shut down in 2003), which was partially offset by higher management incentiveaccruals and increased outside sales commissions recorded in the currentperiod.

Anvil segment expenses for the current period were$20.4 million, including $0.6 million of amortization expense ofdefinite-lived intangibles.

Corporate segment expenses for the current period were$6.4 million.

*RelatedParty Corporate Charges.*   Certain costs incurredby Walter such as insurance, executive salaries, professional service fees,human resources, transportation, and other centralized business functions areallocated to its subsidiaries. Costs incurred by Walter that cannot be directlyattributed to its subsidiaries are allocated to them based on estimated annualrevenues.

*FacilityRationalization, Restructuring and Related Costs.**  *The Company expensed$24.1 million of restructuring costs for the three months ended December 31,2005 related to the closure of the U.S. Pipe Chattanooga, Tennessee plant.These costs are comprised of fixed asset impairments of $19.0 million,severance for terminated hourly and salaried employees of $3.0 million,and environmental costs of $2.1 million, primarily related to landfillclosure and required site clean-up costs. The Company expects to expenseadditional closure costs of $5.2 million in future periods, when allowableunder generally accepted accounting principles.

*InterestExpense Arising from Related Party Payable to Walter.**  *Interest expense was allocated to the Company up tothe date of the Acquisition based upon the outstanding balance of theintercompany note. The intercompany note to Walter of $443.6 millionwas  forgiven. There was no intercompanyinterest expense for the three months ended December 31, 2005 and $5.9 millionfor the three months ended December 31, 2004.

*InterestExpense, Net of Interest Income.**  *Interest expense, net of interestincome, for the current period was $28.1 million and includes $25.2 millionof contractual interest expense on the $1,050.0 million senior securedterm loan entered into on October 3, 2005, and the 10% Senior SubordinatedNotes assumed by the Company as part of the October 3, 2005 Acquisition;$2.5 million in commitment fees for a bridge loan which were expensed atthe expiration of the bridge loan period during the current period and $1.1 millionof amortization of deferred financing fees, partially offset by $0.4 millionof gains on interest rate swaps and $0.3 million of interest income earnedon unrestricted cash balances for the current period.

*Income Tax Expense(Benefit).**  *The provision for income taxes forthe current period was a benefit of $26.7 million as compared to anexpense of $1.1 million in the prior year period. The effective tax ratesfor the first quarter of 2006 was 39.5%. The effective tax rate  for the first quarter of 2005 was (13.1%).The negative tax rate was due to reducing a valuation allowance on statedeferred tax assets.

**SupplementalInformation—Results of Operations for the Three Months Ended December 31,2005 Compared to Pro Forma Results of Operations for the Three Months Ended December 31,2004**

The unaudited pro forma results of operations for thethree months ended December 31, 2004 is presented as if the Acquisition ofPredecessor Mueller Group and borrowings under the 2005 Mueller CreditAgreement had taken place on October 1, 2004 and were carried forwardthrough December 31, 2004.

54

----

**Pro Forma Results of Operations**

***Actual Three MonthsEnded December 31, 2005 As Compared to the Pro FormaThree Months Ended December 31,2004***

| ** **                                                 | ** ** | **Three months ended**        | ** ** | ** **                                      | ** ** | ** **                                                              | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **Actual December 31,  2005** | ** ** | **Pro Forma December 31,  2004** | ** ** | **Actual FY06 Q1 vs. Pro  Forma FY05 Q1** | ** ** |
| ** **                                                 | ** ** | ** **                              | ** ** | ** **                                      | ** ** | **(restated)**                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | ** **                              | ** ** | **Percentage  of net  sales(1)**           | ** ** | ** **                                                              | ** ** | **Percentage  of net  sales(1)** | ** ** | **Increase/  (decrease)** | ** ** | **Percentage  increase/  (decrease)** | ** ** |
| ** **                                                 | ** ** | **(dollars in millions)**     | ** ** |
| Net sales                                                  |       |                                    |       |                                            |       |                                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                    |       | $                                       | 176.7      |                                            |       | 36.8                                                                    | %          |   | $ | 138.6 |   |   | 34.9 | % |   |   | $ | 38.1 |   |   |   | 27.5 | % |   |
| U.S. Pipe                                                  |       | 171.1                                   |       |                                            | 35.6       |                                                                    |       | 141.2 |   |   | 35.5 |   |   |   | 29.9 |   |   |   | 21.2 |   |   |
| Anvil                                                      |       | 132.6                                   |       |                                            | 27.6       |                                                                    |       | 117.5 |   |   | 29.6 |   |   |   | 15.1 |   |   |   | 12.9 |   |   |
| Consolidated                                               |       | $                                       | 480.4      |                                            |       | 100.0                                                                   |       |   | $ | 397.3 |   |   | 100.0 |   |   |   | $ | 83.1 |   |   |   | 20.9 |   |   |
| Gross profit                                               |       |                                    |       |                                            |       |                                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                    |       | $                                       | 15.5       |                                            |       | 8.8                                                                     |       |   | $ | 43.1 |   |   | 31.1 |   |   |   | $ | (27.6 | ) |   |   | (64.0 | ) |   |
| U.S. Pipe                                                  |       | 9.1                                     |       |                                            | 5.3        |                                                                    |       | 12.7 |   |   | 9.0 |   |   |   | (3.6 | ) |   |   | (28.3 | ) |   |
| Anvil                                                      |       | 18.9                                    |       |                                            | 14.3       |                                                                    |       | 30.3 |   |   | 25.8 |   |   |   | (11.4 | ) |   |   | (37.6 | ) |   |
| Consolidated                                               |       | $                                       | 43.5       |                                            |       | 9.1                                                                     |       |   | $ | 86.1 |   |   | 21.7 |   |   |   | $ | (42.6 | ) |   |   | (49.5 | ) |   |
| Selling, general and administrative                        |       |                                    |       |                                            |       |                                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                    |       | $                                       | 19.3       |                                            |       | 10.9                                                                    |       |   | $ | 21.0 |   |   | 15.2 |   |   |   | $ | (1.7 | ) |   |   | (8.1 | ) |   |
| U.S. Pipe                                                  |       | 11.0                                    |       |                                            | 6.4        |                                                                    |       | 13.2 |   |   | 9.3 |   |   |   | (2.2 | ) |   |   | (16.7 | ) |   |
| Anvil                                                      |       | 20.4                                    |       |                                            | 15.4       |                                                                    |       | 20.0 |   |   | 17.0 |   |   |   | 0.4 |   |   |   | 2.0 |   |   |
| Corporate                                                  |       | 6.4                                     |       |                                            | 1.3        |                                                                    |       | 5.8 |   |   | 1.5 |   |   |   | 0.6 |   |   |   | 10.3 |   |   |
| Consolidated                                               |       | $                                       | 57.1       |                                            |       | 11.9                                                                    |       |   | $ | 60.0 |   |   | 15.1 |   |   |   | $ | (2.9 | ) |   |   | (4.8 | ) |   |
| Related party corporate charges                            |       |                                    |       |                                            |       |                                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                    |       | $                                       | —     |                                            |       | —                                                                  |       |   | $ | — |   |   | — |   |   |   | $ | — |   |   |   |   |   |   |
| U.S. Pipe                                                  |       | 1.8                                     |       |                                            | 1.1        |                                                                    |       | 1.9 |   |   | 1.3 |   |   |   | (0.1 | ) |   |   | (5.3 | ) |   |
| Anvil                                                      |       | —                                  |       |                                            | —     |                                                                    |       | — |   |   | — |   |   |   | — |   |   |   |   |   |   |
| Consolidated                                               |       | $                                       | 1.8        |                                            |       | 0.4                                                                     |       |   | $ | 1.9 |   |   | 0.5 |   |   |   | $ | (0.1 | ) |   |   | (5.3 | ) |   |
| Facility rationalization, restructuring and related  costs |       |                                    |       |                                            |       |                                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                    |       | $                                       | —     |                                            |       | —                                                                  |       |   | $ | 0.1 |   |   | — |   |   |   | $ | (0.1 | ) |   |   |   |   |   |
| U.S. Pipe                                                  |       | 24.1                                    |       |                                            | 14.1       |                                                                    |       | — |   |   | — |   |   |   | 24.1 |   |   |   |   |   |   |
| Anvil                                                      |       | —                                  |       |                                            | —     |                                                                    |       | — |   |   | — |   |   |   | — |   |   |   |   |   |   |
| Consolidated                                               |       | $                                       | 24.1       |                                            |       | 5.0                                                                     |       |   | $ | 0.1 |   |   | — |   |   |   | $ | 24.0 |   |   |   |   |   |   |
| Income (loss) from operations                              |       |                                    |       |                                            |       |                                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                    |       | $                                       | (3.8       | )                                               |       | (2.2                                                                    | )          |   | $ | 22.0 |   |   | 15.9 |   |   |   | $ | (25.8 | ) |   |   |   |   |   |
| U.S. Pipe                                                  |       | (27.8                                   | )          |                                            | (16.2      | )                                                                       |       | (2.4 | ) |   | (1.7 | ) |   |   | (25.4 | ) |   |   |   |   |   |
| Anvil                                                      |       | (1.5                                    | )          |                                            | (1.1       | )                                                                       |       | 10.3 |   |   | 8.8 |   |   |   | (11.8 | ) |   |   |   |   |   |
| Corporate                                                  |       | (6.4                                    | )          |                                            | (1.3       | )                                                                       |       | (5.8 | ) |   | (1.5 | ) |   |   | (0.6 | ) |   |   | (10.3 | ) |   |
| Consolidated                                               |       | $                                       | (39.5      | )                                               |       | (8.2                                                                    | )          |   | $ | 24.1 |   |   | 6.1 |   |   |   | $ | (63.6 | ) |   |   |   |   |   |
| Interest expense, net of  interest income                  |       | (28.1                                   | )          |                                            | (5.8       | )                                                                       |       | (31.1 | ) |   | (7.8 | ) |   |   | 3.0 |   |   |   |   |   |   |
| Loss before income taxes                                   |       | (67.6                                   | )          |                                            | (14.1      | )                                                                       |       | (7.0 | ) |   | (1.8 | ) |   |   | (60.6 | ) |   |   |   |   |   |
| Income tax benefit                                         |       | (26.7                                   | )          |                                            | (5.6       | )                                                                       |       | (1.4 | ) |   | (0.4 | ) |   |   | (25.3 | ) |   |   |   |   |   |
| Net loss                                                   |       | $                                       | (40.9      | )                                               |       | (8.5                                                                    | )          |   | $ | (8.4 | ) |   | (2.1 | ) |   |   | $ | (32.5 | ) |   |   |   |   |   |

----

(1)          Percentages are bysegment, if applicable.

Management’s discussion below reflects its analysis ofthe pro forma data presented above. Management believes that the pro formacomparisons will assist in understanding trends in the Company’s 

55

----

business in the factorsthat management considers critical to assessing the Company’s operating andfinancial performance.

*NetSales.**  *Consolidatednet sales for the three months ended December 31, 2005 were $480.4million, an increase of $83.1 million from $397.3 million in theprior year period.

Mueller segment net sales for the three months ended December 31,2005 were $176.7 million, an increase of $38.1 million, or 27.5% from $138.6million in the prior year period. This increase was primarily driven by higherpricing and volumes in hydrants and water valves.

U.S. Pipe segment net sales for the three months endedDecember 31, 2005 were $171.1 million, an increase of $29.9 million,or 21.2% from $141.2 million in the prior year period. This increase wasdriven primarily by improved volumes and pricing of ductile iron pipe sales.

Anvil segment net sales for the three months ended December 31,2005 were $132.6 million, an increase of $15.1 million, or 12.9% from $117.5million in the prior year period. This increase was primarily the result ofcontinued strength in the oilfield and mechanical markets for grooved andhanger products and growth in the sales of foreign-sourced products. Priceincreases implemented in late fiscal 2005 also had a positive impact, and thestrength of the Canadian dollar, relative to the U.S. dollar, assisted inincreasing sales in Canada.

*GrossProfit.*   Consolidatedgross profit for the three months ended December 31, 2005 was$43.5 million, a decrease of $42.6 million compared to$86.1 million in the prior year period. Included in cost of sales for thethree months ended December 31, 2005 was $58.4 million of purchaseaccounting adjustments related to valuing inventory acquired in the Acquisitionat fair value.

Mueller segment gross profit for the three monthsended December 31, 2005 was $15.5 million, a decrease of $27.6 million, or64.0% from $43.1 million in the prior year period. Gross margin decreased to8.8% in the current period compared to 31.1% in the prior year period. Thecurrent period includes $46.2 million related to the amortization expenseresulting from the purchase accounting adjustment to increase acquiredinventories to fair value on the date of acquisition. Excluding the effects ofthis inventory amortization, gross profit would have been $58.7 million andgross margin would have been 33.2% compared to 31.1% in the prior year period.This increase was primarily due to higher pricing and volumes, particularly inhydrants and water valves.

U.S. Pipe segment gross profit for the three monthsended December 31, 2005 was $9.1 million, a decrease of $3.6 million,or 28.3%, compared to $12.7 million in the prior year period. Gross margindecreased to 5.3% in the current period compared to 9.0% in the prior yearperiod. On October 26, 2005 the Company announced that the U.S. PipeChattanooga plant would be closed during fiscal 2006 and that production of theU.S. Pipe valves and hydrants would be transferred to the Mueller manufacturingfacilities at Albertville, Alabama and Chattanooga, Tennessee. In addition totransferring production to Mueller facilities, the sales responsibility forU.S. Pipe valve and hydrant product sales was transferred to the Muellersegment. In conjunction with this transfer, it was determined that certain U.S.Pipe inventory would not ultimately be sold. As a result, inventoryobsolescence write-offs of $10.7 million were recorded to cost of sales duringthe current period.

