UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

|(Mark One)                           |                                                                                         
|------------------------------------ | ----------------------------------------------------------------------------------------
|ý                                    | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934    
|For the year ended December 31, 2007
|or                                  
|o                                    | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-13711

WALTER INDUSTRIES, INC.(Exact name of registrant as specified in its charter)

|Delaware(State or other jurisdiction of
incorporation or organization)             |  | 13-3429953(IRS Employer
Identification No.)
|---------------------------------------------------------------------------------- |  | -------------------------------------------
|4211 W. Boy Scout Boulevard
Tampa, Florida(Address of principal executive offices) |  | 33607(Zip Code)                            
|(813) 871-4811Registrant's telephone number, including area code:                 
|Securities registered pursuant to Section 12(b) of the Act:                       
|Title of each class                                                                |  | Name of exchange on which registered       
|Common Stock, par value $.01                                                       |  | New York Stock Exchange                    

Securities registered pursuant to Section 12(g) of the Act:NONE

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes ý    No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o    No ý

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ý    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of
"large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

|Large accelerated filer ý |  | Accelerated filer o |  | Non-accelerated filer o (Do not check if a smaller reporting company) |  | Smaller reporting company o
|------------------------- |  | ------------------- |  | --------------------------------------------------------------------- |  | ---------------------------

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

The aggregate market value of voting stock held by non-affiliates of the registrant, based on the closing price of the Common Stock on June 30, 2007, the
registrant's most recently completed second fiscal quarter, as reported by the New York Stock Exchange, was approximately $1.5 billion.

Number
of shares of common stock outstanding as of February 29, 2008: 52,357,162

Documents Incorporated by Reference

Applicable
portions of the Proxy Statement for the Annual Meeting of Stockholders of the Company to be held April 23, 2008 are incorporated by reference in Part III of this
Form 10-K.



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PART I

Item 1.    Description of Business and

Item 1A.    Risk Factors

(a)    Narrative Description of Business

General

Walter
Industries, Inc. ("the Company"), organized in 1987, is a diversified company that operates in five reportable segments: Natural Resources, Sloss, Financing, Homebuilding
and Other. Through these operating segments, the Company offers a diversified line of products and services including coal and natural gas, furnace and foundry coke and slag fiber, mortgage financing,
and home construction.

Our
businesses may be grouped in the following broad categories:

Natural Resources and Sloss.Our Natural Resources segment consists primarily of Jim Walter
Resources, Inc. ("JWR"), Tuscaloosa Resources, Inc. ("TRI"), Kodiak Mining Company, LLC ("Kodiak") and United Land Corporation ("United Land"). In 2007, JWR produced
5.8 million tons of high quality metallurgical coal. In addition, JWR owns 50% of Black Warrior Methane Corp., which extracts coalbed methane gas; JWR's portion of the production was
7.2 billion cubic feet of natural gas in 2007. United Land was reclassified from the Other segment to the Natural Resources segment in 2007, as it is the parent company of TRI and Kodiak. All
results have been revised to reflect this change. The Company owns a 51% interest in Kodiak, which operates an underground mine in Shelby County, Alabama designed primarily to produce steam coal. TRI
was acquired on August 31, 2007 and mines primarily low-sulfur coal for the industrial and electric utility markets. Since August 31, 2007, TRI has sold and produced 247,000
tons of coal. Sloss is a manufacturer of furnace and foundry coke and slag fiber. In 2007, Sloss sold 431,000 tons of furnace and foundry coke.

Financing and Homebuilding.Our Financing segment, which includes Walter Mortgage Company ("WMC"),
originates, purchases, services and securitizes non-conforming instalment notes and loans that are secured by mortgages and liens. The mortgage portfolio at December 31, 2007 was
approximately $1.8 billion. Our Homebuilding segment includes Jim Walter Homes, Inc. ("JWH"), which is a leading on-your-lot homebuilder. JWH, which has a
significant presence in the southeastern United States, provides mortgage financing for approximately 94.3% of the homes we build and sells these originated notes to WMC.

Other.The Other segment includes the Company's other land subsidiaries and corporate expenses.

Recent Developments

On February 19, 2008, the Company announced a restructuring of JWH Holding Company, LLC, the Company's Financing and Homebuilding business.
Thirty-six underperforming Jim Walter Homes sales centers have closed or will close as part of the restructuring. The closure of the sales centers will result in a reduction in divisions
from eight to five. In addition, reductions in corporate overhead have been taken. As a result of this restructuring, the Company expects to record a restructuring charge in the range of
$6.0 million to $8.0 million, with the majority of this amount to be recognized in the first quarter 2008, resulting from asset impairments and a 25% reduction in workforce. The Company
expects to offset the impact of lower sales volumes with annualized
reductions in operating expenses in the range of $26.0 to $28.0 million, with a significant portion expected to be recognized in 2008.

As
previously announced, the Company continues to evaluate strategic alternatives for its Financing and Homebuilding businesses. In February 2008, the Board of Directors assigned the
Company's former Chief Financial Officer to focus exclusively on accelerating the implementation of

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separating
the Financing and Homebuilding business from the remaining Walter Industries' energy assets.

The
Company makes its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments
thereto available on its website atwww.walterind.comwithout charge as soon as reasonably practical after filing or furnishing these reports to the
Securities and Exchange Commission ("SEC"). Additionally, the Company will also provide, without charge, a copy of its Form 10-K to any shareholder by mail. Requests should be sent
to Walter Industries Inc., Attention: Shareholder Relations, 4211 W. Boy Scout Boulevard, Tampa, Florida 33607. You may read and copy any document the Company files at the SEC's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. The
Company's SEC filings are also available to the public from the SEC's website at http://www.sec.gov.

(b)    Industry Segments

The Company's industry segment information is included in Note 18 of "Notes to Consolidated Financial Statements" included herein.

(c)    Description of Business

Natural Resources

Jim Walter Resources, Inc.

The operations of Jim Walter Resources, Inc. ("JWR") are conducted through its Mining Division, which mines and sells high quality metallurgical coal from
two underground mines in Alabama, and its De-Gas Division, which extracts and sells natural gas from the coal seams owned or leased by JWR.

In
2004, the Company announced a project to expand production in an area called Mine No. 7 East. The new mine area will consist of one additional longwall unit and three
continuous miner sections, providing incremental annual production capacity of approximately 2.7 million tons. The investment of approximately $177.2 million will result in longwall
production beginning in early 2009. Capital expenditures through December 31, 2007 related to this expansion project amounted to $122.3 million and are expected to be approximately
$39.5 million in 2008. In December 2006, mining operations ceased at Mine No. 5 as planned. The preparation plant at Mine No. 5 will remain operational and serve as the washing
and shipping point for production associated with the Mine No. 7 East expansion project.

The
Mining Division had net sales and revenues of $556.7 million, $611.7 million and $493.5 million in the years ended December 31, 2007, 2006 and 2005,
respectively.

The
Mining Division, headquartered in Brookwood, Alabama, currently has approximately 7.0 million tons of rated annual coal production capacity from its mines located in west
central Alabama between the cities of Birmingham and Tuscaloosa. The Mining Division extracts coal primarily from Alabama's Blue Creek and Mary Lee seams, which contain high-quality
bituminous coal. Blue Creek coal offers high coking strength with low coking pressure, low sulfur and low-to-medium ash content with high BTU values that can be sold either as
metallurgical coal (used to produce coke) or as compliance steam coal (used by electric utilities because it meets current environmental compliance specifications).

The
majority of coal is mined using longwall extraction technology with development support from continuous miners. Underground mining with longwall technology drives greater production
efficiency, improved safety, higher coal recovery and lower production costs. The Mining Division currently operates one longwall mining system in each mine for primary production and four to six
continuous

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miner
sections in each mine for the development of mains and longwall panel entries. As noted above, the Company is investing in Mine No. 7 East such that the mine will operate two longwall
mining systems. The Mining Division's normal operating plan is a longwall/continuous miner production ratio of approximately 80% / 20%. This ratio is expected to remain consistent after the start of
longwall operations for the Mine No. 7 East expansion in 2009.

Environmental
expenditures imposed by laws relating to mining have been insignificant to date and no substantial expenditures are expected in the future.

The
Mining Division's coal is principally sold to a diversified base of offshore metallurgical coal customers. The division's metallurgical coal is sold to customers in numerous markets
throughout Europe, South America, Turkey and Africa. Most metallurgical coal sales are made under fixed price supply contracts, usually with a duration of one year, running principally from July
through June. However, some sales of metallurgical coal can occur in the spot market as dictated by available JWR supply and market demand. During 2007, JWR's two largest customers represented
approximately 13.7% and 12.7% of the Mining Division's sales, respectively. The Company believes that the loss of those customers would not have a material adverse effect on the results of operations
of the Company as the loss of volume from these customers would be replaced with sales to other existing or new customers due to strong worldwide demand for metallurgical coal. Foreign sales accounted
for approximately 97.5% of the Mining Division's net sales during the year. Domestic sales include coal sold to Sloss.

The
De-Gas Division, headquartered in Brookwood, Alabama, extracts and sells natural gas from the coal seams owned or leased by JWR, primarily through Black Warrior Methane
Corp., an equal ownership joint venture with El Paso Production Co., a subsidiary of El Paso Corporation. JWR also operates a wholly owned low quality gas ("LQG") facility. The original
motivation for the joint venture was to increase safety in JWR's Blue Creek mines by reducing natural gas concentrations with wells drilled in conjunction with the mining operations. There were 408
wells producing approximately 12.9 billion cubic feet of natural gas in 2007. JWR generated 7.2 billion cubic feet in 2007, including 1.4 billion cubic feet from its LQG
operations. The degasification operation has improved mining operations and safety by reducing methane gas levels in the mines, and has been a profitable operation. Gas production is expected to
remain level at 6.8 to 7.2 billion cubic feet in 2008.

Kodiak Mining Company, LLC

Kodiak Mining Company, LLC ("Kodiak") was established in 2005 to develop and operate an underground coal mine in Shelby County, Alabama. The mine has high
BTU, low sulfur coal that can be sold into either the metallurgical or steam coal market. Production began in 2006 and is expected to reach 0.3 million tons in 2008. Annual production is
expected to reach approximately 0.7 million tons until the coal is exhausted or a new mining area is developed.

Tuscaloosa Resources, Inc.

On August 31, 2007, the Company acquired all of the outstanding common shares of Tuscaloosa Resources, Inc. ("TRI") for approximately
$12.5 million in cash and $8.5 million of acquired debt, of which $7.1 million was immediately retired. TRI operates surface mines of low-sulfur coal for the
industrial and electric utility markets and is located in Brookwood, Alabama. The acquisition of TRI diversifies the Company's coal production base and provides an opportunity to grow the Company's
domestic Natural Resources business. Since August 31, 2007, TRI has produced and sold 0.2 million tons of coal. In 2008, production is expected to be 0.8 million tons.

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Sloss

Sloss is a manufacturing company that began operations at its current location in 1920. Sloss, founded in 1881, is headquartered in Birmingham and has three major
product lines: foundry coke, furnace coke and slag fiber. Foundry coke is marketed to ductile iron pipe plants and foundries producing castings, such as for the automotive and agricultural equipment
industries. Furnace coke is sold primarily to the domestic steel industry for producing steel in blast furnaces. Slag fiber is an insulating fiber utilized principally as a raw material by acoustical
ceiling tile manufacturers.

Financing

Within the Financing segment, WMC purchases instalment notes and mortgages originated by its affiliated homebuilder, JWH. WMC also offers financing to JWH
homebuyers that is secured by first lien mortgages. WMC services all of its instalment notes and loans. References to instalment notes include mortgage loans originated or purchased by WMC. Mortgage
loans in the portfolio, before allowances, were approximately $234.3 million and $213.9 million at December 31, 2007 and 2006, respectively. At December 31, 2007, the
Company held fixed (98%) and variable-rate (2%) instalment notes ranging from 5.16% to 14.13% annual percentage rate, without points or closing costs. See also Note 2 of "Notes to
Consolidated Financial Statements" included herein for a description of the revenue recognition policies of Financing.

Walter Mortgage Company

WMC, headquartered in Tampa, Florida, was established in 2001 to provide home financing to the customers of JWH and is the successor to MSH (Mid-State
Homes) subsequent to a merger during 2007. MSH was established in 1958 to purchase and service mortgage instalment notes originated by JWH. Through WMC, homebuyers have the option of financing land
along with their home purchase, including a traditional cash down payment in lieu of land equity. Existing WMC customers also have the option of refinancing their mortgage with WMC. WMC initiated a
program to acquire mortgage loans in 2003 that met the Company's underwriting criteria. Loans were purchased from various sellers of first lien mortgages. During 2007, approximately
$39.9 million of mortgage loans were purchased by WMC from third parties. In August 2007, the Company terminated its third party loan acquisition program in light of volatile market conditions
for securitizations of subprime mortgages.

Currently,
WMC funds instalment notes, as well as the mortgage loans it originates, using various warehouse lines of credit. Historically, once a critical mass of assets has been
accumulated, WMC securitizes the assets using a grantor trust, structured as a financing, which requires that the assets and liabilities be recorded on the balance sheet with no gain for tax purposes.
These business trusts acquire the mortgage instalment notes and loans using the proceeds from borrowings secured by the notes. WMC owns, directly or indirectly, all of the beneficial interests in
these trusts. Only the notes in the trusts secure the borrowings of these trusts, and therefore these borrowings are non-recourse to the Company. For additional information on the notes,
the trusts and their related borrowings, see Notes 6 and 12 of "Notes to Consolidated Financial Statements."

At
December 31, 2007, WMC's portfolio was geographically distributed as follows: Texas (33%), Mississippi (15%), Alabama (9%) and Florida and Louisiana, each (6%). The remaining
portfolio was spread primarily in other southeastern states.

Insurance

Best Insurors, Inc. ("Best"), located in Tampa, Florida, is an agency that primarily places fire and extended insurance coverage for homeowners who finance
through WMC or JWH. Cardem Insurance Company Ltd. ("Cardem"), located in Bermuda, primarily provides reinsurance of such insurance

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placed
through Best and provides captive coverage for various other Company risks, including workers' compensation for Homebuilding.

Homebuilding

Jim Walter Homes, Inc.

Jim Walter Homes, Inc. and its subsidiaries ("JWH"), headquartered in Tampa, Florida, markets and supervises the construction of detached, single-family
residential homes, on land owned by its customers, primarily in the southeastern United States where the weather generally permits year-round construction. JWH also provides financing on a
significant portion of the homes sold.

JWH
historically has concentrated on the low- to moderately-priced segment of the housing market. JWH's products consist of over 60 models ranging in size from approximately
800 to over 3,000 square feet. At December 31, 2007, JWH operated 83 branch offices located in 16 states. Subsequent to December 31, 2007, that number will be reduced by the closure of
36 branch offices. See theRecent Developmentssection. During 2007, JWH's net sales originated in the following states: Texas (21%); Florida (7%);
Mississippi (17%); Louisiana (8%); Alabama (14%); South Carolina, (5%), North Carolina (5%), and Georgia (6%). Approximately 60% of the branch offices are located on land that is owned by JWH, with
the balance located on leased land. Branch offices serve as "sales centers" that are designed to allow customers to view various model homes.

Historically,
JWH has not owned or acquired land for home construction purposes and was not a land developer, which significantly limits the amount of required capital to operate the
business. The actual construction of conventionally built homes sold by JWH is generally performed on customer-owned
land by local building sub-contractors with their own crews, pursuant to subcontracts executed in connection with each home.

JWH
builds homes that are constructed to varying degrees of interior completion. JWH's product line includes "shell" homes, which are completely finished on the outside, with the inside
containing only rough floors, ceiling joists, partition studding and closet framing. The majority of JWH's customers select all interior options, thereby purchasing a home considered to be "90+%
complete," which generally excludes only driveway, landscaping and utility connections. Remaining units are sold at varying stages of interior finishing.

The
following chart shows the unit sales volume of JWH and the percent of homes sold by category for the years ended December 31, 2007, 2006 and 2005:

|     |  |       |  | Percent of Unit Sales |  
|---- |  | ----- |  | --------------------- | -
|
|2007 |  | 2,594 |  | 4                     | %
|2006 |  | 3,047 |  | 4                     | %
|2005 |  | 3,022 |  | 4                     | %

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During
the years ended December 31, 2007, 2006 and 2005, the average net sales price of all homes sold was $99,000, $90,000 and $79,000, respectively.

The
estimated backlog of homes to be constructed by JWH as of December 31, 2007 was 1,085, as compared to 1,642 at December 31, 2006. After the land is cleared and
appropriate building permits are obtained, the time to construct a home averages between thirteen and twenty-one weeks.

Most
homes sold by JWH are purchased with financing provided by JWH. Qualified customers may obtain financing on an instalment sale contract offered on a fixed-rate mortgage
basis generally requiring no down payment and secured by the home and the land on which it is situated. JWH does not charge closing costs, points, credit service fees or similar add-on
charges and does not require private mortgage insurance. When a home is financed by JWH, the Company does not obtain third party appraisals or title insurance. JWH offers credit terms for up to a
maximum of 30 years, up to 100% of the purchase price of the home. During 2007, the stated annual percentage rates offered for new mortgage instalment notes ranged between 7.3% and 12.3%.

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If JWH finances the new home purchase, upon completion of construction to the agreed-upon percentage, in the ordinary course of business, JWH sells the building and
instalment sale contract, the note and the related mortgage, deed of trust or other security instrument to WMC, pursuant to an agreement between JWH and WMC.

Other

The Other segment includes the Company's land subsidiaries other than United Land and corporate expenses. The land subsidiaries engage in maximizing the value of
vacant land, primarily through outright property sales and realizing royalty income on coal, timber and other minerals. Corporate expenses consist primarily of salaries, overhead and other costs
associated with executive management, finance, accounting, tax, treasury, legal, information technology, risk management, human resources, payroll and other management services.

Seasonality

Certain of the businesses of the Company are subject to seasonal fluctuations to varying degrees. Sales at JWH are usually their lowest in the winter months due
to weather and the lower level of construction activity. The businesses of the Company may also be significantly influenced by the general economy, interest rates, levels of construction activity and
commodity prices.

Competition

See "Risks Related to the BusinessWe face significant competition in the industries in which we operate and this competition
could harm our sales, profitability and cash flows."

Trade Names, Trademarks and Patents

The names of each of the Company's subsidiaries are well established in the respective markets they serve. Management believes that customer recognition of such
trade names is of significant importance. The Company's subsidiaries have numerous patents and trademarks. Management does not believe, however, that any one such patent or trademark is material to
the Company's individual segments or to the business as a whole.

Environmental

The Company and its subsidiaries are subject to a wide variety of laws and regulations concerning the protection of the environment, both with respect to the
construction and operation of many of its plants, mines and other facilities, and with respect to remediating environmental conditions that may exist at its own and other properties. The Company
believes that it and its subsidiaries are in substantial compliance with federal, state and local environmental laws and regulations. Expenses charged to continuing operations for compliance of
ongoing operations and for remediation of environmental conditions arising from past operations in the years ended December 31, 2007, 2006 and 2005 were approximately $4.9 million,
$4.9 million and $5.9 million, respectively. Because environmental laws and regulations continue to evolve, and because conditions giving rise to obligations and liabilities under
environmental laws are in some circumstances not readily identifiable, it is difficult to forecast the amount of such future environmental expenditures or the effects of changing standards on future
business operations or results. Consequently, such expenditures may be material in the future.

Environmental
matters are more fully described in Note 16 of "Notes to Consolidated Financial Statements."

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Employees

As of December 31, 2007, the Company and its subsidiaries employed approximately 2,700 people, of whom approximately 1,200 were hourly workers and 1,500
were salaried employees. Unions represented approximately 1,200 employees under collective bargaining agreements, of which approximately 1,000 were covered by one contract with the United Mine Workers
of America that expires on December 31, 2011.

Risks Related to the Business

Our business may suffer as a result of changes in general and local economic conditions and other factors beyond our control, which could depress demand
for our products.

The industries in which we operate are cyclical and have experienced significant difficulties in the past. Our financial performance depends, in large part, on
varying conditions in the markets we serve, which fluctuate in response to various factors beyond our control.

The
prices at which JWR sells coal and natural gas are largely dependent on prevailing market prices for those products. We have experienced significant price fluctuations in our coal
and natural gas businesses, and we expect that such fluctuations will continue. Demand for and, therefore, the price of, coal and natural gas are driven by a variety of factors such as availability,
price, location and quality of competing sources of coal or natural gas, availability of alternative fuels or energy sources, government regulation and economic conditions. In addition, reductions in
the demand for metallurgical coal are caused by reduced steel production by our customers, increases in the use of substitutes for steel (such as aluminum, composites or plastics) and the use of
steel-making technologies that use less or no metallurgical coal. Demand for steam coal is primarily driven by the consumption patterns of the domestic electric power generation industry, which, in
turn, is influenced by demand for electricity and technological developments. We estimate that a 10% decrease in the price of coal in 2007 would have resulted in a reduction in pre-tax
income of $52.4 million. Demand for natural gas is also affected by storage levels of natural gas in North America and consumption patterns, which can be affected by weather conditions. We
estimate that a 10% decrease in the price in natural gas in 2007 would have resulted in a reduction in pre-tax income of approximately $1.2 million in that year, which includes the
benefit of hedges. Occasionally we utilize derivative commodity instruments to manage fluctuations in natural gas prices. Currently, we have hedged approximately 69% of our anticipated 2008 natural
gas production at an average price of $8.51 per mmbtu.

Demand
in the financing and homebuilding businesses is affected by changes in general and local economic conditions, such as interest rates, housing costs, migration patterns, employment
levels, job growth and consumer confidence. During 2007, the homebuilding industry experienced a significant downturn, in which there was a significant decline in demand for new homes, an increased
cancellation rate on pending contracts and an increase in mortgage default rates. The supply of alternatives to new homes, such as rental properties and existing homes for sale, has also depressed
prices and reduced margins for the sale of repossessed homes. Almost all purchasers of our homes require mortgage financing for a substantial portion of the purchase price. As a result of actual and
anticipated increases in default rates, lenders have tightened their credit requirements and have made it more difficult to borrow money in the mortgage market generally and the subprime market
particularly. In addition, the interest rates charged to less credit-worthy subprime customers have increased significantly. Although
we offer financing to our customers, we may no longer be able to offer terms that are attractive to potential buyers, thereby reducing demand for the homes we build. We are also subject to weather
conditions and natural disasters, such as hurricanes, tornadoes, floods and fires, which can negatively impact the homebuilding business. This risk is exacerbated by our concentration in a limited
number of states and especially in the coastal states in which we operate.

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Our business is subject to risk of price increases and fluctuations and delay in the delivery of raw materials and purchased components.

Most of the industries in which we operate require significant amounts of raw materials and labor and, therefore, shortages or increased costs of raw materials
and labor could adversely affect our business or results of operations.

Our
coal mining operations rely on the availability of steel, petroleum products and other raw materials for use in various mining equipment. The availability and market prices of these
materials are influenced by various factors that are beyond our control. Over the last year petroleum prices have risen significantly and historically, pricing for steel scrap and petroleum have
fluctuated. Any inability to secure a reliable supply of these materials or shortages in raw materials used in the manufacturing of mining equipment or replacement parts could negatively impact our
operating results.

Our
homebuilding operations rely on the availability of lumber, drywall, cement and other building materials. The availability and market prices of these materials are influenced by
various factors that are beyond our control. Shortages of, and price increases for, such materials have occurred in the past and may occur in the future. Further, if we are unable to secure a proper
level of skilled labor for our homebuilding operations, we may be unable to build as many houses or build them as cost effectively, and our levels of revenue and net income may be reduced.

We face significant competition in the industries in which we operate and this competition could harm our sales, profitability and cash flows.

The consolidation of the U.S. coal industry over the last several years has contributed to increased competition among coal producers. Some of our competitors
have significantly greater financial resources than we do. This competition may affect domestic coal prices and impact our ability to retain or attract customers. In addition, our coal business faces
competition from foreign producers that sell
their coal in the export market. The general economic conditions in foreign markets and changes in currency exchange rates are factors outside of our control that may affect coal prices. If our
competitors' currencies decline against the U.S. dollar or against our customers' currencies, those competitors may be able to offer lower prices to our customers. Furthermore, if the currencies of
our overseas customers were to significantly decline in value in comparison to the U.S. dollar, those customers may seek decreased prices for the coal we sell to them. These factors could reduce our
profitability or result in lower coal sales.

The
homebuilding industry is highly competitive and fragmented. We compete in each of our markets with numerous national, regional and local builders. Some of these competitors have
greater financial resources and more established market positions than we do. We also compete against manufacturers and distributors of factory-built, manufactured homes, lower costs of capital, labor
and material than we do. We compete for customers, raw materials and skilled subcontractors. We also compete with resales of existing homes and available rental housing. Our financing operations are
subject to competition from third-party providers, many of which are substantially larger, may have a lower cost of funds or overhead than we do and may focus exclusively on providing such services.

Coal and Energy businesses

Our failure to retain our current customers and renew our existing customer contracts could adversely affect our business.

A significant portion of the sales of our coal and methane gas are to long-term customers. The success of these businesses depends on our ability to
retain our current clients and renew our existing customer contracts and solicit new customers. Our ability to do so generally depends on a variety of factors, including the quality and price of our
products, our ability to market these products effectively

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and
the level of competition we face. If we are unsuccessful in renewing contracts with our long-term customers and they discontinue purchasing coal or methane gas from us, or if we are
unable to sell our coal or methane gas to new customers on terms as favorable to us, our revenues could suffer significantly.

If transportation for our coal becomes unavailable or uneconomic for our customers, our ability to sell coal could suffer.

Transportation costs represent a significant portion of the total cost of coal to the customer and, as a result, the cost of transportation is a critical factor
in a customer's purchasing decision. Increases in our transportation costs could make our coal less competitive with the same or alternative products from competitors with lower transportation costs.

We
typically depend upon rail or barge to deliver coal to the port of Mobile, Alabama. While our coal customers typically arrange and pay for transportation from the port of Mobile to
the point of use, disruption of any of these transportation services because of weather-related problems, strikes, lock-outs, transportation delays or other events could temporarily impair
our ability to supply our products to our customers, thereby resulting in lost sales and reduced profitability. All of our mines are served by only one rail carrier, which increases our vulnerability
to these risks, although our access to barge transportation partially mitigates that risk. In addition, port congestion in the Port of Mobile and delayed coal shipments result in demurrage fees to us.
If this disruption were to persist over an extended period of time, demurrage costs could significantly impact profits.

Coal mining is subject to inherent risks and is dependent upon many factors and conditions beyond our control, which may cause our profitability and our
financial position to decline.

Coal mining is subject to inherent risks and is dependent upon a number of conditions beyond our control that can affect our costs and production schedules at
particular mines. These risks and conditions include:



These
risks and conditions could result in damage to or the destruction of mineral properties or production facilities, personal injury or death, environmental damage, delays in mining,
monetary losses and legal liability. For example, an explosion and fire occurred in Mine No. 5 in September 2001. This accident resulted in the deaths of thirteen employees and caused extensive
damage to the mine. Our insurance coverage may not be available or sufficient to fully cover claims which may arise from these risks and conditions. We have also experienced adverse geological
conditions in our mines, such as variations in coal seam thickness, variations in the competency and make-up of the roof strata, fault-related discontinuities in the coal seam and the
potential for ingress of excessive amounts of methane

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gas
or water. Such adverse conditions may increase our cost of sales and reduce our profitability, and may cause us to decide to close a mine. Any of these risks or conditions could have a negative
impact on our profitability, the cash available from our operations and our financial position.

Forecasts of future performance, reserve estimates and a decline in pricing could affect our revenues.

Forecasts of our future performance are based on estimates of our recoverable coal reserves. Reserves estimates are based on a number of sources of information,
including engineering, geological, mining and property control maps, our operational experience of historical production from similar areas with similar conditions and assumptions governing future
pricing and operational costs. Reserves estimates will change periodically to reflect mining activities, the acquisition or divestiture of reserve holdings and modifications of mining plans. Certain
factors beyond our control could affect the accuracy of these estimates, including unexpected mining conditions, future coal prices, operating and development costs and federal, state and local
regulations affecting mining operations. In addition, since we deplete our reserves as we mine, the ability to acquire additional reserves that are economically recoverable at the time and have
comparable costs is paramount. Our results of operations are dependent upon our ability to mine our reserves and the prices at which we sell our coal. A decline in reserves and or pricing could
adversely affect our operating results and profitability.

Work stoppages and other labor relations matters may harm our business.

The majority of our employees within the Jim Walter Resources and Sloss businesses are unionized and we have a risk of work stoppages as the result of strike or
lockout. The majority of employees of JWR are members of United Mine Workers of America ("UMWA"). Normally, our negotiations with the UMWA follow the national contract negotiated with the UMWA by the
Bituminous Coal Operators Association. The collective bargaining agreement expires December 31, 2011. At our Sloss subsidiary, our contract with the United Steelworkers of America expires
December 6, 2010. We experienced a strike at Sloss at the end of 2001 that lasted eight months. Future work stoppages, labor union issues or labor disruptions at our key customers or service
providers could impede our ability to produce and deliver our products, to receive critical equipment and supplies or to collect payment. This may increase our costs or impede our ability to operate
one or more of our operations.

The
demand for coal in recent years has caused a significant constriction of the labor supply and higher labor costs. As coal producers compete for skilled miners, employee turnover
rates have increased which negatively affects operating costs. If the shortage of skilled work force continues and we are unable to train and retain the necessary number of miners, it could adversely
affect our productivity, costs and ability to expand production.

The government extensively regulates our mining operations, which imposes significant costs on us, and future regulations could increase those costs or
limit our ability to produce coal.

Federal,
state and local authorities regulate the coal mining industry with respect to matters such as employee health and safety, permitting and licensing requirements, air quality
standards, water pollution, plant and wildlife protection, reclamation and restoration of mining properties after mining is completed, the discharge of materials into the environment, surface
subsidence from underground mining, and the effects that mining has on groundwater quality and availability. In addition, we are subject to significant legislation mandating specified benefits for
retired coal miners. Numerous governmental permits and approvals are required for mining operations. We are required to prepare and present to federal, state or local authorities data pertaining to
the effect or impact that any proposed exploration for or production of coal may have upon the environment. Compliance with these regulations may be costly and time-consuming and may delay
commencement or continuation of exploration or production operations. The possibility exists that new legislation and/or regulations and

11

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orders
may be adopted that may have a material adverse effect on our mining operations, our cost structure and/or our customers' ability to use coal. New legislation or administrative regulations (or
judicial interpretations of existing laws and regulations), including proposals related to the protection of the environment that would further regulate and tax the coal industry, may also require us
or our customers to change operations significantly or incur increased costs.

In
addition, the United States and over 160 other nations are signatories to the 1992 Framework Convention on Climate Change, which is intended to limit emissions of greenhouse gases,
such as carbon dioxide. In December 1997, in Kyoto, Japan, the signatories to the convention established a binding set of emission targets for developed nations. Although the specific emission targets
vary from country to country, the United States would have been required to reduce emissions to 93% of 1990 levels over a five-year budget period from 2008 through 2012. Although the
United States has not ratified the emission targets and no comprehensive regulations focusing on U.S. greenhouse gas emissions are in place, these restrictions, whether through ratification of the
emission targets or other efforts to stabilize or reduce greenhouse gas emissions, could adversely impact the price of and demand for coal.

Recent
mining accidents involving fatalities in Utah, West Virginia, Kentucky and Mexico have received national attention and prompted responses at the state and federal level that have
resulted in increased scrutiny of current safety practices and procedures in the mining industry. For example, on January 26, 2006, West Virginia passed a new law imposing stringent new mine
safety and accident reporting requirements and increased civil and criminal penalties for violations of mine safety laws. Other states have proposed or passed similar bills and resolutions addressing
mine safety practices. On January 25, 2006, an Alabama circuit judge ordered the Alabama governor and legislature to take action to ensure the safety of Alabama's mineworkers. In addition,
several mine safety bills have been introduced in Congress that would mandate improvements in mine safety practices, increase or add civil and criminal penalties for non-compliance with
such laws or regulations, and expand the scope of federal oversight, inspection and enforcement activities. On February 7, 2006, the federal Mine Safety and Health Administration ("MSHA")
announced the promulgation of new emergency rules on mine safety. These rules address mine safety, equipment, training and emergency reporting requirements. On June 15, 2006, the Federal Mine
Improvement and New Emergency Response (MINER) Act of 2006 was signed into law and implementation of the specific requirements is currently underway. The
implementation of these new requirements will cause us to incur substantial additional costs which will impact our operating costs.

Environmental, health and safety laws and regulations could subject us to liability for fines, clean-ups and other damages, require us to
incur significant costs to modify our operations and increase our costs.

We
are subject to a wide variety of laws and regulations concerning the protection of the environment and human health and safety, both with respect to the construction and operation of
our mines and other facilities and with respect to remediating environmental conditions that may exist at our own and other properties. Certain of our facilities have been in operation for many years
and, over time, we and predecessor operators of these facilities may have generated, used, handled and disposed of hazardous and other regulated wastes. Environmental liabilities could exist,
including cleanup obligations at these or at other locations where materials from our operations were disposed of, which could result in future expenditures that cannot be currently quantified and
which could reduce our profits. Failure to comply with any environmental, health or safety requirements could result in the assessment of damages, or imposition of penalties, suspension of production,
a required upgrade or change to equipment, or processes or a cessation of operations at one or more of our facilities. Because these laws are complex, constantly changing and may be applied
retroactively, there is a risk that these requirements, in particular as they change in the future, may impair our business, profitability and results of operations.

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We
may be required to conduct investigations and perform remedial activities that could require us to incur material costs in the future. Our operations involve the use of hazardous
substances and the disposal of hazardous wastes. We may incur costs to manage these substances and wastes and may be subject to claims for damage for personal injury, property damages or damage to
natural resources.

Financing and Homebuilding Business

The homebuilding industry is experiencing deteriorating conditions that may continue for an indefinite period and may further adversely affect our
business and results of operations.

During 2007, the U.S. homebuilding industry experienced a significant downturn which continues today. There has been a significant decline in demand for new
homes, an increased cancellation rate on pending contracts and an increase in mortgage default rates. We, like many other homebuilders, experienced a drop in net new sales, a reduction in our
operating margins and higher cancellations which resulted in our decision to close thirty-six underperforming homebuilding sales centers. The homebuilding market may not improve in the
near future, and it may weaken further which may require the closure of additional sales centers which would have an adverse effect on our business and our results of operations.

Our revenues are seasonal due to weather conditions and the level of construction activity at different times of the year; we may not be able to
generate revenues that are sufficient to cover our expenses during certain periods of the year.

The homebuilding industry is moderately seasonal, with lower production and lower revenues during the winter months. This seasonality in demand has resulted in
fluctuations in our revenues and operating results. Because much of our overhead and expenses are fixed payments, seasonal trends can cause reductions in our overall profit margin and financial
condition, especially during our slower periods.

We are exposed to increased risks of delinquencies, defaults and losses on mortgages and loans associated with our strategy of providing credit or loans
to lower credit grade borrowers.

We specialize in originating, securitizing and servicing mortgage notes and loans (which we refer to as "mortgage assets") to credit-impaired borrowers who are
generally unable to qualify for loans from conventional mortgage sources due to loan size, credit characteristics or other requirements. We are subject to various risks associated with the lower
credit homeowners whom we finance, including, but not limited to, the risk that these borrowers will not pay the principal and finance charges or interest when due, and that the value received from
the sale of the borrower's home in a repossession will not be sufficient to repay the borrower's obligation to us. Delinquencies and defaults cause reductions in our interest income and our net
income.

If
delinquency rates and losses are greater than we expect:



During
economic slowdowns or recessions, mortgage and loan delinquencies and defaults generally increase. In addition, significant declines in market values of residences securing
mortgages and loans

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reduce
homeowners' equity in their homes. The limited borrowing power of our customers increases the likelihood of delinquencies, defaults and credit losses on foreclosure. Many of our borrowers have
limited access to consumer financing for a variety of reasons, including a relatively high level of debt service, lower credit scores, higher loan-to-value ratios of the
mortgage assets, past credit write-offs, outstanding judgments or prior bankruptcies. As a result, the actual rate of delinquencies, repossessions and credit losses on our loans are often
higher under adverse economic conditions than those experienced in the mortgage loan industry in general.

Approximately
2% of our mortgage portfolio is comprised of adjustable rate mortgage loans that require payment adjustments during the term of the loan. This adjustment in payment may
result in increased payment defaults by borrowers who are unprepared or unable to meet higher payment requirements, resulting in higher losses to us. In addition, the rate of delinquencies may be
higher after natural disasters or adverse weather conditions. For example, during 2005, Hurricane Katrina impacted several states where our mortgage asset portfolio had high concentrations of
customers. As a result, our delinquency rate in those states increased substantially and we incurred a special $1.3 million provision for estimated losses on instalment notes that was
anticipated as a result.

After
a default by a borrower, we evaluate the cost effectiveness of repossessing the property. Such default may cause us to charge our allowances for credit losses on our loan
portfolio. Any material decline in real estate values increases the loan-to-value ratios of our loans and the loans backing our mortgage related securities. This weakens
collateral values and the amount, if any, obtained upon repossessions. If we must take losses on a mortgage or loan backing our mortgage related securities or loans that exceed our allowances, our
financial condition, net income and cash flows could suffer.

The credit facilities we utilize for short-term borrowings to fund our mortgage origination business will expire in 2008.

We depend on short-term borrowings to warehouse instalment notes and mortgages that are originated by our homebuilding subsidiaries and Walter
Mortgage Company and serviced by Walter Mortgage Company. Therefore, we rely on our ability to renew or replace our maturing short-term borrowings on a continuous basis. We currently have
two committed warehouse facilities providing up to an aggregate of $350.0 million of liquidity from three lenders and one surety provider, a $150.0 million facility that matures in July
2008 and a $200.0 million facility that matures in October 2008. If our lenders do not allow us to renew our borrowings or we cannot replace maturing borrowings at less favorable terms, we
might have to seek other, less favorable and more costly sources of borrowing, sell our mortgage-related assets under adverse market conditions, or we might not be able to continue to originate
mortgage assets, which would significantly harm our net income and may result in material losses.

We
pay interest on our borrowings under our variable funding warehouse loan facilities at a floating rate based on short-term rates, and, therefore, increases in
short-term interest rates will increase the cost of our facilities. In addition, if the regulatory capital requirements imposed on our lenders change, it may significantly increase the
cost of the variable funding loan facilities. Increases in the cost of our facilities would reduce our profitability and may prevent us from continuing to originate instalment notes and mortgages.

The
amount of financing we receive under our variable funding loan facilities is directly related to the lenders' valuation of the mortgage assets that secure the outstanding borrowings.
Our lenders have the ability to re-evaluate the market value of the mortgage assets that secure our outstanding borrowings under certain circumstances. In the event the lenders determine
that the value of the mortgage assets has decreased, they have the right to initiate a margin call. A margin call would require us to transfer additional instalment notes and mortgage loans to the
lenders (without any advance of funds from the lenders for such transfer of mortgages) or to repay a portion of the

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outstanding
borrowings. Any such margin call could cause our mortgage origination business, net income and liquidity to decline significantly.

Our strategy of securitizing our mortgage assets makes us dependent on the capital markets for liquidity and cash flow and exposes us to substantial
risks.

We have historically relied on our securitizations to generate cash for repayment of borrowings under our variable funding loan facilities, origination of new
mortgage assets and general working capital
purposes. Our ability to complete securitizations of our mortgage assets at favorable prices, or at all, depends on a number of factors, including:



In
2007, mortgage securitization markets generally, and subprime securitization markets especially, have experienced a significant disruption that continues today. A large number of
mortgage-backed securities have been down-graded or placed on credit watch, resulting in investors in asset-backed securities and other structured vehicles experiencing problems including
declines in value and losses from their investments in subprime mortgage securities. As a result of these significant industry events, we may not succeed in securitizing mortgage assets at favorable
terms or at all that we currently have outstanding under, and pledged to, our warehouse credit facilities or that we originate in the future. Our inability to continue to successfully securitize our
mortgage assets on favorable terms or at all would significantly impair our mortgage origination business.

Our mortgage-backed and asset-backed securitizations require over-collateralization and credit enhancement, which may decrease our cash flow
and net income.

Our securitizations typically have over-collateralization requirements that may decrease the value of our ownership interests in our securitizations
and have a negative impact on our cash flow. Generally, if the mortgage assets of a securitization trust perform poorly, the over-collateralization feature of the securitization directs
excess cash flow from the
securitized pool of mortgage assets to the senior debt securities of the trust. During any period in which this happens we may not receive any cash distributions from such mortgage trust. In addition,
the pool of mortgage assets of a securitization must meet certain performance tests based on delinquency levels, losses and other criteria in order for us to receive excess cash flow. If these
performance tests, or significant terms regarding the calculation of such tests, are not satisfied, we would not be permitted to receive excess cash flow from the securitizations. Material variations
in the rate or timing of our receipt of cash distributions from these mortgage assets may adversely affect our mortgage origination business and net income and may affect our overall financial
condition.

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Furthermore, our completed securitizations have used various forms of credit enhancement to improve the prices at which we issued our mortgage-backed and asset-backed notes. We currently
expect that the credit enhancement for the senior tranches we issue in the future will be primarily in the form of subordination of certain tranches, financial guaranty insurance policies for the
assets or both. The market for any subordinate securities we issue could remain illiquid or the subordinate securities could trade at steep discounts, thereby reducing the proceeds we receive from a
securitization of mortgage assets. If we use financial guaranty insurance policies and the cost of these insurance policies increases, our net interest margin will be reduced. Such credit enhancement
features may not be available at costs that would allow us to achieve profitable levels of net interest margin from the securitizations of our mortgage assets.

We are subject to a number of federal, local and state laws and regulations that may prohibit or restrict our homebuilding, financing or servicing in
some regions or areas.

We are subject to a number of federal, state and local laws that affect homebuilding, sales, mortgage financing and servicing. There have been an increasing
number of "anti-predatory" lending and consumer protection laws that impose restrictions on mortgage loans, including the amount of fees, interest or annual percentage rates that may be
charged. As a result of current market conditions, the U.S. Congress has announced that it will be considering new legislation in the mortgage sector. To the extent that the enactment of new laws
imposes broad restrictions on our homebuilding, financing and servicing, we may be subject to the imposition of requirements that offset sales, costs, profitability or may be prohibited or restricted
from operating in certain regions or areas which could negatively impact our future revenue and earnings.

We may be subject to product liability or warranty claims that could require us to make significant payments.

We would be exposed to product liability claims in the event that the manufacture or use of our products results, or is alleged to result, in bodily injury and/or
property damage. There is a risk that we will experience product liability or warranty losses in the future or that we will incur significant costs to defend such claims. Such losses and costs may be
material. While we currently have product liability insurance, our product liability insurance coverage may not be adequate for any liabilities that may ultimately be incurred or the coverage may not
continue to be available on terms acceptable to us. A successful claim brought against us in excess of our available insurance coverage could require us to
make significant payments or cause a requirement to participate in a product recall that may harm our reputation or profitability.

We
warrant our homebuilding products to be free of certain defects. As a homebuilder, we are subject in the ordinary course of our business to product liability and home warranty claims.
Because of the long useful life of our products, it is possible that latent defects might not appear for several years. Any losses that result or are alleged to result from defects in our products,
could subject us to claims for damages, including consequential damages. In addition, we could elect to replace our defective products and/or compensate our customers for damages caused by our
defective products even in the absence of a formal claim for damages. The insurance that we maintain may not be available on terms acceptable to us in the future and such coverage may not be adequate
for liabilities actually incurred. Any claims or expenses relating to defective products that result in liability exceeding our insurance coverage could raise costs and expenses or require us to
accrue expenses or record accounting charges and reduce our net income. Further, claims of defects could result in adverse publicity against us, which could lower our sales and harm our business.

Our homebuilding operations expose us to a variety of risks including liability for action of third parties.

We are exposed to a variety of risks associated with construction activities, including shortages of raw materials or labor, cost overruns, unforeseen
environmental or engineering problems and natural

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disasters,
any of which could delay construction and result in a substantial increase in our expenses. In addition, we contract with unaffiliated subcontractors to construct our homes. Although the
timing and quality of our construction depends on the availability, skill and cost of these subcontractors, we are responsible for the performance of the entire contract, including work assigned to
these subcontractors. Any construction delays or cost increases could harm our operating results, the impact of which may be further affected by our inability to raise sales prices.

Economic conditions in Texas, North Carolina, Mississippi, Alabama and Florida have a material impact on our profitability because we conduct a
significant portion of our business in these markets.

We currently conduct a significant portion of our financing and homebuilding businesses in the Texas, North Carolina, Mississippi, Alabama and Florida markets. In
the past, home prices and sales activities have declined from time to time and rates of loss and delinquency on mortgage assets have increased from time to time, driven primarily by weaker economic
conditions in these markets. Furthermore, precarious economic and budget situations at the state government level may depress the market for our homes or hinder the ability of our customers to repay
their obligations in areas in which we conduct the majority of our financing or homebuilding operations. Our concentration of homebuilding or mortgage assets in such markets may have a negative impact
on our operating results.

General Risks

Our expenditures for postretirement benefit and pension obligations are significant and could be materially higher than we have predicted if our
underlying assumptions prove to be incorrect.

We provide a range of benefits to our employees and retired employees, including pensions and postretirement healthcare. We record annual amounts relating to
these plans based on calculations specified by generally accepted accounting principles, which include various actuarial assumptions. As of December 31, 2007, we estimate that our pension
plans' aggregate accumulated benefit obligation had a present value of approximately $173.5 million, and our fair value of plan assets was approximately $163.8 million. As of
December 31, 2007, we estimate that our postretirement health care and life insurance plans' aggregate accumulated benefit obligation would have had a present value of approximately
$335.0 million, and such benefits are not required to be funded. In respect of the funding obligations for our plans, we must make minimum cash contributions on a quarterly basis. Our estimated
minimum funding obligation relating to these plans in 2008 is $36.0 million. We have estimated these obligations based on assumptions described under the heading "Critical Accounting Policies
and EstimatesEmployee Benefits" in "Management's Discussion and Analysis of Results of Operations and Financial Condition" and in the notes to our consolidated financial statements
incorporated herein by reference. Assumed health care cost trend rates, discount rates, expected return on plan assets and salary increases have a significant effect on the amounts reported for the
pension and health care plans. If our assumptions do not materialize as expected, cash expenditures and costs that we incur could be materially higher. Moreover, regulatory changes could increase our
obligations to provide these or additional benefits.

In
addition, certain of our subsidiaries participate in multiemployer pension and healthcare plan trusts established for union employees. Contributions to these funds could increase as a
result of future collective bargaining with the UMWA, a shrinking contribution base as a result of the insolvency of other coal companies who currently contribute to these funds, lower than expected
returns on pension fund assets, or other funding deficiencies. We have no current intention to withdraw from any multiemployer pension plan, but if we were to do so, under the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), we would be liable for a proportionate share of the plan's unfunded vested benefit liabilities upon our withdrawal. Through July 1, 2008, our
withdrawal liability for the multiemployer pension plans amounts to $182.5 million.

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We self-insure workers' compensation and certain medical and disability benefits, and greater than expected claims could reduce our
profitability.

We are self-insured for workers' compensation benefits for work-related injuries. Workers' compensation liabilities, including those
related to claims incurred but not reported, are recorded principally using annual valuations based on discounted future expected payments using historical data of the division or combined insurance
industry data when historical data is limited. In addition, JWR is responsible for medical and disability benefits for black lung disease under the Federal Coal Mine Health and Safety Act of 1969, as
amended, and is self-insured against black lung related claims. We perform an annual evaluation of the overall black lung liabilities at the balance sheet date, using assumptions regarding
rates of successful claims, discount factors, benefit increases and mortality rates, among others.

Based
on the actuarially determined present value of workers' compensation liabilities using a discount factor of 4.22% and 4.64% for 2007 and 2006, respectively, we have recorded
liabilities of $33.7 million and $33.5 million as of December 31, 2007 and 2006, respectively. A one-percentage-point increase in the discount rate on the discounted
claims liability at December 31, 2007 would decrease our liability by $0.3 million, while a one-percentage-point decrease in the discount rate would increase our liability by
$0.3 million.

If
the number or severity of claims for which we are self insured increases, or we are required to accrue or pay additional amounts because the claims prove to be more severe than our
original assessment, our operating results could be reduced.

Natural disasters and adverse weather conditions could disrupt our businesses and adversely affect our results of operations.

The climates of many of the states in which we operate, including Mississippi, Alabama, Florida and Texas, where we have some of our larger operations, present
increased risks of natural disaster and adverse weather. Natural disasters or adverse weather in the areas in which we build, finance or insure homes or have mining or manufacturing operations, or in
nearby areas, have in the past, and may in the future, delay new home deliveries, increase costs by damaging inventories of homes and construction materials, reduce the availability of raw materials
and skilled labor, lead to significant insurance claims, cause increases in delinquencies and defaults in our mortgage portfolio, limit access to our mines and facilities, destroy or damage our
inventory, reduce or eliminate certain modes of transporting our coal, increase volatility in the cost of raw materials and weaken the demand for new homes in affected areas, which could adversely
affect our earnings. In addition, the rate of delinquencies may be higher after natural disasters or adverse weather conditions. For example, during the third quarter of 2005, Hurricane Katrina
impacted several states where our mortgage asset portfolio had high concentrations of customers. As a result, our delinquency rate in those states increased substantially and we incurred a special
$1.3 million provision for estimated losses on instalment notes
that was anticipated as a result of Hurricane Katrina. The occurrence of large loss events due to natural disasters or adverse weather could reduce the insurance coverage available to us, increase the
cost of our insurance premiums and weaken the financial condition of our insurers, thereby limiting our ability to mitigate any future losses we may incur from such events. Moreover, severe flooding,
wind and water damage, forced evacuations, contamination, gas leaks, fire and environmental and other damage caused by natural disasters or adverse weather could lead to a general economic downturn,
including increased prices for oil, gas and energy, loss of jobs, regional disruptions in travel, transportation and tourism and a decline in real-estate related investments, especially in
the areas most directly damaged by the disaster or storm.

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We may be unsuccessful in identifying or integrating suitable acquisitions, which could impair our growth.

Our growth strategy is built upon organic growth and on taking advantage of opportunities to acquire complementary businesses. This strategy depends on the
availability of acquisition candidates with businesses that can be successfully integrated into our existing business and that will provide us with complementary capabilities, products or services.
However, we may be unable to identify targets that will be suitable for acquisition. In addition, if we identify a suitable acquisition candidate, our ability to successfully implement the acquisition
will depend on a variety of factors, including our ability to finance the acquisition. Our ability to finance our acquisitions is subject to a number of factors, including the availability of adequate
cash from operations or of acceptable financing terms and the terms of our debt instruments. In addition, there are many challenges to integrating acquired companies and businesses in our company,
including eliminating redundant operations, facilities and systems, coordinating management and personnel, retaining key employees, managing different corporate cultures and achieving cost reductions
and cross-selling opportunities. We may not be able to meet these challenges in the future.

We may be required to satisfy certain indemnification obligations to Mueller Water or may not be able to collect on indemnification rights from Mueller
Water.

In connection with the spin-off of Mueller Water on December 14, 2006, we entered into certain agreements with Mueller Water, including an
income tax allocation agreement and a joint litigation agreement. Under the terms of those agreements, we and Mueller Water agreed to indemnify each other with respect to the indebtedness, liabilities
and obligations that will be retained by our respective companies, including certain tax and litigation liabilities. These indemnification obligations could be significant. For example, to the extent
that we or Mueller Water take any action that would be inconsistent with the treatment of the spin-off of Mueller Water as a tax-free transaction under Section 355 of
the Internal Revenue Code, then any tax resulting from such actions is attributable to the acting company. The ability to satisfy these indemnities
if called upon to do so will depend upon the future financial strength of each of our companies. We cannot determine whether we will have to indemnify Mueller Water for any substantial obligations
after the distribution. If Mueller Water has to indemnify us for any substantial obligations, Mueller Water may not have the ability to satisfy those obligations. If Mueller Water is unable to satisfy
its obligations under its indemnity to us, we may have to satisfy those obligations.

Restrictive covenants in our debt instruments may limit our ability to engage in certain transactions and may diminish our ability to make payments on
our indebtedness.

Our debt instruments contain various covenants that limit our ability to engage in certain transactions. Our 2005 Credit Agreement requires the maintenance of
specified financial ratios and the satisfaction of other financial condition tests. In addition, our debt instruments require us to provide regular financial information to our lenders. Such
requirements generally may be satisfied by our timely filing with the SEC of annual and quarterly reports under the Exchange Act. Our ability to satisfy those financial ratios, tests or covenants can
be affected by events beyond our control, and there is a risk that we will not meet those tests. A breach of any of these covenants could result in a default under our debt instruments. If an event of
default were not remedied after the delivery of notice of default and lapse of any relevant grace period, the holders of our debt would be able to declare it immediately due and payable. The failure
to maintain an aggregate of $350.0 million of liquidity in warehouse facilities for our Financing and Homebuilding business would breach a covenant under our 2005 Credit Facility. In such an
event, we would seek to amend or obtain a waiver of this requirement from our lenders. If we are unable to obtain an amendment or waiver and we are unable to obtain alternate warehouse lines of
credit, we would have an event of default under our 2005 Credit Agreement and the respective lenders could also terminate all commitments to extend further credit. If we were unable to repay those

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amounts,
such lenders could proceed against the collateral granted to them to secure the indebtedness under our senior credit facilities.

We may have substantial additional federal tax liability for accounting adjustments related to our method of recognizing revenue on the sale of homes
and interest on related instalment note receivables, as well as to federal income taxes allegedly owed.

The Internal Revenue Service has issued a Notice of Proposed Deficiency assessing additional tax of $82.2 million for the fiscal years ended May 31,
2000, December 31, 2000 and December 31, 2001. The proposed adjustments relate primarily to our method of recognizing revenue on the sale of homes and related interest on the instalment
note receivables. In addition, a controversy exists with regard to federal income taxes allegedly owed by our consolidated group of companies for fiscal years 1980 through 1994. It is estimated that
the amount of tax presently claimed by the Internal Revenue Service is approximately $34.0 million for issues currently in dispute in bankruptcy court. This amount if determined to be owed
would result in substantial interest and penalties. While we believe that our tax
filing positions have substantial merit and intend to defend any tax claims asserted, we cannot offer any assurance that the Internal Revenue Service or a federal court will uphold our tax filing
positions. Moreover, although we believe that we have sufficient accruals to address any such tax claims, including related interest and penalties, an adverse ruling, judgment or court order could
impose significant financial liabilities in excess of our accruals, which could have an adverse effect on our financial condition and results of operations and could require a significant cash
payment.

Item 1B.    Unresolved Staff Comments:

None

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Item 2.    Description of Property

The administrative headquarters and manufacturing facilities of the Company and its subsidiaries as of December 31, 2007 are summarized as follows:

|                     |                   |  |                                                 |  |        | Square Footage
|-------------------- | ----------------- |  | ----------------------------------------------- |  | ------ | --------------
|
|
|Natural Resources    |                   |  |                                                 |  |        |               
|Jim Walter Resources |                   |  |                                                 |  |        |               
|                     | Brookwood, AL     |  | Administrative headquarters                     |  |        |               
|                     | Brookwood, AL     |  | Central shop, supply center and training center |  |        |               
|                     | Brookwood, AL     |  | Real estate                                     |  | 7,000  |               
|                     | Brookwood, AL     |  | Coal mines                                      |  | 28,146 |               
|Kodiak               |                   |  |                                                 |  |        |               
|                     | Shelby County, AL |  | Mine support facilities                         |  |        |               
|                     | Shelby County, AL |  | Administrative headquarters                     |  |        |               
|                     | Shelby County, AL |  | Supply shop                                     |  |        |               
|Tuscaloosa Resources |                   |  |                                                 |  |        |               
|                     | Jefferson, AL     |  | Administrative headquarters                     |  |        |               
|                     | Tuscaloosa, AL    |  | Coal mines                                      |  | 670    |               
|                     | Pickens, AL       |  | Coal mines                                      |  | 80     |               
|Sloss                |                   |  |                                                 |  |        |               
|                     | Birmingham, AL    |  | Administrative headquarters                     |  |        |               
|                     | Birmingham, AL    |  | Furnace & foundry coke battery                  |  | 511    |               
|                     | Birmingham, AL    |  | Slag fiber                                      |  | 5      |               
|                     | Birmingham, AL    |  | Closed facility                                 |  | 3      |               
|                     | Birmingham, AL    |  | Closed facility                                 |  | 2      |               
|                     | Alexandria, IN    |  | Closed facility                                 |  | 33     |               
|Homebuilding         |                   |  |                                                 |  |        |               
|                     | Tampa, FL         |  | Administrative headquarters                     |  |        |               
|Financing            |                   |  |                                                 |  |        |               
|                     | Tampa, FL         |  | Administrative headquarters                     |  |        |               
|Other                |                   |  |                                                 |  |        |               
|                     | Tampa, FL         |  | Corporate headquarters                          |  |        |               

21

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Recoverable coal reserves assigned to currently operating mines were estimated to be approximately 124.5 million tons as of December 31, 2007.

A
summary of mineral reserves, as calculated by Natural Resources' Mine Planning and Engineering department, is as follows:

ESTIMATED RECOVERABLE (1) COAL RESERVES AS OF DECEMBER 31, 2007
(In Thousands of Tons)

|               |  | Reserves (2) |  | Classifications (3) |  | Type (4) |  | JWR's Interest |  | Quality |  | Production (6)
|-------------- |  | ------------ |  | ------------------- |  | -------- |  | -------------- |  | ------- |  | --------------
|
|No. 4 Mine     |  | 54,856       |  | 54,856              |  |         |  | 51,775         |  | 3,081   |  | S/M           
|No. 5 Mine (8) |  |             |  |                    |  |         |  |               |  |        |  |              
|No. 7 Mine     |  | 69,622       |  | 69,622              |  |         |  | 58,036         |  | 11,586  |  | S/M           
|               |  |              |  |                     |  |          |  |                |  |         |  |               
|TOTAL (7)      |  | 124,478      |  | 124,478             |  |         |  | 109,811        |  | 14,667  |  |               
|               |  |              |  |                     |  |          |  |                |  |         |  |               

---

Item 3.   Legal Proceedings

See the section entitled "Environmental" in Description of Business and Notes 2, 11 and 16 of "Notes to Consolidated Financial Statements" included
herein.

Item 4.    Submission of Matters to a Vote of Security Holders:

None

22

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PART II

Item 5.    Market for the Registrant's Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company's common stock (the "Common Stock") has been listed on the New York Stock Exchange under the trading symbol "WLT" since December 18, 1997. The
table below sets forth, for the fiscal periods indicated, the range of high and low closing sales prices of the Common Stock.