In addition, because of the plant closure process,current period actual production capacity at the U.S. Pipe Chattanooga facilitywas significantly lower than normal capacity, resulting in facility expenses of$5.2 million charged directly to cost of sales.

Excluding the charges for inventory write-offs of$10.7 million and facility expenses of $5.2 million, U.S. Pipe gross marginswould have been $25.0 million, or 14.6% for the current period, comparedto 9.0 % in the prior year period. This increase is primarily due to higherductile iron pipe selling prices.

56

----

Anvil segment gross profit for the three months ended December 31,2005 was $18.9 million, a decrease of $11.4 million, or 37.6%, compared to $30.3million in the prior year period. The current period includes $12.2 millionrelated to the amortization expense resulting from the purchase accountingadjustment to increase acquired inventories to fair value on the date ofacquisition. Excluding the effects of this inventory amortization, gross profitwould have been $31.1 million and gross margin would have been 23.5% comparedto 25.8% in the prior year period.

*Selling,General & Administrative.**  *Consolidated expenses for the threemonths ended December 31, 2005 were $57.1 million, a decrease of$2.9 million, compared to $60.0 million in the prior year period.Expenses as a percentage of net sales improved to 11.9% in the current periodcompared to 15.1% in the prior year period.

Mueller segment expenses for the three months ended December 31,2005 were $19.3 million, a decrease of $1.7 million, or 8.1%, compared to $21.0million in the prior year period. Expenses as a percentage of net sales improvedto 10.9% in the current period compared to 15.2% in the prior year period.

U.S. Pipe segment expenses for the three months ended December 31,2005 were $11.0 million, compared to $13.2 million for the prior yearperiod. As a percentage of net sales, expenses improved to 6.4% in the currentperiod compared to 9.31% in the prior year period. Prior period costs includeda $4.0 million environmental charge related to the Anniston, Alabama site(shut down in 2003), which were partially offset by higher management incentiveaccruals and increased outside sales commissions recorded in the currentperiod.

Anvil segment expenses for the current period were$20.4 million, an increase of $0.4 million, or 2.0%, compared to $20.0 millionin the prior year period. Expenses as a percentage of net sales improved to15.4% in the current period compared to 17.0% in the prior year period.

Corporate segment expenses for the current period were$6.4 million, an increase of $0.6 million compared to $5.8 million in the prioryear period.

*RelatedParty Corporate Charges.*   Certaincosts incurred by Walter such as insurance, executive salaries, professionalservice fees, human resources, transportation, and other centralized businessfunctions are allocated to its subsidiaries. Costs incurred by Walter thatcannot be directly attributed to its subsidiaries are allocated to them basedon estimated annual revenues.

*FacilityRationalization, Restructuring and Related Costs.**  *The Company expensed$24.1 million of restructuring costs for the three months ended December 31,2005, related to the closure of the U.S. Pipe Chattanooga, Tennessee plant.These costs are comprised of fixed asset impairments of $19.0 million,severance for terminated hourly and salaried employees of $3.0 million, andenvironmental costs of $2.1 million, primarily related to landfill closureand required site clean-up costs. The Company expects to expense additionalclosure costs of $5.2 million in future periods, when allowable under generallyaccepted accounting principles. The Company expensed $0.1 million for the threemonths ended December 31, 2004, for severance related to the closure of aMueller segment manufacturing facility in Colorado.

*Interest Expense, Net ofInterest Income.**  *Interestexpense, net of interest income, for the current period was $28.1 millionand includes $25.2 million of contractual interest expense on the $1,050.0million senior secured term loan entered into on October 3, 2005, and the10% Senior Subordinated Notes assumed by the Company as part of the October 3,2005 Acquisition; $2.5 million in commitment fees for a bridge loan which wereexpensed at the expiration of the bridge loan period during the current periodand $1.1 million of amortization of deferred financing fees, partially offsetby $0.4 million of gains on interest rate swaps and $0.3 million of interestincome earned on unrestricted cash balances for the period. Interest expense,net of interest income, for the prior year period was $31.1 million. Thedecrease is primarily due 

57

----

to the inclusion inthe prior year period of $5.9 million of interest expense arising from arelated party payable to Walter.

**Financial Condition**

Cash and cash equivalents increased from zero at September 30,2005 to $63.5 million at December 31, 2005, reflecting $74.9 million incash flows provided by operations and $24.6 million in cash flows provided byfinancing activities, offset by $36.0 million of cash flows used in investingactivities. At September 30, 2005, U.S. Pipe was a wholly-owned subsidiaryof Walter and all of its net cash activity was transferred into Walter’sconcentrated cash management system on a daily basis.

Net receivables, consisting principally of tradereceivables, were $267.0 million at December 31, 2005, an increase of$148.5 million from September 30, 2005. The Acquisition accounted for anincrease of $161.9 million, partially offset by a $13.4 million decrease forthe U.S. Pipe segment, primarily due to lower U.S. Pipe sales levels in  the quarter ended December 31, 2005compared to the quarter ended September 30, 2005.

Inventories were $429.1 million at December 31,2005, an increase of $281.9 million from September 30, 2005. TheAcquisition accounted for an increase of $373.2 million, partially offset byreducing acquired inventory during the period by $62.2 million and a$29.1 million decrease for the U.S. Pipe segment, primarily due toreductions in pipe, valve, and hydrant inventories and a $10.7 millioninventory obsolescence write-down identified with the closure of the U.S. PipeChattanooga plant.

Current deferred income taxes, net, were $58.8 millionat December 31, 2005, an increase of $47.7 million from September 30,2005. The Acquisition accounted for $29.4 million of the increase. Theremainder of the increase was primarily due to $15.8 million of accruedexpenses not currently deductible.

Prepaid expenses, consisting principally ofmaintenance supplies and tooling parts and prepaid insurance premiums, were$32.1 million at December 31, 2005, an increase of $30.6 million from September 30,2005. The Acquisition accounted for $31.1 million of the increase.

Property, plant and equipment was $344.8 million at December 31,2005, an increase of $195.6 million from September 30, 2005, primarily dueto the Acquisition ($212.9 million) and capital expenditures ($16.0 million),partially offset by fixed assets impairments resulting from the U.S. PipeChattanooga plant closure ($17.8 million) and depreciation expense ($17.1million).

Deferred financing fees, net, were $28.8 million at December 31,2005. There were no deferred financing fees at September 30, 2005. Allfees are related to the 2005 Mueller Credit Agreement entered into inconjunction with the October 3, 2005 Acquisition and the existing 10%Senior Subordinated Notes at Predecessor Mueller Group that were assumed aspart of the Acquisition.

Due from Walter affiliate was $20.0 million at December 31,2005, representing a $20.0 million note receivable for cash contributed toWalter by the Company subsequent to the Acquisition. There was no such amountat September 30, 2005.

Identifiable intangibles, net, were$849.3 million at December 31, 2005. There were no such intangiblesat September 30, 2005. Certain intangibles were identified during theallocation of the purchase of the Acquisition: (a) indefinite-lived intangibleassets consisting of trade names and trademarks of $403.0 million; and (b) definite-livedintangible assets consisting of customer relationships of $396.6 millionand technology of $56.3 million. Amortization expense resulting fromdefinite-lived assets for the three months ended December 31, 2005 was$6.6 million.

Goodwill was $718.5 million at December 31,2005, an increase of $660.1 million from September 30, 2005. Thisincrease represents goodwill identified during the allocation of the purchaseprice of the Acquisition.

58

----

Accounts payable were $105.9 million atDecember 31, 2005, an increase of $53.4 million fromSeptember 30, 2005. The Acquisition accounted for $47.3 million ofthe increase.

Accrued expenses were $105.1 million atDecember 31, 2005, an increase of $70.4 million compared toSeptember 30, 2005. The Acquisition accounted for $67.3 million ofthe increase. The remainder of the increase was primarily due to the additionof accrued restructuring of $3.8 million related to the U.S. PipeChattanooga plant closure.

Long-term debt, including the current portion, was$1,382.9 million at December 31, 2005. There was no debt payable tonon-affiliates at September 30, 2005. All debt amounts are related to the2005 Mueller Credit Agreement entered into in conjunction with the October 3,2005 Acquisition and existing notes and capital leases at Predecessor MuellerGroup that were assumed as part of the Acquisition.

Payable to parent, Walter, was $2.6 million at December 31,2005 compared to $443.6 million at September 30, 2005. In conjunctionwith the contribution of U.S. Pipe to the Company at October 3, 2005, theintercompany balance was forgiven. The remaining payable represents certaincosts incurred by Walter which benefited the Company and are required to besettled in cash.

Accrued pension liability, net increased$43.6 million to $97.2 million at December 31, 2005. TheAcquisition accounted for an increase of $41.4 million.

Non-current deferredincome taxes, net, were $312.0 million at December 31, 2005, anincrease of $321.5 million compared to September 30, 2005. TheAcquisition accounted for $301.3 million of the increase. The remainder ofthe increase was primarily due to $20.0 million of accrued expense notcurrently deductible.

***Statement of Cash Flows***

Historically, ourfinancing requirements have been funded primarily through cash generated byoperating activities and borrowings under our revolving credit facility. Fromtime to time, we have also raised additional funds through term debt offerings.

*Cashflows from operating activities.**  *Net cash provided by operations was$74.9 million for the first three months of 2006, compared to net cashprovided of $21.5 million for the first three months of 2005. Thedifference was due primarily to the Acquisition.

*Cash flows used ininvesting activities.**  *Inthe first three months of 2006 we had net cash used in investing activities of$36.0 million compared to net cash used in the first three months of 2005of $20.4 million.

*Cashflows from financing activities.**  *Net cash provided by financingactivities was $24.6 million for the first three months of 2006, comparedto net cash used in the first three months of 2005 of $1.2 million.

**Liquidity and Capital Resources**

Our principal sources ofliquidity have been, and are expected to be, cash flow from operations andborrowings under the 2005 Mueller Credit Agreement. Our principal uses of cashwill be debt service requirements as described below, capital expenditures,working capital requirements, dividends to our parent, Mueller Water, tofinance our cash needs and possible acquisitions.

*Debt Service*

As of December 31, 2005, we had: (a) totalconsolidated indebtedness of approximately $1,382.9 million; and (b) approximately$113.9 million of borrowings available under the revolver portion of the2005 Mueller Credit Agreement, subject to customary conditions. As of December 31,2005, the 

59

----

Company had$31.1 million in letters of credit outstanding under the 2005 MuellerCredit Agreement, which reduces availability for borrowings thereunder. Thesignificant debt service obligations under the credit facility and indenturescould have material consequences to our security holders. Our key financialcovenants are dependent on attaining certain levels of EBITDA, as defined inthe respective debt arrangements. The most restrictive covenant in effect at December 31,2005 related to a leverage ratio, as defined in the 2005 Mueller CreditAgreement, which required approximately $237.0 million of EBITDA over thetrailing twelve months, based on net debt outstanding at December 31,2005. We were in compliance with this covenant at December 31, 2005.

*2005Mueller Credit Agreement:**  *OnOctober 3, 2005, the Company entered into a credit agreement (the “2005Mueller Credit Agreement”) consisting of a $145 million senior securedrevolving credit facility maturing in October 2010 (the “2005 MuellerRevolving Credit Facility”) and a $1,050 million senior secured term loanmaturing in October 2012 (the “2005 Mueller Term Loan”). The 2005 MuellerCredit Agreement is a secured obligation of the Company and substantially allof its wholly-owned domestic subsidiaries, including U.S. Pipe. The 2005Mueller Term Loan requires quarterly principal payments of $2.6 millionthrough October 3, 2012, at which point in time the remaining principaloutstanding is due. The commitment fee on the unused portion of the 2005Mueller Revolving Credit Facility is 0.50% and the interest rate is a floatinginterest rate of 2.5% over LIBOR. The 2005 Mueller Term Loan carries a floatinginterest rate of 2.25% over LIBOR.

Proceeds from the 2005 Mueller Credit Agreement were$1,053.4 million, net of $21.6 million of underwriting fees andexpenses which will be amortized over the life of the loans. The proceeds wereused to finance the acquisition of our parent, Predecessor Mueller Water byWalter and to refinance existing indebtedness.

The 2005 Mueller Credit Agreement contains customaryevents of default and covenants, including covenants that restrict the abilityof the Company and certain of its subsidiaries to incur certain additionalindebtedness, pay dividends, create or permit liens on assets, engage inmergers or consolidations, and certain restrictive financial covenants.

On January 24, 2006, the Company entered into anAmendment No. 1 (the “First Amendment”) to the 2005 Credit Agreement. TheFirst Amendment removes the requirement that the Company and its subsidiarieschange their fiscal year end to December 31 and, in the event of aninitial public offering of the Company, provides the ability for the Company topay up to $8.5 million in cash dividends to Mueller Water for furtherdistribution to Mueller Water’s shareholders. Mueller Water is a wholly-ownedsubsidiary of Walter.

The debt instrumentsdescribed below were liabilities of Predecessor Mueller prior to theAcquisition on October 3, 2005 and continue as liabilities of the Companysubsequent to the Acquisition.

*10% Senior SubordinatedNotes:*   On April 23, 2004, theCompany issued $315 million principal face amount of 10% seniorsubordinated notes due 2012. The senior subordinated notes areguaranteed by each of the Company’s existing domestic restricted subsidiaries.The subordinated notes contain customary covenants and events of default,including covenants that limit the Company’s ability to incur debt, paydividends and make investments.