Year ended
December 31, 2007High

Low1st Fiscal quarter

$
28.75

$
23.902nd Fiscal quarter


32.52


25.573rd Fiscal quarter


32.23


20.534th Fiscal quarter


38.79


26.80


Year ended
December 31, 2006(1)High

Low1st Fiscal quarter

$
35.21

$
25.662nd Fiscal quarter


36.40


23.373rd Fiscal quarter


28.78


21.974th Fiscal quarter


28.00


20.66




During the year ended December 31, 2007, the Company declared and paid to shareholders of record on March 16, June 8,
September 14 and December 7 a dividend of $0.05 per share as of each of these dates. During the year ended December 31, 2006, the Company declared and paid to shareholders of
record on March 17, June 9, September 15 and November 20 a dividend of $0.04 per share as of each of these dates. Covenants contained in certain of the debt instruments
referred to in Note 12 of "Notes to
Consolidated Financial Statements" may restrict the amount the Company can pay in cash dividends. Future dividends will be declared at the discretion of the board of directors and will depend on the
Company's future earnings, financial condition and other factors affecting dividend policy. As of February 15, 2008, there were 120 shareholders of record of the Common Stock.

The
following table sets forth certain information relating to the Company's equity compensation plans as of December 31, 2007:

|                                                        |                                     | Number of
Securities to be
Issued upon
Exercise of
Outstanding
Options, Warrants
and Rights |           | Weighted
Average Exercise
Price of
Outstanding
Options
Warrants and
Rights |   | Number of
Securities
Remaining
Available for
Future Issuance
|------------------------------------------------------- | ----------------------------------- | ------------------------------------------------------------------------------------------- | --------- | -------------------------------------------------------------------------- | - | ------------------------------------------------------------
|Equity compensation plans approved by Security holders: |                                     |                                                                                             |           |                                                                            |   |                                                             
|                                                        | 2002 Long-term Incentive Award Plan |                                                                                             | 1,656,613 |                                                                            | $ | 21.94                                                       
|                                                        | 1995 Long-term Incentive Stock Plan |                                                                                             | 384,692   |                                                                            |   | 8.05                                                        
|                                                        | 1996 Employee Stock Purchase Plan   |                                                                                             |          |                                                                            |   |                                                            

23

---



Recent Sales of Unregistered Securities

The Company issued and sold in a private placement, $175.0 million principal amount of 3.75% Convertible Senior Subordinated Notes, due 2024, to qualified
institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended on April 20, 2004. Proceeds to the Company were approximately $168.9 million, net of
approximately $6.1 million of underwriting fees and expenses. During 2006, holders of $174.2 million of the Company's Convertible Senior Subordinated Notes surrendered convertible notes
in exchange for 9.761 million shares of the Company's common stock and $19.4 million of conversion inducement fees. In January 2008, the holders of the remaining notes agreed to convert
the $0.8 million principal amount in exchange for 84,013 shares of the Company's common stock and $0.1 million of conversion inducement fees.

Purchase of Equity Securities by the Company and Affiliated Purchasers

On August 13, 2007, the Company's Board of Directors authorized a $25.0 million Common Stock Open Market share buyback program to replace the
July 21, 2003 authorized program. During 2007, the Company acquired 232,753 shares and, at December 31, 2007, $19.4 million remains available under this authorization.

Item 6.    Selected Financial Data

The following data, insofar as it relates to each of the years ended December 31, 2007, 2006, 2005, 2004 and 2003 has been derived from annual consolidated
financial statements, including the consolidated balance sheets and the related consolidated statements of operations, changes in stockholders' equity and comprehensive income (loss) and statements of
cash flows and the notes thereto as they relate to the Company's continuing operations as of December 31, 2007. The information presented below is for continuing operations and should be read
in conjunction with the Company's consolidated financial statements and the notes thereto including Note 2 related to significant accounting policies, Note 3 related to discontinued
operations and acquisitions, and the other information contained elsewhere in this report.

24

---



|                                                                                            |                                       | Years ended December 31,
|------------------------------------------------------------------------------------------- | ------------------------------------- | ------------------------
|
|
|Net sales and revenues                                                                      |                                       | $                       
|Income from continuing operations                                                           |                                       | $                       
|Basic income per share from continuing operations                                           |                                       | $                       
|Number of shares used in calculation of basic income per share from continuing operations   |                                       |                         
|Diluted income per share from continuing operations                                         |                                       | $                       
|Number of shares used in calculation of diluted income per share from continuing operations |                                       |                         
|Capital expenditures                                                                        |                                       | $                       
|Net property, plant and equipment                                                           |                                       | $                       
|Total assets(1)                                                                             |                                       | $                       
|Debt:                                                                                       |                                       |                         
|                                                                                            | Mortgage-backed/asset-backed notes    |                         
|                                                                                            | Term debt                             |                         
|                                                                                            | Convertible senior subordinated notes |                         
|                                                                                            | Other debt                            |                         
|Quarterly cash dividend per common share                                                    |                                       | $                       

---

25

---





Item 7.    Management's Discussion and Analysis of Results of Operations and Financial Condition and

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

CRITICAL ACCOUNTING ESTIMATES

Management's discussion and analysis is based on, and should be read in conjunction with, the consolidated financial statements and notes thereto, particularly
Note 18 of "Notes to Consolidated Financial Statements" which presents net sales and revenues and operating income by reportable segment. The preparation of financial statements in accordance
with accounting principles generally accepted in the United States of America ("U.S. GAAP") requires management to make estimates and assumptions that affect the amounts reported in these
financial statements or disclosed in the related notes thereto. Management evaluates these estimates and assumptions on an ongoing basis, utilizing historical experience, consultation with experts and
other methods considered reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from management's estimates.

Management
believes the following discussion addresses the Company's most critical accounting estimates, which are those that are most important to the portrayal of the Company's
financial condition and results and require management's most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are
inherently uncertain. These estimates are based upon management's historical experience and on various other assumptions
that the Company believes reasonable under the circumstances. Changes in estimates used in these and other items could have a material impact on our financial statements.

Revenue recognition

Revenue transactions involving the sale of homes, products and commodities are recorded when title to the goods is transferred. Interest income on instalment
notes is recognized using the interest method. Instalment notes receivable are initially recorded at the discounted value of the future instalment note payments using an imputed interest rate which
represents the estimated prevailing market rate of interest for credit of similar terms issued to customers with credit ratings similar to Homebuilding's customers. The Company estimates this rate by
reference to rates charged by competitors and other lenders to customers of similar credit quality. These estimates affect revenue recognition by determining the allocation of income between the
amount recognized by the Homebuilding segment from the construction of the home and the amount recognized by the Financing segment over the life of the instalment note as interest income. Variations
in the estimated market rate of interest used to initially record the instalment notes receivable could affect the amount and timing of income recognition in each of these segments.

Allowances for Losses

Allowances for losses on trade and other accounts receivable are based, in large part, upon judgments and estimates of expected losses and specific identification
of problem trade accounts and other receivables. Significantly weaker than anticipated industry or economic conditions could impact customers' ability to pay or could impact the value of underlying
collateral such that actual losses are greater than the amounts provided for in these allowances.

Management's
periodic evaluation of the adequacy of the allowance for losses on instalment notes is based on the Company's past loss experience, known and inherent risks in the
portfolio, delinquencies, the estimated value of the underlying real estate collateral, and current economic and market conditions within the applicable geographic areas surrounding the underlying
real estate. The allowance for losses on instalment notes and mortgage loans is increased by provisions for losses charged to income and is reduced by charge-offs net of recoveries.

26

---



The
allowance for losses on instalment notes receivable was $14.0 million at December 31, 2007 compared to $13.0 million at December 31, 2006. See
Note 6 of "Notes to the Consolidated Financial Statements." The following table shows information about the allowance for losses for the periods presented.

|($ in thousands)  |  | Allowance
for Losses |        | As a % of
Net
Instalment
Notes
Receivable |      | Net
Losses and
Charge Offs
Deducted from
the Allowance |   | As a % of
Net
Instalment
Notes
Receivable | 
|----------------- |  | -------------------- | ------ | ----------------------------------------- | ---- | ------------------------------------------------------ | - | ----------------------------------------- | 
|December 31, 2007 |  | $                    | 13,992 |                                           | 0.76 | %                                                      | $ | 12,908                                    | 
|December 31, 2006 |  | $                    | 13,011 |                                           | 0.73 | %                                                      | $ | 8,540                                     | 
|December 31, 2005 |  | $                    | 12,489 |                                           | 0.74 | %                                                      | $ | 9,435                                     | 

The
following table presents information about delinquencies in the instalment notes receivable portfolio.

|                                                             |                 | December 31, |       
|------------------------------------------------------------ | --------------- | ------------ | ------
|
|Total Number of Accounts Outstanding                         |                 |              | 39,053
|Delinquencies as a Percent of Number of Accounts Outstanding |                 |              |       
|                                                             | 31-60 Days      |              |       
|                                                             | 61-90 Days      |              |       
|                                                             | 91-Days or more |              |       
|                                                             |                 |              |       
|                                                             |                 |              | 3.69  
|Instalment Notes Receivable Outstanding(1)($ in millions)    |                 | $            | 1,851 
|Delinquencies as a Percent of Amounts Outstanding(1)         |                 |              |       
|                                                             | 31-60 Days      |              |       
|                                                             | 61-90 Days      |              |       
|                                                             | 91-Days or more |              |       
|                                                             |                 |              |       
|                                                             |                 |              | 4.59  

---

The
calculation of delinquencies excludes from delinquent amounts those accounts that are in bankruptcy proceedings that are paying their mortgage payments in contractual compliance with
bankruptcy court approved mortgage payment obligations.

Inventory valuation

The valuation of coal inventories are subject to estimates due to possible gains or losses resulting from inventory movements from the mine site to storage
facilities at the Port of Mobile, inherent inaccuracies in belt scales and aerial surveys used to measure quantities and due to fluctuations in moisture content. Adjustments to coal tonnages on hand
are made for an estimate of coal shortages due to these inherent losses, primarily based on historical findings, the results of aerial surveys and periodic coal pile clean-ups.
Additionally, the Company evaluates its non-coal inventories for indications of excess and obsolete exposure based upon anticipated usage, inventory turnover, inventory levels and ultimate
product sales value. If necessary, an adjustment for losses related to inventory values is recognized. This evaluation of inventory values is based on management's estimation of market conditions
relating to both pricing and anticipated sales volumes for the Company's products.

27

---



Employee Benefits

The Company provides a range of benefits to its employees and retired employees, including pensions and postretirement healthcare. The Company records annual
amounts relating to these plans based on calculations specified by U.S. GAAP, which include various actuarial assumptions used in developing the required estimates including the following key
factors:



|                                                                    |                                | Pension Benefits |      | Other Benefits
|------------------------------------------------------------------- | ------------------------------ | ---------------- | ---- | --------------
|
|Weighted average assumptions used to determine benefit obligations: |                                |                  |      |               
|                                                                    | Discount rate                  |                  | 6.50 | %             
|                                                                    | Rate of compensation increase  |                  | 3.60 | %             
|Weighted average assumptions used to determine net periodic cost:   |                                |                  |      |               
|                                                                    | Discount rate                  |                  | 5.90 | %             
|                                                                    | Expected return on plan assets |                  | 8.90 | %             
|                                                                    | Rate of compensation increase  |                  | 3.50 | %             

|
|

|                                      |                                                                                   |  |   |  |   | December 31, |     
|------------------------------------- | --------------------------------------------------------------------------------- |  | - |  | - | ------------ | ----
|
|
|Assumed health care cost trend rates: |                                                                                   |  |   |  |   |              |     
|                                      | Health care cost trend rate assumed for next year                                 |  |  |  |  |              | 8.60
|                                      | Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) |  |  |  |  |              | 5.00
|                                      | Year that the rate reaches the ultimate trend rate                                |  |  |  |  |              | 2013

The discount rate used to determine pension and other post-retirement expense was increased to 6.50% for 2007 from 5.90% used in 2006.
The rate of return on plan assets used to determine pension expense is 8.90% for both 2007 and 2006. The discount rate is based on a yield-curve approach which discounts each projected benefit
obligation based cash flow of the liability stream at an interest rate specifically applicable to the timing of each respective liability stream cash flow. The model sums the present values of all of
the cash flows and then calculates the equivalent weighted-average discount rate by imputing the single interest rate that equates the total present value with the stream of future cash flows. The
Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when appropriate. As required by U.S. GAAP, the effects
of the modifications are amortized over future periods.

Assumed
healthcare cost trend rates, discount rates, expected return on plan assets and salary increases have a significant effect on the amounts reported for the pension and healthcare
plans. A

28

---



one-percentage-point
change in the rate for each of these assumptions would have the following effects as of and for the year ended December 31, 2007 (in thousands):

|                                |                                                               | Increase (Decrease) |  
|------------------------------- | ------------------------------------------------------------- | ------------------- | -
|
|Healthcare cost trend:          |                                                               |                     |  
|                                | Effect on total of service and interest cost components       |                     | $
|                                | Effect on postretirement benefit obligation                   |                     |  
|Discount rate:                  |                                                               |                     |  
|                                | Effect on postretirement service and interest cost components |                     |  
|                                | Effect on postretirement benefit obligation                   |                     |  
|                                | Effect on current year postretirement expense                 |                     |  
|                                | Effect on pension service and interest cost components        |                     |  
|                                | Effect on pension benefit obligation                          |                     |  
|                                | Effect on current year pension expense                        |                     |  
|Expected return on plan assets: |                                                               |                     |  
|                                | Effect on current year pension expense                        |                     |  
|Rate of compensation increase:  |                                                               |                     |  
|                                | Effect on pension service and interest cost components        |                     |  
|                                | Effect on pension benefit obligation                          |                     |  
|                                | Effect on current year pension expense                        |                     |  

The
Company also has significant liabilities for uninsured or partially insured employee-related liabilities, including workers' compensation liabilities, miners' Black Lung benefit
liabilities, and liabilities for various life and health benefits. The recorded amounts of these liabilities are based on estimates of loss from individual claims and on estimates determined on an
actuarial basis from historical experience using assumptions regarding rates of successful claims, discount factors, benefit increases and mortality rates.

Workers'
compensation and Black Lung benefit liabilities are also affected by discount rates used. Changes in the frequency or severity of losses from historical experience, changes in
discount rates or actual losses on individual claims that differ materially from estimated amounts could affect the recorded amount of these liabilities. At December 31, 2007, a
one-percentage-point
increase in the discount rate on the discounted Black Lung liability would decrease the liability by $1.1 million, while a one-percentage-point decrease in the discount rate would
increase the liability by $1.3 million.

For
the workers' compensation liability, the Company applies a discount rate at a risk-free interest rate, generally a U.S. Treasury bill rate, for each policy year. The rate
used is one with a duration that corresponds to the weighted average expected payout period for each policy year. Once a discount rate is applied to a policy year, it remains the discount rate for the
year until all claims are paid. The use of this method decreases the volatility of the liability as impacted by changes in the discount rate. At December 31, 2007, a
one-percentage-point increase in the discount rate on the discounted workers' compensation liability would decrease the liability by $0.3 million, while a
one-percentage-point decrease in the discount rate would increase the liability by $0.3 million.

Litigation, Investigations and Claims

The Company is involved in litigation, investigations and claims arising out of the normal conduct of its business, including those relating to commercial
transactions, as well as environmental, health and safety matters. The Company estimates and accrues its liabilities resulting from such matters based on a variety of factors, including outstanding
legal claims and proposed settlements; assessments by internal counsel of pending or threatened litigation; and assessments of potential environmental liabilities and

29

---



remediation
costs. The Company believes it has adequately accrued for these potential liabilities; however, facts and circumstances may change that could cause the actual liabilities to exceed the
estimates, or that may require adjustments to the recorded liability balances in the future.

As
discussed in Note 11 of "Notes to Consolidated Financial Statements," the Company is in dispute with the Internal Revenue Service (the "IRS") on a number of Federal income tax
issues. The Company believes that its tax filing positions have substantial merit and it intends to vigorously defend these positions. The Company has established accruals that it feels are sufficient
to address claims, including related interest and penalties, where its defense may be unsuccessful or where a settlement of issues may be warranted. The amount of the accrual is based on an assessment
by management of both the probability and extent of loss for each of the disputed issues involved. Since the issues involved are highly complex, are subject to the uncertainties of extensive
litigation and/or administrative processes and may require an extended period of time to reach ultimate resolution, it is possible that management's estimate of this liability could change.

Accruals
for property-liability claims and claims expense are the estimated amounts necessary to settle both reported and unreported claims of insured property-liability losses, based
upon the facts in each
case and the Company's experience with similar cases. The establishment of appropriate accruals, including accruals for catastrophes such as hurricanes, is an inherently uncertain process. Accrual
estimates are regularly reviewed and updated using the most current information available. Accruals for catastrophic uninsured losses at plant or mine facilities would be made on an ad hoc basis based
on relevant facts and circumstances.

Environmental
laws and regulations continue to evolve and because conditions giving rise to obligations and liabilities under environmental laws are in some circumstances not readily
identifiable, it is difficult to forecast the amount of such future environmental expenditures or the effects of changing standards on future business operations or results.

Accounting for the Impairment of Long-Lived Assets Including Goodwill and Intangibles

Long-lived assets, including goodwill and intangibles, are reviewed for impairment whenever events or changes in circumstances indicate that the book
value of the asset may not be recoverable. The Company periodically evaluates whether events and circumstances have occurred that indicate possible impairment. Long-lived assets of
Homebuilding have been reviewed for impairment during each of the years ended December 31, 2007, 2006 and 2005 due to the operating losses incurred by this segment. In 2005, the Company
recognized a complete impairment of goodwill. No other impairment charges have been recorded, however, due to forecasted, undiscounted cash flows expected to be generated over the remaining life of
the combined long-lived assets of this business. Subsequent to December 31, 2007, the Company decided to close 36 sales centers. As a result of this decision, the Company expects to
record an impairment charge in the first quarter of 2008, based on those individual assets where the net book value exceeds the expected sales proceeds to be received upon closure. Kodiak's
long-lived assets were reviewed for impairment for the year ended December 31, 2007 as a result of continued operating losses. No impairment charges were recorded based on
forecasted undiscounted cash flows expected to be generated over the remaining life of the mine.

Goodwill
is also reviewed for possible impairment at least annually. The Company uses quoted market prices, if available, or estimates of future cash flows of the related asset, asset
grouping or reporting unit in measuring whether the assets are recoverable. Changes in market conditions and actual or estimated future cash flows could have an impact on the recoverability of such
assets, resulting in future impairment charges. It is reasonably possible that the Financing segment's goodwill, of $10.9 million as of December 31, 2007, may be impaired in the near
term if the unfavorable conditions in the sub-prime market persist or continue to deteriorate. See alsoRisks Related to the Business.

30

---



Restructuring Charges

The Company occasionally records restructuring costs associated with mine closings, labor reductions and other exit activities. These costs are estimated by
management based on factors such as projected timing and duration of transitions, the amount and timing of termination benefits and the amount and timing of related contract exit costs. During the
restructuring process, management reviews the estimates of restructuring costs and adjusts them if necessary given current economic conditions.

DISCONTINUED OPERATIONS

As more fully discussed in Note 3 of "Notes to Consolidated Financial Statements," the Company completed the spin-off of Mueller Water, which
included the Mueller, U.S. Pipe and Anvil operating segments, on December 14, 2006. In addition, during the first quarter of 2007, the Company decided to exit the manufacture and distribution
of modular homes due to the poor performance of this division, which operated as Crestline Homes, Inc. ("Crestline"). As such, the operating results, assets and liabilities, and cash flows of
Mueller Water and Crestline have been reported apart from the Company's continuing operations as "discontinued operations" for all periods presented. Income (loss) from discontinued operations
includes the net operating results of the Mueller Water and Crestline businesses.

RESULTS OF CONTINUING OPERATIONS

2007 Summary Operating Results

|                                         |                                                       | For the Year Ended December 31, 2007 |        
|---------------------------------------- | ----------------------------------------------------- | ------------------------------------ | -------
|
|
|Net sales                                |                                                       | $                                    | 611,778
|Interest income on instalment notes      |                                                       |                                      |       
|Miscellaneous income                     |                                                       |                                      | 28,634 
|                                         |                                                       |                                      |        
|                                         | Net sales and revenues                                |                                      |        
|Cost of sales                            |                                                       |                                      | 406,640
|Interest expense(1)                      |                                                       |                                      |       
|Depreciation                             |                                                       |                                      | 36,113 
|Selling, general, & administrative       |                                                       |                                      | 19,723 
|Provision for losses on instalment notes |                                                       |                                      |       
|Postretirement benefits                  |                                                       |                                      | 29,584 
|Amortization of intangibles              |                                                       |                                      | 351    
|Restructuring & impairment charges       |                                                       |                                      |       
|                                         |                                                       |                                      |        
|                                         | Operating income (loss)                               |                                      | $      
|                                         |                                                       |                                      |        
|                                         | Other debt interest                                   |                                      |        
|                                         |                                                       |                                      |        
|                                         | Income from continuing operations before income taxes |                                      |        
|                                         |                                                       |                                      |        

---

31

---



Year Ended December 31, 2007 as Compared to the Year Ended December 31, 2006

Overview

The Company's income from continuing operations for the year ended December 31, 2007 was $114.2 million, or $2.18 per diluted share, which compares
to $152.9 million, or $3.00 per diluted share in 2006.

Principal
factors impacting income from continuing operations in 2007 compared to 2006 include:



Outlook and Strategic Initiatives

Natural Resources and Sloss



32

---





33

---





Homebuilding and Financing



Consolidated Results of Continuing Operations

Net sales and revenues for the year ended December 31, 2007 were $1.2 billion. Revenues declined by $32.2 million, or 2.5% from
$1.3 billion in 2006. Decreased revenues at Natural Resources were partially offset by increased revenues at Homebuilding and Sloss. Natural Resources revenues decreased primarily due to lower
pricing for coal and natural gas and lower natural gas volumes partially offset by an increase in the volume of metallurgical coal sales. Prior year results included $23.4 million of
miscellaneous income relating to an insurance settlement for the 2005 Mine No. 5 water ingress problem. Homebuilding revenues increased due to higher average selling prices partially offset by
lower unit completions. Revenue growth at Sloss reflects increased furnace coke volumes and foundry coke pricing.

Cost
of sales, exclusive of depreciation, increased $35.2 million to $703.7 million and represented 70.2% of net sales in 2007 versus $668.5 million and 66.2% of net
sales in 2006. The increase in percentage in 2007 primarily reflects the effect of lower revenues on a relatively fixed cost structure at Natural Resources, partially offset by improvements at
Homebuilding and Sloss. Homebuilding's cost of sales, exclusive of depreciation, as a percentage of net sales decreased from 79.8% in 2006 to 75.6% in 2007
while cost of sales, exclusive of depreciation, as a percentage of net sales at Sloss decreased from 84.7% in 2006 to 82.4% in 2007.

34

---



Depreciation
for the year ended December 31, 2007 was $47.3 million, an increase of $9.2 million compared to 2006. This increase is primarily due to the Company's
continued investment in the expansion of Natural Resources' mining operations and the replacement of mining equipment.

Provision
for losses on instalment notes was $13.9 million in 2007, compared to $9.1 million in 2006. This increase in the current year provision is primarily due to
continued weakness in Financing's Adjusted Rate Mortgage ("ARM") portfolio.

Postretirement
benefits expense increased to $26.7 million in 2007, compared to $13.5 million in 2006, primarily due to an unfavorable change in actuarial assumptions year
over year and a plan amendment resulting from the January 2007 contract with the United Mine Workers of America. Additionally, a $4.1 million curtailment gain was recognized in 2006 related to
the Financing and Homebuilding segments. In 2008, the Company expects its postretirement benefits expense to be $26.3 million.

Interest
expense on other debt decreased $19.2 million to $18.8 million resulting from the recognition of $10.9 million in capitalized interest primarily related to
Natural Resources capital expansion projects as well as reduction of interest expense resulting from reduced term debt outstanding. In 2006, the Company recorded $19.4 million of debt
conversion expense related to the conversion of approximately $174.2 million of the Company's Convertible Senior Subordinated Notes.

The
Company's effective tax rate of 31.0% in 2007 and 32.1% in 2006 differed from the Federal statutory rate primarily as a result of the favorable effect of Natural Resources'
percentage depletion deductions. See Note 11 to "Notes to Consolidated Financial Statements."

The
current and prior year results also include the impact of the factors discussed in the following segment analysis.

Segment Analysis

Natural Resources

Natural Resources, which includes the operations of Jim Walter Resources and United Land (parent company of Kodiak Mining and Tuscaloosa Resources), reported net
sales and revenues of $640.4 million for the year ended December 31, 2007, a decrease of $47.2 million from $687.6 million in 2006. The decrease was primarily due to lower
metallurgical coal prices, and natural gas prices and natural gas volumes, partially offset by increased metallurgical coal volumes. In addition, miscellaneous income in 2006 included
$23.4 million for the settlement of an insurance claim for the 2005 Mine No. 5 water ingress problem. Statistics in the following table relate to Jim Walter Resources, only.

|                                            |  | For the year ended December 31,
|------------------------------------------- |  | -------------------------------
|
|Average Coal Selling Price (per ton)        |  | $                              
|Tons of Coal Sold (in millions)             |  |                                
|Average Natural Gas Selling Price (per MCF) |  | $                              
|Billion Cubic Feet of Natural Gas Sold      |  |                                
|Number of Natural Gas Wells                 |  |                                

For
the year ended 2007, Natural Resources' operating income was $148.0 million, compared to operating income of $252.2 million in 2006. The decrease in operating income in
2007 reflects lower metallurgical coal and natural gas prices and lower natural gas volumes, higher coal production costs and $17.8 million of operating losses at Kodiak Mining. Kodiak Mining's
losses reflect difficult geological conditions and slow advance rates during the year. The prior year included $23.4 million of

35

---



operating
income recognized for the settlement of an insurance claim for the 2005 Mine No. 5 water ingress problem.

Sloss

Net sales and revenues were $134.9 million for 2007, an increase of $1.9 million compared to 2006. Revenues increased in 2007 due to higher furnace
coke volumes and increased foundry coke pricing. Sloss' operating income was $11.9 million in 2007 as compared to $8.1 million in 2006, an increase of $3.8 million, primarily as a
result of increased furnace coke volumes, increased foundry coke pricing and lower raw material costs. Operating income for 2006 includes an impairment charge of $1.6 million relating to Sloss'
chemical division, which was sold in November 2006.

Financing

Net sales and revenues were comparable year over year, $219.7 million in 2007 versus $219.6 million in 2006. Operating income was
$49.6 million in 2007, compared to $54.0 million in 2006. Operating income decreased primarily as a result of lower prepayment income and an increase in the provision for losses on
instalment notes reflecting weaker performance in the ARM portion of the portfolio.

Delinquencies
(the percentage of amounts outstanding over 30 days past due) were 4.6% at December 31, 2007, up from 4.4% at December 31, 2006 primarily as the
Company's third party purchased loans, which include the ARM portion of the Company's portfolio, exhibited higher levels of delinquencies and losses. At January 31, 2008, delinquencies improved
to 4.3% as performance in the fixed rate portion of the portfolio improved. The calculation of delinquencies excludes from delinquent amounts those accounts that are in bankruptcy proceedings and are
paying their mortgage payments in contractual compliance with bankruptcy court approved mortgage payment plans.

Homebuilding

Net sales and revenues were $245.9 million in 2007, an increase of $3.2 million from 2006 as a result of higher average net selling prices,
partially offset by lower unit completions as shown in the table below.

For the year ended December 31,2007

2006Unit completions


2,510


2,663Average net selling price

$
98,683

$
90,292


The
operating loss was $5.3 million for 2007 compared to an operating loss of $10.8 million in 2006. The improved performance in 2007 was due to higher average net selling
prices and a reduction in cost of sales as a percent of net sales resulting from improved productivity, partially offset by an increase in postretirement benefits which reflected a curtailment gain of
$2.7 million in 2006.

Other

Net sales and revenues were $6.4 million for 2007 compared to $4.8 million in 2006. Contributing to this revenue growth was a $0.7 million
increase in sales of land. Net general corporate expenses, principally included in selling, general and administrative expense, were $23.7 million for the year ended 2007 compared to
$25.3 million for 2006, reflecting lower personnel related expenses and professional fees.

36

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2006 Summary Operating Results

|                                                   |                                                       | For the Year Ended December 31, 2006 |        
|-------------------------------------------------- | ----------------------------------------------------- | ------------------------------------ | -------
|
|
|Net sales                                          |                                                       | $                                    | 634,152
|Interest income on instalment notes                |                                                       |                                      |       
|Miscellaneous income                               |                                                       |                                      | 53,459 
|                                                   |                                                       |                                      |        
|                                                   | Net sales and revenues                                |                                      |        
|Cost of sales                                      |                                                       |                                      | 370,438
|Interest expense(1)                                |                                                       |                                      |       
|Depreciation                                       |                                                       |                                      | 27,286 
|Selling, general, & administrative                 |                                                       |                                      | 17,914 
|Provision for losses on instalment notes           |                                                       |                                      |       
|Postretirement benefits                            |                                                       |                                      | 19,764 
|Amortization of intangibles                        |                                                       |                                      |       
|Provision for estimated hurricane insurance losses |                                                       |                                      |       
|Restructuring & impairment charges                 |                                                       |                                      |       
|                                                   |                                                       |                                      |        
|                                                   | Operating income (loss)                               |                                      | $      
|                                                   |                                                       |                                      |        
|                                                   | Other debt interest and debt conversion expense       |                                      |        
|                                                   |                                                       |                                      |        
|                                                   | Income from continuing operations before income taxes |                                      |        
|                                                   |                                                       |                                      |        

---

Year Ended December 31, 2006 as Compared to the Year Ended December 31, 2005

Overview

The Company's income from continuing operations for the year ended December 31, 2006 was $152.9 million or $3.00 per diluted share, which compares
to $43.0 million, or $0.96 per diluted share in 2005.

Principal
factors impacting income from continuing operations in the prior year results include:



37

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Consolidated Results of Continuing Operations

Net sales and revenues for the year ended December 31, 2006 were $1.3 billion versus $1.1 billion for the year ended December 31,
2005, a 16.0% increase. Increased revenues at Natural Resources, Sloss and Homebuilding were partially offset by decreased revenues at Financing. Natural Resources revenues increased primarily due to
price increases for coal and natural gas, and higher gas volumes, partially offset by decreased coal sales volumes. Homebuilding revenues increased due to higher average selling prices. Financing
revenues declined primarily due to a declining yield in the portfolio and lower prepayment income, partially offset by an increase in the balance of the note portfolio.

Cost
of sales, exclusive of depreciation, increased $76.1 million to $668.5 million and represented 66.2% of net sales in 2006 versus $592.5 million, or 68.2% of net
sales in 2005. The percentage improvement in 2006 was primarily the result of improved performance at Homebuilding and Natural Resources.

Depreciation
for 2006 was $38.1 million, an increase of $6.7 million compared to 2005. The increase was primarily due to higher capital expenditures at Natural Resources.

Selling,
general and administrative expenses of $141.5 million were 11.1% of net sales and revenues in 2006 compared to $148.9 million, or 13.6% in 2005. This improvement
was due primarily to lower costs at Homebuilding resulting from focused efforts to reduce overhead expenses and due to lower corporate employee-related expenses.

Provision
for losses on instalment notes was $9.1 million in 2006, compared to $10.7 million in 2005. The prior year included a $1.3 million charge for expected
portfolio losses resulting from Hurricanes Katrina and Rita, offset slightly by higher volume of resales in 2006 in the Financing segment.

Postretirement
benefits expense decreased to $13.5 million in 2006, compared to $14.4 million in 2005, primarily due to a $4.1 million curtailment gain resulting
from the termination of benefits for certain current employees and those retirees who are eligible for Medicare of the Financing and Homebuilding segments.

Interest
expense for mortgage-backed and asset-backed notes decreased to $118.7 million in 2006, compared to $122.0 million in 2005 primarily due to lower average monthly
debt balances and delayed warehouse borrowings resulting from a favorable cash position.

Interest
expense on other debt increased $14.6 million to $38.0 million due to a higher average debt balance outstanding in 2006 resulting from the borrowings under the
2005 Walter Credit

38

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Agreement
to finance the acquisition of Mueller Water in October 2005. Debt conversion expense of $19.4 million in 2006 was related to the conversion of approximately $174.2 million of
the Company's Convertible Senior Subordinated notes during 2006. There were no conversions recognized in 2005.

Restructuring
and impairment charges were $1.6 million in 2006, a decrease of $55.3 million from 2005. The current year included a $1.6 million impairment charge
relating to Sloss' chemical division, which was sold in November 2006, while 2005 included a $56.7 million goodwill impairment charge at Homebuilding.

The
Company's effective tax rate of 32.1% in 2006 differed from the Federal statutory rate primarily due to the favorable effect of Natural Resources' percentage depletion deductions,
partially offset by non-deductible debt conversion expenses. The Company's effective tax rate of 49.0% in 2005 differed from the Federal statutory rate primarily due to the effect of the
largely non-deductible $56.7 million goodwill impairment charge.

The
2006 and 2005 results also include the impact of the factors discussed in the following segment analysis.

Segment Analysis

Natural Resources

Net sales and revenues were $687.6 million for the year ended December 31, 2006, an increase of $129.2 million from $558.4 million in
2005. The increase was primarily due to higher metallurgical coal and natural gas prices, and increased natural gas volumes, partially offset by decreased coal volumes. In addition, miscellaneous
income in 2006 included $23.4 million for the settlement of an insurance claim for the 2005 Mine No. 5 water ingress problem. Statistics in the following table relate to Jim Walter
Resources, only.

For the year ended
December 31,2006

2005Average Coal Selling Price (per ton)

$
103.58

$
82.33Tons of Coal Sold (in millions)


5.6


5.9Average Natural Gas Selling Price (per MCF)

$
8.67

$
7.95Billion Cubic Feet of Natural Gas Sold


7.7


6.9Number of Natural Gas Wells


415


405


Natural
Resources' 2006 operating income was $252.2 million, compared to operating income of $170.5 million in 2005. The increase in operating income in 2006 primarily
resulted from the shift to higher margin metallurgical coal sales and increased margins from higher natural gas pricing, partially offset by higher freight costs and higher Mine No. 4
production costs per ton. Cost per ton increased at Mine No. 4 predominantly due to lower production volume relative to 2005 as a result of thin seam conditions and weak roof conditions
encountered at the beginning of the longwall panel, which began in April 2006. These conditions contributed to reduced longwall advance rates and difficulties with roof control. The longwall at Mine
No. 4 improved advance rates in the later months of 2006 and achieved normal longwall advance rates. The increase in operating income in 2006 was also due to $23.4 million of income
recognized for the settlement of an insurance claim for the 2005 Mine No. 5 water ingress problem, whereas 2005 included $21.9 million of idle mine costs primarily resulting from the
water ingress.

The
Company completed production at Mine No. 5 in December 2006. As of December 31, 2006 mining equipment has been recovered and the mine shafts are in process of being
sealed. Approximately $6.6 million of the closure costs qualify as restructuring costs and were recorded prior to December 31,

39

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2005.
Other costs, primarily representing workers' compensation and other incremental costs related to the closure of the mine were charged to expense when incurred.

Sloss

Net sales and revenues were $133.0 million for 2006, an increase of $4.0 million compared to 2005. Revenues increased in 2006 due to higher furnace
coke volume and pricing, which increased 6.4% and 1.3%, respectively, over 2005, partially offset by a 13.9% decline in shipments of foundry coke. Sloss' operating income was $3.4 million lower
than 2005 primarily due to an impairment charge of $1.6 million relating to the chemical division, which was sold in November 2006.

Financing

Net sales and revenues were $219.6 million in 2006, a decrease of $9.6 million from 2005. This decrease is attributable to a declining yield on the
portfolio and lower prepayment-related interest income. Operating income was $54.0 million in 2006, compared to $46.0 million in 2005. Operating income increased primarily as a result of
a $1.7 million decrease in the provision for losses on installment notes. In addition, 2005 included a provision for estimated hurricane insurance losses of $10.0 million. Due to a
relatively inactive hurricane season in 2006, there were no significant charges for excess catastrophic losses in Financing's insurance business.

Delinquencies
(the percentage of amounts outstanding over 30 days past due) were 4.4% at December 31, 2006, down from 5.2% at December 31, 2005. The improvement is
primarily due to customer payment disruptions caused by the 2005 hurricanes which temporarily increased payment defaults in 2005. The calculation of delinquencies excludes from delinquent amounts
those accounts that are in bankruptcy proceedings that are paying their mortgage payments in contractual compliance with bankruptcy court approved mortgage payment obligations.

Homebuilding

Net sales and revenues were $242.7 million in 2006, an increase of $55.8 million from 2005 as a result of higher average net selling prices and
slightly higher overall deliveries as shown in the table below.

For the year ended
December 31,2006

2005Unit completions


2,663


2,361Average net selling price

$
90,292

$
78,800


The
segment reported operating losses of $10.8 million and $90.6 million for the years ended December 31, 2006, and 2005, respectively. 2005 results included a
$56.7 million goodwill impairment charge. The improved performance in 2006 was due to higher average net selling prices and cost reductions.

Other

Net sales and revenues were $4.8 million for 2006 compared to $2.6 million in 2005. Land sales were $0.4 million higher in 2006 than 2005.
Net general corporate expenses, principally included in selling, general and administrative expenses were $25.3 million in 2006 compared to $28.5 million in 2005 reflecting lower
personnel related expenses and professional fees, partially offset by an increase in bonus expense and stock-based compensation expense resulting from the January 1, 2006 adoption of Statement
of Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment."

FINANCIAL CONDITION

Cash and cash equivalents of continuing operations were $30.6 million at December 31, 2007, down from $127.4 million at December 31,
2006, reflecting $140.0 million in cash flows provided by continuing operating activities, $153.3 million of cash flows used in investing activities of continuing operations and
$84.1 million of cash flows used in financing activities of continuing operations. See additional discussion in the Statement of Cash Flows section that follows.

40

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Restricted short-term investments of $75.9 million at December 31, 2007 decreased $14.2 million from December 31, 2006 primarily due to the lower
volume of prepayments and timing of collections from securitization financings at the Financing segment, partially offset by the addition of restricted cash held for TRI's operations. TRI was acquired
in 2007.

Prepaid
expenses of $38.3 million at December 31, 2007 increased $8.6 million from December 31, 2006 primarily due to an increase in costs associated with
heightened pre-production activity for Natural Resources' longwall mining operations and increases in the Company's prepaid taxes.

Property,
plant and equipment was $435.0 million at December 31, 2007, an increase of $124.9 million over 2006 primarily as a result of continued investment in
Natural Resources' mining operations and the replacement of mining equipment. Balances in 2007 also include the acquisition of TRI's assets.

Other
assets were $156.1 million at December 31, 2007, up $20.8 million from December 31, 2006 predominantly due to an increase in the Company's deferred tax
assets as a result of initially applying FIN 48 on January 1, 2007.

Accounts
payable increased $9.7 million to $72.1 million at December 31, 2007 primarily resulting from an increase in amounts owed to Mueller Water for their portion
of income tax refunds relating to prior periods and due to the acquisition of TRI.

Accrued
expenses of $83.1 million at December 31, 2007 decreased from $94.9 million at December 31, 2006 primarily due to an $11.1 million decrease in
current taxes payable.

Accrued
interest decreased $3.1 million to $13.9 million at December 31, 2007 primarily resulting from lower term loan borrowings.

Other
liabilities of $216.4 million at December 31, 2007 increased $26.9 million from $189.5 million at December 31, 2006 primarily due to an increase
in the reserve for uncertain tax positions as a result of the adoption of FIN 48 in 2007 and an increased obligation relating to unfavorable interest rate hedge
mark-to-market positions, partially offset by a reduction in the pension liability due to changes in actuarial assumptions.

LIQUIDITY AND CAPITAL RESOURCES

Overview

The Company's principal sources of short-term funding are existing cash balances, operating cash flows and borrowings under its revolving credit
facility and warehouse lines of credit. The Company's principal sources of long-term funding are its bank term loan and its financings under mortgage-backed/asset-backed notes. As of
December 31, 2007, total debt has decreased by $54.1 million compared to December 31, 2006. See discussion below and Note 12 of "Notes to Consolidated Financial
Statements."

Cash
inflows from the sale of goods at the Company's Natural Resources and Sloss segments are generated in the normal course, generally within 90 days or less from the date of
title transfer of the goods sold. At our Financing and Homebuilding segments, the majority of homes constructed and sold by Homebuilding are internally financed. Homebuilding incurs construction costs
to build the home, which are financed via internal Company resources, including existing cash balances, cash flows generated from operations or borrowings under credit facilities. When the home is
completed, Homebuilding tenders it to the customer. Upon tender, Homebuilding recognizes the sale of the home and sells the instalment note contract to WMC, which recognizes an increase in instalment
notes receivable. No cash is generated from this intercompany transaction. WMC then borrows periodically under its warehouse facilities, typically at 80% of the face of the instalment note contract,
using the instalment note contract as collateral. On a monthly basis, WMC pays interest and other funding costs under the warehouse facilities using collections from instalment notes receivable.
Historically, once

41

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there
is approximately $200.0 million to $300.0 million of accumulated borrowings under the warehouse facilities, WMC will package the instalment notes and pledge them as collateral to
complete a mortgage-backed/asset-backed securitized debt offering. WMC historically has received 90% to 95% of the face value of the instalment notes receivable as proceeds from the securitized debt
offer. WMC uses these proceeds to pay off the warehouse facilities and any excess cash flow generated would be available for general corporate purposes.

The
Company believes that, based on current forecasts and anticipated market conditions, funding generated from operating cash flow and available sources of liquidity will be sufficient
to meet
operating needs, to make planned capital expenditures and to make all required interest payments on indebtedness for the next twelve to eighteen months. However, the Company's operating cash flows and
liquidity are significantly influenced by numerous factors, including the general economy and, in particular, prices of coal and natural gas, coal production, levels of construction activity, costs of
raw materials, conditions in the asset-backed securities capital markets and interest rates.

Mortgage-backed/Asset-backed Notes

At December 31, 2007, non-recourse mortgage-backed/asset-backed notes outstanding totaled $1.7 billion and consisted of eight separate
series of public debt offerings and one issue of private debt providing long-term financing for instalment notes receivable and mortgage assets purchased by WMC. Trust IX and Trust XIV are
borrowers under a $200.0 million and a $150.0 million Variable Funding Loan Agreement ("warehouse facilities") providing temporary financing to WMC for its purchases of instalment notes
from Homebuilding and for its mortgage loans originations. The $150.0 million Trust IX facility was renewed on July 30, 2007, under substantially similar terms as the previous facility,
and matures July 28, 2008. The $200.0 million Trust XIV facility was renewed on October 25, 2007, under substantially similar terms as the previous facility, and matures
October 23, 2008. At December 31, 2007, there were $189.2 million of borrowings outstanding under these warehouse facilities. The Company expects to refinance these borrowings
during the next twelve months with similar facilities or other financing vehicles. If the lenders under these facilities do not allow the Company to renew our borrowings or the Company cannot replace
maturing borrowings at less favorable terms, the Company might have to seek other, less favorable and more costly sources of borrowing, sell mortgage-related assets under adverse market conditions, or
cease to originate mortgage assets, which could significantly reduce net income and may result in material losses. Furthermore, in 2007, mortgage securitization markets generally, and subprime
securitization markets especially, have experienced a significant disruption that continues today. A large number of other companies' mortgage-backed securities have been down-graded or
placed on credit watch, resulting in investors in asset-backed securities and other structured vehicles experiencing problems including declines in value and losses from their investments in subprime
mortgage securities. As a result of these significant industry events, the Company may be unsuccessful in securitizing mortgage assets at favorable terms or at all that are currently outstanding
under, and pledged to, our variable funding loan facilities or that originate in the future. The Company's inability to continue to successfully securitize mortgage assets on favorable terms or at all
could significantly impair our mortgage origination business.

2005 Walter Credit Agreement

The 2005 Walter Credit Agreement is a secured obligation of the Company and substantially all of the wholly owned domestic subsidiaries of the Company. The 2005
Walter Term Loan requires quarterly principal payments of $0.6 million through October 3, 2012, at which time the remaining principal outstanding is due. The 2005 Walter Term Loan
carries a floating interest rate of 175 basis points over LIBOR. At December 31, 2007, the balance outstanding on the term loan was $218.5 million and the weighted-average interest rate
was 6.73%. The commitment fee on the unused portion of the 2005 Walter Revolving Credit Facility is 0.375% and the interest rate is a floating rate of 150 basis points over LIBOR. At
December 31, 2007, there were no borrowings outstanding under the

42

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revolving
credit facility, but the Company issued $42.8 million in letters of credit, reducing availability for borrowings to $182.2 million.

In
2007, the Company used available cash to repay $30.2 million of the term loan. In 2006, the Company sold 2.65 million shares of common stock for $168.7 million of
net cash proceeds. Of these proceeds, $102.9 million was used to repay the term loan facility. In addition, in 2006, the Company repaid $22.3 million on the term loan facility on a
mandatory basis and made $75.0 million of optional prepayments using available cash flow.

The
failure to maintain an aggregate of $350.0 million of liquidity in variable funding loan facilities for the Financing and Homebuilding businesses would breach a covenant under
the 2005 Walter Credit Agreement. In such an event, the Company would seek to amend or obtain a waiver of this requirement from lenders. If the Company was unable to obtain an amendment or waiver and
the Company is unable to obtain alternate variable funding loan lines of credit, there would be an event of default under the 2005 Walter Credit Agreement and the respective lenders could also
terminate all commitments to extend further credit. If the Company were unable to repay those amounts, such lenders could proceed against the collateral granted to them to secure the indebtedness
under the senior credit facilities.

Convertible Senior Subordinated Notes

On April 20, 2004, the Company issued $175.0 million aggregate principal amount of 3.75% Convertible Senior Subordinated Notes due May 1,
2024 (the "convertible notes"). During 2006, holders of $174.2 million of the Company's convertible notes surrendered their convertible notes in exchange for 9.761 million shares of the
Company's common stock and $19.4 million of conversion inducement fees. In January 2008, the holders of the remaining notes agreed to convert the principal amount in exchange for 84,013 shares
of the Company's common stock and $0.1 million of conversion inducement fees.

Statement of Cash Flows

Cash balances outstanding were $30.6 million and $127.4 million at December 31, 2007 and December 31, 2006, respectively. The decrease
in cash is primarily the result of $156.4 million of capital expenditures, $44.7 million of debt repayments, $11.7 million for the TRI acquisition, $10.4 million of
dividend payments and $5.6 million of stock purchases under the stock repurchase program, partially offset by $140.0 million of cash provided by operating activities of continuing
operations.

Cash
flows provided by operating activities of continuing operations were $140.0 million in 2007 as compared to $185.6 million in 2006. The decrease of $45.6 million
is primarily a result of $38.7 million decrease in income from continuing operations, an increase in the instalment notes receivable due to the growth of the originated portfolio resulting from
higher average selling prices and slower prepayments, as well as a $22.3 million increase in taxes paid.

Cash
flows used in investing activities of continuing operations in 2007 were $153.3 million as compared to $97.7 million in 2006. The major cause of this change is due to
increased capital expenditures primarily associated with the Mine No. 7 East expansion.

Cash
flows used in financing activities of continuing operations in 2007 were $84.1 million compared to cash flows used in financing activities of $90.0 million in 2006.
Cash flows used in financing activities in 2007 included retirements of corporate debt ($44.7 million), retirements of mortgage-backed/asset-backed notes ($219.8 million), partially
offset by the issuance of mortgage-backed/asset-backed notes ($189.2 million), dividends paid ($10.4 million) and purchases of stock under stock repurchase program ($5.6 million).
Cash flows used in financing activities of continuing operations in 2006 included retirements of other debt ($200.2 million) and retirements of mortgage-back/asset-backed notes
($392.6 million), substantially offset by cash proceeds from the sale

43

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of
the Company's common stock ($168.7 million) and the issuance of mortgage-backed/asset-backed notes ($401.9 million). Cash used in financing activities in 2006 also includes
$82.1 million of cash remaining on Mueller Water's balance sheet at the time of the spin-off.

Capital
expenditures totaled $156.4 million in the year ended December 31, 2007 related principally to the Mine No. 7 East expansion project and other mine
development activities at Natural Resources. We estimate that capital expenditures for the year ending December 31, 2008 will approximate $110.0 million to $135.0 million. Of this
amount, approximately $40.0 million to $45.0 million relates to the Mine No. 7 East expansion project and approximately $20.0 million for a new set of longwall shields.
Actual expenditures in 2008 may be more or less than this amount, depending upon the level of earnings and cash flow, or expansion opportunities in certain markets.

Contractual Obligations and Commercial Commitments

The Company has certain contractual obligations and commercial commitments. Contractual obligations are those that will require cash payments in accordance with
the terms of a contract, such as a borrowing or lease agreement. Commercial commitments represent potential obligations for performance in the event of demands by third parties or other contingent
events, such as lines of credit or guarantees of debt.

The
following tables summarize the Company's contractual obligations and commercial commitments as of December 31, 2007. This table does not include interest owed on these
obligations. For the year ended December 31, 2007, the Company paid approximately $19.7 million of interest on other debt. For the year ending December 31, 2008, the Company
estimates total cash interest payments related to other debt will be approximately $14.3 million. The unconditional purchase obligations primarily represent commitments to purchase raw
materials and equipment.

Contractual
obligations and commercial commitments:

|                                      |  |   |           | Payments Due by Period (in thousands)
|------------------------------------- |  | - | --------- | -------------------------------------
|
|Mortgage-backed/asset-backed debt(1)  |  | $ | 1,706,218 |                                      
|Other debt                            |  |   | 218,517   |                                      
|Financing agreement and other debt(2) |  |   | 6,558     |                                      
|Operating leases                      |  |   | 24,384    |                                      
|Unconditional purchase obligations    |  |   | 62,969    |                                      
|                                      |  |   |           |                                      
|Total contractual cash obligations    |  | $ | 2,018,646 |                                      
|                                      |  |   |           |                                      
|Other long-term liabilities(3)        |  |   |           |                                      
|                                      |  |   |           |                                      
|Total cash obligations(4)             |  |   |           |                                      
|                                      |  |   |           |                                      

---

44

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Available commitments under existing borrowing arrangements:

|                                         |  |   |         | Amounts of Commitment Expiration per Year (in thousands)
|---------------------------------------- |  | - | ------- | --------------------------------------------------------
|
|Trust IX Variable Funding Loan Facility  |  | $ | 150,000 |                                                         
|Trust XIV Variable Funding Loan Facility |  |   | 200,000 |                                                         
|Revolving Credit Facilities(1)           |  |   | 182,200 |                                                         
|                                         |  |   |         |                                                         
|Total commercial commitments             |  | $ | 532,200 |                                                         
|                                         |  |   |         |                                                         

---

Environmental,
miscellaneous litigation and other commitments and contingencies:

See
Note 16 of "Notes to Consolidated Financial Statements" for discussion of these matters not included in the tables above due to their contingent nature.

MARKET RISK

The Company is exposed to certain market risks inherent in the Company's operations. These risks generally arise from transactions entered into in the normal
course of business. The Company's primary market risk exposures relate to interest rate risk and commodity risks. The Company does not enter into derivatives or other financial instruments for trading
or speculative purposes.

Interest rate risk

The Company's primary interest rate risk exposures relate to the interest rates on its third-party indebtedness and the instalment notes receivable portfolio
during the warehousing period and prepayments thereof.

On
October 3, 2005, the Company entered into a credit agreement as more fully described in Note 12 of "Notes to Consolidated Financial Statements" with total credit
facilities of $675.0 million and floating rate interest rates based on LIBOR plus a spread.

The
Company has two variable funding loan facilities totaling $350.0 million that provide temporary financing to WMC, as further described in Note 12 of "Notes to
Consolidated Financial Statements." At December 31, 2007, there was $189.2 million of borrowings outstanding under these facilities. There were no borrowings outstanding at
December 31, 2006. The variable funding loan facilities are at a floating rate based on short-term rates.

On
November 1, 2005, the Company entered into an interest rate hedge agreement ("hedge") with a notional value of $75 million, as more fully described in Note 12 of
"Notes to Consolidated Financial Statements." The objective of the hedge is to protect the Company against rising LIBOR interest rates that would have a negative effect on the Company's cash flows due
to changes in interest payments on its 2005 Walter Credit Agreement. The structure of the hedge is a three-year collar contract with a floor of 4.25% and a cap of 5.69%. The collar
agreement calls for the Company to make fixed rate payments over the term of the hedge when stated three-month LIBOR rates are below the floor and to receive payments from the counter-party when the
three-month LIBOR rates are above the cap. It is anticipated that the hedge will be settled upon maturity, and is accounted for as a cash flow hedge. The changes in the fair value of these swaps that
take place through the date of maturity are recorded in accumulated other comprehensive income (loss).

45

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As of December 31, 2007 and 2006, the Company holds multiple interest rate hedge agreements with various counterparties with an aggregate notional value of $215.0 million
and $50.0 million, respectively. The objective of these hedges is to protect against changes in the benchmark interest rate on the forecasted issuance of mortgage-backed notes in a
securitization anticipated to be priced on or around April 1, 2008. The hedges will be settled on or before maturity and are being accounted for as a cash flow hedges. As such, changes in the
fair value of the hedges that take place through the date of maturity are recorded in accumulated other comprehensive income (loss).

A
ten percent decrease in interest rates from the December 31, 2007 and 2006 rates would result in an increase to annual pre-tax income from these financial
instruments of approximately $2.4 million and $1.8 million, respectively, while a ten percent increase in rates would decrease annual pre-tax income approximately
$2.4 million and $1.4 million, respectively.

The
Company's fixed-rate gross instalment notes receivables were $1.8 billion and fixed-rate mortgage-backed/asset-backed notes were $1.5 billion as
of December 31, 2007. The fixed rate nature of these instruments and their offsetting positions effectively mitigate significant interest rate risk exposure from these instruments. If interest
rates decrease, the Company may be exposed to higher prepayment speeds. This could result in a modest increase in short-term profitability. However, it could adversely impact
long-term profitability as a result of a shrinking portfolio. Changes in interest rates may impact the fair value of these financial instruments.

Commodity risks

The Company is exposed to commodity price risk on sales of natural gas. On an annual basis, the Company's sales of natural gas approximates 6.8 million
mmbtu (equivalent of 7.0 billion cubic feet).

The
Company occasionally utilizes derivative commodity instruments to manage the exposure to changing natural gas prices. Such derivative instruments are structured as cash flow hedges
and not for trading. During 2007 and 2006, the Company hedged approximately 57% and 42%, respectively, of its natural gas sales with swap contracts. These swap contracts effectively converted a
portion of forecasted sales at floating-rate natural gas prices to a fixed-rate basis. These swap
contracts resulted in cash inflows of $8.7 million in 2007 and cash inflows of $12.3 million in 2006, impacting net sales and revenues.

At
December 31, 2007, swap contracts to hedge approximately 0.8 million mmbtu of anticipated natural gas sales in 2008 and at December 31, 2006, swap contracts to
hedge approximately 0.6 million mmbtu of anticipated natural gas sales in 2007, were outstanding as more fully described in Note 17 of "Notes to Consolidated Financial Statements." A ten
percent increase in the natural gas prices from December 31, 2007 and 2006 would result in a decrease of $0.5 million and $0.4 million, respectively, in the fair value of the swap
contracts outstanding.

In
February 2008, the Company entered into three additional swap contracts to hedge approximately a combined 4.6 million mmbtu of anticipated natural gas sales in 2008.

NEW ACCOUNTING PRONOUNCEMENTS

In 2006 the FASB issued SFAS No. 157, "Fair Value Measurements," which provides a definition of fair value, establishes a framework for measuring fair
value and expands financial statement disclosure requirements. SFAS No. 157 requires companies to base fair values on what they would receive from a sale to a third party in the open market.
The Company does not expect the adoption of this statement, which became effective January 1, 2008, to have a material effect on its consolidated financial statements.

46

---



In
2006 the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans," which requires the Company to measure plan assets and
liabilities as of the fiscal year-end reporting date. The Company uses a September 30 measurement date and will be required to adopt this provision December 31, 2008. The
Company does not expect the adoption of this statement to have a material effect on its consolidated financial statements.

In
2007 the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities," which allows reporting entities to choose to measure many financial
instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to reduce volatility in reported earnings that result from
measuring related assets and liabilities differently without having to apply complex hedge accounting provisions, using the guidance in SFAS No. 133 (as amended), "Accounting for Derivative
Instruments and Hedging Activities." The Company has not elected the fair value option, as provided in this statement. As such,
the Company does not expect the adoption of this statement, which became effective January 1, 2008, to have a material effect on its consolidated financial statements.

In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements," that amends ARB 51, "Consolidated Financial Statements," to
establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is
an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. The Company has not yet determined what impact the adoption of this
requirement, which becomes effective January 1, 2009, will have on its consolidated financial statements.

Also
in December 2007, the FASB issued SFAS No. 141(R), "Business Combinations," a replacement of SFAS No. 141, "Business Combinations." The objective of this Statement is
to improve the relevance, representational faithfulness and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects.
This Statement establishes principles and requirements for how the acquirer recognizes and measures the identifiable assets acquired and liabilities assumed, measures the goodwill acquired or gain
from a bargain purchase, and determines what information to disclose. The Company has not yet determined what impact the adoption of this requirement, which becomes effective January 1, 2009,
will have on its consolidated financial statements with respect to future acquisitions.

PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT

Except for historical information contained herein, the statements in this document are forward-looking and made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties that may cause the Company's actual results in future periods to differ
materially from forecasted results. Those risks include, among others, changes in customers' demand for the Company's products, changes in raw material, labor, equipment and transportation costs and
availability, geologic and weather conditions, changes in extraction costs and pricing in the Company's mining operations, changes in customer orders, pricing actions by the Company's competitors,
potential changes in the mortgage-backed capital market, and general changes in economic conditions. Those risks also include the timing of and ability to execute other strategic actions that may be
pursued. The Company has no duty to update its outlook statements as of any future date.