On October 4, 2005,the Company notified the holders of the subordinated notes that the Acquisitionwas a change in control and that, as a result, the holders had a right to causethe Company to repurchase their senior subordinated notes on or before 5:00 p.m.eastern standard time, on November 4, 2005 at a price of 101% of theprincipal face amount of such notes. The change of control offer expired at5:00 p.m. eastern standard time, on November 6, 2005, with nosubordinated notes being validly tendered and not withdrawn and, accordingly,no subordinated notes were purchased pursuant to the change of control offer.

60

----

*CapitalExpenditures*

The 2005 Mueller CreditAgreement contains restrictions on our ability to make capital expenditures.Based on current estimates, management believes that the amount of capitalexpenditures permitted to be made under the senior credit facility will beadequate to maintain the properties and business of our continuing operations.

*Sources of Funds*

We anticipate that our operating cash flow, togetherwith permitted borrowings under the senior credit facility, will be sufficientto meet our anticipated future operating expenses, capital expenditures anddebt service obligations as they become due for at least the next twelvemonths. However, our ability to make scheduled payments of principal of, to payinterest on or to refinance our indebtedness and to satisfy our other debtobligations will depend upon our future operating performance, which will beaffected by general economic, financial, competitive, legislative, regulatory,business and other factors beyond our control.

From time to time we may explore additional financingmethods and other means to lower our cost of capital, which could include stockissuance or debt financing and the application of the proceeds therefrom to therepayment of bank debt or other indebtedness. In addition, in connection withany future acquisitions, we may require additional funding which may beprovided in the form of additional debt or equity financing or a combinationthereof. There can be no assurance that any additional financing will beavailable to us on acceptable terms.

As disclosed in MuellerWater’s Registration Statement on Form S-1 filed on February 3,2006 with the Securities and Exchange Commission, we anticipate using the netproceeds from the public offering of Mueller Water’s Common Stock, as well asany proceeds received from any exercise of the underwriters’ option to purchaseadditional shares of Common Stock, to repay certain of our indebtedness,including a portion of the Company’s term loan under the 2005 Mueller CreditAgreement and a portion of the Company’s 10% senior subordinated notes due 2012and for general corporate purposes.

**Off-Balance Sheet Arrangements**

We do not have any relationships with unconsolidatedentities or financial partnerships, such as entities often referred to asstructured finance or special purpose entities, which would have been establishedfor the purpose of facilitating off-balance sheet arrangements or othercontractually narrow or limited purposes. In addition, we do not have anyundisclosed borrowings or debt, and we have not entered into any derivativecontracts (other than those described in “—Qualitative and QuantitativeDisclosure About Market Risk—Interest Rate Risk”) or synthetic leases. We are,therefore, not materially exposed to any financing, liquidity, market or creditrisk that could arise if we had engaged in such relationships.

We utilize letters ofcredit and surety bonds in the ordinary course of business to ensure ourperformance of contractual obligations. As of December 31, 2005, we had$31.1 million of letters of credit and $23.3 million of surety bondsoutstanding.

61

----

**Contractual Obligations**

Our contractualobligations as of December 31, 2005:

**Payments Due byPeriod**

| **Contractual Obligations**       | ** ** | ** **                          | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **After 5 Years** | ** ** | **Total** | ** ** |
|----------------------------------------|------------|-------------------------------------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|-----------------------------|------------|-----------|------------|
| ** **                             | ** ** | **(dollars in millions)** | ** ** |
| Long-term debt                         |       |                                |       |                            |       |               |       |               |       |                        |       |      |       |   |   |   |   |   |   |
| Principal on long-term  debt           |       |                                | $          | 10.5                            |       |               |       | $                  | 21.0       |                        |       |      | $          | 21.0 |   |   |   | $ | 1,309.9 |   |   | $ | 1,362.4 |   |
| Interest on long-term  debt(1)         |       |                                | 103.4      |                            |       |               | 204.6      |               |       |                        | 201.6      |      |       |   | 161.4 |   |   | 671.0 |   |
| Capital lease  obligations             |       |                                | 1.0        |                            |       |               | 1.2        |               |       |                        | 0.1        |      |       |   | — |   |   | 2.3 |   |
| Operating leases                       |       |                                | 9.0        |                            |       |               | 9.5        |               |       |                        | 3.2        |      |       |   | 3.1 |   |   | 24.8 |   |
| Unconditional purchase  obligations(2) |       |                                | 21.3       |                            |       |               | 0.7        |               |       |                        | —     |      |       |   | — |   |   | 22.0 |   |
| Other long-term  obligations(3)        |       |                                | —     |                            |       |               | —     |               |       |                        | —     |      |       |   | — |   |   | — |   |
| Total contractual cash  obligations    |       |                                | $          | 145.2                           |       |               |       | $                  | 237.0      |                        |       |      | $          | 225.9 |   |   |   | $ | 1,474.4 |   |   | $ | 2,082.5 |   |

----

(1)          Interest on the seniorcredit facility is calculated using LIBOR of 4.54%, the rate in effect onDecember 31, 2005. Each increase or decrease in LIBOR of 0.125% wouldresult in an increase or decrease in annual interest on the senior creditfacility and secured notes of $1.3 million. Because the interest rateunder the senior credit facility will be variable, actual payments may differ.Interest does not include payments that could be required under ourinterest-rate swap agreements, which payments will depend upon movements ininterest rates and could vary significantly. The payments due on the existinginterest rate swaps are estimated to be approximately $4.9 million, net ofLIBOR interest calculated at 4.54% received from counterparties.

(2)          Includes contractual obligationsfor purchases of raw materials and capital expenditures.

(3)          Excludesthe deferred payment portion of the purchase price for Star Pipe, Inc. (“Star”),purchased by Predecessor Mueller Group on January 15, 2004. The Starpurchase price is subject to adjustment to reflect, among other things, adeferred payment to be made by us to the extent that the gross profit of thebusiness exceeds the target gross profit from February 1, 2004 to January 31,2007. Although the maximum amount payable is $23.0 million, we estimatethat the total deferred payment will be approximately $3.0 million to$6.0 million. This calculation of the potential Star purchase priceadjustment is based on management’s best estimate; however, the actualadjustment may be materially different.

**Effect of Inflation; Seasonality**

We do not believe that general inflation (except forscrap steel, brass ingot and steel pipe) has had a material impact on ourfinancial position or results of operations.

Our business is dependentupon the construction industry, which is very seasonal due to the impact ofwinter or wet weather conditions. Our net sales and operating income havehistorically been lowest, and our working capital needs have been highest, inthe three month periods ending around December 31 and March 31, whenthe northern United States and all of Canada generally face weather thatrestricts significant construction activity and we build working capital inanticipation of the peak construction season, during which time our working capitalneeds tend to be reduced.

**Critical Accounting Policies**

Our significantaccounting policies include those of U.S. Pipe and Predecessor Mueller Group.While all significant accounting policies are important to our consolidatedfinancial statements, some of these 

62

----

policies may be viewed as being critical. Such policies are thosethat are both most important to the portrayal of our financial condition andrequire our most difficult, subjective and complex estimates and assumptionsthat affect the reported amounts of assets, liabilities, revenues, expenses andrelated disclosure of contingent assets and liabilities. These estimates arebased upon our historical experience and on various other assumptions that webelieve to be reasonable under the circumstances. Our actual results may differfrom these estimates under different assumptions or conditions. We believe ourmost critical accounting policies are as follows:

***Pensions***

We sponsor anumber of defined benefit retirement plans. We record annual amounts relatingto these plans based on calculations specified by accounting principlesgenerally accepted in the United States of America, which include variousactuarial assumptions including the following:

*U.S. Pipe*

| ** **                                                                     | ** ** | **Pension Benefits**    | ** ** | **Other Benefits**     | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                     | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
| Weighted-average assumptions used to determine benefit  obligations:           |       |                         |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Discount rate                                                                  |       |                         | 5.0        | %                           |       |   | 6.0 | % |   |   | 5.0 | % |   |   | 6.0 | % |   |
| Rate of compensation increase                                                  |       |                         | 3.5        | %                           |       |   | 3.5 | % |   |   | — |   |   |   | — |   |   |
| Weighted-average  assumptions used to determine net periodic costs:            |       |                         |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Discount rate:                                                                 |       |                         | 6.0        | %                           |       |   | 6.4 | % |   |   | 6.0 | % |   |   | 6.4 | % |   |
| Expected return on plan assets                                                 |       |                         | 8.9        | %                           |       |   | 8.9 | % |   |   | — |   |   |   | — |   |   |
| Rate of compensation increase                                                  |       |                         | 3.5        | %                           |       |   | 3.5 | % |   |   | — |   |   |   | — |   |   |
| Assumed health  care cost trend rates:                                         |       |                         |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Health care cost trend rate assumed for next year                         |       |                         | —     |                        |       |   | — |   |   |   | 10.0 | % |   |   | 10.0 | % |   |
| Rate to which cost trend rate is assumed to decline (the  ultimate trend rate) |       |                         | —     |                        |       |   | — |   |   |   | 5.0 | % |   |   | 5.0 | % |   |
| Year that the rate reaches the ultimate trend rate                        |       |                         | —     |                        |       |   | — |   |   |   | 2010 |   |   |   | 2009 |   |   |

 

The discount rate used to determine pension expensewas decreased to 6.0% for 2005 from 6.4% used in 2004. The discount rate isbased on a proprietary bond defeasance model designed by the plans’ investmentconsultant to create a portfolio of high quality corporate bonds which, ifinvested on the measurement date, would provide the necessary future cash flowsto pay accumulated benefits when due. The premise of the model is that annualbenefit obligations are funded from the cash flows generated from periodic bondcoupon payments, principal maturities and the interest on excess cash flows,i.e. carry forward balances.

The model uses a statistical program to determine theoptimal mix of securities to offset benefit obligations. The model is populatedwith an array of Moody’s Aa-rated corporate fixed income securities that areactively traded in the bond market on the measurement date. None of thesecurities used in the model had embedded call, put or convertible features,and none were structured with par paydowns or deferred income streams. All ofthe securities in the model are considered appropriate for the analysis as theyare diversified by maturity date and issuer and offer predictable cash flowstreams. For diversification purposes, the model was constrained to purchasingno more than 20% of any outstanding issuance. Carry 

63

----

forward interest iscredited at a rate determined by adding the appropriate implied forwardTreasury yield to the Aa-rated credit spread as of the measurement date.

The expected return on plan assets was based on U.S.Pipe’s expectation of the long-term average rate of return on assets in thepension funds, which was modeled based on the current and projected asset mixof the funds and considering the historical returns earned on the type ofassets in the funds. We will review our actuarial assumptions on an annualbasis and make modifications to the assumptions based on current rates andtrends when appropriate. As required by U.S. GAAP, the effects of themodifications are amortized over future periods.

Assumed health care cost trends, discountrates, expected return on plan assets and salary increases have a significanteffect on the amounts reported for the pension plans and health care plans. Aone-percentage-point change in the rate for each of these assumptions wouldhave the following effects: 

| ** **                                                    | ** ** | **1-Percentage  Point Increase** | ** ** | **1-Percentage  Point Decrease** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| ** **                                                    | ** ** | **(dollars in millions)**   | ** ** |
| Discount rate:                                                |       |                                  |       |                                  |       |   |   |   |   |
| Effect on  pension service and interest cost components  |       |                                  | $          | (0.2                                  | )          |   |   | $ | 0.2 |   |   |
| Effect on  pension benefit obligation                         |       |                                  | (24.5      | )                                     |       |   | 29.8 |   |   |
| Effect on  current year pension expense                       |       |                                  | (1.5       | )                                     |       |   | 1.8 |   |   |
| Expected return on plan assets:                               |       |                                  |       |                                  |       |   |   |   |   |
| Effect on  current year pension expense                       |       |                                  | (1.2       | )                                     |       |   | 1.2 |   |   |
| Rate of compensation increase:                                |       |                                  |       |                                  |       |   |   |   |   |
| Effect on  pension service and interest cost components  |       |                                  | 0.3        |                                  |       |   | (0.3 | ) |   |
| Effect on  pension benefit obligation                         |       |                                  | 2.8        |                                  |       |   | (2.4 | ) |   |
| Effect on current year pension expense                        |       |                                  | 0.6        |                                  |       |   | (0.5 | ) |   |
|                                                               |            |                                       |            |                                       |            |  |  |  |  |  |  |

 

Among the items affecting U.S. Pipe’s net accruedretirement pension benefits were additional minimum pension liabilitiesrecognized in 2005, which primarily resulted from a further decline in theaverage discount rate from 6.0% to 5.0%. As a result, the net accrued benefitwas increased by $24.1 million and accumulated other comprehensive loss (acomponent of equity) was increased by a similar amount, net of a tax benefit of$8.2 million. Depending on future plan asset performances and interest rates,additional adjustments to our net accrued benefit and equity may be required.