47

---



UNAUDITED INTERIM FINANCIAL INFORMATION:
(in thousands, except per share amounts)

|                                       |  | Quarter ended
|-------------------------------------- |  | -------------
|
|Net sales and revenues                 |  | $            
|Income from continuing operations      |  |              
|Income from discontinued operations    |  |              
|                                       |  |              
|Net income                             |  | $            
|                                       |  |              
|Diluted income (loss) per share:(2)(3) |  |              
|Income from continuing operations      |  | $            
|Income from discontinued operations    |  |              
|                                       |  |              
|Net income                             |  | $            
|                                       |  |              

|
|

|                                       |  | Quarter ended
|-------------------------------------- |  | -------------
|
|Net sales and revenues                 |  | $            
|Income from continuing operations      |  |              
|Income from discontinued operations    |  |              
|                                       |  |              
|Net income                             |  | $            
|                                       |  |              
|Diluted income (loss) per share:(2)(3) |  |              
|Income from continuing operations      |  | $            
|Income from discontinued operations    |  |              
|                                       |  |              
|Net income                             |  | $            
|                                       |  |              

---

Fourth quarter 2007 results include favorable pre-tax adjustments of $12.7 million comprised of $8.9 million of interest
capitalization primarily related to Natural Resources' capital expansion projects, applicable to prior periods, and $3.8 million to increase deferred loan origination fees, previously amortized
too quickly. In addition, the provision for income taxes in the fourth quarter of 2007 includes a favorable adjustment of $3.2 million to reduce taxes payable to amounts determined to be owed
for prior years. The combined effect of these unusual items was an estimated increase to diluted earnings per share of $0.22 for the fourth quarter of 2007. These adjustments were not considered to
have a material effect on the full-year 2007 results.

Item 8.    Financial Statements and Supplementary Data

Financial Statements and Supplementary Data consist of the financial statements as indexed on page F-1 and unaudited financial information
presented in Part II, Item 7, "Management's Discussion and Analysis of Results of Operations and Financial Condition".

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Incorporated by reference to the 2008 Proxy Statement.

48

---



Item 9A.    Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of December 31, 2007, the Company's management, including the Company's vice chairman (principal executive and financial officer), evaluated the
effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities
Exchange Act of 1934, as amended ("Exchange Act"). These disclosure controls and procedures have been designed to ensure that information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and regulations and that such information is accumulated
and communicated to the Company's management, including its principal executive and financial officer, as appropriate, to allow timely decisions regarding required financial disclosure. Based on this
evaluation, the principal executive and financial officer has concluded that the Company's disclosure controls and procedures were effective as of December 31, 2007.

Management's Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act
Rule 13a-15(f)). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. A company's internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management
assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2007. In making this assessment, management used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") inInternal Control-Integrated Framework. Management has
concluded that, as of December 31, 2007, the Company's internal control over financial reporting was effective.

Evaluation of Changes in Internal Control over Financial Reporting

There were no changes in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange
Act of 1934) during the quarter ended December 31, 2007 that have materially affected, or are reasonably likely to materially affect the Company's internal control over financial reporting.

Item 9B.    Other Information

None

49

---





Part III

Item 10.    Directors, Executive Officers and Corporate Governance

Executive Officers of the Registrant

Set forth below is a list showing the names, ages and positions of the executive officers of the Company.

|Name                  |  | Age |  | Position                                                                                
|--------------------- |  | --- |  | ----------------------------------------------------------------------------------------
|Victor P. Patrick     |  | 50  |  | Vice Chairman, Chief Financial Officer and General Counsel                              
|Mark J. O'Brien       |  | 65  |  | Chairman and Chief Executive Officer, JWH Holding Company, LLC                          
|George R. Richmond    |  | 57  |  | Chief Executive Officer, Jim Walter Resources, Inc.                                     
|Joseph J. Troy        |  | 44  |  | Executive Vice President, Structured Finance of JWH Holding Company, LLC                
|Charles E. Cauthen    |  | 49  |  | Chief Financial Officer, JWH Holding Company, LLC and President, Walter Mortgage Company
|Miles C. Dearden, III |  | 48  |  | Senior Vice President, Treasurer                                                        
|Lisa A. Honnold       |  | 40  |  | Senior Vice President, Controller                                                       
|Larry E. Williams     |  | 60  |  | Senior Vice President, Human Resources                                                  
|Charles C. Stewart    |  | 52  |  | President, Sloss Industries Corporation and United Land Corporation                     

Our
executive officers as of February 29, 2008 are listed below.

Victor P. Patrickwas appointed Vice Chairman, Chief Financial Officer and General Counsel in February 2008. Mr. Patrick previously
served as Vice Chairman and General Counsel since April 2007 and Vice Chairman, General Counsel and Secretary since August 2006. Mr. Patrick joined the Company in 2002 as Senior Vice President,
General Counsel and Secretary. Prior to joining the Company, he worked for Honeywell International from 1994 to July 2002, most recently as Vice President, Secretary and Deputy General Counsel.
Mr. Patrick has also served as a Director of the Company since December 2006.

Mark J. O'Brienwas appointed Chairman and Chief Executive Officer of the Company's JWH Holding Company, LLC (consisting of its
Financing and Homebuilding businesses) in February 2006. Mr. O'Brien has also served as a member of the Company's board of directors since June 2005. Previously, he was the Chief Executive
Officer of Pulte Homes, Inc., where he served in various capacities for 21 years until his retirement in 2003.

George R. Richmondwas appointed Chief Executive Officer of Jim Walter Resources in February 2006, serving previously as President and
Chief Operating Officer of Jim Walter Resources since 1997. Mr. Richmond has held various positions at JWR since 1978. Mr. Richmond has also served as a Director of the Company since
December 2006.

Joseph J. Troywas appointed Executive Vice President of Structured Finance, JWH Holding Company, LLC, in February 2008.
Mr. Troy previously served as Executive Vice President, Chief Financial Officer since August 2006. Mr. Troy has also served as Senior Vice PresidentFinancial Services,
President of Walter Mortgage Company and Senior Vice President and Treasurer of the Company since November 2000. He was Executive Vice President and Chief Financial Officer of Gold Standard Multimedia
from February 2000 to November 2000. From 1998 through February 2000, he was Vice President and Treasurer of the Company.

Charles E. Cauthenwas appointed Chief Financial Officer of JWH Holding Company, LLC and President of Walter Mortgage Company in
November 2006. Prior thereto, he served as President of Jim

50

---



Walter
Homes since August 2005. Previously, he served the Company as Chief Operating Officer of Jim Walter Homes since February 2005 and Senior Vice President and Controller since November 2000. Prior
thereto, he was Senior Vice President and Chief Financial OfficerConsumer Products Group, Bank of America, from 1999 to November 2000.

Miles C. Dearden, IIIwas appointed Senior Vice President in February 2005 and Vice President, Treasurer in April 2002. Previously, he was
Assistant Treasurer beginning in March 2001. Prior to joining the Company, he worked for Bank of America from 1987 until 2001, most recently as a managing director for the bank's Global Corporate and
Investment Bank.

Lisa A. Honnoldwas appointed Senior Vice President, Controller of the Company in March 2006. Ms. Honnold previously served as Vice
President of Corporate Accounting for the Company since December 2005. Prior to joining the Company, Ms. Honnold was Vice President, Corporate Controller of Catalina Marketing Corporation from
December 2004 to November 2005, holding the previous title of Assistant Controller since November 2003. From 1996 to November 2003, Ms. Honnold held various positions with NACCO
Industries, Inc., last serving as Manager of Financial Reporting and Analysis.

Larry E. Williamswas appointed Senior Vice President, Human Resources in November 2001. Previously, he was Senior Vice President/Human
Resources for CoBank from 1989 to 2001.

Charles C. Stewartwas appointed President of Sloss Industries Corporation in May 2003 and President of United Land Corporation in July
2007. Prior thereto, he served as Vice President of Engineering at Jim Walter Resources, Inc. Mr. Stewart joined the company in 1978.

Code of Conduct

The Board has adopted a Code of Conduct Policy and Compliance Program ("Code of Conduct") which is applicable to all employees, directors and officers of the
Company. The code of Conduct is posted on the Company's website atwww.walterind.comand is available in print to stockholders who request a copy. The
Company has made available an Ethics Hotline, where employees can anonymously report a violation of the Code of Conduct.

Additional Information

Additional information, as required in Item 10. "Directors and Executive Officers of the Registrant" are incorporated by reference to the Proxy Statement
(the "2008 Proxy Statement") included in the Schedule 14A to be filed by the Company with the Securities and Exchange Commission (the "Commission") under the Securities Exchange Act of 1934, as
amended.

Item 11.    Executive Compensation

Incorporated by reference to the 2008 Proxy Statement.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The equity compensation plan information as required by Item 201(d) of Regulation S-K is illustrated in Part II, Item 5 of
this document. All other information as required by Item 12 is incorporated by reference to the 2008 Proxy Statement.

Item 13.    Certain Relationships and Related Transactions, and Director Independence

Incorporated by reference to the 2008 Proxy Statement.

51

---



Item 14.    Principal Accounting Fees and Services

Incorporated by reference to the 2008 Proxy Statement.

Part IV

Item 15.    Exhibits, Financial Statement Schedules



52

---





SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

|              |  | WALTER INDUSTRIES, INC.                                                                                                                                   
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|March 7, 2008 |  | /s/VICTOR P. PATRICKVictor P. Patrick, Vice Chairman and Director, Chief Financial Officer and General Counsel (Principal
Executive and Financial Officer)

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

March 7, 2008

/s/HOWARD L. CLARK JR.Howard L. Clark, Jr., Director*March 7, 2008

/s/JERRY W. KOLBJerry W. Kolb, Director*March 7, 2008

/s/PATRICK A. KRIEGSHAUSERPatrick A. Kriegshauser, Director*March 7, 2008

/s/MARK J. O'BRIENMark J. O'Brien, Director, Chairman and Chief Executive Officer, JWH Holding Company, LLC*March 7, 2008

/s/BERNARD G. RETHOREBernard G. Rethore, Director*March 7, 2008

/s/GEORGE R. RICHMONDGeorge R. Richmond, Director, President and Chief Executive Officer, Jim Walter Resources*March 7, 2008

/s/MICHAEL T. TOKARZMichael T. Tokarz, Chairman*March 7, 2008

/s/A.J. WAGNERA.J. Wagner, Director*March 7, 2008

/s/LISA A. HONNOLDLisa A. Honnold, Senior Vice President, Controller and Principal Accounting Officer


|*By: |  | /s/VICTOR P. PATRICK
Victor P. Patrick
Attorney-in-Fact |  |  |  | 
|---- |  | ------------------------------------------------------- |  |  |  | 

53

---



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|Walter Industries, Inc. and Subsidiaries |                                                                                                                                                              | 
|---------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------ | 
|                                         | Reports of Independent Registered Certified Public Accounting Firms                                                                                          | 
|                                         | Consolidated Balance SheetsDecember 31, 2007 and 2006                                                                                                       | 
|                                         | Consolidated Statements of Operations for Each of the Three Years in the Period Ended December 31, 2007                                                      | 
|                                         | Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income (Loss) for Each of the Three Years in the Period Ended December 31, 2007 | 
|                                         | Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended December 31, 2007                                                      | 
|                                         | Notes to Consolidated Financial Statements                                                                                                                   | 

F-1

---



Report of Independent Registered Certified Public Accounting Firm

The
Board of Directors and Stockholders of Walter Industries, Inc.

We
have audited the accompanying consolidated balance sheet of Walter Industries, Inc. and subsidiaries (the Company) as of December 31, 2007, and the related consolidated
statements of operations, changes in stockholders' equity and comprehensive income, and cash flows for the year then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial statements based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Walter Industries, Inc. and subsidiaries at
December 31, 2007, and the consolidated results of their operations and their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.

As
discussed in Note 11, the Company adopted Financial Accounting Standards Board Interpretation No. 48,Accounting for Uncertainty in Income
Taxes, as of January 1, 2007.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Walter Industries, Inc. and subsidiaries' internal control over
financial reporting
as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report
dated February 29, 2008 expressed an unqualified opinion thereon.

/s/
Ernst & Young LLP
Tampa, Florida
February 29, 2008

F-2

---



Report of Independent Registered Certified Public Accounting Firm
on Internal Control over Financial Reporting

The
Board of Directors and Stockholders of Walter Industries, Inc.

We
have audited Walter Industries, Inc. and subsidiaries' internal control over financial reporting as of December 31, 2007, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Walter Industries, Inc.'s management is responsible for
maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's
Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As
indicated in the accompanying Management's Report on Internal Controls over Financial Reporting, management's assessment of and conclusion on the effectiveness of internal control
over financial reporting did not include the internal controls of Tuscaloosa Resources, Inc., which is included in the 2007 consolidated financial statements of Walter Industries, Inc. and
subsidiaries and constituted $26.3 million and $20.6 million of total and net assets, respectively, as of December 31, 2007 and $17.2 million and $0.3 of revenues and net
income, respectively, for the year then ended. Our audit of internal control over financial reporting of Walter Industries, Inc. and subsidiaries also did not include an evaluation of the internal
control over financial reporting of Tuscaloosa Resources, Inc.

In
our opinion, Walter Industries, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based
on the COSO criteria.

F-3

---



We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Walter Industries, Inc. and
subsidiaries as of December 31, 2007, and the related consolidated statements of operations, changes in stockholders' equity and comprehensive income, and cash flows for the year then ended and
our report dated February 29, 2008 expressed an unqualified opinion thereon.

/s/
Ernst & Young LLP
Tampa, Florida
February 29, 2008

F-4

---



Report of Independent Registered Certified Public Accounting Firm

To
Board of Directors and Stockholders of Walter Industries, Inc.:

In
our opinion, the consolidated balance sheet as of December 31, 2006 and the related consolidated statements of operations, changes in stockholders' equity and comprehensive
income, and cash flows for each of two years in the period ended December 31, 2006 present fairly, in all material respects, the financial position of Walter Industries, Inc. and its
subsidiaries at December 31, 2006, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2006, in conformity with accounting
principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/
PricewaterhouseCoopers LLP
Tampa, Florida
February 28, 2007 except as it relates to the discontinued operations of Crestline Homes Inc. as described in Note 3 and the change in segments as described in Note 18, as to which the
date is March 7, 2008

F-5

---



WALTER INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

|                                                                                   |                                                | December 31,                                          |          
|---------------------------------------------------------------------------------- | ---------------------------------------------- | ----------------------------------------------------- | ---------
|
|ASSETS                                                                             |                                                |                                                       |          
|Cash and cash equivalents                                                          |                                                | $                                                     | 30,614   
|Short-term investments, restricted                                                 |                                                |                                                       | 75,851   
|Instalment notes receivable, net of allowance of $13,992 and $13,011, respectively |                                                |                                                       | 1,837,059
|Receivables, net                                                                   |                                                |                                                       | 81,698   
|Inventories                                                                        |                                                |                                                       | 101,676  
|Prepaid expenses                                                                   |                                                |                                                       | 38,340   
|Property, plant and equipment, net                                                 |                                                |                                                       | 435,035  
|Other assets                                                                       |                                                |                                                       | 156,113  
|Goodwill                                                                           |                                                |                                                       | 10,895   
|Assets of discontinued operations                                                  |                                                |                                                       |         
|                                                                                   |                                                |                                                       |          
|                                                                                   |                                                | $                                                     | 2,767,281
|                                                                                   |                                                |                                                       |          
|LIABILITIES AND STOCKHOLDERS' EQUITY                                               |                                                |                                                       |          
|Accounts payable                                                                   |                                                | $                                                     | 72,072   
|Accrued expenses                                                                   |                                                |                                                       | 83,072   
|Accrued interest                                                                   |                                                |                                                       | 13,940   
|Debt:                                                                              |                                                |                                                       |          
|                                                                                   | Mortgage-backed/asset-backed notes             |                                                       |          
|                                                                                   | Other debt                                     |                                                       |          
|Accumulated postretirement benefits obligation                                     |                                                |                                                       | 335,034  
|Other liabilities                                                                  |                                                |                                                       | 216,372  
|Liabilities of discontinued operations                                             |                                                |                                                       |         
|                                                                                   |                                                |                                                       |          
|                                                                                   | Total liabilities                              |                                                       |          
|                                                                                   |                                                |                                                       |          
|Commitments and Contingencies (Note 16)                                            |                                                |                                                       |          
|Stockholders' equity:                                                              |                                                |                                                       |          
|                                                                                   | Common stock, $.01 par value per share:        |                                                       |          
|                                                                                   |                                                | Authorized200,000,000 shares                         |          
|                                                                                   |                                                | Issued51,991,134 and 72,730,770 shares               |          
|                                                                                   | Capital in excess of par value                 |                                                       |          
|                                                                                   | Accumulated deficit                            |                                                       |          
|                                                                                   | Treasury stock0 and 20,771,902                |                                                       |          
|                                                                                   |                                                | shares, at cost                                       |          
|                                                                                   | Accumulated other comprehensive income (loss): |                                                       |          
|                                                                                   |                                                | Pension and post-retirement benefit plans, net of tax |          
|                                                                                   |                                                | Unrealized gain (loss) on hedges, net of tax          |          
|                                                                                   |                                                |                                                       |          
|                                                                                   |                                                | Total stockholders' equity                            |          
|                                                                                   |                                                |                                                       |          
|                                                                                   |                                                | $                                                     | 2,767,281
|                                                                                   |                                                |                                                       |          

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

F-6

---



WALTER INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

|                                                           |                                                             | For the years ended December 31, |          
|---------------------------------------------------------- | ----------------------------------------------------------- | -------------------------------- | ---------
|
|Net sales and revenues:                                    |                                                             |                                  |          
|                                                           | Net sales                                                   |                                  | $        
|                                                           | Interest income on instalment notes                         |                                  |          
|                                                           | Miscellaneous                                               |                                  |          
|                                                           |                                                             |                                  |          
|                                                           |                                                             |                                  | 1,241,372
|                                                           |                                                             |                                  |          
|Cost and expenses:                                         |                                                             |                                  |          
|                                                           | Cost of sales (exclusive of depreciation)                   |                                  |          
|                                                           | Depreciation                                                |                                  |          
|                                                           | Selling, general and administrative                         |                                  |          
|                                                           | Provision for losses on instalment notes                    |                                  |          
|                                                           | Postretirement benefits                                     |                                  |          
|                                                           | Interest expensemortgage-backed/asset-backed notes         |                                  |          
|                                                           | Interest expenseother debt                                 |                                  |          
|                                                           | Amortization of intangibles                                 |                                  |          
|                                                           | Restructuring and impairment charges                        |                                  |          
|                                                           | Provision (credit) for estimated hurricane insurance losses |                                  |          
|                                                           | Debt conversion expense                                     |                                  |          
|                                                           |                                                             |                                  |          
|                                                           |                                                             |                                  | 1,075,915
|                                                           |                                                             |                                  |          
|Income from continuing operations before income            |                                                             |                                  |          
|                                                           | tax expense and minority interest                           |                                  |          
|Income tax expense                                         |                                                             |                                  | 51,229   
|                                                           |                                                             |                                  |          
|Income from continuing operations before minority interest |                                                             |                                  | 114,228  
|Minority interest in net loss of affiliate                 |                                                             |                                  |         
|                                                           |                                                             |                                  |          
|Income from continuing operations                          |                                                             |                                  | 114,228  
|Income (loss) from discontinued operations                 |                                                             |                                  | (2,229   
|                                                           |                                                             |                                  |          
|Net income                                                 |                                                             | $                                | 111,999  
|                                                           |                                                             |                                  |          
|Basic income per share:                                    |                                                             |                                  |          
|                                                           | Income from continuing operations                           |                                  | $        
|                                                           | Income (loss) from discontinued operations                  |                                  |          
|                                                           |                                                             |                                  |          
|                                                           | Net income                                                  |                                  | $        
|                                                           |                                                             |                                  |          
|Diluted income per share:                                  |                                                             |                                  |          
|                                                           | Income from continuing operations                           |                                  | $        
|                                                           | Income (loss) from discontinued operations                  |                                  |          
|                                                           |                                                             |                                  |          
|                                                           | Net income                                                  |                                  | $        
|                                                           |                                                             |                                  |          

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

F-7

---



WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE YEARS ENDED DECEMBER 31, 2007
(in thousands)

|                                                                                           |                                         | Total                                                                                 |          | Common
Stock |        | Capital in
Excess of
Par Value |   | Comprehensive
Income (Loss) |           | Accumulated
Deficit |   | Treasury
Stock |         | Accumulated
Other
Comprehensive
Income (Loss) |         
|------------------------------------------------------------------------------------------ | --------------------------------------- | ------------------------------------------------------------------------------------- | -------- | ------------ | ------ | ------------------------------ | - | --------------------------- | --------- | ------------------- | - | -------------- | ------- | --------------------------------------------- | --------
|Balance at December 31, 2004                                                               |                                         | $                                                                                     | 259,227  |              | $      | 580                            |   | $                           | 1,178,121 |                     |   |                |         | $                                             | (609,048
|Comprehensive loss:                                                                        |                                         |                                                                                       |          |              |        |                                |   |                             |           |                     |   |                |         |                                               |         
|                                                                                           | Net income                              |                                                                                       |          | 7,046        |        |                                |   |                             |           |                     |   | $              | 7,046   |                                               |         
|                                                                                           | Other comprehensive loss, net of tax:   |                                                                                       |          |              |        |                                |   |                             |           |                     |   |                |         |                                               |         
|                                                                                           |                                         | Cumulative foreign currency translation adjustment                                    |          |              | (113   | )                              |   |                             |           |                     |   |                |         | (113                                          | )       
|                                                                                           |                                         | Increase in additional pension liability, net of $6.0 million tax benefit             |          |              | (9,573 | )                              |   |                             |           |                     |   |                |         | (9,573                                        | )       
|                                                                                           |                                         | Net unrealized loss on hedges, net of $0.3 million tax benefit                        |          |              | (619   | )                              |   |                             |           |                     |   |                |         | (619                                          | )       
|                                                                                           |                                         |                                                                                       |          |              |        |                                |   |                             |           |                     |   |                |         |                                               |         
|Comprehensive loss                                                                         |                                         |                                                                                       |          |              |        |                                |   |                             |           |                     | $ | (3,259         | )       |                                               |         
|                                                                                           |                                         |                                                                                       |          |              |        |                                |   |                             |           |                     |   |                |         |                                               |         
|Stock issued upon exercise of stock options                                                |                                         |                                                                                       | 19,872   |              |        | 18                             |   |                             | 19,854    |                     |   |                |         |                                               |         
|Tax benefit from the exercise of stock options                                             |                                         |                                                                                       | 17,469   |              |        |                                |   |                             | 17,469    |                     |   |                |         |                                               |         
|Dividends paid, $0.16 per share                                                            |                                         |                                                                                       | (6,145   | )            |        |                                |   |                             | (6,145    | )                   |   |                |         |                                               |         
|Stock-based compensation                                                                   |                                         |                                                                                       | 1,452    |              |        |                                |   |                             | 1,452     |                     |   |                |         |                                               |         
|                                                                                           |                                         |                                                                                       |          |              |        |                                |   |                             |           |                     |   |                |         |                                               |         
|Balance at December 31, 2005                                                               |                                         |                                                                                       | 288,616  |              |        | 598                            |   |                             | 1,210,751 |                     |   |                |         |                                               | (602,002
|Adjustment to initially apply SEC SAB No. 108                                              |                                         |                                                                                       | 5,069    |              |        |                                |   |                             |           |                     |   |                |         |                                               | 5,069   
|                                                                                           |                                         |                                                                                       |          |              |        |                                |   |                             |           |                     |   |                |         |                                               |         
|Adjusted balance at December 31, 2005                                                      |                                         |                                                                                       | 293,685  |              |        | 598                            |   |                             | 1,210,751 |                     |   |                |         |                                               | (596,933
|Comprehensive income:                                                                      |                                         |                                                                                       |          |              |        |                                |   |                             |           |                     |   |                |         |                                               |         
|                                                                                           | Net income                              |                                                                                       |          | 198,369      |        |                                |   |                             |           |                     |   | $              | 198,369 |                                               |         
|                                                                                           | Other comprehensive income, net of tax: |                                                                                       |          |              |        |                                |   |                             |           |                     |   |                |         |                                               |         
|                                                                                           |                                         | Cumulative foreign currency translation adjustment                                    |          |              | 1,053  |                                |   |                             |           |                     |   |                |         | 1,053                                         |         
|                                                                                           |                                         | Decrease in additional pension liability, net of $0.3 million tax provision           |          |              | 703    |                                |   |                             |           |                     |   |                |         | 703                                           |         
|                                                                                           |                                         | Net unrealized gain on hedges, net of $2.8 million tax provision                      |          |              | 4,113  |                                |   |                             |           |                     |   |                |         | 4,113                                         |         
|                                                                                           |                                         |                                                                                       |          |              |        |                                |   |                             |           |                     |   |                |         |                                               |         
|Comprehensive income                                                                       |                                         |                                                                                       |          |              |        |                                |   |                             |           |                     | $ | 204,238        |         |                                               |         
|                                                                                           |                                         |                                                                                       |          |              |        |                                |   |                             |           |                     |   |                |         |                                               |         
|Adjustment to initially apply FASB Statement No. 158                                       |                                         |                                                                                       | (74,513  | )            |        |                                |   |                             |           |                     |   |                |         |                                               |         
|Sale of common stock                                                                       |                                         |                                                                                       | 168,680  |              |        | 26                             |   |                             | 168,654   |                     |   |                |         |                                               |         
|Stock issued upon conversion of convertible notes                                          |                                         |                                                                                       | 176,108  |              |        | 98                             |   |                             | 176,010   |                     |   |                |         |                                               |         
|Gain on sale of investment in Mueller Water Products, Inc. through initial public offering |                                         |                                                                                       | 132,048  |              |        |                                |   |                             | 125,088   |                     |   |                |         |                                               |         
|Stock dividend for spin-off of Mueller Water Products, Inc                                 |                                         |                                                                                       | (919,933 | )            |        |                                |   |                             | (944,393  | )                   |   |                |         |                                               |         
|Stock issued upon exercise of stock options                                                |                                         |                                                                                       | 4,735    |              |        | 6                              |   |                             | 4,729     |                     |   |                |         |                                               |         
|Tax benefit on the exercise of stock options                                               |                                         |                                                                                       | 8,310    |              |        |                                |   |                             | 8,310     |                     |   |                |         |                                               |         
|Dividends paid, $0.16 per share                                                            |                                         |                                                                                       | (6,825   | )            |        |                                |   |                             | (6,825    | )                   |   |                |         |                                               |         
|Stock-based compensation                                                                   |                                         |                                                                                       | 15,375   |              |        |                                |   |                             | 15,375    |                     |   |                |         |                                               |         
|                                                                                           |                                         |                                                                                       |          |              |        |                                |   |                             |           |                     |   |                |         |                                               |         
|Balance at December 31, 2006                                                               |                                         |                                                                                       | 1,908    |              |        | 728                            |   |                             | 757,699   |                     |   |                |         |                                               | (398,564
|Adjustment to initially apply FIN 48                                                       |                                         |                                                                                       | (4,421   | )            |        |                                |   |                             |           |                     |   |                |         |                                               | (4,421  
|                                                                                           |                                         |                                                                                       |          |              |        |                                |   |                             |           |                     |   |                |         |                                               |         
|Adjusted balance at January 1, 2007                                                        |                                         |                                                                                       | (2,513   | )            |        | 728                            |   |                             | 757,699   |                     |   |                |         |                                               | (402,985
|Comprehensive income:                                                                      |                                         |                                                                                       |          |              |        |                                |   |                             |           |                     |   |                |         |                                               |         
|                                                                                           | Net income                              |                                                                                       |          | 111,999      |        |                                |   |                             |           |                     |   | $              | 111,999 |                                               |         
|                                                                                           | Other comprehensive income, net of tax: |                                                                                       |          |              |        |                                |   |                             |           |                     |   |                |         |                                               |         
|                                                                                           |                                         | Change in pension and postretirement benefit plans, net of $9.7 million tax provision |          |              | 15,231 |                                |   |                             |           |                     |   |                |         | 15,231                                        |         
|                                                                                           |                                         | Net unrealized loss on hedges, net of $4.3 million tax benefit                        |          |              | (8,446 | )                              |   |                             |           |                     |   |                |         | (8,446                                        | )       
|                                                                                           |                                         |                                                                                       |          |              |        |                                |   |                             |           |                     |   |                |         |                                               |         
|Comprehensive income                                                                       |                                         |                                                                                       |          |              |        |                                |   |                             |           |                     | $ | 118,784        |         |                                               |         
|                                                                                           |                                         |                                                                                       |          |              |        |                                |   |                             |           |                     |   |                |         |                                               |         
|Retirement of treasury stock                                                               |                                         |                                                                                       |         |              |        | (207                           | ) |                             | (259,902  | )                   |   |                |         |                                               |         
|Purchases of stock under stock repurchase program                                          |                                         |                                                                                       | (5,627   | )            |        | (1                             | ) |                             | (5,626    | )                   |   |                |         |                                               |         
|Stock issued upon exercise of stock options                                                |                                         |                                                                                       | 1,447    |              |        |                                |   |                             | 1,447     |                     |   |                |         |                                               |         
|Tax benefit on the exercise of stock options                                               |                                         |                                                                                       | 2,015    |              |        |                                |   |                             | 2,015     |                     |   |                |         |                                               |         
|Dividends paid, $0.20 per share                                                            |                                         |                                                                                       | (10,411  | )            |        |                                |   |                             | (10,411   | )                   |   |                |         |                                               |         
|Stock-based compensation                                                                   |                                         |                                                                                       | 11,810   |              |        |                                |   |                             | 11,810    |                     |   |                |         |                                               |         
|Other                                                                                      |                                         |                                                                                       | (792     | )            |        |                                |   |                             |           |                     |   |                |         |                                               |         
|                                                                                           |                                         |                                                                                       |          |              |        |                                |   |                             |           |                     |   |                |         |                                               |         
|Balance at December 31, 2007                                                               |                                         | $                                                                                     | 114,713  |              | $      | 520                            |   | $                           | 497,032   |                     |   |                |         | $                                             | (290,986
|                                                                                           |                                         |                                                                                       |          |              |        |                                |   |                             |           |                     |   |                |         |                                               |         

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

F-8

---



WALTER INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

|                                                                                               |                                                                                | For the years ended December 31,                         |        
|---------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | -------------------------------------------------------- | -------
|
|OPERATING ACTIVITIES                                                                           |                                                                                |                                                          |        
|Net income                                                                                     |                                                                                | $                                                        | 111,999
|                                                                                               | Loss (income) from discontinued operations                                     |                                                          |        
|                                                                                               |                                                                                |                                                          |        
|                                                                                               | Income from continuing operations                                              |                                                          |        
|Adjustments to reconcile income from continuing operations to net cash provided by operations: |                                                                                |                                                          |        
|                                                                                               | Provision for losses on instalment notes receivable                            |                                                          |        
|                                                                                               | Depreciation                                                                   |                                                          |        
|                                                                                               | Restructuring and impairment charges                                           |                                                          |        
|                                                                                               | Provision for (benefit from) deferred income taxes                             |                                                          |        
|                                                                                               | Other                                                                          |                                                          |        
|Decrease (increase) in assets, net of effect of acquisitions:                                  |                                                                                |                                                          |        
|                                                                                               | Receivables                                                                    |                                                          |        
|                                                                                               | Inventories                                                                    |                                                          |        
|                                                                                               | Prepaid expenses                                                               |                                                          |        
|                                                                                               | Instalment notes receivable, net                                               |                                                          |        
|Increase (decrease) in liabilities, net of effect of acquisitions:                             |                                                                                |                                                          |        
|                                                                                               | Accounts payable                                                               |                                                          |        
|                                                                                               | Accrued expenses                                                               |                                                          |        
|                                                                                               | Accrued interest                                                               |                                                          |        
|                                                                                               |                                                                                |                                                          |        
|                                                                                               |                                                                                | Cash flows provided by operating activities              |        
|                                                                                               |                                                                                |                                                          |        
|INVESTING ACTIVITIES                                                                           |                                                                                |                                                          |        
|                                                                                               | Acquisitions, net of cash acquired                                             |                                                          |        
|                                                                                               | Purchases of loans                                                             |                                                          |        
|                                                                                               | Principal payments received on purchased loans                                 |                                                          |        
|                                                                                               | Additions to property, plant and equipment                                     |                                                          |        
|                                                                                               | Cash proceeds from sale of property, plant and equipment                       |                                                          |        
|                                                                                               | Decrease (increase) in short-term investments, restricted                      |                                                          |        
|                                                                                               | Other                                                                          |                                                          |        
|                                                                                               |                                                                                |                                                          |        
|                                                                                               |                                                                                | Cash flows used in investing activities                  |        
|                                                                                               |                                                                                |                                                          |        
|FINANCING ACTIVITIES                                                                           |                                                                                |                                                          |        
|                                                                                               | Issuance of mortgage-backed/asset-backed notes                                 |                                                          |        
|                                                                                               | Payments on mortgage-backed/asset-backed notes                                 |                                                          |        
|                                                                                               | Proceeds from issuance of other debt                                           |                                                          |        
|                                                                                               | Retirement of other debt                                                       |                                                          |        
|                                                                                               | Sale of common stock                                                           |                                                          |        
|                                                                                               | Cash spun-off to Mueller Water Products, Inc.                                  |                                                          |        
|                                                                                               | Tax benefit on the exercise of employee stock options                          |                                                          |        
|                                                                                               | Exercise of employee stock options                                             |                                                          |        
|                                                                                               | Dividends paid                                                                 |                                                          |        
|                                                                                               | Purchases of stock under stock repurchase program                              |                                                          |        
|                                                                                               | Other                                                                          |                                                          |        
|                                                                                               |                                                                                |                                                          |        
|                                                                                               |                                                                                | Cash flows provided by (used in) financing activities    |        
|                                                                                               |                                                                                |                                                          |        
|                                                                                               |                                                                                | Cash flows used in continuing operations                 |        
|                                                                                               |                                                                                |                                                          |        
|CASH FLOWS FROM DISCONTINUED OPERATIONS                                                        |                                                                                |                                                          |        
|                                                                                               | Cash flows provided by operating activities                                    |                                                          |        
|                                                                                               | Cash flows used in investing activities                                        |                                                          |        
|                                                                                               | Cash flows provided by financing activities                                    |                                                          |        
|                                                                                               |                                                                                |                                                          |        
|                                                                                               |                                                                                | Cash flows provided by (used in) discontinued operations |        
|                                                                                               |                                                                                |                                                          |        
|Net increase (decrease) in cash and cash equivalents                                           |                                                                                |                                                          | (96,756
|                                                                                               |                                                                                |                                                          |        
|Cash and cash equivalents at beginning of year                                                 |                                                                                |                                                          | 127,369
|                                                                                               | Add: Cash and cash equivalents of discontinued operations at beginning of year |                                                          |        
|Net increase (decrease) in cash and cash equivalents                                           |                                                                                |                                                          | (96,756
|                                                                                               | Less: Cash and cash equivalents of discontinued operations at end of year      |                                                          |        
|                                                                                               |                                                                                |                                                          |        
|Cash and cash equivalents at end of year                                                       |                                                                                | $                                                        | 30,614 
|                                                                                               |                                                                                |                                                          |        

F-9

---



WALTER INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(in thousands)

|SUPPLEMENTAL DISCLOSURES: |                                                            |                                   |   |         |         |   |         |         |   |        
|------------------------- | ---------------------------------------------------------- | --------------------------------- | - | ------- | ------- | - | ------- | ------- | - | -------
|                          | Interest paid, net of capitalized interest                 |                                   | $ | 125,694 |         | $ | 148,703 |         | $ | 135,408
|                          | Income taxes paid (refunded), net                          |                                   |   | 54,818  |         |   | 32,495  |         |   | 18,483 
|                          | Investing Activities:                                      |                                   |   |         |         |   |         |         |   |        
|                          | Acquisition of TRI in 2007 and Mueller Water in 2005:      |                                   |   |         |         |   |         |         |   |        
|                          |                                                            | Fair value of assets acquired     |   | $       | 26,260  |   | $       |        |   | $      
|                          |                                                            | Fair value of liabilities assumed |   |         | (14,216 | ) |         |         |   |        
|                          |                                                            | Less: Cash acquired               |   |         | (394    | ) |         |         |   |        
|                          |                                                            |                                   |   |         |         |   |         |        
|                          |                                                            | Net cash paid                     |   | $       | 11,650  |   |         |         |   | $      
|                          |                                                            |                                   |   |         |         |   |         |        
|                          | Financing Activities:                                      |                                   |   |         |         |   |         |         |   |        
|                          | One-year property insurance policy financing agreement     |                                   | $ | 5,277   |         | $ |        |         | $ |       
|                          | Non-cash conversion of Senior Subordinated Convertible     |                                   |   |         |         |   |         |         |   |        
|                          |                                                            | Notes into common stock           |   |         |         |   |         | 174,215 |   |        
|                          | Non-cash dividend to spin-off Mueller Water Products, Inc. |                                   |   |         |         |   | 944,393 |         |   |        

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

F-10

---



WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1Organization

Walter Industries, Inc. ("Walter"), together with its consolidated subsidiaries ("the Company"), is a diversified company that operates in five reportable
segments: Natural Resources, Sloss, Financing, Homebuilding and Other, see Note 18. Through these operating segments, the Company offers a diversified line of products and services including
coal and natural gas, furnace and foundry coke, slag fiber, mortgage financing and home construction.

NOTE 2Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of all wholly and majority owned subsidiaries. Preparation of financial statements in accordance with
U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. Actual results could
differ from those estimates. All significant intercompany balances and transactions have been eliminated. The notes to consolidated financial statements, except where otherwise indicated, relate to
continuing operations only.

Concentrations of Credit Risk

Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist principally of cash and cash equivalents,
investments, instalment notes receivable, and trade and other receivables.

The
Company maintains cash and cash equivalents in high quality securities with various financial institutions. Concentrations of credit risk with respect to instalment notes receivable
and trade and other receivables are limited due to the large number of customers and their dispersion across many geographic areas. However, of the gross amount of instalment notes receivable at
December 31, 2007, 33%, 15%, 9%, and 6%, (December 31, 2006, 32%, 15%, 8%, and 6%) are secured by homes located in the states of Texas, Mississippi, Alabama, and Florida and Louisiana
(each 6%), respectively. The Company believes the potential for incurring material losses related to the concentration of these credit risks is remote.

The
Company provides insurance to homeowners primarily in the southeastern United States and, due to the concentration in this area, is subject to risk of loss due to the threat of
hurricanes and other natural disasters.

Revenue Recognition

Natural ResourcesFor coal shipments via rail, revenue is recognized when title and risk of loss transfer to the customer when
the railcar is loaded. For coal shipments via ocean vessel, revenue is recognized under international shipping standards as defined by Incoterms 2000 when title and risk of loss transfer to the
customer. For the Company's methane gas operations, revenue is recognized when the gas has been transferred to the customer's pipeline, at which time transfer of title occurs.

Miscellaneous
income in 2006 includes $23.4 million related to the settlement of an insurance claim associated with a 2005 water ingress problem at Mine No. 5.

SlossFor products shipped via rail or truck, revenue is recognized when title and risk of loss transfer to the customer,
generally at the point of shipment.

FinancingWithin the Financing segment, Walter Mortgage Company ("WMC"), the successor by merger to Mid-State
Homes. Inc., purchases, securitizes and services instalment notes and mortgages originated by Jim Walter Homes ("JWH"). JWH offers financing to homebuyers and WMC originates

F-11

---



and
purchases loans that are secured by mortgages and liens. References to instalment notes or mortgage instalment notes include mortgage loans offered by WMC.

Instalment
notes receivable are initially recorded by JWH at the discounted value of the future instalment note payments using an imputed interest rate. The imputed interest rate used
represents the estimated prevailing market rate of interest for credit of similar terms issued to customers with credit ratings similar to JWH's customers. The Company estimates this rate by reference
to rates charged by competitors and other lenders to customers of similar credit quality. These estimates affect revenue recognition by determining the allocation of income between the amount
recognized by the Homebuilding segment from the construction of the home and the amount recognized by the Financing segment over the life of the instalment note as interest income. Variations in the
estimated market rate of interest used to initially record instalment notes receivable could affect the amount and timing of income recognition in each of these segments. Instalment note payoffs
received in advance of scheduled maturity (prepayments) effect the amount of interest income due to the recognition of any remaining unamortized discounts or premiums arising from the note's
inception.

The
interest income earned by WMC is recognized using the interest method. The legal instruments used in each company allow for different fee structures to be charged to the customer,
for example late fees and prepayment fees, and ultimately recognized as revenue. JWH offers instalment notes, which state the maximum amount to be charged to the customer, and ultimately recognized as
revenue, based on the contractual number of payments and dollar amount of monthly payments. In each of the three years ended December 31, 2007, WMC purchased fixed and variable rate mortgage
loans and offered mortgage loans that have fixed monthly payments and repayment terms similar to instalment notes. WMC has the ability to levy costs to protect their collateral position upon default,
such as attorney fees and late charges, as allowed by state law.

Instalment
notes are placed on non-accrual status when any portion of the principal or interest is ninety days past due. When placed on non-accrual status, the
related interest receivable is reversed against interest income of the current period. Instalment notes are removed from non-accrual status when the amount financed and the associated
interest income become current. Recoveries of advanced taxes and insurance related to instalment notes are recognized as income when collected.

The
Financing segment sells homes and related real estate repossessed or foreclosed on from customers in default of their loans or notes ("Repo Sales"). Repo Sales involve the sale and,
in most circumstances, the financing of both a home and related real estate. Revenues from Repo Sales are recognized by the full accrual method where appropriate. However, the requirement for a
minimum
5% initial cash investment, (for primary residences), frequently is not met. When this is the case, losses are immediately recognized, and gains are deferred and recognized by the instalment method
until the buyer's investment reaches the minimum 5%. At that time, revenue is recognized by the full accrual method.

HomebuildingThe Company's operations primarily involve selling a home constructed for consumers on real estate owned by the
consumer ("On Your Lot Sales"). Sales for cash at closing occasionally occur for each of the above categories. However, most involve some form of seller financing. Since the real estate (land) is
already owned by the customer and is not financed by the Company, these transactions represent sales of personal property financed by instalment sales contracts ("Notes"). Revenue from the
construction and sale of a home is recognized upon completion of construction and legal transfer of ownership to the customer.

OtherGenerally, land sales are recognized as revenue when legal transfer of ownership to the buyer occurs, which is at
closing.

Given
the diversity of the Company's businesses, many transactions have unique characteristics, which have to be analyzed on a case-by-case basis. This diversity
of products and contracts can lead to variations in the timing of income recognition. However, most transactions are not individually significant, nor could they materially impact earnings.

F-12

---



Shipping and Handling

Costs to ship products to customers are included in cost of sales and amounts billed to customers, if any, to cover shipping and handling are included in net
sales.

Advertising

The Company recognizes advertising costs as incurred in selling, general and administration expenses in the statement of operations. The amount of advertising
expense recognized in 2007, 2006 and 2005 was $5.0 million, $5.2 million and $6.4 million, respectively.

Cash and Cash Equivalents

Cash and cash equivalents include short-term deposits and highly liquid investments that have original maturities of three months or less when
purchased and are stated at cost which approximates market. The Company's cash management system provides for the reimbursement of all major bank disbursement accounts on a daily basis. Checks issued
but not yet presented to the banks for payment are included in accounts payable.

Allowances for Losses

Allowances for losses on trade and other accounts receivables are based, in large part, upon judgments and estimates of expected losses and specific
identification of problem trade accounts and other receivables. Significantly weaker than anticipated industry or economic conditions could impact customers' ability to pay such that actual losses may
be greater than the amounts provided for in these allowances.

Management's
periodic evaluation of the adequacy of the allowance for losses on instalment notes is based on the Company's past loss experience, known and inherent risks in the
portfolio, delinquencies, the estimated value of the underlying real estate collateral and current economic and market conditions within the applicable geographic areas surrounding the underlying real
estate. The calculation of delinquencies excludes from delinquent amounts those accounts that are in bankruptcy proceedings that are paying their mortgage payments in contractual compliance with
bankruptcy court approved mortgage payment obligations. The allowance for losses on instalment notes is increased by provisions for losses charged to income and is reduced by charge-offs,
net of recoveries.

Inventories

Inventories are valued at the lower of cost or market. Natural Resources' coal inventories are determined using the first-in, first-out
("FIFO") method, while supplies inventory is determined using the average cost method of accounting. Homes under construction are determined using actual costs. Financing's inventory of repossessed
property is recorded at its estimated fair value less estimated costs to sell. The valuation of coal inventories are subject to estimates due to possible gains or losses resulting from inventory
movements from the mine site to storage facilities at the Port of Mobile, inherent inaccuracies in belt scales and aerial surveys used to measure quantities and due to fluctuations in moisture
content. Periodic adjustments to coal tonnages on hand are made for an estimate of coal shortages due to these inherent gains and losses, primarily based on historical findings, the results of aerial
surveys and periodic coal pile clean-ups. Additionally, the
Company evaluates its inventory in terms of excess and obsolete exposures. This evaluation includes such factors as anticipated usage, inventory turnover, inventory levels and ultimate product sales
value.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost. Depreciation is recorded principally on the straight-line method over the estimated useful lives
of the assets. Leasehold improvements are amortized on the straight-line method over the lesser of the useful life of the improvement or the remaining lease term. Estimated useful lives
used in computing depreciation expense range from 3 to

F-13

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20 years
for machinery and equipment, 3 to 50 years for land improvements and buildings, and mine life for mine development costs. Gains and losses upon disposition are reflected in the
statement of operations in the period of disposition. Maintenance and repair expenditures are charged to expense as incurred.

Direct
internal and external costs to implement computer systems and software are capitalized and are amortized over the estimated useful life of the system or software, beginning when
site installations or module development is complete and ready for its intended use, which generally is 3 to 5 years.

The
Company has certain asset retirement obligations, primarily related to reclamation efforts for its Natural Resources segment. These obligations are recognized at fair value in the
period in which it is incurred and the carrying amount of the related long-lived asset is correspondingly increased. Over time, the liability is accreted to its future value. The
corresponding asset capitalized at inception is depreciated over the useful life of the asset. In addition, the Company has certain legal obligations for asset retirements related to disposing of
materials in the event of closure, abandonment or sale of certain of its facilities, primarily in the Sloss segment. The Company plans to operate the facilities that are subject to the asset
retirement obligations for the foreseeable future and as such has not estimated a liability at December 31, 2007. The Company will recognize a liability in the period in which the plant will
not operate in the foreseeable future and information is available to reasonably estimate the liability's fair value.

For
the years ended December 31, 2007, 2006 and 2005, the Company capitalized interest costs in the amount of $10.9 million, $0.5 million and $0.1 million,
respectively. Interest capitalization increased in 2007 primarily due to Natural Resources' capital expansion projects and the recognition of $4.6 million of capitalized interest applicable to
prior years' expansion projects.

Accounting for the Impairment of Long-Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be
recoverable. The Company periodically evaluates whether events and circumstances have occurred that indicate possible impairment. When impairment indicators exist, the Company uses market quotes, if
available or an estimate of the future undiscounted net cash flows of the related asset or asset group over the remaining life in measuring whether or not the asset values are recoverable. There have
been no significant impairments of long-lived assets during the three years ended December 31, 2007.

Workers' Compensation and Pneumoconiosis ("Black Lung")

The Company is self-insured for workers' compensation benefits for work related injuries. Liabilities, including those related to claims incurred but
not reported, are recorded principally using annual valuations based on discounted future expected payments and using historical data of the division or combined insurance industry data when
historical data is limited. Workers' compensation liabilities were as follows (in thousands):

|                                                              |  | December 31,
|------------------------------------------------------------- |  | ------------
|
|Undiscounted aggregated estimated claims to be paid           |  | $           
|Workers compensation liability recorded on a discounted basis |  | $           

F-14

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The Company applies a discount rate at a risk-free interest rate, generally a U.S. Treasury bill rate, for each policy year. The rate used is one with a duration that
corresponds to the weighted average expected payout period for each policy year. Once a discount rate is applied to a policy year, it remains the discount rate for the year until all claims are paid.
The weighted average rate used for discounting the liability at December 31, 2007 was 4.22%. A one-percentage-point increase in the discount rate on the discounted claims liability
would decrease the liability by $0.3 million, while a one-percentage-point decrease in the discount rate would increase the liability by $0.3 million.

The
Company is responsible for medical and disability benefits for black lung disease under the Federal Coal Mine Health and Safety Act of 1969, as amended, and is
self-insured against black lung related claims. The Company performs an annual evaluation of the overall black lung liabilities at the balance sheet date. The calculation is performed
using assumptions regarding rates of successful claims, discount factors, benefit increases and mortality rates, among others. The present value of the obligation recorded by the Company using a
discount factor of 6.5% and 5.7% for 2007 and 2006, respectively, was $8.2 million and $7.4 million as of December 31, 2007 and 2006, respectively, and was recorded in other
liabilities. A one-percentage-point increase in the discount rate on the discounted claims liability would decrease the liability by $1.1 million, while a
one-percentage-point decrease in the discount rate would increase the liability by $1.3 million.

Insurance Claims (Hurricane Losses)

Accruals for property-liability claims and claims expense are recognized when probable and reasonably estimable at amounts necessary to settle both reported and
unreported claims of insured property-liability losses, based upon the facts in each case and the Company's experience with similar cases. The establishment of appropriate accruals, including accruals
for catastrophes such as hurricanes, is an inherently uncertain process. Accrual estimates are regularly reviewed and updated, using the most current information available.

The
Company recorded a credit of $(1.0) million in 2006 and a provision of $10.0 million in 2005 for estimated hurricane insurance losses, net of expected reinsurance proceeds
from unrelated insurance carriers. These estimates were recorded in the Financing segment for claim losses as a result of damage from Hurricanes Katrina and Rita in 2005 and four hurricanes in 2004
that impacted the Company's market area.

Derivative Instruments and Hedging Activities

The Company enters into interest rate hedge agreements in accordance with the Company's internal debt and interest rate risk management policy, which is designed
to mitigate risks related to floating rate financing agreements that are subject to changes in the market rate of interest. Also, the Company enters into interest rate hedge agreements designed to
protect against the risk of rising interest rates on the forecasted amount of securitization debt to be issued to finance instalment notes and mortgage loans receivable of the Financing segment.
Changes in the fair value of interest rate hedge agreements that are designated and effective as hedges are recorded in accumulated other comprehensive income (loss) ("OCI"). Deferred gains or losses
are reclassified from OCI to the statement of operations in the same period as the underlying transactions are recorded and are recognized in the caption, interest expense. In addition, the settled
amount of an interest rate hedge agreement that has been terminated prior to its original term continues to be deferred in OCI and is recognized in the statement of operations over the term of the
underlying debt agreement designated as the hedged item. Changes in the fair value of interest rate hedge agreements that are not effective as hedges are recorded immediately in the statement of
operations as interest expense.

To
protect against the reduction in the value of forecasted cash flows resulting from sales of natural gas, the Company periodically engages in a natural gas hedging program. The Company
hedges

F-15

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portions
of its forecasted revenues from sales of natural gas with natural gas derivative contracts, generally either "swaps" or "collars". The Company enters into natural gas derivatives that
effectively convert a portion of its forecasted sales at floating-rate natural gas prices to a fixed-rate basis, thus reducing the impact of natural gas price changes on net
sales and revenues. When natural gas prices fall, the decline in value of future natural gas sales is offset by gains in the value of swap contracts designated as hedges. Conversely, when natural gas
prices rise, the increase in the value of future cash flows from natural gas sales is offset by losses in the value of the swap contracts. Changes in the fair value of natural gas derivative
agreements that are designated and effective as hedges are recorded in OCI. Deferred gains or losses are reclassified from OCI to the statement of operations in the same period as the underlying
transactions are recorded and are recognized as miscellaneous income. Changes in the fair value of natural gas hedge agreements that are not effective as hedges or are not designated as hedges are
recorded immediately in the statement of operations as miscellaneous income.

During
the three years ended December 31, 2007, the Company did not hold any non-derivative instruments designated as hedges or any derivatives designated as fair
value hedges. In addition, the Company does not enter into derivative financial instruments for speculative or trading purposes. Derivative contracts are entered into only with counterparties that
management considers credit-worthy.

Cash
flows from hedging activities are reported in the statement of cash flows in the same classification as the hedged item, generally as a component of cash flows from operations.

Environmental Expenditures

The Company capitalizes environmental expenditures that increase the life or efficiency of property or that reduces or prevents environmental contamination. The
Company accrues for environmental expenses resulting from existing conditions that relate to past operations when the costs are probable and reasonably estimable. See Note 16 for additional
discussion of environmental matters.

Income (Loss) per Share

The Company calculates basic income (loss) per share based on the weighted average common shares outstanding during each period and diluted income (loss) per
share based on weighted average and dilutive common equivalent shares outstanding during each period. Dilutive common equivalent shares include the dilutive effect of stock awards, as well as the
Company's convertible senior subordinated notes, see Note 15.

Adoption of FASB Staff Position No. AUG AIR-1

On January 1, 2007, as required, the Company adopted FASB Staff Position No. AUG AIR-1, "Accounting for Planned Major Maintenance Activities"
("AUG AIR-1"), which provides guidance on which methods are allowed to properly account for planned major maintenance activities. The adoption of this statement did not have a material
effect on the Company's operating results, financial position or cash flows.

NOTE 3Discontinued Operations & Acquisitions

Acquisition, Initial Public Offering and Spin-off of Mueller Water Products, Inc.

In 2005, the Company acquired all of the outstanding common stock of Mueller Water Products, Inc. ("Mueller Water") for $943.4 million and assumed
approximately $1.1 billion of indebtedness at Mueller Water. In conjunction with the acquisition, the Company's wholly owned subsidiary, United States Pipe and Foundry Company, LLC,
("U.S. Pipe") was contributed to Mueller Water. Also in 2005, the Company announced its plan to undertake an initial public offering and spin-off of Mueller Water.

F-16

---



In
2006, Mueller Water completed its initial public offering ("IPO") of 28.8 million shares of Series A common stock, at $16 per share (NYSE: MWA). In connection with the
IPO, Mueller Water issued approximately 85.8 million shares of Series B common stock to the Company in exchange for the Company's one share held prior to the IPO. On December 14,
2006, the Company distributed all of its 85.8 million shares of Mueller Water Series B common stock to its shareholders. The distribution took place in the form of a pro rata common
stock dividend whereby each shareholder received 1.6524432 shares of Mueller Water Series B common stock for each share of Company common stock held on the record date ("the
spin-off"). The spin-off was intended to be tax-free to the Company and to the shareholders of the Company for U.S. income tax purposes, except for any cash
received in lieu of fractional shares.

As
a result of the 2006 distribution, the Company no longer holds an ownership interest in Mueller Water. The Company and Mueller Water have entered into several agreements to facilitate
the spin-off, including an Income Tax Allocation Agreement that sets forth the rights and obligations of the Company and Mueller Water with respect to taxes and other liabilities that
could be imposed in the event of a determination by the Internal Revenue Service, upon audit, that is inconsistent with the tax-free status of the spin-off or any other
consequences anticipated in connection with the spin-off. Additionally, the Company and Mueller Water entered into a Joint Litigation Agreement that allocates responsibilities for pending
and future litigation and claims, allocates insurance coverages and third-party indemnification rights, where appropriate, and provides that each party should cooperate with each other regarding such
litigation claims and rights going forward.

As
a result of the spin-off, amounts previously reported in the Mueller Co., Anvil and U.S. Pipe segments (collectively, "Mueller Water") are presented as discontinued
operations for 2006 and 2005. The Company allocated certain corporate expenses, limited to specifically identified costs and other corporate shared services that support segment operations, to
discontinued operations. These costs represent expenses that have historically been allocated to and recorded by these operating segments as selling, general and administrative expenses. The Company
did not elect to allocate additional interest expense to discontinued operations.

Other Discontinued Operations Activity

During the first quarter of 2007, the Company decided to exit the manufacture and distribution of modular homes due to the poor performance of this division,
which operated as Crestline Homes, Inc. ("Crestline"). As such, the Company has reported the results of operations, assets, liabilities and cash flows of Crestline as discontinued operations
for all periods presented. Crestline's results were previously reported in the Homebuilding segment. The loss from discontinued operations for the year ended December 31, 2007 includes the
results of operations of this business through May 30, 2007, partially offset by a modest gain on the sale of the business on that date.

During
2006, the Company recorded a charge of $1.7 million, net of a tax benefit of $0.9 million, to recognize the effect of certain post-closing adjustments
resulting from the 2003 sale of Applied Industrial Materials Corporation ("AIMCOR"). This charge, as well as other legal and consulting costs resulting from the transaction, is included as a loss from
discontinued operations in the 2006 consolidated statement of operations.

F-17

---



The
table below presents the significant components of operating results included in income (loss) from discontinued operations (primarily Mueller Water and Crestline) for the years
ended December 31, 2007, 2006 and 2005 (in thousands).

For the years ended December 31,2007

2006

2005Net sales and revenues

$
12,358

$
1,828,626

$
955,915Income (loss) from discontinued operations before income tax expense and minority interest

$
(3,428
)
$
99,828

$
(57,522
)Income tax (expense) benefit


1,199


(42,249
)

21,594Minority interest





(12,144
)

Income (loss) from discontinued operations

$
(2,229
)
$
45,435

$
(35,928
)


The
assets and liabilities of Crestline included as discontinued operations in the consolidated balance sheet as of December 31, 2006 are shown below (in
thousands).

Cash and cash equivalents

$
1Receivables, net


3,549Inventory


3,344Prepaid expenses


419Property, plant and equipment, net


1,026Other assets


1,988Total assets

$
10,327Accounts payable

$
383Accrued expenses


1,622Total liabilities

$
2,005


Acquisition of Tuscaloosa Resources

On August 31, 2007, the Company acquired all of the outstanding common shares of Tuscaloosa Resources, Inc. ("TRI") for $12.5 million, of
which $11.7 million was paid in 2007. TRI's debt at the date of acquisition totaled $8.5 million of which $7.1 million was retired in 2007. TRI mines primarily
low-sulfur coal for the industrial and electric utility markets and is located in Brookwood, Alabama. The acquisition of TRI, included in the Natural Resources segment, diversifies the
Company's coal production base and provides an opportunity to grow the Company's domestic Natural Resources business.

The
financial results of TRI have been included in the Company's consolidated financial statements beginning on September 1, 2007. Assets acquired and liabilities assumed were
recorded at their estimated fair values as of August 31, 2007. The purchase price allocation is preliminary and is subject to future adjustments based on the resolution of a working capital
adjustment, certain loss contingencies and tax matters, as provided in the purchase agreement.

NOTE 4Stock-Based Compensation Plans

As of January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), "Share-Based Payment" and the Securities and Exchange Commission Staff
Bulletin No. 107 (collectively "SFAS 123(R)") which requires the Company to value and record, as compensation expense, stock awards granted to employees under a fair value based method.
Prior to January 1, 2006, the Company accounted for stock awards granted to employees under the recognition and measurement principles of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. Prior to the adoption of SFAS 123(R), compensation expense was not required for

F-18

---



stock
options granted to the Company's employees because all stock options granted had an intrinsic value of $0 at the date of the grant. However, compensation expense associated with restricted stock
unit grants was required to be recognized over the vesting period of the grant.