*Predecessor Mueller Group*

| ** **                                                           | ** ** | **Pension  At September 30,** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                           | ** ** | **2005**                                | ** ** | **2004** | ** ** |
| Weighted-Average  Assumptions used to determine benefit obligations: |       |                                    |       |   |   |   |   |   |   |
| Discount rate                                                        |       |                                    | 5.2        | % |   |   | 5.8 | % |   |
| Rate of  compensation increase                                       |       |                                    | 3.5        | % |   |   | 3.5 | % |   |
| Weighted-Average  Assumptions used to determine net periodic costs:  |       |                                    |       |   |   |   |   |   |   |
| Discount rate:                                                       |       |                                    | 5.8        | % |   |   | 6.0 | % |   |
| Expected return  on plan assets                                      |       |                                    | 7.9        | % |   |   | 7.9 | % |   |
| Rate of compensation  increase                                       |       |                                    | 3.5        | % |   |   | 3.5 | % |   |

 

64

----

The discount rateused to determine pension expense was decreased to 5.8% for 2005 from 6.0% usedin 2004. The rate of return on plan assets used to determine pension expense is7.9% for both 2005 and 2004. The discount rate is based on a model portfolio ofAa-rated bonds with a maturity matched to the estimated payouts of futurepension benefits. The expected return on plan assets is based on PredecessorMueller Group’s expectation of the long-term average rate of return on assetsin the pension funds, which was modeled based on the current and projectedasset mix of the funds and considering the historical returns earned on thetype of assets in the funds. We will review the actuarial assumptions on anannual basis and make modifications to the assumptions based on current ratesand trends when appropriate. As required by U.S. GAAP, the effects of themodifications are amortized over future periods.

Assumed discount rates, expected return onplan assets and salary increases have a significant effect on the amountsreported for the pension plans. A one-percentage-point change in the rate foreach of these assumptions would have the following effects: 

| ** **                                                    | ** ** | **1-Percentage  Point Increase** | ** ** | **1-Percentage  Point Decrease** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| ** **                                                    | ** ** | **(dollars in millions)**   | ** ** |
| Discount rate:                                                |       |                                  |       |                                  |       |   |   |   |   |
| Effect on pension service and interest cost  components  |       |                                  | $          | (0.1                                  | )          |   |   | $ | — |   |   |
| Effect on pension benefit obligation                          |       |                                  | $          | (12.4                                 | )          |   |   | $ | 14.0 |   |   |
| Effect on current year pension expense                        |       |                                  | $          | (1.2                                  | )          |   |   | $ | 1.2 |   |   |
| Expected return on plan  assets:                              |       |                                  |       |                                  |       |   |   |   |   |
| Effect on current year pension expense                        |       |                                  | $          | (0.8                                  | )          |   |   | $ | 0.8 |   |   |
| Rate of compensation  increase:                               |       |                                  |       |                                  |       |   |   |   |   |
| Effect on pension service and interest cost  components  |       |                                  | —     |                                  |       |   | — |   |   |
| Effect on pension benefit obligation                          |       |                                  | $          | 0.3                                   |       |   |   | $ | (0.3 | ) |   |
| Effect on current  year pension expense                       |       |                                  | $          | 0.1                                   |       |   |   | $ | — |   |   |

 

Among the items affectingour net accrued retirement pension benefits were additional minimum pensionliabilities recognized in 2005, which primarily resulted from a further declinein the average discount rate from 5.8% to 5.2%. As a result, the net accruedbenefit was increased by $2.8 million and accumulated other comprehensiveearnings (a component of equity) was reduced by a similar amount, net of a taxbenefit of $1.1 million. Depending on future plan asset performance andinterest rates, additional adjustments to our net accrued benefit and equitymay be required.

***Workers’Compensation***

We are self-insured for workers’compensation benefits for work-related injuries. Liabilities, including thoserelated to claims incurred but not reported, are recorded principally usingannual valuations based on discounted future expected payments and usinghistorical data or combined insurance industry data when historical data islimited. Pursuant to the terms of the Tyco Purchase Agreement, PredecessorMueller Group is indemnified by Tyco for all liabilities that occurred prior toAugust 16, 1999. Workers’ compensation liabilities were as follows:

| ** **                                                          | ** ** | **December 31,  2005**         | ** ** | **September 30,  2005** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------------|------------|------------------------------|------------|
| ** **                                                          | ** ** | **(dollars in millions)** | ** ** |
| Undiscounted aggregated estimated claims to be paid                 |       |                                | $          | 27.0                         |       |   |   | $ | 14.4 |   |   |
| Workers’ compensation liability recorded on a discounted basis |       |                                | $          | 22.8                         |       |   |   | $ | 11.9 |   |   |

 

65

----

A one-percentage-point increase in the discount rate on thediscounted claims liability would decrease the liability by $0.1 million,while a one-percentage-point decrease in the discount rate would increase theliability by $0.1 million.

***Litigation,Investigations and Claims***

We are involved in litigation, investigations, and claims arisingout of the normal conduct of our business, including those relating tocommercial transactions, as well as environmental, health and safety matters.We estimate and accrue liabilities resulting from such matters based on avariety of factors, including outstanding legal claims and proposed settlements;assessments by internal counsel of pending or threatened litigation; andassessments of potential environmental liabilities and remediation costs. Webelieve we have adequately accrued for these potential liabilities; however,facts and circumstances may change and could cause the actual liability toexceed the estimates, or that may require adjustments to the recorded liabilitybalances in the future.

***RevenueRecognition***

We recognize revenue based on the recognition criteria set forthin the Securities and Exchange Commission’s Staff Accounting Bulletin 104 “RevenueRecognition in Financial Statements,” which is when delivery of a product hasoccurred and there is persuasive evidence of a sales arrangement, sales pricesare fixed and determinable, and collectibility from the customers is reasonablyassured. Revenue from the sale of products is recognized when title passes upondelivery to the customer. Sales are recorded net of cash discounts and rebates.

***Receivables***

Receivables relateprimarily to customers located in North America. To reduce credit risk, weperform credit investigations prior to accepting an order and, when necessary,require letters of credit to insure payment.

Our estimate for uncollectible accounts receivable is based, inlarge part, upon judgments and estimates of expected losses and specificidentification of problem trade accounts. Significantly weaker than anticipatedindustry or economic conditions could impact customers’ ability to pay suchthat actual losses are greater than the amounts provided for in theseallowances. Our periodic evaluation of the adequacy of our allowance is basedon our analysis of our prior collection experience, specific customercreditworthiness and current economic trends within the industries we serve. Incircumstances where we are aware of a specific customer’s inability to meet itsfinancial obligation to us (e.g., bankruptcy filings or substantial downgradingof credit ratings), we record a specific reserve to reduce the receivable tothe amount we reasonably believe will be collected.

***Inventories***

Inventories are recorded at the lower of cost (first-in,first-out) or market value. Additionally, we evaluate our inventory in terms ofexcess and obsolete exposures. This evaluation includes such factors asanticipated usage, inventory turnover, inventory levels and ultimate productsales value. Inventory cost includes an overhead component that can be affectedby levels of production and actual costs incurred. Management periodicallyevaluates the effects of production levels and actual costs incurred on thecosts capitalized as part of inventory cost.

***Income Taxes***

Deferred taxliabilities and assets are recognized for the expected future tax consequencesof events that have been included in the financial statements or tax returns.Deferred tax liabilities and assets are 

66

----

determined based on the differences between the financialstatements and the tax basis of assets and liabilities, using tax rates ineffect for the years in which the differences are expected to reverse. Avaluation allowance is provided to offset any net deferred tax assets if, basedupon the available evidence, it is more likely than not that some or all of thedeferred tax assets will not be realized. If we were to reduce our estimates offuture taxable income, we could be required to record a valuation allowanceagainst our deferred tax assets.

We have recorded provisions associated with income tax exposures.Such provisions require significant judgment and are adjusted when events orcircumstances occur that would require a change in the estimated accrual.

***Accounting for theImpairment of Long-Lived Assets Including Goodwill and Other Intangibles***

Long-lived assets, including goodwill and intangible assets thathave an indefinite life are tested for impairment annually (or more frequentlyif events or circumstances indicate possible impairments). Definite-livedintangible assets are amortized over their respective estimated useful livesand reviewed for impairment annually or more frequently if events orcircumstances indicate possible impairment. Any recognized intangible assetdetermined to have an indefinite useful life will not be amortized, but insteadtested for impairment in accordance with the standard until its life is determinedto no longer be indefinite. We use an estimate of future undiscounted net cashflows of the related asset or asset grouping over the remaining life inmeasuring whether long-lived assets other than goodwill and intangibles areimpaired. If impaired, we may need to record impairment charges to reduce thecarrying value of our long-lived assets.

***Stock-BasedCompensation***

The Company participates in the stock-basedcompensation plans of its parent company, Walter Industries. Historically,Walter Industries did not allocate any costs of this plan to U.S. Pipe.Beginning October 1, 2005, we adopted SFAS No. 123(R), “Share-BasedPayment,” which requires that compensation costs related to share-based paymenttransactions be recognized in the financial statements over the period that anemployee provides service in exchange for the award. We will use a modifiedprospective method, under which we will record compensation cost for new andmodified awards over the related vesting period of such awards. The Company hadno stock options outstanding at December 31, 2005.

***DerivativeInstruments and Hedging Activities***

We currently useinterest rate swaps as required in the 2005 Mueller Credit Agreement to reducethe risk of interest rate volatility. The amount to be paid or received frominterest rate swaps is charged or credited to interest expense over the livesof the interest rate swap agreements. Changes in the fair value of derivativesare recorded each period in earnings or Accumulated Other Comprehensive Income(Loss), depending on whether a derivative is designated and effective as partof a hedge transaction and meets the applicable requirements associated withStatement of Financial Accounting Standards (SFAS) No. 133.

For a derivativeto qualify as a hedge at inception and throughout the hedge period, we mustformally document the nature and relationships between the hedging instrumentsand hedged items, as well as its risk-management objectives, strategies forundertaking the various hedge transactions and method of assessing hedgeeffectiveness. Any financial instruments qualifying for hedge accounting mustmaintain a specified level of effectiveness between the hedging instrument andthe item being hedged, both at inception and throughout the hedged period.

Additionally, we utilize forward contracts to mitigate itsexposure to changes in foreign currency exchange rates from third party andintercompany forecasted transactions. The primary currency to which we areexposed and to which we hedge the exposure is the Canadian dollar. Theeffective portion of 

67

----

unrealized gains and losses associatedwith forward contracts are deferred as a component of Accumulated OtherComprehensive Income (Loss) until the underlying hedged transactions arereported in our consolidated statement of earnings. The balance was notmaterial at December 31, 2005.

**RecentlyIssued Accounting Standards**

In November 2004, the Financial AccountingStandards Board issued SFAS No. 151, “Inventory Costs,” which clarifiesthe accounting for abnormal amounts of idle facility expense, freight, handlingcosts, and wasted material. This Statement requires that those items berecognized as current-period charges regardless of whether they meet thecriterion of “so abnormal.” In addition, this Statement requires thatallocation of fixed production overheads to the costs of conversion be based onthe normal capacity of the production facilities. The Company adopted SFAS No. 151on October 1, 2005, the beginning of its 2006 fiscal year. The impact ofthe adoption of SFAS No. 151 on the Company’s financial statements mayhave a material impact on our operating income in the event actual productionoutput is significantly higher or lower than normal capacity. In the eventactual production capacity is significantly different than normal capacity, theCompany may be required to recognize certain amounts of facility expense,freight, handling costs or wasted materials as a current period expense**.**

In March 2005, the FASB issued FASBInterpretation No. 47, “Accounting for Conditional Asset RetirementObligations” (“FIN 47”), which is an interpretation of FASB No. 143, “Accountingfor Asset Retirement Obligations” (“SFAS 143”). This interpretationclarifies terminology within SFAS 143 and requires companies to recognizea liability for the fair value of a conditional asset retirement obligationwhen incurred if the liability’s fair value can be reasonably estimated. FIN 47is effective for fiscal years beginning after December 15, 2005. Thisstandard is not expected to have a material impact on the Company’s financialcondition or results of operations.

In June 2005, theFASB issued FASB No. 154, “Accounting Changes and Error Corrections”,which changes the requirements for accounting for and reporting of a change inaccounting principle. SFAS 154 requires retrospective application to priorperiods’ financial statements of a voluntary change in accounting principleunless it is impracticable. SFAS 154 also requires that a change in methodof depreciation, amortization or depletion for long-lived, nonfinancial assetsbe accounted for as a change in accounting estimate that is affected by achange in accounting principle. SFAS 154 is effective for accountingchanges made in fiscal years beginning after December 15, 2005. The adoptionof SFAS 154 is not expected to have a material impact on the Company’sfinancial condition or results of operations.

**ITEM 3.   QUALITATIVE AND QUANTITATIVE DISCLOSUREABOUT MARKET RISK**

We are exposed tovarious market risks, which are potential losses arising from adverse changesin market rates and prices, such as interest rates and foreign exchangefluctuations. We do not enter into derivatives or other financial instrumentsfor trading or speculative purposes.

Our primary financial instruments are cash and cash equivalents.This includes cash in banks and highly rated, liquid money market investmentsand U.S. government securities. We believe that those instruments are notsubject to material potential near-term losses in future earnings fromreasonably possible near-term changes in market rates or prices.

***Interest Rate Risk***

At December 31,2005, the Company had fixed rate debt of $335.5 million and variable ratedebt of $1,047.4 million. The pre-tax earnings and cash flows impact resulting froma 100 basis point increase in interest rates on variable rate debt, holdingother variables constant and excluding the impact of the hedging agreementsdescribed below, would be approximately $10.4 million per year.

68

----

On October 27, 2005, the Company entered into sixinterest rate hedge transactions with a cumulative notional amount of$350 million. The swap terms are between one and seven years with fiveseparate counter-parties. The objective of the hedges is to protect the Companyagainst rising LIBOR interest rates that would have a negative effect on theCompany’s cash flows due to changes in interest payments on its 2005 MuellerTerm Loan. The structure of the hedges are a one-year 4.617% LIBOR swap of$25 million, a three-year 4.740% LIBOR swap of $50 million, afour-year 4.800% LIBOR swap of $50 million, a five-year 4.814% LIBORswap of $100 million, a six-year 4.915% LIBOR swap of $50 million,and a seven year 4.960% LIBOR swap of $75 million. These swap agreementscall for the Company to make fixed rate payments over the term at each swap’sstated fixed rate and to receive payments based on three month LIBOR from thecounter-parties. These swaps will be settled quarterly over their lives andwill be accounted for as cash flow hedges. As such, changes in the fair valueof these swaps that take place through the date of maturity will be recorded inAccumulated Other Comprehensive Income (Loss). These hedges comply withcovenants contained in the 2005 Mueller Credit Agreement.