SFAS 123(R)
applies to new awards and to awards modified, repurchased or canceled after January 1, 2006. The Company utilizes the modified prospective application method
for stock options and restricted stock units granted prior to January 1, 2006, which requires the Company to record compensation expense beginning January 1, 2006 for the unvested
portion of those stock awards. This compensation expense is charged to the statement of operations with a corresponding credit to capital in excess of par value and is generally recognized utilizing
the graded vesting method for stock options and straight-line method for restricted stock units. In addition, the Company is required, upon adoption, to calculate the pool of income tax
benefits that were previously recorded in capital in excess of par value and are available to absorb future income tax benefit deficiencies that can result
from the exercise or maturity of stock awards. The Company has elected to calculate this pool under the alternative transition method provided for in FASB Staff Position No. 123
(R)-3, "Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards." Additionally, the Company is required to reflect the benefits of tax deductions in
excess of recognized compensation cost as an operating cash outflow and a financing cash inflow. The Company uses the Black-Scholes option pricing model to value its stock option grants and estimates
forfeitures in calculating the expense related to stock-based compensation.

In
accordance with the modified prospective transition method, the Company's consolidated financial statements for periods ended prior to January 1, 2006 have not been restated to
reflect, and do not include, the impact of SFAS 123(R). Had compensation cost for the Company's option plans for the year ended December 31, 2005 been determined based on the fair value
at the grant dates as prescribed by SFAS 123(R), the Company's net income and net income per share on a pro forma basis would have been (in thousands, except per share data):

For the year ended December 31, 2005(a)Net income, as reported

$
7,046Add: Stock-based compensation expense included in reported net income, net of related tax effects


944Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects


(2,449
)Pro forma net income

$
5,541Net income per share:Basicas reported

$
0.18Basicpro forma


0.14Dilutedas reported


0.23Dilutedpro forma


0.11


---

The
preceding pro forma results were calculated using the Black Scholes option-pricing model. Weighted average assumptions used for stock compensation awards granted in
the year ended December 31, 2005 were:

Risk free interest rate

4.10
%Dividend yield

0.40
%Expected life (years)

5.8Volatility

40.36
%


F-19

---



Equity Award Plans

The stockholders of the Company approved the 2002 Long-Term Incentive Award Plan (the "2002 Plan"), under which an aggregate of 3.9 million, as
restated to reflect the modification for the Mueller Water spin-off, shares of the Company's common stock have been reserved for grant and issuance of incentive and
non-qualified stock options, stock appreciation rights and stock awards.

Under
the Long-Term Incentive Stock Plan approved by stockholders in October 1995 (the "1995 Plan") and amended in September 1997, an aggregate of 6.0 million shares
of the Company's common stock have been reserved for the grant and issuance of incentive and non-qualified stock options, stock appreciation rights and stock awards. However, the 1995 Plan
expired in 2005 and, therefore, no further grants will be issued under this plan.

Under
both plans (collectively, the "Equity Award Plans"), an option becomes exercisable at such times and in such installments as set by the Compensation Committee of the Board of
Directors (generally, vesting occurs over three years in equal annual increments), but no option will be exercisable after the tenth anniversary of the date on which it is granted.

Under
both plans, the Company may issue restricted stock units. The Company has issued restricted stock units which fully vest generally after three or seven years of continuous
employment. Certain of these units are subject to accelerated vesting if the stock price of the Company reaches certain pre-established targets within certain time periods after issuance.

In
connection with the spin-off of Mueller Water, and in accordance with the anti-dilution provisions contained within the Equity Award Plans, the Company
modified the equity awards outstanding at December 14, 2006, the spin-off date. The modifications were structured to maintain the intrinsic value for the employee. All equity awards
in the Company's stock held by employees of or employees transferring to Mueller Water were cancelled and replaced by equity awards in Mueller Water stock. Similarly, all equity awards held by
employees remaining with the Company were cancelled and replaced by new equity awards with similar terms such that the intrinsic value immediately after the spin-off was the same as the
intrinsic value immediately prior to the spin-off. There were no modifications to any other terms of the awards. These modifications did not yield any incremental compensation cost under
FAS 123 (R).

For
the years ended December 31, 2007, 2006 and 2005, the Company recorded stock-based compensation expense related to equity awards of Walter Industries, Inc. in its
continuing operations of approximately $9.1 million, $8.1 million, and $1.3 million, respectively. These amounts are included in selling, general and administrative expenses and
have been allocated to the reportable segments. The total income tax benefits in the Company's continuing operations recognized in the statements of operations for share-based compensation
arrangements were $3.2 million, $2.9 million, and $0.5 million for such years, respectively.

A
summary of activity related to stock options under the Equity Award Plans during the year ended December 31, 2007, including awards applicable to discontinued operations, is
presented below:

|                                 |  | Shares    |   | Weighted
Average
Exercise Price |       | Weighted
Average
Remaining
Contractual
Term (in years) |      | Aggregate
Intrinsic Value
($000)
|-------------------------------- |  | --------- | - | ------------------------------- | ----- | ------------------------------------------------------ | ---- | --------------------------------
|Outstanding at December 31, 2006 |  | 1,739,837 |   | $                               | 21.02 |                                                        |      |                                 
|Granted                          |  | 182,448   |   |                                 | 28.53 |                                                        |      |                                 
|Exercised                        |  | (175,222  | ) |                                 | 8.27  |                                                        |      |                                 
|Cancelled                        |  | (30,786   | ) |                                 | 29.19 |                                                        |      |                                 
|                                 |  |           |   |                                 |       |                                                        |      |                                 
|Outstanding at December 31, 2007 |  | 1,716,277 |   | $                               | 22.98 |                                                        | 7.65 |                                 
|                                 |  |           |   |                                 |       |                                                        |      |                                 
|Exercisable at December 31, 2007 |  | 785,310   |   | $                               | 17.13 |                                                        | 6.58 |                                 
|                                 |  |           |   |                                 |       |                                                        |      |                                 

F-20

---



Weighted average assumptions used to determine the grant-date fair value of options granted under the Equity Award Plans during the years ended December 31, 2007 and
December 31, 2006 were:

For the year ended
December 31, 2007

For the year ended
December 31, 2006Risk free interest rate

4.72
%
4.67
%Dividend yield

0.78
%
0.30
%Expected life (years)

4.29

5.20Volatility

34.49
%
36.76
%Forfeiture rate

3.22
%
4.50
%


The
risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant with a term equal to the expected life. The expected dividend yield is based on
the Company's estimated annual dividend payout at grant date. The expected term of the options represents the period of time the options are expected to be outstanding. Expected volatility is based on
historical volatility of the Company's share price for the expected term of the options.

A
summary of activity related to restricted stock units under the Equity Award Plans during the year ended December 31, 2007, is as follows:

|                                 |  | Shares   |   | Aggregate
Intrinsic Value
($000) |        | Weighted
Average
Contractual Term
in Years
|-------------------------------- |  | -------- | - | -------------------------------- | ------ | ------------------------------------------
|Outstanding at December 31, 2006 |  | 350,301  |   |                                  |        |                                           
|Granted                          |  | 130,441  |   |                                  |        |                                           
|Exercised                        |  | (121,858 | ) |                                  |        |                                           
|Cancelled                        |  | (33,850  | ) |                                  |        |                                           
|                                 |  |          |   |                                  |        |                                           
|Outstanding at December 31, 2007 |  | 325,034  |   | $                                | 11,674 |                                           
|                                 |  |          |   |                                  |        |                                           

The
weighted-average grant-date fair values of stock options granted during the years ended December 31, 2007 and 2006 were $9.43 and $11.48, respectively. The
weighted-average grant-date fair values of restricted stock units granted during the years ended December 31, 2007 and 2006 were $28.02 and $32.85, respectively. The total amount of
cash received from exercise of stock options was $1.4 million and $4.7 million for the years ended December 31, 2007 and 2006, respectively. The total intrinsic value of stock
awards exercised or converted during 2007 and was $7.0 million and $26.4 million, respectively. The total fair value of shares vested during the years 2007 and 2006 were
$6.8 million and $2.2 million, respectively.

Unrecognized
compensation costs related to non-vested share-based compensation arrangements granted under the Equity Award Plans were approximately $6.8 million and
$10.9 million as of December 31, 2007 and 2006, respectively; these costs are to be recognized over a weighted average period of 1.8 years and 2.3 years, respectively.

Subsidiary Equity Award

Effective March 1, 2007, JWH Holding Company, LLC, a wholly owned subsidiary of the Company, adopted the 2007 Long-term Incentive Award
Plan (the "2007 Plan") of JWH Holding Company, LLC, under which up to 20% of the LLC interest may be awarded or granted as incentive and non-qualified stock options to
eligible employees, consultants and directors.

In
2006, the Board of Directors granted a special equity award to certain executives of the Financing and Homebuilding businesses whereby the employees received non-qualified
options in JWH Holding Company, LLC to acquire the equivalent of 11.25% of the total combined designated equity of

F-21

---



the
Financing and Homebuilding businesses. The exercise price of these options was fair value at date of grant. These options vest over a three-year period and expire in ten years. As of
December 31, 2007, none of the options have been forfeited or exercised. Exercisable options totaled 33% and 0% as of December 31, 2007 and 2006, respectively.

The
Company calculated the fair value of these options awards using the Black-Scholes model using the following assumptions:

Risk free interest rate

4.62
%Dividend yield

0.00
%Expected life (years)

3.0Volatility

41.85
%Forfeiture rate

0.00
%


Compensation
expense for the years ended December 31, 2007 and 2006, totaled $2.6 million and $2.9 million, respectively. These amounts are included in selling,
general and administrative expenses
and have been allocated to the reportable segments. The total income tax benefits recognized for share based compensation arrangements in the Company's continuing operations in the statements of
operations was $1.0 million for each of these years. As of December 31, 2007, there was $1.0 million of unrecognized compensation cost that is expected to be recognized over
1.2 years.

Employee Stock Purchase Plan

The Walter Industries, Inc. Employee Stock Purchase Plan was adopted in January 1996 and amended in April 2004. All full-time employees of the
Company who have attained the age of majority in the state in which they reside are eligible to participate. The Company contributes a sum equal to 15% (20% after five years of continuous
participation) of each participant's actual payroll deduction as authorized, and remits such funds to a designated brokerage firm that purchases in the open market shares of the Company's common stock
for the accounts of the participants. The total number of shares that may be purchased under the plan is 3.5 million. Total shares purchased under the plan during the years ended
December 31, 2007, 2006 and 2005 were approximately 50,000, 35,000, and 43,000, respectively, and the Company's contributions recognized as expense were approximately $0.2 million,
$0.3 million, and $0.4 million, respectively, during such years.

NOTE 5Restricted Short-Term Investments

Restricted short-term investments at December 31, 2007 and 2006 include (i) temporary investments primarily in commercial paper or money
market accounts with maturities less than 90 days from collections on instalment notes receivable owned by various Mid-State Trusts (the "Trusts") ($68.8 million and
$84.0 million, respectively) which are available only to pay expenses of the Trusts and principal and interest on indebtedness of the Trusts and (ii) miscellaneous other segregated
accounts restricted to specific uses ($7.1 million and $6.0 million, respectively).

NOTE 6Instalment Notes Receivable and Mortgage Loans

Instalment notes receivable arise from sales of detached, single-family homes to JWH customers. Mortgage loans are originated by WMC by providing both land and
home financing and re-financing for JWH customers. These receivables require periodic payments, over periods of 10 to 30 years, and are secured by first mortgages or similar
security instruments. Cash flows from the financing of the Company's Homebuilding customers are classified as operating activities. WMC also has purchased loans from third parties, including mortgage
companies and other homebuilders. Purchases of loans from third parties, as well as the principal payments on those loans, are considered investing activities in the statement of cash flows.

F-22

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The
credit terms offered by JWH and its affiliates are usually for 100% of the purchase price of the home. The buyer's ownership of the land and improvements necessary to complete the
home constitute an equity investment to which the Company has access should the buyer default on payment of the instalment note obligation. The Company currently holds fixed (98%) and
variable-rate (2%) instalment notes ranging from 5.16% to 14.13% annual percentage rate, without points or closing costs.

Instalment
notes receivable and mortgage loans receivable are held for investment and are not held for sale. WMC and Mid-State Capital Corporation, a wholly owned subsidiary
of WMC, have created a number of business trusts for the purpose of purchasing instalment notes and mortgage loans owned by WMC with the net proceeds from the issuance of mortgage-backed notes or
asset-backed notes. WMC and Mid-State Capital Corporation directly or indirectly own all of the beneficial interests in these trusts. The assets of the trusts are not available to satisfy
claims of general creditors of the Company and the liabilities for notes issued by the trusts are to be satisfied solely from the proceeds of the instalment notes owned by the trusts and are
non-recourse to the Company.

Instalment
notes receivable are summarized as follows (in thousands):

December 31,2007

2006Instalment notes receivable

$
1,616,753

$
1,578,760Mortgage loans


234,298


213,948Less: Allowance for losses


(13,992
)

(13,011
)Instalment notes receivable, net(1)(2)(3)(4)

$
1,837,059

$
1,779,697


---

Activity
in the allowance for losses is summarized as follows (in thousands):

|                               |  | For the years ended December 31, |        
|------------------------------ |  | -------------------------------- | -------
|
|Balance at beginning of year   |  | $                                | 13,011 
|Provisions charged to income   |  |                                  | 13,889 
|Charge-offs, net of recoveries |  |                                  | (12,908
|                               |  |                                  |        
|Balance at end of year         |  | $                                | 13,992 
|                               |  |                                  |        

Charge-offs
on instalment notes and mortgage loans occur when management believes it will be unable to collect amounts which are contractually due. The
charge-off is measured based upon the excess of the recorded investment in the receivable over the estimated fair value of the collateral as reduced by estimated selling costs. Recoveries
on charge-offs, recognized when received, are immaterial to aggregate charge-offs.

F-23

---



NOTE 7Receivables

Receivables are summarized as follows (in thousands):

December 31,2007

2006Trade receivables

$
60,534

$
44,407Other receivables


23,905


41,624Less: Allowance for losses


(2,741
)

(937
)Receivables, net

$
81,698

$
85,094


Other
receivables at December 31, 2006 include $18.4 million due from the Company's insurance carrier for the settlement of claims associated with a 2005
water ingress problem at Mine No. 5.

NOTE 8Inventories

Inventories are summarized as follows (in thousands):

December 31,2007

2006Finished goods

$
29,650

$
35,138Goods in process


19,598


25,830Raw materials and supplies


16,021


15,145Repossessed houses held for resale


36,407


29,414Total inventories

$
101,676

$
105,527


NOTE 9Property, Plant and Equipment

Property, plant and equipment are summarized as follows (in thousands):

December 31,2007

2006Land

$
55,729

$
57,483Land improvements


21,214


18,697Mineral rights


23,781


15,437Buildings and leasehold improvements


70,462


67,884Mine development costs


63,691


15,677Machinery and equipment


364,021


298,084Construction in progress


111,696


75,613Total


710,594


548,875Less: Accumulated depreciation


(275,559
)

(238,712
)Net

$
435,035

$
310,163


NOTE 10Goodwill

Goodwill is not amortized, but instead is reviewed for impairment on an annual basis, or more frequently if significant events occur that indicate that impairment
could exist. The fair value of each of the Company's reporting units is determined using valuation models and expected future cash flow projections related to each reporting unit, which is then
discounted using a risk-adjusted discount rate and adjusted for comparable industry earnings multiples. The Company's reporting units are similar, although not identical, to its reporting
segments.

F-24

---



The changes in the carrying amount of goodwill by reportable segment for the years ended December 31, 2007, 2006 and 2005 were as follows (in thousands):

|                                |  | Homebuilding |         | Financing |   | Total  | 
|------------------------------- |  | ------------ | ------- | --------- | - | ------ | 
|Balance as of January 1, 2005   |  | $            | 56,727  |           | $ | 10,895 | 
|Impairment charge               |  |              | (56,727 | )         |   |       | 
|                                |  |              |         |           |   |        | 
|Balance as of December 31, 2005 |  |              |        |           |   | 10,895 | 
|Activity                        |  |              |        |           |   |       | 
|                                |  |              |         |           |   |        | 
|Balance as of December 31, 2006 |  |              |        |           |   | 10,895 | 
|Activity                        |  |              |         |           |   |       | 
|                                |  |              |         |           |   |        | 
|Balance as of December 31, 2007 |  | $            |        |           | $ | 10,895 | 
|                                |  |              |         |           |   |        | 

For
2007, 2006 and 2005, the Company used a discounted cash flow approach in performing its annual impairment testing. As a result of this annual testing, the Company recorded an
impairment charge of $56.7 million to reduce the goodwill of the Homebuilding segment to zero in 2005. This impairment charge was driven by significantly lower than expected operating results
of the Homebuilding segment during the fourth quarter of 2005 which in turn led to reduced future cash flow expectations versus those forecasted in the prior year.

NOTE 11Income Taxes

Income tax expense (benefit) applicable to continuing operations consists of the following components (in thousands):

|                |       | For the years ended December 31,
|--------------- | ----- | --------------------------------
|
|
|Federal         |       | $                               
|State and local |       |                                 
|                |       |                                 
|                | Total |                                 
|                |       |                                 

The
income tax expense (benefit) at the Company's effective tax rate differed from the statutory rate as follows:

|                   |                                        | For the years ended December 31, |     
|------------------ | -------------------------------------- | -------------------------------- | ----
|
|Statutory tax rate |                                        | 35.0                             | %   
|Effect of:         |                                        |                                  |     
|                   | State and local income tax             |                                  | 4.4 
|                   | Non-deductible goodwill impairment     |                                  |    
|                   | Foreign sales benefit                  |                                  |    
|                   | Excess depletion benefit               |                                  | (7.8
|                   | Non-deductible debt conversion expense |                                  |    
|                   | Change in valuation allowance          |                                  |    
|                   | Other                                  |                                  | (0.6
|                   |                                        |                                  |     
|Effective tax rate |                                        | 31.0                             | %   
|                   |                                        |                                  |     

F-25

---



Deferred
tax assets (liabilities) related to the following (in thousands):

|                                                            |                                                      | December 31,                   |        
|----------------------------------------------------------- | ---------------------------------------------------- | ------------------------------ | -------
|
|Deferred tax assets:                                        |                                                      |                                |        
|                                                            | Allowance for losses                                 |                                | $      
|                                                            | Inventories                                          |                                |        
|                                                            | Net operating loss/capital loss/credit carryforwards |                                |        
|                                                            | Accrued expenses                                     |                                |        
|                                                            | Postretirement benefits other than pensions          |                                |        
|                                                            | Pensions                                             |                                |        
|                                                            |                                                      |                                |        
|                                                            |                                                      |                                | 217,879
|Less: valuation allowance                                   |                                                      |                                | (6,639 
|                                                            |                                                      |                                |        
|                                                            |                                                      | Total deferred tax assets      |        
|                                                            |                                                      |                                |        
|Deferred tax liabilities:                                   |                                                      |                                |        
|                                                            | Interest income on instalment notes                  |                                |        
|                                                            | Depreciation and amortization                        |                                |        
|                                                            |                                                      |                                |        
|                                                            |                                                      | Total deferred tax liabilities |        
|                                                            |                                                      |                                |        
|Net deferred tax assets applicable to continuing operations |                                                      | $                              | 83,458 
|                                                            |                                                      |                                |        

A summary of activity in the valuation allowance for deferred tax assets (liabilities) is shown below (in thousands):

|                                   |  | For the years ended December 31,
|---------------------------------- |  | --------------------------------
|
|Balance at beginning of period     |  | $                               
|Additions charged to tax provision |  |                                 
|Reductions                         |  |                                 
|                                   |  |                                 
|Balance at end of period           |  | $                               
|                                   |  |                                 

The change in valuation allowances recorded as a component of income tax expense at December 31, 2007 consists primarily of state tax benefits true-up
at Homebuilding for which the Company believes it is more likely than not that the deferred tax asset will be realized.

The
Company has net operating loss carryforwards for Alabama state income taxes at Sloss of approximately $1.0 million that expire beginning in 2016. The annual utilization of the
loss carryforward is limited due to a 2004 change in ownership, but the Company believes that the losses will be utilized within the carryforward period due to expected profitability of operations and
tax planning strategies. Homebuilding has state net operating loss carryforwards for state income tax purposes for which a valuation allowance previously had been established that are significantly
limited due to the 2004 change in ownership and may expire before utilization. If certain changes in ownership occur, utilization of the net carryforwards and credits may be further limited.

The
Company files income tax returns in the U.S. and in various state and local jurisdictions which are routinely examined by tax authorities in these jurisdictions. The statute of
limitations related to the consolidated Federal income tax return is closed for the years prior to August 31, 1983 and the years ended May 31, 1997, 1998 and 1999. The state impact of
any federal changes for these years remains subject to examination for a period up to five years after formal notification to the states. The Company generally remains subject to income tax in various
states for prior periods ranging from three

F-26

---



to
ten years depending on jurisdiction. The Company is currently under audit by the Internal Revenue Service (the "IRS) for the years ended December 31, 2002 through December 31, 2005.

On
February 20, 2006, the IRS completed its audit of the Company's Federal income tax returns and issued a 30-day letter proposing tax deficiencies in the amount of
$82.2 million for the years ended May 31, 2000, December 31, 2000 and December 31, 2001. The issues in the
30-day letter relate primarily to the Company's method of recognizing revenue on the sale of homes and related interest on the installment notes receivable. The items at issue relate
primarily to the timing of revenue recognition and consequently, should the IRS prevail on its positions, the Company's financial exposure is limited to interest and penalties.

On
December 27, 1989, the Company and most of its subsidiaries each filed a voluntary petition for reorganization under Chapter 11 of Title 11 of the United States Code
(the "Bankruptcy Proceedings") in the United States Bankruptcy Court for the Middle District of Florida, Tampa Division (the "Bankruptcy Court"). The Company emerged from bankruptcy on
March 17, 1995 (the "Effective Date") pursuant to the Amended Joint Plan of Reorganization Dated as of December 9, 1994, as modified on March 1, 1995 (as so modified the
"Consensual Plan"). Despite the confirmation and effectiveness of the Consensual Plan, the Bankruptcy Court continues to have jurisdiction over, among other things, the resolution of disputed
prepetition claims against the Company and other matters that may arise in connection with or related to the Consensual Plan, including claims related to Federal income taxes.

A
controversy exists with regard to Federal income taxes allegedly owed by the Company for fiscal years 1980 through 1994. In connection with the bankruptcy proceedings, the IRS filed a
proof of claim in the Bankruptcy Court (the "Proof of Claim") for a substantial amount of taxes, interest and penalties with respect to fiscal years ended August 31, 1980 and August 31,
1983 through May 31, 1994. The Company filed an adversary proceeding in the Bankruptcy Court disputing the Proof of Claim (the "Adversary Proceeding") and the various issues have been and are
being litigated in the Bankruptcy Court.

The
amounts initially asserted by the Proof of Claim do not reflect the subsequent resolution of various issues through settlements or concessions by the parties. After adjustment for
these items, the Company estimates that the amount of tax presently claimed by the IRS is approximately $34.0 million for issues currently in dispute in the Adversary Proceeding. This amount is
subject to interest and penalties. Of the $34.0 million in claimed tax, $21.0 million represents issues in which the IRS is not challenging the deductibility of the particular expense
but only whether such expense is deductible in a particular year. Consequently, the Company believes that, should the IRS prevail on any such issues, the Company's financial exposure is limited to
interest and possible penalties and the amount of tax claimed will be offset by deductions in other years. Substantially all of the issues in the Proof of Claim, which have not been settled or
conceded, have been litigated before the Bankruptcy Court and are subject to appeal but only at the conclusion of the entire Adversary Proceeding.

The
Company believes that those portions of the Proof of Claim which remain in dispute or are subject to appeal substantially overstate the amount of taxes allegedly owing. However,
because of the complexity of the issues presented and the uncertainties associated with litigation, the Company is unable to predict the ultimate outcome of the Adversary Proceeding.

The
Company believes that all of its current and prior tax filing positions have substantial merit and intends to defend vigorously any tax claims asserted. The Company believes that it
has sufficient accruals to address any claims, including interest and penalties.

On
January 1, 2007, as required, the Company adopted FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"). FIN 48 clarifies the
accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized

F-27

---



in
the financial statements. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As a result of
adoption, the Company recognized an increase of $4.4 million in the liability for unrecognized tax benefits with a corresponding increase to the accumulated deficit as of January 1,
2007.

A
reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows (in thousands):

|Gross unrecognized tax benefits at January 1, 2007   |  | $ | 53,287 |  
|---------------------------------------------------- |  | - | ------ | -
|Decreases for tax positions taken in prior years     |  |   | (4,190 | )
|Increases in tax positions for the current year      |  |   | 1,305  |  
|Decreases for changes in temporary differences       |  |   | (427   | )
|                                                     |  |   |       
|Gross unrecognized tax benefits at December 31, 2007 |  | $ | 49,975 |  
|                                                     |  |   |       

The
total amount of net unrecognized tax benefits that, if recognized, would affect the effective tax rate was $35.4 million at December 31, 2007. The Company recognizes
interest related to unrecognized tax benefits in interest expense-other debt and penalties in selling, general and administrative expenses. For the years ended December 31, 2007, 2006 and 2005,
interest expense includes $9.2 million, $4.7 million and $5.9 million, respectively, for interest accrued on the liability for unrecognized tax benefits. As of December 31,
2007, the Company had accrued interest and penalties related to the unrecognized tax benefits of $76.3 million. Due to the potential for resolution of state issues and expiration of various
statutes of limitation, it is reasonably possible that the Company's gross unrecognized tax benefits balance may change within the next twelve months up to $2.0 million.

NOTE 12Debt

Debt consisted of the following (in thousands):

|                                    |                                 | December 31,                             |           | Weighted Average Stated Interest Rate At December 31, 2007 |         |          
|----------------------------------- | ------------------------------- | ---------------------------------------- | --------- | ---------------------------------------------------------- | ------- | ---------
|
|
|Mortgage-Backed/Asset Backed Notes: |                                 |                                          |           |                                                            |         |          
|                                    | Trust IV Asset Backed Notes     |                                          | $         | 171,536                                                    |         | $        
|                                    | Trust VI Asset Backed Notes     |                                          |           | 135,242                                                    |         |          
|                                    | Trust VII Asset Backed Notes    |                                          |           | 115,126                                                    |         |          
|                                    | Trust VIII Asset Backed Notes   |                                          |           | 134,235                                                    |         |          
|                                    | Trust IX Variable Funding Loan  |                                          |           | 95,100                                                     |         |          
|                                    | Trust X Asset Backed Notes      |                                          |           | 201,540                                                    |         |          
|                                    | Trust XI Asset Backed Notes     |                                          |           | 179,350                                                    |         |          
|                                    | Trust XIV Variable Funding Loan |                                          |           | 94,100                                                     |         |          
|                                    | 2004-1 Trust Asset Backed Notes |                                          |           | 173,712                                                    |         |          
|                                    | 2005-1 Trust Asset Backed Notes |                                          |           | 190,122                                                    |         |          
|                                    | 2006-1 Trust Asset Backed Notes |                                          |           | 216,155                                                    |         |          
|                                    |                                 |                                          |           |                                                            |         |          
|                                    |                                 |                                          | 1,706,218 |                                                            |         | 1,736,706
|                                    |                                 |                                          |           |                                                            |         |          
|Other debt:                         |                                 |                                          |           |                                                            |         |          
|                                    |                                 | 2005 Walter Term Loan(1)                 |           |                                                            | 218,517 |          
|                                    |                                 | Convertible Senior Subordinated Notes(2) |           |                                                            | 785     |          
|                                    |                                 | Other(3)                                 |           |                                                            | 6,558   |          
|                                    |                                 |                                          |           |                                                            |         |          
|                                    |                                 |                                          | 225,860   |                                                            |         | 249,491  
|                                    |                                 |                                          |           |                                                            |         |          
|                                    |                                 |                                          | Total     |                                                            | $       | 1,932,078
|                                    |                                 |                                          |           |                                                            |         |          

F-28

---



The
Company's debt repayment schedule, excluding interest, as of December 31, 2007 is as follows (in thousands):

|                                      |  | Payments Due
|------------------------------------- |  | ------------
|
|Mortgage-backed/asset-backed notes(4) |  | $           
|2005 Walter Term Loan                 |  |             
|Other debt                            |  |             
|                                      |  |             
|                                      |  | $           
|                                      |  |             

---

Mortgage-Backed and Asset-Backed Notes and Variable Funding Loan Facilities

The Trusts beneficially owned by WMC and Mid-State Capital Corporation, the Company's wholly owned subsidiaries, are the depositors under the
Company's outstanding mortgage-backed and asset-backed notes (the "trust notes"), which consist of eight separate series of public debt offerings and one private offering. Trust IX and Trust XIV are
borrowers under a $150.0 million and a $200.0 million Variable Funding Loan Agreement (the "variable funding loan facilities"). Mortgage-backed/asset-backed notes provide
long-term financing for instalment notes receivable and mortgage assets purchased by WMC, while the variable funding loan facilities provide temporary warehouse financing. In each case,
these instalment notes receivable and mortgage assets are deposited into Trusts. Upon deposit, these instalment notes and mortgage assets become assets of the Trusts and are not available to satisfy
claims of general creditors of the Company. The trust notes and the variable funding loan facilities are to be satisfied solely from the proceeds of the underlying instalment notes receivable and
mortgages and are non-recourse to the Company.