The Company has two interest rate hedge agreementswith a cumulative notional value amount of $100 million that existed as ofOctober 3, 2005: a $50 million two-year 3.928% LIBOR swap thatmatures in May 2007 and a $50 million two-year 4.249% LIBOR swap thatmatures in April 2007. The changes in fair value of these two swaps wererecorded immediately as interest expense in the Statements of Operations untilachieving hedge effectiveness in October 2005 and November 2005,respectively, at which times such changes in fair value were recorded inAccumulated Other Comprehensive Income (Loss).

The Company recorded an unrealized loss from itscontracts, net of tax, of $1.1 million at December 31, 2005 inAccumulated Other Comprehensive Income (Loss).

We will consider entering into additional interestrate swaps or other interest rate hedging instruments to protect againstinterest rate fluctuations on our floating rate debt.

The 2005 Mueller CreditAgreement requires that at least 50% of the funded debt of the Company and itsrestricted subsidiaries on a consolidated basis be fixed for a period beginningno later than January 1, 2006 and ending October 3, 2008. Thisrequirement can be met with any combination of fixed rate debt and rateprotection agreements. The Company is currently in compliance with thisrequirement.

***Currency Risk***

Outside of theUnited States, we maintain assets and operations in Canada and, to a muchlesser extent, China. The results of operations and financial position of ourforeign operations are principally measured in their respective currency andtranslated into United States dollars. As a result, exposure to foreigncurrency gains and losses exists. The reported income of these subsidiarieswill be higher or lower depending on a weakening or strengthening of the UnitedStates dollar against the respective foreign currency. Our subsidiaries andaffiliates also purchase and sell products and services in various currencies.As a result, we may be exposed to cost increases relative to the localcurrencies in the markets in which we sell. Because a different percentage ofour revenues is in foreign currency than our costs, a change in the relativevalue of the United States dollar could have a disproportionate impact on ourrevenues compared to our cost, which could impact our margins.

A portion of ourassets are based in our foreign locations and are translated into United Statesdollars at foreign currency exchange rates in effect as of the end of eachperiod, with the effect of such translation reflected in other comprehensiveincome (loss). Accordingly, our consolidated stockholders’ equity willfluctuate depending upon the weakening or strengthening of the United Statesdollar against the respective foreign currency.

69

----

We have entered intoforward exchange contracts principally to hedge currency fluctuations intransactions (primarily anticipated inventory purchases) denominated in foreigncurrencies, thereby limiting the risk that would otherwise result from changesin exchange rates. The majority of the Company’s exposure to currency movementsis in Canada. All of the foreign exchange contracts have maturity dates in2006. Gains and losses on the forward contracts are expected to be offset bylosses / gains in recognized net underlying foreign currency transactions. Asof December 31, 2005, the Company had entered into one forward contract ina notional amount of less than $0.1 million, selling U.S. dollars andpurchasing Euros at an exchange rate of $1.3635.

Subsequent to December 31,2005, the Company entered into forward contracts in a notional amount of$9.1 million primarily to protect anticipated inventory purchases by itsCanadian operations. With these hedges, the Company purchases U.S. dollars andsells Canadian dollars at an average exchange rate of $0.867.

***Raw Materials Risk***

Our products are made from several basic raw materials, includingsteel pipe, scrap steel, iron, brass ingot, sand, resin and natural gas, whoseprices fluctuate as market supply and demand change. Accordingly, productmargins and the level of profitability can fluctuate if we are not able to passraw material costs on to our customers. Management estimates for our Muellerand Anvil segments that raw material accounted for approximately 18% of ourcost of goods sold due to increasing raw material prices in 2005. Managementestimates U.S. Pipe’s scrap metal and ferrous alloys used in the manufacturingprocess accounted for 40% of the cost to manufacture ductile iron pipe as of September 30,2005. Historically, we have been able to obtain an adequate supply of rawmaterials and do not anticipate any shortage of these materials. We generallypurchase raw materials at spot prices but may, from time to time, enter intocommodity derivatives to reduce our exposure to fluctuation in the price of rawmaterials. On January 12, 2006, the Company entered into a swapcontract to hedge anticipated purchases of natural gas from February 2006through March 2006 totaling 0.4 million mmbtu, or approximately 80% ofexpected natural gas consumption, at a price of $9.41 per mmbtu. This swapcontract effectively converts a portion of forecasted purchases at marketprices to a fixed price basis.

**ITEM4.**                CONTROLSAND PROCEDURES

***Evaluation ofDisclosure Controls and Procedures.***

The Company maintainsdisclosure controls and procedures that are designed to ensure that informationrequired to be disclosed in the reports filed or submitted under the SecuritiesExchange Act of 1934, as amended (“Exchange Act”), is recorded, processed,summarized, and reported within the time periods specified in the Commission’s rules andforms and that such information is accumulated and communicated to the Company’smanagement including its principal executive and financial officers, as appropriateto allow timely decisions regarding required disclosure.

As of the end of theperiod covered by this report, the Company’s management evaluated theeffectiveness of the design and operation of disclosure controls and procedurespursuant to Rule 13a-15(b) of the Exchange Act. This evaluationwas done under the supervision and with the participation of management,including Dale B. Smith, President and Chief Executive Officer, and Jeffery W.Sprick, Chief Financial Officer.

Based on this evaluation andbecause of the material weakness described below, the Company’s Chief ExecutiveOfficer and Chief Financial Officer have concluded that the Company’sdisclosure controls and procedures were not effective as of December 31,2005. Notwithstanding this material weakness, management concluded that thefinancial statements included in this Form 10-Q for the period endedDecember 31, 2005 fairly present in all material respects their financialposition, results of operations and cash flows for the periods presented inconformity with GAAP.

70

----

***Material Weaknessin Internal Control over Financial Reporting***

A material weakness is acontrol deficiency or a combination of control deficiencies that results inmore than a remote likelihood that a material misstatement of the annual orinterim consolidated financial statements will not be prevented or detected.

As of September 30,2005, the Company did not maintain effective controls over the preparation,review and presentation and disclosure of its consolidated financialstatements, due to a lack of personnel with experience in financial reportingand control procedures necessary for SEC registrants. Specifically, theCompany’s controls failed to prevent or detect the incorrect presentation ofthe following in the Predecessor Mueller consolidated financial statements: (i) cashflows from the effect of exchange rate changes on cash balances; (ii) cashflows from the loss on disposal of property, plant and equipment; (iii) cashflows and balance sheet presentation of book overdrafts; (iv) thepresentation of current and non-current deferred income tax assets inPredecessor Mueller’s consolidated balance sheet; and (v) classificationof certain depreciation expense as selling, general and administrative expense insteadof cost of sales in their consolidated statement of operations. Further, theCompany’s controls failed to prevent or detect the incorrect presentation ofshipping and handling costs in the Company unaudited consolidated statement ofoperations for the three months ended December 31, 2004 as presented inthe 10-Q for the period ended December 31, 2005. The Company’s controldeficiency resulted in the restatement of Predecessor Mueller’s annualconsolidated financial statements for fiscal 2004 and 2003 and interimconsolidated financial statements for the first three quarters of fiscal 2005,all interim periods of fiscal 2004, audit adjustments to the 2005 annualconsolidated financial statements and the restatement of the Company’sconsolidated statement of operations for the three months ended December 31,2004. Additionally, this control deficiency could result in a misstatement ofthe presentation and disclosure of the Company’s consolidated financialstatements that would result in a material misstatement in the annual orinterim financial statements that would not be prevented or detected.Accordingly, management has determined that this control deficiency constitutesa material weakness.

As of September 30,2004****and 2005, Predecessor Mueller reportedthe following control deficiencies that, in the aggregate, constituted amaterial weakness in internal control over preparation, review and presentationand disclosure of their consolidated financial statements. SpecificallyPredecessor Mueller’s control deficiencies included: (i) a lack ofpersonnel with experience in financial reporting and control proceduresnecessary for SEC registrants; (ii) a lack of sufficient controls toprevent or detect, on a timely basis, unauthorized journal entries; (iii) alack of sufficient controls over information technology data conversion andprogram changes; (iv) a lack of sufficient controls over the developmentand communication of income tax provisions; (v) a lack of effectivecontrols surrounding “whistleblower” hotline complaints and internalcertifications to ensure that issues were communicated on a more timely basisby management to the audit committee and the independent registered publicaccounting firm; (vi) a lack of effective controls over revenuerecognition associated with full truckload shipments not immediately dispatchedby freight carriers; and (vii) a lack of formal controls and proceduresregarding assessment of financial exposures and transactions, includingconsideration of accounting implications under GAAP. These control deficienciesresulted in audit adjustments to the consolidated financial statements for theyear ended September 30, 2004. Additionally, these control deficiencies,in the aggregate, could result in a misstatement to accounts and disclosuresthat would result in a material misstatement to the annual or interim financialstatements that would not be prevented or detected. While item (i) aboveremains unremediated and has been added as a component of the material weaknessexisting at December 31, 2005 described above, management has concludedthat based on the remediation actions described below, items (ii)through (vii) of this material weakness did not exist at December 31,2005.

***Remediation ofMaterial Weakness***

In order to remediate thematerial weakness first reported as of September 30, 2004, PredecessorMueller: (i) reassigned its Chief Financial Officer, appointed an InterimChief Financial Officer and hired 

71

----

additionalaccounting and finance staff; (ii) introduced increased training for theirexisting financial and accounting and other staff; (iii) retainedthird-party consultants with significant SEC financial reporting experience toprovide assistance in complying with SEC reporting requirements; (iv) formeda disclosure committee to supervise the preparation of their Exchange ActReports and other public communications; (v) improved their controls over,and began developing written policies and procedures that cover all significantaccounting processes, including journal entries, the development andcommunication of income tax provisions, information data conversion issues andprogram changes, revenue recognition and assessing financial exposures; (vi) improvedand centralized controls over information technology; and (vii) implementedglobal compliance initiatives under the direction of their Chief ComplianceOfficer including controls surrounding “whistleblower” hotline complaints andinternal certifications. The Company continued these improvement efforts duringthe quarter ended December 31, 2005 and has concluded that it hasremediated items (ii) through (vii) of this material weakness. However,as disclosed above, item (i) of this material weakness continues to existas of December 31, 2005 and has been added as a component of thecontinuing material weakness at December 31, 2005 described above.

During the quarter ended December 31,2005, the Company took steps to remediate the material weakness that continuedas of December 31, 2005. These steps included a thorough review, on aquarterly basis, of foreign currency translation cash flow statement effects,book overdrafts and transactions related to property, plant and equipment andan additional review, on a quarterly basis, of the classification requirementsof each component line item and the individual elements that comprise each lineitem of the statement of cash flows, in accordance with Statement of FinancialAccounting Standards, No.95, “Statement of Cash Flows.” Additionally, the classificationof deferred income tax items in the balance sheet and cash flow statement, aswell as depreciation in the statement of operations, will be evaluatedquarterly as will the proper classification of shipping and handling costswithin our consolidated statement of operations.

Inaddition, during the quarter ended December 31, 2005, the Company made thefollowing changes in internal control over financial reporting:

·       hireda full time Chief Financial Officer, Jeffery W. Sprick, and a Corporate Controllerwith SEC financial reporting experience;

·       hiredadditional finance and accounting personnel for its Pratt and Chattanoogafacilities;

·       designatedthe Walter Industries Audit Committee, which is fully independent under NewYork Stock Exchange listing rules and the rules of the SEC, as its auditcommittee; and

·       beganto implement an internal quarterly review plan to review higher risk areas infinancial reporting, such as revenue recognition, inventory valuation and cashflow reporting.

The Company continues toupgrade the knowledge of its finance staff by implementing on-going UnitedStates GAAP training programs, consisting of providing appropriate technicalresources to our finance team and training on the use of such resources,conducting a series of training sessions for plant controllers, periodicdistribution of changes in accounting and reporting standards, and issuing andupdating our accounting policies. Additionally, the Company terminated theformer Chief Compliance Officer of Predecessor Mueller and reassigned thoseduties to the Director of Internal Audit. While significant improvements havebeen implemented, management believes that additional remediation is needed andwill require changes in personnel, processes and procedures to ensure timelyand accurate financial reporting on a sustainable basis.

The Company believes theadditional control procedures as designed, when implemented, will fullyremediate the above material weakness.

***Changes in InternalControl Over Financial Reporting***

Except as described above,there were no changes internal control over financial reporting during thequarter ended December 31, 2005, that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

72

----

**PART II**   OTHERINFORMATION

**Item 1.**                        LegalProceedings

We are involved in various legal proceedings which have arisen inthe normal course of our operations, including the proceedings summarizedbelow. The effect of the outcome of these matters on the Company’s futureresults of operations cannot be predicted with certainty as any such effectdepends on future results of operations and the amount and timing of theresolution of such matters. Other than the litigation described below, we donot believe that any of our outstanding litigation would have a materialadverse effect on our business, operations or prospects.

U.S. Pipe has implemented an Administrative Consent Order (“ACO”)for its Burlington, New Jersey plant that was required under the New JerseyEnvironmental Cleanup Responsibility Act (now known as the Industrial SiteRecovery Act). The ACO required soil and ground water cleanup. U.S. Pipe hascompleted, and has received final approval for the soil cleanup required by theACO. U. S. Pipe is continuing to address ground water issues at this site.Further remediation could be required. These remediation costs are expected tobe minimal. Long term ground water monitoring will be required to verifynatural attenuation. It is not known how long ground water monitoring will berequired. Management does not believe monitoring or further cleanup costs, ifany, will have a material adverse effect on the financial condition or resultsof operations of the Company and its subsidiaries.

The Federal Comprehensive Environmental Response, Compensation andLiability Act (“CERCLA”), generally imposes liability, which may be joint andseveral and is without regard to fault or the legality of waste generation ordisposal, on certain classes of persons, including owners and operators ofsites at which hazardous substances are released into the environment (or posea threat of such release), persons that disposed or arranged for the disposalof hazardous substances at such sites, and persons who owned or operated suchsites at the time of such disposal. CERCLA authorizes the EPA, the States and,in some circumstances, private entities to take actions in response to publichealth or environmental threats and to seek to recover the costs they incurfrom the same classes of persons. Certain governmental authorities can alsoseek recovery for damages to natural resources.

Currently, U.S. Pipe has been identified as a potentiallyresponsible party (“PRP”) by the EPA under CERCLA with respect to cleanup ofhazardous substances at U.S. Pipe’s former Anniston, Alabama facility, to whichits wastes allegedly were transported or deposited. U.S. Pipe is among many PRP’sat the site and a significant number of the PRP’s are substantial companies.With respect to the Anniston, Alabama site, a Consent Order has been negotiatedand signed between the PRP’s and the EPA. Management estimates the Company’sand U.S. Pipe’s aggregate share of liability for cleanup under the ConsentOrder, after allocation among the several PRP’s, will be approximately $4.0 million.U.S. Pipe accrued for this liability in 2004, and the accrual was recorded inour financial statements as of October 3, 2005. Civil litigation inrespect of the site is also ongoing, including a putative class action lawsuitalleging property damage and personal injury. Management does not believe thatU.S. Pipe’s share of any additional liability will have a material adverseeffect on the financial condition of the Company, but could be material toresults of operations in future reporting periods.

In the purchase agreement relating to the August 1999sale by Tyco of the Predecessor Mueller Group business to our prior owners,Tyco agreed to indemnify Predecessor Mueller Group and their affiliates for all“Excluded Liabilities.” Excluded Liabilities include, among other things,substantially all liabilities relating to the time prior to the August 1999Tyco sale. The indemnity survives indefinitely and is not subject to anydeductibles or caps. However, we may be responsible for these liabilities inthe event that Tyco (or any successor entity) ever becomes financially unableor fails to comply with, the terms of the indemnity. In addition, Tyco’sindemnity does not cover environmental liabilities to the extent caused by usor Predecessor Mueller or the operation of the Predecessor Mueller Groupbusiness after the August 1999 Tyco sale, nor does it cover environmentalliabilities arising with respect to businesses or sites acquired after the August 1999Tyco sale, which would include the U.S. Pipe business and facilities.

73

----

Our subsidiary, James Jones Company, andits former parent company are defendants in a false claims lawsuit in which aformer James Jones Company employee is suing on behalf of cities, waterdistricts and municipalities. The employee alleges that the defendants soldallegedly non-conforming public water system parts to various governmententities. The lawsuit seeks consequential damages, penalties and punitivedamages. Our subsidiary, Mueller Co., which had also been named as a defendant,brought a summary judgment motion and was dismissed from this litigation in January 2004.On September 15, 2004, the trial court ruled against the intervention ofapproximately 30 municipalities that had failed to intervene within the timedeadlines previously specified by the Court. The trial court also ruled thatthe majority of municipalities that had purchased James Jones products fromcontractors or distributors, were not in privity with the James Jones Companyand were not entitled to punitive damages. Following the Court’s ruling, thewater districts and municipalities filed a new action against the James JonesCompany, Mueller Co. and Watts (former parent company of James Jones Company),alleging fraud and intentional misrepresentation. This lawsuit is based on thesame underlying facts as the false claims lawsuit. Any liability associatedwith these lawsuits is covered by the Tyco indemnity, and the defense is beingpaid for and conducted by Tyco.

Some of our subsidiaries have been namedas defendants in a small number of asbestos-related lawsuits. We do notbelieve these lawsuits, either individually or in the aggregate, are materialto our financial position or results of operations.

As discussed inNote 14 “Commitments and Contingencies” to the Consolidated FinancialStatements, the Company is subject to other legal matters in the normal courseof business.

**Item 1A.**                Risk Factors

**Ourbusiness would be adversely affected by a downturn in government spendingrelated to infrastructure upgrades, repairs and replacements, or in thecyclical residential or non-residential building markets.**

Our business is primarily dependent upon spending onwater and wastewater infrastructure upgrades, repairs and replacement, newwater and wastewater infrastructure spending (which is dependent uponresidential construction) and spending on non-residential construction. We arealso subject to general economic conditions, the need for constructionprojects, interest rates and government incentives provided for public workprojects. In addition, a significant percentage of our products are ultimatelyused by municipalities or other governmental agencies in public watertransmission and collection systems. As a result, our sales could be impactedadversely by declines in the number of projects planned by public wateragencies, government spending cuts, general budgetary constraints, difficultyin obtaining necessary permits or the inability of government entities to issuedebt. It is not unusual for water projects to be delayed and rescheduled for anumber of reasons, including changes in project priorities and difficulties incomplying with environmental and other government regulations. Spending growthin the infrastructure upgrades, repairs and replacement sector has slowed inrecent years as state and local governments’ budgets were negatively impactedby the downturn in the economy. We cannot assure you that economic conditionswill continue to improve or that if they do, that state and local governmentswill address deferred infrastructure needs. Although the residential buildingmarket has experienced growth in recent years, we cannot assure that thisgrowth will continue in the future. The residential and non-residentialbuilding markets are cyclical, and, historically, down cycles have typicallylasted approximately four to six years. Any significant decline in theresidential or non-residential building markets or governmental spending oninfrastructure could have a material adverse effect on our financial conditionand results of operations.

**Ourindustry is very competitive and some of our products are commodities.**

The domestic and international markets for flowcontrol products are competitive. While there are only a few competitors formost of our product offerings, many of them are well-established companies withstrong brand recognition. In particular, our malleable iron and cast iron pipefitting products, which together comprised 5% of our pro forma sales for the2005 fiscal year, face competition from less expensive imports and our pipenipple and hanger products and our pipe fittings and couplings products, 

74

----

which together comprised16% of our pro forma sales in 2005, compete on the basis of price and are soldin fragmented markets with low barriers to entry, allowing less expensivedomestic and foreign producers to gain market share and reduce our margins.Also, competition for ductile iron pressure pipe sold by our U.S. Pipe segmentcomes not only from ductile pipe produced by a concentrated number of domesticmanufacturers, but also from pipe composed of other materials, such aspolyvinylchloride (PVC), high density polyethylene (HDPE), concrete,fiberglass, reinforced plastic and steel.

**Foreigncompetition is intense and could have a material adverse effect on ourfinancial condition and results of operations.**

Inaddition to domestic competition, we face intense foreign competition. Theintensity of foreign competition is affected significantly by fluctuations inthe value of the U.S. dollar against foreign currencies and by the level ofimport duties imposed by the U.S. Department of Commerce on certain products.Foreign competition is likely to further increase and certain product priceswill continue to face downward pressure as our domestic competitors shift theiroperations or outsource manufacturing requirements overseas or source suppliesfrom foreign vendors in an effort to reduce expenses.

In 2003, the U.S. Department of Commerce imposedanti-dumping duties on imported malleable and non-malleable iron fittings fromChina. We cannot assure you that these government agencies will continue thecurrent duties on imported malleable and non-malleable iron fittings. If theduties for respondent companies, which range from 7.4% to 14.3% (111.4% forother producers/exporters) for malleable iron fittings and 6.3% to 7.1% (75.5%for other producers/exporters) for non-malleable iron fittings, are reduced orcompletely eliminated, we may be forced to reduce the prices of some of ourproducts. An increase in foreign competition, a decrease in these duties or astrengthening in the U.S. dollar could have a material adverse effect on ourfinancial condition and results of operations.

**Wedepend on a group of major distributors for a significant portion of our sales;any loss of these distributors could reduce our sales and continuingconsolidation could cause price pressure.**

Inthe fiscal year ended 2005, on a pro forma basis, approximately 37% of our proforma sales were to our ten largest distributors, and approximately 30% of ourpro forma sales were to our three largest distributors: Hughes Supply, FergusonEnterprises and National Waterworks. Our business relationships with most ofour major distributor branches may be terminated at the option of either partyupon zero to 60 days’ notice.

Our reliance on these major distributors exposes usto:

·       the risk of changes in thebusiness condition of our major distributors; and

·       the risk that the loss of amajor distributor could adversely affect our results of operations.

Whileour relationships with our ten largest distributors have been long-lasting,distributors in our industry have experienced significant consolidation inrecent years, and we cannot assure you that our distributors will not beacquired by other distributors who buy products from our competitors. Ourability to retain these customers in the face of other competitors generallydepends on a variety of factors, including the quality and price of ourproducts and our ability to market these products effectively. We cannot assureyou that, as consolidation among distributors continues, distributors will notbe able to force us to lower our prices, which would have an adverse impact onour financial condition or results of operations. For example, Home Depotacquired National Waterworks in 2005 and announced in January 2006 that itintends to acquire Hughes Supply. As a result, two of our three largestdistributors could be combined under common control. Moreover, the loss of anyof National Waterworks, Hughes Supply or Ferguson Enterprises as a distributorcould have a material adverse effect on our financial condition or results ofoperations.

75

----

**Ourbrass valve products contain lead, which may be replaced in the future.**

Our brass valve products,which constituted approximately 6% of our pro forma sales in the twelve monthsended September 30, 2005, contain approximately 5.0% lead. Environmentaladvocacy groups, relying on standards established by California’s Proposition65, are seeking to eliminate or reduce the content of lead in some of theseproducts, including water meters and valves, and to limit their sale inCalifornia. Some of our business units have entered into settlement agreementswith these environmental advocacy groups that have required them to eithermodify some of these products or offer substitutes for them with respect toproducts sold in California. Modifications of or substitutions for our productsto meet or conform with regulatory requirements will require incrementalcapital spending of up to $8.0 million in the next two years and willrequire us to purchase more expensive raw materials, and we may not be able topass these costs on to our customers. Legislation to substantially restrictlead content in water products has been introduced in the United StatesCongress. If Congress adopts such legislation or if similar issues are raisedin Congress in the future or in other jurisdictions or if these or otheradvocacy groups file suit against us under Proposition 65, our results ofoperations and financial condition could be adversely affected.

**Ourresults have been, and may continue to be, adversely impacted by increases inraw material prices.**

Our business is subject tothe risk of price increases and fluctuations and periodic delays in thedelivery of raw materials and purchased components that are beyond our control.Our operations require substantial amounts of raw materials or purchasedcomponents, such as steel pipe and scrap steel and iron, brass ingot, sand,resin, and natural gas. Management estimates that scrap metal and ferrousalloys used in the U.S. Pipe manufacturing process account for up to 40% of theU.S. Pipe cost to manufacture ductile iron pipe and raw materials and purchasedcomponents used in our manufacturing processes currently account forapproximately 18% of the Mueller and Anvil cost of goods sold. Fluctuations inthe price and delivery of these materials may be driven by the supply/demandrelationship for a material, factors particular to that material orgovernmental regulation for raw materials such as natural gas. In addition, ifany of our suppliers seeks bankruptcy relief or otherwise cannot continue itsbusiness as anticipated or we cannot renew our supply contracts on favorableterms, the availability or price of raw materials could be adversely affected.

The availability and priceof certain raw materials or purchased components, such as steel scrap, brassingot and natural gas are subject to market forces largely beyond our control,including North American and international demand freight costs, speculationand foreign exchange rates. We generally purchase raw materials at spot pricesand generally do not have the ability to hedge our exposure to price changes.We are not always able, and may not be able in the future, to pass on increasesin the price of these raw materials to our customers. In particular, when rawmaterial prices increase rapidly or to significantly higher than normal levels,we may not be able to pass price increases through to our customers on a timelybasis, if at all, which could adversely affect our operating margins and cashflow. Any fluctuations in the price or availability of raw materials orpurchased components may have a material adverse effect on our business,results of operations or financial condition.

**Weare dependent upon the successful operation of our key manufacturingfacilities.**

Someof our key products, including hydrants, valves and ductile iron pipe, aremanufactured at five of our largest manufacturing facilities. The operation ofsuch facilities involves various operating risks, including, but not limitedto:

·       catastrophicevents such as fires, explosions, floods, earthquakes or other similaroccurrences;

·       interruptionsin raw materials and energy supply;

·       adversegovernment regulation;

·       breakdownsor equipment failures;

76

----

·       violationsof our permit requirements or revocation of permits;

·       releasesof pollutants and hazardous substances to air, soil, surface water orgroundwater;

·       shortagesof equipment or spare parts; and

·       labordisputes.

A decrease in, or theelimination of, the revenues generated by our key facilities or a substantialincrease in the costs of operating such facilities could materially impact ourcash flows and results of operations.

**Wemay be unsuccessful in identifying or integrating suitable acquisitions, whichcould adversely affect our growth.**

Our growth strategy isbuilt upon organic growth and on taking advantage of opportunities to acquirecomplementary businesses. This strategy depends on the availability ofacquisition candidates with businesses that can be successfully integrated intoour existing business and that will provide us with complementary manufacturingcapabilities, products or services. However, we may be unable to identifytargets that will be suitable for acquisition. In addition, if we identify asuitable acquisition candidate, our ability to successfully implement theacquisition will depend on a variety of factors, including our ability tofinance the acquisition. Our ability to finance our acquisitions is subject toa number of factors, including the availability of adequate cash fromoperations or of acceptable financing terms and the terms of our debtinstruments. In addition, there are many challenges to integrating acquiredcompanies and businesses in our company, including eliminating redundantoperations, facilities and systems, coordinating management and personnel,retaining key employees, managing different corporate cultures and achievingcost reductions and cross-selling opportunities. We cannot assure you that wewill be able to meet these challenges in the future.

**Businesseswe have acquired or will acquire may not perform as expected.**

We may be adverselyaffected if businesses we have recently acquired or acquire in the future donot perform as expected. Acquired businesses may perform below expectationsafter the acquisition for various reasons, including legislative or regulatorychanges that affect the areas in which a business specializes, the loss of keycustomers after the acquisition has closed, general economic factors thataffect a business in a direct way and the cultural incompatibility of anacquired management team with us. Any of these factors could adversely affectour results of operations.

**Wehave recorded a significant amount of goodwill and other identifiableintangible assets, and we may never realize the full value of our intangibleassets.**

We have recorded asignificant amount of goodwill and other identifiable intangible assets. As of December 31,2005, goodwill and other net identifiable intangible assets were approximately$718.5 million and $849.3 million (or, collectively, approximately56% of our total assets). Goodwill and net identifiable intangible assets ofMueller Water are recorded at fair value on the date of acquisition andgoodwill of U.S. Pipe remain at historical cost. In accordance with FinancialAccounting Standards Board Statement of Financial Accounting Standards (“SFAS”)No. 142, Goodwill and Other Intangible Assets, are reviewed at leastannually for impairment. Impairment may result from, among other things,deterioration in our performance, adverse market conditions, adverse changes inapplicable laws or regulations, including changes that restrict the activitiesof or affect the products and services sold by our business, and a variety ofother factors. The amount of any quantified impairment must be expensed immediatelyas a charge to results of operations. Depending on future circumstances, it ispossible that we may never realize the full value of our intangible assets. Anyfuture determination of impairment of a significant portion of goodwill orother identifiable intangible assets would result in a non-cash impairmentcharge and would have an adverse effect on our financial condition and resultsof operations.

77

----

**Wehave a significant amount of debt that could adversely affect our financialhealth.**

As of December 31,2005, our total debt was $1,382.9 million. We may incur significant additionalindebtedness from time to time. The level of our indebtedness could haveimportant consequences, including:

·       makingit more difficult for us to satisfy our obligations under our debt instruments;

·       limitingcash flow available for general corporate purposes, including capitalexpenditures and acquisitions, because a substantial portion of our cash flowfrom operations must be dedicated to servicing our debt;

·       limitingour ability to obtain additional debt financing in the future for workingcapital, capital expenditures or acquisitions;

·       limitingour flexibility to react to competitive and other changes in our industry andeconomic conditions generally; and

·       exposing us to risksinherent in interest rate fluctuations because a substantial portion of ourborrowings is at variable rates of interest, which could result in higherinterest expense in the event of increases in interest rates.

**Wewill require a significant amount of cash to service our debt and our abilityto generate cash depends on many factors beyond our control.**

Our ability to pay or torefinance our indebtedness will depend upon our future operating performance,which will be affected by general economic, financial, competitive,legislative, regulatory, business and other factors beyond our control. Wecannot assure you that our business will generate sufficient cash flow fromoperations, that currently anticipated revenue growth and operating improvementswill be realized or that future borrowings will be available to us in an amountsufficient to enable us to pay our indebtedness, or to fund our other liquidityneeds. If we are unable to meet our debt service obligations or fund our otherliquidity needs, we could attempt to restructure or refinance our indebtednessor seek additional equity capital. We cannot assure you that we will be able toaccomplish those actions on satisfactory terms, if at all.

**Restrictivecovenants in our debt instruments may adversely affect us.**

Our debt instrumentscontain various covenants that limit our ability to engage in certaintransactions. Our senior credit facilities also require the maintenance ofspecified financial ratios and the satisfaction of other financial conditiontests. In addition, our debt instruments require us to provide regularfinancial information to our lenders and bondholders. Such requirementsgenerally may be satisfied by our timely filing with the SEC of annual andquarterly reports under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”). Our ability to satisfy those financial ratios, tests or covenants can beaffected by events beyond our control, and we cannot assure you that we willmeet those tests. A breach of any of these covenants could result in a defaultunder our debt instruments. If an event of default is not remedied after thedelivery of notice of default and lapse of any relevant grace period, theholders of our debt would be able to declare it immediately due and payable.Upon the occurrence of an event of default under our senior credit facilities,the lenders could also terminate all commitments to extend further credit. Ifwe were unable to repay those amounts, the lenders could proceed against thecollateral granted to them to secure the indebtedness under our senior creditfacilities. We have pledged substantially all of our assets (including ourintellectual property), other than the assets of our foreign subsidiaries, assecurity under our senior credit facilities. If the lenders under our seniorcredit facilities or noteholders of the notes accelerate the repayment ofborrowings, we cannot assure you that we will have sufficient assets to repayour senior credit facilities and our other indebtedness.

78

----

**Certainof our brass valve products may not be in compliance with NSF standards, whichcould limit the ability of municipalities to buy our products.**

The National SanitaryFoundation (“NSF”) is a non-profit entity that was contracted by the U.S.Environmental Protection Agency (“EPA”) to promulgate standards for the waterindustry. NSF has issued NSF 61, which governs the leaching characteristics ofvalves and devices that are part of drinking water distribution networks,including certain of our products made from brass. In recent years, a growingmajority of states have adopted, by statute or regulation, a requirement thatwater distribution systems utilize products that comply with NSF 61 and/or arecertified as NSF 61 compliant. We, along with others in the industry, areengaged in the lengthy process of attempting to obtain certification of NSF 61compliance for all of our relevant products. In fiscal 2005, our sales of brassvalve products were approximately 6% of our total sales, on a pro forma basis.Approximately 35% of these products have not been certified and these representapproximately 20% of our brass valve product sales. In the event that some ofour brass valve products are found not to be in compliance with NSF 61, thoseproducts may not be accepted by various municipalities or we may be forced tomodify non-conforming products with substitute materials which may requireincreased cost, thereby adversely affecting profitability. In addition, if ourcompetitors develop a complete line of NSF 61 compliant brass valve productsbefore we do, we may be placed at a competitive disadvantage which may, inturn, adversely affect profitability.

**Ourbusiness may be adversely impacted by work stoppages and other laborrelations matters.**

We are subject to a riskof work stoppages and other labor relations matters because our hourlyworkforce is highly unionized. As of December 31, 2005, approximately 85%of our hourly workforce was represented by unions. These employees arerepresented by locals from approximately six different unions, including theGlass, Molders, Pottery, Plastics and Allied Workers International Union, whichis our largest union. Our labor agreements will be negotiated as they expire atvarious times through March 2010. Work stoppages for an extendedperiod of time could have a material adverse effect on our business. Laborcosts are a significant element of the total expenditures involved in ourmanufacturing process, and an increase in the costs of labor could thereforehave a material adverse effect on our business. In addition, the freightcompanies who deliver our products to our distributors generally use unionizedtruck drivers, and we could also be adversely affected if our contractors facework stoppages or increased labor costs.

**Ourrevenues are influenced by weather conditions and the level of constructionactivity at different times of the year; we may not be able to generaterevenues that are sufficient to cover our expenses during certain periods ofthe year.**

Some of our products,including ductile iron pipe, are moderately seasonal, with lower productioncapacity and lower sales in the winter months. This seasonality in demand hasresulted in fluctuations in our revenues and operating results. Because much ofour overhead and expenses are fixed payments, seasonal trends can causereductions in our profit margin and financial condition, especially during ourslower periods.

**Wemay be subject to product liability or warranty claims that could require us tomake significant payments.**

We would be exposed toproduct liability claims in the event that the use of our products results, oris alleged to result, in bodily injury and/or property damage. We cannot assureyou that we will not experience any material product liability or warrantylosses in the future or that we will not incur significant costs to defend suchclaims. While we currently have product liability insurance, we cannot assureyou that our product liability insurance coverage will be adequate for anyliabilities that may ultimately be incurred or that it will continue to beavailable on terms acceptable to us. A successful claim brought against us inexcess of our available insurance coverage or a requirement to participate in aproduct recall may have a materially adverse effect on our business.

79

----

Under the terms of thepurchase agreement (the “Tyco Purchase Agreement”) relating to the August 1999sale by Tyco International Ltd. (“Tyco”) of the Predecessor Mueller Groupbusiness to our prior owners, we are indemnified by Tyco for all liabilitiesarising in connection with the Predecessor Mueller Group business with respectto products manufactured or sold prior to the closing of that transaction. Theindemnity survives forever and is not subject to any dollar limits. In thepast, Tyco has made substantial payments and/or assumed defense of claimspursuant to this indemnification provision. However, we may be responsible forthese liabilities in the event that Tyco ever becomes financially unable orfails to comply with, the terms of the indemnity. In addition, Tyco’s indemnitydoes not cover product liabilities to the extent caused by our productsmanufactured after that transaction. On January 14, 2006, Tyco’s board ofdirectors announced that it approved a plan to separate Tyco into threeseparate, publicly traded companies. At this time, we do not know which of thenew entities will assume the indemnity provided under the terms of the TycoPurchase Agreement if this plan is implemented. Should the entity or entitiesthat assume Tyco’s obligations under the Tyco Purchase Agreement ever becomefinancially unable or fail to comply with the terms of the indemnity, we may beresponsible for such obligations or liabilities.

We warrant our products tobe free of certain defects. Because of the long useful life of our products, itis possible that latent defects might not appear for several years. Any lossesthat result or are alleged to result from defects in our products, couldsubject us to claims for damages, including consequential damages. In addition,we could elect to replace our defective products and/or compensate ourcustomers for damages caused by our defective products even in the absence of aformal claim for damages. The insurance that we maintain may not be availableon terms acceptable to us in the future and such coverage may not be adequatefor liabilities actually incurred. Any claims or expenses relating to defectiveproducts that result in liability exceeding our insurance coverage could raisecosts and expenses or require us to accrue expenses or record accountingcharges and reduce our net income. Further, claims of defects could result inadverse publicity against us, which could lower our sales and harm ourbusiness.

**Wemay be adversely affected by environmental, health and safety laws andregulations or liabilities.**

We are subject to variouslaws and regulations relating to the protection of the environment and humanhealth and safety and must incur capital and other expenditures to comply withthese requirements. Failure to comply with any environmental, health or safetyrequirements could result in the assessment of damages, or imposition ofpenalties, suspension of production, a required upgrade or change to equipmentor processes or a cessation of operations at one or more of our facilities.Because these laws are complex, constantly changing and may be appliedretroactively, we cannot assure you that these requirements, in particular asthey change in the future, will not have a material adverse effect on ourbusiness, profitability and results of operations.

In addition, we will berequired to incur costs to comply with the EPA’s National Emissions Standardsfor Hazardous Air Pollutants (“NESHAP”) for iron and steel foundries and forour foundries’ painting operations. These costs may be substantial. We may berequired to conduct investigations and perform remedial activities that couldrequire us to incur material costs in the future. Our operations involve theuse of hazardous substances and the disposal of hazardous wastes. We may incurcosts to manage these substances and wastes and may be subject to claims fordamage for personal injury, property damages or damage to natural resources.

Under the terms of theTyco Purchase Agreement, we are indemnified by Tyco for all environmentalliabilities arising in connection with the Predecessor Mueller Group businessand relating to actions occurring or conditions existing prior to the closingof that transaction. The indemnity survives forever and is not subject to anydollar limits. In the past, Tyco has made substantial payments and/or assumeddefense of claims pursuant to this indemnification provision. Should Tyco (orany successor entity) ever become financially unable or fail to comply with theterms of the indemnity, we may be responsible for such obligations orliabilities. In addition, Tyco’s indemnity does not cover environmentalliabilities to the extent caused by us or Predecessor Mueller Group or theoperation of our business after that transaction, nor 

80

----

does itcover environmental liabilities arising with respect to businesses, such as theU.S. Pipe operations, or sites, including U.S. Pipe facilities, acquired after August 1999.

Our U.S. Pipe segment hasbeen identified as a potentially responsible party liable under federalenvironmental laws for a portion of the clean-up costs with regard to twosites, one in Alabama and one in California, and is currently subject to anadministrative consent order requiring certain monitoring and clean-up withregard to its Burlington, New Jersey facility. Such clean-up costs could have amaterial adverse impact to our result of operations in any given reportingperiod.

**Ourloss of the services of, or inability to obtain, key personnel could have amaterial adverse effect on our future success.**

Our success depends to asignificant degree upon the contributions of Dale Smith, as well as othermembers of our senior management. Although Mr. Smith has entered intoemployment agreements with us or Walter Industries, these agreements may beterminated and such persons may not remain affiliated with us. If any of ourkey personnel were to cease their affiliation with us, we may be unable to findsuitable replacement personnel, and our results of operations could suffer. Wedo not intend to maintain key person life insurance on any person.

**Weneed to improve our internal controls to comply with SEC reportingrequirements; public reporting obligations have put significant demands on ourfinancial, operational and management resources.**

Predecessor Mueller Groupreported a material weakness in both fiscal 2004 and fiscal 2005 related tomaintaining effective controls over the preparation, review and presentationand disclosure of its consolidated financial statements. There also existsignificant deficiencies in our internal controls over financial reportingwhich, if unremediated, may result in more than a remote likelihood that amaterial misstatement of our annual or interim financial statements will not beprevented or detected.

The Public CompanyAccounting Oversight Board (“PCAOB”) defines a significant deficiency as acontrol deficiency, or a combination of control deficiencies, that adverselyaffects the company’s ability to initiate, authorize, record, process, orreport external financial data reliably in accordance with generally acceptedaccounting principles such that there is more than a remote likelihood that amisstatement of the company’s annual or interim financial statements that ismore than inconsequential will not be prevented or detected. The PCAOB definesa material weakness as a single deficiency, or a combination of deficiencies,that results in more than a remote likelihood that a material misstatement ofthe annual or interim financial statements will not be prevented or detected.

The material weaknessesand significant deficiencies will need to be addressed as a part of theevaluation of our internal controls over financial reporting pursuant to theSarbanes-Oxley Act of 2002 and may impair our ability to comply with Section 404of the Act. We are currently taking additional steps to implement an internalcontrol structure and procedures for financial reporting that would allow us toproduce financial statements and related disclosure within the time periods andin the form required under the Exchange Act. Failure to implement remediationplans in future periods could have an adverse effect on us.

**Compliancewith internal control reporting requirements and securities laws andregulations is likely to increase our costs.**

The Sarbanes-Oxley Act of2002, as well as rules subsequently implemented by the SEC and the PublicCompany Accounting Oversight Board, have required changes in the corporategovernance and securities disclosure or compliance practices of publiccompanies over the last few years. We expect these new rules andregulations to continue to increase our legal and financial compliance costs,as well as our ongoing audit costs, and to make legal, accounting andadministrative activities more time-consuming and costly. In 2006, we will needto comply with the internal control reporting requirements of theSarbanes-Oxley Act, which will have a significant impact on our compliance costin 2006.

81

----

We also expect these rules andregulations to make it more difficult and expensive for us to obtain directorand officer liability insurance, and we may be required to accept reducedcoverage or incur substantially higher costs to obtain coverage. These new rules andregulations could also make it more difficult for us to attract and retainqualified members of our board of directors, particularly to serve on our auditcommittee, and executive officers.

**Wemay not be able to achieve the anticipated synergies in connection with ourintegration and rationalization plans.**

We are pursuing severalinitiatives designed to rationalize our manufacturing facilities and to use ourmanufacturing expertise to reduce our costs. In fiscal 2006, we expect toachieve integration synergies between our Mueller and U.S. Pipe segments byclosing the U.S. Pipe Chattanooga, Tennessee production facility andintegrating it into the Mueller Chattanooga and Albertville, Alabama productionfacilities. We have initiated the implementation of plant and distributioncombination and production efficiency strategies within our Mueller and Anvilsegments, which efforts will continue through fiscal years 2006, 2007 and thebeginning of 2008. Our Mueller segment sales force has begun to integrate U.S.Pipe products as complementary product offerings as part of their salesefforts. We also have begun to use our combined purchasing leverage to reduceraw material and overall product costs. If we fail to implement our integrationand rationalization plans, at the economic levels or within the time periodsexpected, we may not be able to achieve the projected levels of synergies andcost savings. In addition, we expect to incur substantial severance,environmental and impairment costs in connection with our integration andrationalization plans.

**If wefail to protect our intellectual property, our business and ability to competecould suffer.**

Our business depends uponour technology and know-how, which is largely developed internally. While webelieve that none of our operating units is substantially dependent on anysingle patent, trademark, copyright, or other form of intellectual property, werely on a combination of patent protection, copyright and trademark laws, tradesecrets protection, employee and third party confidentiality and nondisclosureagreements and technical measures to protect our intellectual property rights.There can be no assurance that the measures that we take to protect ourintellectual property rights will be adequate to deter infringement ormisappropriation or independent third-party development of our technology or toprevent an unauthorized third party from obtaining or using information orintellectual property that we regard as proprietary or to keep others fromusing brand names similar to our own. The disclosure, misappropriation orinfringement of our intellectual property could harm our ability to protect ourrights and our competitive position. In addition, our actions to enforce ourrights may result in substantial costs and diversion of management and otherresources. We may also be subject to intellectual property infringement claimsfrom time to time, which may result in our incurring additional expenses anddiverting company resources to respond to these claims.

**Iftransportation for our ductile iron pipe products becomes unavailable or uneconomicfor our customers, our ability to sell ductile iron pipe products would suffer.**

Transportation costs are acritical factor in a customer’s purchasing decision. Increases intransportation costs could make our ductile iron pipe products less competitivewith the same or alternative products from competitors with lowertransportation costs.

We typically depend uponrail, barge and trucking systems to deliver our products to customers. Whileour customers typically arrange and pay for transportation from our factory tothe point of use, disruption of these transportation services because ofweather-related problems, strikes, lock-outs or other events could temporarilyimpair our ability to supply our products to our customers thereby resulting inlost sales and reduced profitability.

82

----

**Risks Relating to our Relationship with WalterIndustries**

**WalterIndustries controls us and may have conflicts of interest.**

Walter Industries, Inc. is our ultimate parentand the sole stockholder of our parent, Mueller Water. Even after completion ofthe pending offering of Mueller Water’s Series A Common stock, Walter willbeneficially own all of Mueller Water’s outstanding Series B common stock(which Series B common stock is entitled to eight votes per share on anymatter submitted to a vote of our stockholders), by means of which Walter willown in excess of 50% of the voting power with respect to Mueller Water. For aslong as Walter Industries continues to beneficially own shares of common stockrepresenting more than 50% of such voting power, Walter Industries will be ableto direct the election of all of the members of the board of directors ofMueller Water and exercise a controlling influence over the business andaffairs of Mueller Water and Mueller Water’s direct and indirect subsidiariesincluding the Company. As a result, Walter Industries effectively will be ableto control any determinations with respect to mergers or other businesscombinations, the acquisition or disposition of assets, the incurrence ofindebtedness, the issuance of any additional common stock or other equitysecurities, the repurchase or redemption of common stock or preferred stock,the payment of dividends and the level and timing of capital expendituresrelating to the operation of the Company’s business. Similarly, Walter Industrieswill have the power to determine or significantly influence the outcome ofmatters submitted to a vote of Mueller Water’s stockholders, including thepower to prevent an acquisition or any other change in control and could takeother actions that might be favorable to Walter Industries.

Walter Industries has announced its intention to spinoff Mueller Water and its subsidiaries and may take such actions with respectto Mueller Water and its subsidiaries, including the Company, as Walter deemsappropriate to effect the announced spin-off. Beneficial ownership of at least80% of the total voting power and 80% of each class of any nonvoting capitalstock is required in order to effect a tax-free spin-off of us or certain othertax-free transactions. Walter Industries will have an option available to it topurchase additional shares of Mueller Water Series B common stock and/orany nonvoting capital stock to maintain its percentage of the total votingpower and value of Mueller Water. Additionally, with respect to shares of anynonvoting Mueller Water capital stock that may be issued in the future, WalterIndustries will have an option to purchase such additional shares so as tomaintain ownership of 80% of each outstanding class of such stock.

Each member of a consolidated group for federal incometax purposes is severally liable for the federal income tax liability of eachother member of the consolidated group for any year in which it is a member ofthe group at any time during such year. Each member of the Walter Industriescontrolled group, which currently includes Walter Industries, Mueller Water,the Company and Walter Industries’ other subsidiaries, is also jointly andseverally liable for pension and benefit funding and termination liabilities ofother group members, as well as certain benefit plan taxes. Accordingly, wecould be liable under such provisions in the event any such liability isincurred, and not discharged, by any other member of the Walter Industriesconsolidated or controlled group for any period during which we were includedin the Walter Industries consolidated or controlled group. If Walter Industriesretains less than 80% of the value of Mueller Water, we will no longer beincluded in the Walter Industries’ consolidated federal income tax group, andthere is no assurance that our tax position will be as favorable as if wecontinued to be included in the Walter Industries’ consolidated federal incometax group.

A controversy exists with regard to federal incometaxes allegedly owed by the Walter consolidated group, which includes theCompany, for fiscal years 1980 through 1994. It is estimated that the amount oftax presently claimed by the IRS is approximately $34.0 million for issuescurrently in dispute in bankruptcy court for matters unrelated to the Company.This amount is subject to interest and penalties. However, Walter Industriesbelieves that their tax filing positions have substantial merit and intend to 

83

----

defend vigorously anyclaims asserted. Walter Industries believes that it has an accrual sufficientto cover the estimated probable loss, including interest and penalties.

By virtue of itscontrolling beneficial ownership and the terms of a tax allocation agreementthat will be entered into between Mueller Water and Walter Industries, WalterIndustries effectively will control all of our tax decisions for periods duringwhich we are a member of the Walter Industries consolidated federal income taxgroup and certain combined, consolidated or unitary state and local income taxgroups. Under the terms of a tax allocation agreement between Walter Industriesand Mueller Water, Walter Industries will have sole authority to respond to andconduct all tax proceedings (including tax audits) relating to our federalincome and combined state returns, to file all such returns on behalf of us andto determine the amount of our liability to (or entitlement to payment from)Walter Industries for such periods. This arrangement may result in conflicts ofinterests between us and Walter Industries. In addition, the tax allocationagreement will provide that in the event that Walter Industries effectuates aspin-off of the Mueller Water common stock that it owns and such spin-off isnot tax-free pursuant to Section 355 of the Internal Revenue Code of 1986,as amended, or the “Code,” we will generally be responsible for any taxesincurred by Walter Industries or its stockholders if such taxes result fromcertain of our actions or omissions. If the taxes incurred by Walter Industriesor its stockholders do not result from certain of our actions or omissions anddo not result from certain of Walter Industries’ actions or omissions, then wegenerally will be responsible for a percentage of such taxes based uponthe  market value of Mueller Water’s stockrelative to Walter Industries’ market value.

**Becausewe have limited experience operating as a stand-alone entity, we may bematerially and adversely affected by the separation of our business from WalterIndustries.**

Our company is acombination of the Predecessor Mueller Water business acquired by WalterIndustries on October 3, 2005 and the U.S. Pipe business. As of the dateof this report, Walter Industries owns all outstanding shares of Mueller Watercommon stock. Our operations as a stand-alone company may place significantdemands on our management, operational, and technical resources. Our futureperformance will depend on our ability to function as a stand-alone company andon our ability to finance and manage expanding operations and to adapt ourinformation systems to changes in its business. We rely on contractualarrangements that require Walter Industries and its affiliates to provide orprocure certain critical transitional services and shared arrangements to ussuch as:

·       certaintax and accounting services;

·       certainhuman resources services, including benefit plan administration;

·       communicationssystems;

·       insurance;and

·       supplyarrangements.

After the termination of these arrangements, we maynot be able to replace these services and arrangements in a timely manner or onterms and conditions, including service levels and cost, as favorable as thosewe have received from Walter Industries and its affiliates. We cannot assureyou that our separation from Walter Industries will be successful, which couldmaterially and adversely impact our business, our results and our financialreporting ability.

Furthermore, the financialinformation included in this prospectus may not necessarily reflect what theoperating results and financial condition would have been had we been aseparate, stand-alone entity during the periods presented or be indicative ofour future operating results and financial condition.

84

----

**Item 6.**   Exhibits

**(a) Exhibits**
| 3.1  |   | Certificate of Formation of Mueller Group, LLC  together with Certificate of Conversion to Limited Liability Company of  Mueller Group, Inc. (1)                                                                                                                                                                                        |
|------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2  |   | Limited Liability  Company Agreement of Mueller Group, LLC (1)                                                                                                                                                                                                                                                                               |
| 4.1  |   | First Supplemental  Indenture, dated as of October 3, 2005 by and among Mueller Group, LLC,  Mueller Group Co-Issuer, Inc. and Law Debenture Trust Company of New  York *                                                                                                                                                          |
| 10.1 |   | Credit Agreement dated  as of October 3, 2005 among Mueller Group, LLC, Bank of America, N.A.,  as administrative agent, Morgan Stanley Senior Funding, Inc., as  syndication agent, Calyon New York Branch, Fifth Third Bank and JPMorgan  Chase Bank, N.A., as co-documentation agents, and the other lenders named  therein (2) |
| 31.1 |   | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of  2002.*                                                                                                                                                                                                                                  |
| 31.2 |   | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of  2002.*                                                                                                                                                                                                                                  |
| 32.1 |   | Certification of Chief  Executive Officer pursuant to Section 906 of the Sarbanes Oxley Act of  2002.*                                                                                                                                                                                                                                  |
| 32.2 |   | Certification of Chief  Financial Officer pursuant to Section 906 of the Sarbanes Oxley Act of  2002.*                                                                                                                                                                                                                                  |

----

(1)          Previously filed as an Exhibit tothe Company’s Annual Report on Form 10 K for the fiscal year ended September 30,2005 as filed with the Securities and Exchange Commission on December 20,2005.

(2)          Previously filed as an Exhibit tothe Company’s Current Report on Form 8 K as filed with the SEC on October 6,2005.

*                    Filedherewith.

85

----

**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

|                           | MUELLER GROUP, LLC |
|---------------------------|--------------------|
|                      |               |   |
|                      |               |   |
| Date: March 30, 2006 | By:                | /s/ DALE B. SMITH |
|                      |               | Dale B. Smith |
|                      |               | *President  and Chief Executive Officer* |
|                      |               | * * |
| Date: March 30, 2006 | By:                | /s/ JEFFERY W. SPRICK |
|                      |               | Jeffery W. Sprick |
|                      |               | *Chief  Financial Officer* |

 

86

----