As
noted above, the Company has two variable funding loan facilities totaling $350.0 million that provide temporary warehouse financing to WMC for its current purchases of
instalment notes and mortgages originated by Homebuilding and purchases of third-party mortgage loans. The $150.0 million Trust IX facility was renewed on July 30, 2007, under
substantially similar terms as the previous facility, and matures July 28, 2008. The $200.0 million Trust XIV facility was renewed on October 25, 2007, under
substantially similar terms as the previous facility, and matures October 23, 2008. At December 31, 2007, there were $189.2 million of borrowings outstanding under these
facilities.

If
the lenders under these facilities do not allow the Company to renew our borrowings or the Company cannot replace maturing borrowings at less favorable terms, the Company might have
to seek other, less favorable and more costly sources of borrowing, sell mortgage-related assets under adverse market conditions, or cease to originate mortgage assets, which could significantly
reduce net income and may result in material losses. Furthermore, in 2007, mortgage securitization markets generally, and subprime securitization markets especially, have experienced a significant
disruption that continues today. A large number of other companies' mortgage-backed securities have been down-graded or placed on credit watch, resulting in investors in asset-backed
securities and other structured vehicles experiencing problems including declines in value and losses from their investments in subprime

F-29

---



mortgage
securities. As a result of these significant industry events, the Company may be unsuccessful in securitizing mortgage assets at favorable terms or at all that are currently outstanding
under, and pledged to, our variable funding loan facilities or that originate in the future. The Company's inability to continue to successfully securitize mortgage assets on favorable terms or at all
could significantly impair our mortgage origination business.

The
variable funding loan facilities contain covenants that, among other things, restrict the ability of the borrower Trust to dispose of assets, engage in other businesses, create
liens, engage in mergers or consolidations and otherwise restrict corporate activities. In addition, under certain circumstances, if the market value of the instalment note receivable or mortgage
assets securing the facilities has decreased, the lenders under the variable funding loan facilities have the right to require the Trust to transfer additional mortgages to the Trusts or to repay a
portion of the outstanding borrowings. Events of default under the variable funding loan facilities include customary events of default as well as asset quality and performance tests. The borrower
Trust's failure to comply with the covenants in the variable funding loan facilities could result in an event of default, which, if not cured, amended or waived, could result in the entire principal
balance and accrued interest becoming immediately due and payable.

2005 Walter Credit Agreement

In 2005, Walter Industries entered into a $675.0 million credit agreement ("2005 Walter Credit Agreement") which includes (1) an amortizing term
loan facility in an initial aggregate principal amount of $450.0 million, $218.5 million of which was outstanding as of December 31, 2007, and (2) a $225.0 million
revolving credit facility, which provides for loans and letters of credit. As of December 31, 2007, the Company had issued $42.8 million in letters of credit, which reduced availability
for borrowings under the revolving credit facility to $182.2 million. As of December 31, 2007, there were no borrowings outstanding under the revolving credit facility. The revolving
credit facility will terminate in 2010, and the term loan matures in 2012.

Loans
under the 2005 Walter Credit Agreement bear interest, at the Company's option, at LIBOR plus 150 basis points or the alternate base rate plus 50 basis points for borrowings under
the revolving credit facility; and LIBOR plus 175 basis points or the alternate base rate plus 75 basis points for the term loan. In addition, the Company pays quarterly commitment fees at a rate
equal to 0.375% per year on the unused portion of the revolving credit facility and a letter of credit fee.

The
term loan is subject to mandatory prepayments with the net cash proceeds from the sale of property, incurrence of debt, issuances of equity securities and excess cash flow, subject
to specified exceptions and limitations. All of the Company's direct and indirect domestic restricted subsidiaries, as defined, are guarantors of the 2005 Walter Credit Agreement. The Company's
obligations are secured by substantially all of the Company's and guarantors' real, personal and intellectual property, and the Company's ownership interest in the guarantors.

The
2005 Walter Credit Agreement contains customary negative covenants and restrictions on the Company's ability to engage in specified activities, including, but not limited to, as
defined, limitations on other indebtedness, liens, investments and guarantees; restrictions on dividends and redemptions of capital stock (limited to 50% of the previous year's net income plus
$25.0 million) and prepayments and redemptions of debt; limitations on capital expenditures; and restrictions on mergers and acquisitions, sales of assets, sale and leaseback transactions and
transactions with affiliates. The failure to maintain an aggregate of $350.0 million of liquidity in variable funding loan facilities for the Financing and Homebuilding businesses would breach
a covenant under the 2005 Walter Credit Agreement. In such an event, the Company would seek to amend or obtain a waiver of this requirement from lenders. If the Company was unable to obtain an
amendment or waiver and the Company is unable to obtain alternate variable funding loan lines of credit, there would be an event of default under the 2005 Walter Credit Agreement and the respective
lenders could also terminate all commitments to extend further credit. If the Company were unable to repay those amounts, such

F-30

---



lenders
could proceed against the collateral granted to them to secure the indebtedness under the senior credit facilities. The 2005 Walter Credit Agreement also contains financial covenants requiring
the Company to maintain a maximum consolidated leverage ratio, a maximum consolidated senior secured leverage ratio and a minimum fixed charge coverage ratio.

Convertible Notes

In 2004, the Company issued $175.0 million aggregate principal amount of 3.75% Convertible Senior Subordinated Notes due May 1, 2024 (the
"convertible notes"). During 2006, holders of approximately $174.2 million of the Company's convertible notes surrendered their convertible notes in exchange for 9.761 million shares of
the Company's common stock and $19.4 million of conversion inducement payments. A tax benefit of $6.4 million related to these conversions was recognized as an increase to stockholders'
equity. In January 2008, the holders of the remaining $0.8 million notes agreed to convert
the principal amount in exchange for 84,013 shares of the Company's common stock and $0.1 million of conversion inducement payments.

Interest Rate Hedge Agreements

As of December 31, 2007 and 2006, the Company holds multiple interest rate hedge agreements with various counterparties with an aggregate notional value of
$215.0 million and $50.0 million, respectively. The objective of these hedges is to protect against changes in the benchmark interest rate on the forecasted issuance of mortgage-backed
notes in a securitization. The hedges will be settled on or before their maturity date of April 1, 2008 and are being accounted for as cash flow hedges. As such, changes in the fair value of
the hedges that take place through the date of maturity, or until the forecasted issuance of mortgage-backed notes in a securitization is no longer probable, are recorded in accumulated other
comprehensive income (loss).

On
November 1, 2005, the Company entered into an interest rate hedge agreement with a notional value of $75.0 million. The objective of the hedge is to protect the Company
against rising LIBOR interest rates that would have a negative effect on the Company's cash flows due to changes in interest payments on its 2005 Walter Credit Agreement. The structure of the hedge is
a three-year collar contract with a floor of 4.25% and a cap of 5.69%. The collar agreement calls for the Company to make fixed rate payments over the term of the hedge when stated
three-month LIBOR rates are below the floor and to receive payments from the counter-party when the three-month LIBOR is above the cap. It is anticipated that the hedge will be settled upon maturity
and is being accounted for as a cash flow hedge. As such, changes in the fair value of the hedge that take place through the date of maturity are recorded in accumulated other comprehensive income
(loss).

The
fair value of interest rate hedges outstanding at December 31, 2007 and 2006 was a liability of $9.4 million and an asset of $0.4 million, respectively. Of this
deferred loss at December 31, 2007, $1.2 million is expected to be recognized as interest expense during 2008, primarily as an offset to the anticipated cash flows arising from the 2008
issuance of mortgage-backed notes. During 2007, 2006 and 2005, the Company recorded an unrealized gain (loss) from interest rate hedge agreements, net of tax, of ($6.1) million,
$0.2 million and ($0.1) million, respectively, in accumulated other comprehensive income (loss).

NOTE 13Pension and Other Employee Benefits

The Company has various pension and profit sharing plans covering substantially all employees. In addition to its own pension plans, the Company contributes to
certain multi-employer plans. The Company funds its retirement and employee benefit plans in accordance with the requirements of the plans and, where applicable, in amounts sufficient to satisfy the
"Minimum Funding Standards" of the
Employee Retirement Income Security Act of 1974 ("ERISA"). The plans provide benefits based on years of service and compensation or at stated amounts for each year of service.

F-31

---



The Company also provides certain postretirement benefits other than pensions, primarily healthcare, to eligible retirees. The Company's postretirement benefit plans are not funded. New
salaried employees have been ineligible to participate in postretirement healthcare benefits since May 2000. Effective January 1, 2003, the Company placed a monthly cap on Company contributions
for postretirement healthcare coverage. In 2006, the Company terminated benefits for certain employees of Financing and Homebuilding that had not reached a certain number of years of continuous
service and/or age. Those employees will no longer be eligible to earn postretirement healthcare benefits. In addition, retiree medical coverage was terminated for those retirees who are eligible for
Medicare. As a result of these changes, the Company recognized a curtailment gain of $4.1 million in 2006.

The
Company uses a September 30 measurement date for all of its pension and postretirement benefit plans. The amounts recognized for such plans are as follows:

|                                                                      |                                                | Pension Benefits |         | Other Benefits |  
|--------------------------------------------------------------------- | ---------------------------------------------- | ---------------- | ------- | -------------- | -
|
|
|Accumulated benefit obligation                                        |                                                | $                | 173,546 |                | $
|                                                                      |                                                |                  |         |                |  
|Change in projected benefit obligation:                               |                                                |                  |         |                |  
|                                                                      | Benefit obligation at beginning of year        |                  | $       | 189,443        |  
|                                                                      | Service cost                                   |                  |         | 4,058          |  
|                                                                      | Interest cost                                  |                  |         | 10,899         |  
|                                                                      | Amendments                                     |                  |         |               |  
|                                                                      | Actuarial (gain)/loss                          |                  |         | (5,254         | )
|                                                                      | Net curtailment gain                           |                  |         |               |  
|                                                                      | Benefits paid                                  |                  |         | (9,599         | )
|                                                                      |                                                |                  |         |                |  
|                                                                      | Benefit obligation at end of year              |                  | $       | 189,547        |  
|                                                                      |                                                |                  |         |                |  
|Change in plan assets:                                                |                                                |                  |         |                |  
|                                                                      | Fair value of plan assets at beginning of year |                  | $       | 141,478        |  
|                                                                      | Actual gain on plan assets                     |                  |         | 22,970         |  
|                                                                      | Employer contributions                         |                  |         | 8,992          |  
|                                                                      | Benefits paid                                  |                  |         | (9,599         | )
|                                                                      |                                                |                  |         |                |  
|                                                                      | Fair value of plan assets at end of year       |                  | $       | 163,841        |  
|                                                                      |                                                |                  |         |                |  
|Funded (unfunded) status of the plan                                  |                                                | $                | (25,706 | )              | $
|                                                                      | Post-measurement date contributions            |                  |         | 624            |  
|                                                                      |                                                |                  |         |                |  
|Net amount recognized                                                 |                                                | $                | (25,082 | )              | $
|                                                                      |                                                |                  |         |                |  
|Amounts recognized in the consolidated balance sheet:                 |                                                |                  |         |                |  
|                                                                      | Other liabilities                              |                  | $       | (26,274        | )
|                                                                      | Accumulated postretirement benefits obligation |                  |         |               |  
|                                                                      | Other assets                                   |                  |         | 1,192          |  
|                                                                      |                                                |                  |         |                |  
|Net amount recognized                                                 |                                                | $                | (25,082 | )              | $
|                                                                      |                                                |                  |         |                |  
|Amounts recognized in accumulated other comprehensive income, pre-tax |                                                |                  |         |                |  
|                                                                      | Prior service cost (credit)                    |                  | $       | 2,160          |  
|                                                                      | Net actuarial loss                             |                  |         | 37,143         |  
|                                                                      |                                                |                  |         |                |  
|Net amount recognized                                                 |                                                | $                | 39,303  |                | $
|                                                                      |                                                |                  |         |                |  

F-32

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The
components of net periodic benefit cost are as follows (in thousands):

|                                                    |                                    | Pension Benefits |       | Other Benefits |  
|--------------------------------------------------- | ---------------------------------- | ---------------- | ----- | -------------- | -
|
|
|Components of net periodic benefit cost:            |                                    |                  |       |                |  
|                                                    | Service cost                       |                  | $     | 4,058          |  
|                                                    | Interest cost                      |                  |       | 10,899         |  
|                                                    | Expected return on plan assets     |                  |       | (12,237        | )
|                                                    | Amortization of prior service cost |                  |       | 415            |  
|                                                    | Amortization of net loss           |                  |       | 4,573          |  
|                                                    | Curtailment gain                   |                  |       |               |  
|                                                    |                                    |                  |       |                |  
|Net periodic benefit cost for continuing operations |                                    | $                | 7,708 |                | $
|                                                    |                                    |                  |       |                |  

Information
for pension plans with an accumulated benefit obligation in excess of plan assets are as follows (in thousands):

|                               |  | December 31,
|------------------------------ |  | ------------
|
|Projected benefit obligation   |  | $           
|Accumulated benefit obligation |  |             
|Fair value of plan assets      |  |             

The
estimated portion of net prior service cost and net actuarial loss remaining in accumulated other comprehensive income that is expected to be recognized as a component of net
periodic benefit cost in 2008 are as follows (in thousands):

|                            |  | Pension Benefits |       | Other Benefits |  
|--------------------------- |  | ---------------- | ----- | -------------- | -
|Prior service cost          |  | $                | 305   |                | $
|Net actuarial loss          |  |                  | 2,459 |                |  
|                            |  |                  |       |                |  
|Net amount to be recognized |  | $                | 2,764 |                | $
|                            |  |                  |       |                |  

Changes
in plan assets and benefit obligations recognized in other comprehensive income as (income) loss in 2007 are as follows (in thousands):

|                                                                    |  | Pension Benefits |         | Other Benefits |   | Total   |  
|------------------------------------------------------------------- |  | ---------------- | ------- | -------------- | - | ------- | -
|Current year net actuarial gain                                     |  | $                | (15,986 | )              | $ | (15,664 | )
|Amortization of actuarial loss                                      |  |                  | (4,573  | )              |   | (7,291  | )
|Amortization of prior service cost (credit)                         |  |                  | (415    | )              |   | 3,550   |  
|Amendment                                                           |  |                  |        |                |   | 15,445  |  
|                                                                    |  |                  |         |                |   |         |  
|Total                                                               |  |                  | (20,974 | )              |   | (3,960  | )
|Deferred taxes                                                      |  |                  | 8,086   |                |   | 1,617   |  
|                                                                    |  |                  |         |                |   |         |  
|Total recognized in other comprehensive (income) loss, net of taxes |  | $                | (12,888 | )              | $ | (2,343  | )
|                                                                    |  |                  |         |                |   |         |  

In
2007, Jim Walter Resources signed a new contract with the United Mine Workers of America ("UMWA") which eliminated certain retiree deductible requirements for employees who are
members

F-33

---



of
the UMWA. This enhanced employee benefit increased the reported accumulated postretirement benefits obligation by $15.4 million in 2007 with $9.3 million in accumulated other
comprehensive income net of a $6.1 million tax benefit.

A
summary of key assumptions used is as follows:

|                                                                    |                                | Pension Benefits |      | Other Benefits |     
|------------------------------------------------------------------- | ------------------------------ | ---------------- | ---- | -------------- | ----
|
|
|Weighted average assumptions used to determine benefit obligations: |                                |                  |      |                |     
|                                                                    | Discount rate                  |                  | 6.50 | %              | 5.90
|                                                                    | Rate of compensation increase  |                  | 3.60 | %              | 3.50
|Weighted average assumptions used to determine net periodic cost:   |                                |                  |      |                |     
|                                                                    | Discount rate                  |                  | 5.90 | %              | 5.40
|                                                                    | Expected return on plan assets |                  | 8.90 | %              | 8.90
|                                                                    | Rate of compensation increase  |                  | 3.50 | %              | 3.50

|                                                     |                                                                                   |  |   |  |   |  |   | December 31, |      |   |     
|---------------------------------------------------- | --------------------------------------------------------------------------------- |  | - |  | - |  | - | ------------ | ---- | - | ----
|
|
|Assumed health care cost trend rates at December 31: |                                                                                   |  |   |  |   |  |   |              |      |   |     
|                                                     | Health care cost trend rate assumed for next year                                 |  |  |  |  |  |  |              | 8.60 | % | 9.40
|                                                     | Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) |  |  |  |  |  |  |              | 5.00 | % | 5.00
|                                                     | Year that the rate reaches the ultimate trend rate                                |  |  |  |  |  |  |              | 2013 |   | 2013

The discount rate is based on a yield-curve approach which discounts each projected benefit obligation based cash flow of the liability stream at
an interest rate specifically applicable to the timing of each respective liability stream cash flow. The model sums the present values of all of the cash flows and then calculates the equivalent
weighted-average discount rate by imputing the single interest rate that equates the total present value with the stream of future cash flows.

The
yield curve used is a hypothetical Aa spot yield-curve represented by a series of 60 individual semi-annual discount rates from one-half to thirty years. Each
discount rate in the curve was determined by creating a hypothetical zero coupon bond derived by bootstrapping. Bootstrapping is a technique used by bond analysts to derive the yield of hypothetical
zero coupon bonds from coupon bonds. It assumes that the value of any individual Aa coupon security should equal the value of a package of zero coupon Aa securities that duplicates the coupon bond's
cash flow. It is an iterative calculation that determines the discount rate which equates the cash flows of each semi-annual coupon bond with a hypothetical zero coupon bond based on the
actual coupon bond price quotations for each semi-annual maturity cell and equal weighting of the highest yielding (yield to maturity) quartile of bonds in five distinct maturity groups.
Each bond was a Aa rated, non-callable bond with at least $150 million par outstanding.

The
expected return on pension assets is based on the long-term actual average rate of return on the Plans' pension assets and projected returns using asset mix forecasts and
historical return data.

F-34

---



The
Company's pension plans' weighted-average asset allocations at September 30, 2007 and 2006, by asset category, are as follows:

|                  |  | 2007 |   | 2006 |  
|----------------- |  | ---- | - | ---- | -
|Asset Category:   |  |      |   |      |  
|Equity securities |  | 70   | % | 69   | %
|Debt securities   |  | 29   | % | 30   | %
|Other             |  | 1    | % | 1    | %
|                  |  |      |   |      |  
|Total             |  | 100  | % | 100  | %
|                  |  |      |   |      |  

The
plan assets of the pension plans are held and invested by the Walter Industries, Inc. Subsidiaries Master Pension Trust ("Pension Trust"). The Pension Trust employs a total
return investment approach whereby a mix of equity and fixed income investments are used to meet the long-term funding requirements of the Pension Trust. The asset mix strives to generate
rates of return sufficient to fund plan liabilities and exceed the long-term rate of inflation, while maintaining an appropriate level of portfolio risk. Risk tolerance is established
through consideration of plan liabilities, plan funded status and corporate financial condition. The investment portfolio is diversified across domestic and foreign equity holdings, and by investment
styles and market capitalizations. Fixed income holdings are diversified by issuer, security type and principal and interest payment characteristics. Derivatives may be used to gain market exposure in
an efficient and timely manner; however, derivatives may not be used to leverage the portfolio beyond the market value of the underlying investments. Investment risk is measured and monitored on an
ongoing basis through quarterly investment portfolio reviews, annual benefits liability measurements, and periodic asset/liability studies.

As
of September 30, 2007 the Trust's strategic asset allocation was as follows:

|                   |                             | Strategic
Allocation |    | Tactical
Range |      
|------------------ | --------------------------- | -------------------- | -- | -------------- | -----
|Asset Class        |                             |                      |    |                |      
|Total Equity       |                             | 70                   | %  | 65-70          | %    
|                   | Large Capitalization Stocks |                      | 45 | %              | 40-50
|                   | Mid Capitalization Stocks   |                      | 10 | %              | 8-12 
|                   | International Stocks        |                      | 15 | %              | 12-18
|Total Fixed Income |                             | 30                   | %  | 25-35          | %    
|Total Cash         |                             | 0                    | %  | 0-2            | %    

These
ranges are targets and deviations may occur from time-to-time due to market fluctuations. Portfolio assets are typically rebalanced to the allocation
targets at least annually.

The
Pension Trust employs a building block approach in determining the long-term rate of return for plan assets. Historical market returns are studied and
long-term risk/return relationships between equity and fixed income asset classes are analyzed. This analysis supports the widely accepted fundamental investment principle that assets with
greater risk generate higher returns over long periods of time. The historical impact of returns in one asset class on returns of another asset class is reviewed to evaluate portfolio diversification
benefits. Current market factors including inflation rates and interest rate levels are considered before assumptions are developed. The long-term portfolio return is established via the
building block approach by adding interest rate risk and equity risk premiums to the anticipated long-term rate of inflation. Proper consideration is given to the importance of portfolio
diversification and periodic rebalancing. Peer data and historical return assumptions are reviewed to check for reasonableness.

Assumed
healthcare cost trend rates, discount rates, expected return on plan assets and salary increases have a significant effect on the amounts reported for the pension and healthcare
plans. A

F-35

---



one-percentage-point
change in the trend rate for these assumptions would have the following effects (in thousands):

|                                |                                                               | Increase (Decrease) |  
|------------------------------- | ------------------------------------------------------------- | ------------------- | -
|
|Health care cost trend:         |                                                               |                     |  
|                                | Effect on total of service and interest cost components       |                     | $
|                                | Effect on postretirement benefit obligation                   |                     |  
|Discount rate:                  |                                                               |                     |  
|                                | Effect on postretirement service and interest cost components |                     |  
|                                | Effect on postretirement benefit obligation                   |                     |  
|                                | Effect on current year postretirement benefits expense        |                     |  
|                                | Effect on pension service and interest cost components        |                     |  
|                                | Effect on pension benefit obligation                          |                     |  
|                                | Effect on current year pension expense                        |                     |  
|Expected return on plan assets: |                                                               |                     |  
|                                | Effect on current year pension expense                        |                     |  
|Rate of compensation increase:  |                                                               |                     |  
|                                | Effect on pension service and interest cost components        |                     |  
|                                | Effect on pension benefit obligation                          |                     |  
|                                | Effect on current year pension expense                        |                     |  

The
Company's minimum pension plan funding requirement for 2008 is $17.1 million, which the Company expects to fully fund. The Company also expects to pay $18.6 million in
2008 for benefits related to its other postretirement healthcare plan. The following estimated benefit payments from the plans, which reflect expected future service, as appropriate, are expected to
be paid (in thousands):

|                |  | Pension
Benefits |        | Other
Postretirement
Benefits
Before
Medicare
Subsidy |   | Medicare
Part D
Subsidy
|--------------- |  | ---------------- | ------ | ----------------------------------------------------- | - | -----------------------
|2008            |  | $                | 9,599  |                                                       | $ | 19,330                 
|2009            |  |                  | 10,817 |                                                       |   | 21,028                 
|2010            |  |                  | 14,414 |                                                       |   | 22,653                 
|2011            |  |                  | 12,117 |                                                       |   | 23,928                 
|2012            |  |                  | 13,037 |                                                       |   | 25,000                 
|Years 2013-2017 |  |                  | 76,373 |                                                       |   | 136,691                

The
Company and certain of its subsidiaries maintain profit sharing and 401(k) plans. The total cost of these plans in 2007, 2006 and 2005 was $2.4 million, $2.4 million
and $2.2 million, respectively.

UMWA Pension and Benefit Trusts

The Company is required under the Agreement with the UMWA to pay amounts to the UMWA Pension Trusts based principally on hours worked by UMWA represented
employees. These multi-employer pension trusts provide benefits to eligible retirees through a defined benefit plan. The Employee Retirement Income Security Act of 1974 ("ERISA"), as amended in 1980,
imposes certain liabilities on contributors to multi-employer pension plans in the event of a contributor's withdrawal from the plan. The Company does not have any intention to withdraw from the plan;
however, through July 1, 2008, the calculation of the Company's combined withdrawal liability amounts to $182.5 million.

F-36

---



The
withdrawal liability is calculated based on the contributor's proportionate share of the plan's unfunded vested liabilities.

The
Coal Industry Retiree Health Benefit Act of 1992 ("Coal Act") created two multiemployer benefit plans: (1) the United Mine Workers of America Combined Benefit Fund ("Combined
Fund") into which the former UMWA Benefit Trusts were merged, and (2) the 1992 Benefit Fund.

The
Combined Fund provides medical and death benefits for all beneficiaries of the former UMWA Benefit Trusts who were actually receiving benefits as of July 20, 1992. The 1992
Benefit Fund provides medical and death benefits to orphan UMWA-represented members eligible for retirement on February 1, 1993, and who actually retired between July 20,
1992 and September 30, 1994. The Coal Act provides for the assignment of beneficiaries to former employers and the allocation of unassigned beneficiaries (referred to as orphans) to companies
using a formula set forth in the Coal Act. The Coal Act requires that responsibility for funding the benefits to be paid to beneficiaries, be assigned to their former signatory employers or related
companies. This cost is recognized as an expense in the year the payments are assessed.

The
UMWA 1993 Benefit Plan is a defined contribution plan that was created as the result of negotiations for the National Bituminous Coal Wage Agreement (NBCWA) of 1993. This plan
provides healthcare benefits to orphan UMWA retirees who are not eligible to participate in the Combined Fund, or the 1992 Benefit Fund or whose last employer signed the 1993, or a later, NBCWA and
who subsequently goes out of business.

Contributions
to these plans in 2007, 2006 and 2005 were $10.4 million, $2.2 million and $1.9 million, respectively. The increase in the 2007 multi-employer benefits
expense over the prior years is primarily due to an increase in the hourly rate of funding resulting from the new agreement with the UMWA effective January 1, 2007.

NOTE 14Stockholders' Equity

On August 13, 2007, the Company's Board of Directors authorized a $25.0 million Common Stock Open Market share buyback program to replace the
July 21, 2003 authorized program. During 2007, the Company acquired 232,753 shares and, at December 31, 2007, $19.4 million remains available under this authorization.

F-37

---



NOTE 15Net Income (Loss) Per Share

A reconciliation of the basic and diluted net income (loss) per share computations for the years ended December 31, 2007, 2006 and 2005 are as follows (in
thousands, except per share data):

|                                           |                                             | For the years ended December 31,               |                                                                               
|------------------------------------------ | ------------------------------------------- | ---------------------------------------------- | ------------------------------------------------------------------------------
|
|
|Numerator:                                 |                                             |                                                |                                                                               
|                                           | Income from continuing operations           |                                                | $                                                                             
|                                           | Effect of dilutive securities:              |                                                |                                                                               
|                                           |                                             |                                                | Interest related to 3.75% convertible senior subordinated notes, net of tax(a)
|                                           |                                             |                                                |                                                                               
|                                           |                                             | $                                              | 114,228                                                                       
|                                           |                                             |                                                |                                                                               
|                                           | Income (loss) from discontinued operations  |                                                | $                                                                             
|                                           |                                             |                                                |                                                                               
|Denominator:                               |                                             |                                                |                                                                               
|                                           | Average number of common shares outstanding |                                                |                                                                               
|                                           | Effect of dilutive securities:              |                                                |                                                                               
|                                           |                                             | Stock options(b)                               |                                                                               
|                                           |                                             | 3.75% convertible senior subordinated notes(a) |                                                                               
|                                           |                                             |                                                |                                                                               
|                                           |                                             |                                                | 52,016                                                                        
|                                           |                                             |                                                |                                                                               
|Income from continuing operations          |                                             | $                                              | 2.20                                                                          
|Income (loss) from discontinued operations |                                             |                                                | (0.05                                                                         
|                                           |                                             |                                                |                                                                               
|Net income (loss) per share                |                                             | $                                              | 2.15                                                                          
|                                           |                                             |                                                |                                                                               

---

NOTE 16Commitments and Contingencies

Income Tax Litigation

The Company is currently engaged in litigation with regard to Federal income tax disputes; see Note 11 for a more complete explanation.

F-38

---



Environmental Matters

The Company is subject to a wide variety of laws and regulations concerning the protection of the environment, both with respect to the construction and operation
of its plants, mines and other facilities and with respect to remediating environmental conditions that may exist at its own and other properties.

The
Company believes that it is in substantial compliance with federal, state and local environmental laws and regulations. The Company accrues for environmental expenses resulting from
existing conditions that relate to past operations when the costs are probable and reasonably estimable.

Sloss
and Walter Industries, Inc. have received a letter from attorneys purporting to represent a group of residents of the North Birmingham area of Jefferson County, Alabama
alleging personal injury, property damage, nuisance and trespass. The allegations against Sloss relate to air emissions from its coking facility. Walter is named in this litigation because of its
ownership interest in Sloss. Management believes that if a suit is filed on these allegations, Sloss and Walter will have substantial defenses.

Sloss
Industries entered into a decree order in 1989 relative to a Resource Conservation Recovery Act ("RCRA") compliance program mandated by the EPA. A RCRA Facility Investigation
("RFI") Work Plan was prepared which proposed investigative tasks to assess the presence of contamination at the Sloss facility. The Work Plan was approved in 1994 and the Phase I
investigations were conducted and completed between 1995 and 1999. Phase II investigations for the Chemical Plant/Coke Plant and Biological Treatment Facility and Sewers/Land Disposal Areas
were performed in 2000 and 2001 and are substantially complete. At the end of 2004, the EPA re-directed Sloss' RFI efforts toward completion of the Environmental Indicator ("EI")
determinations for the Current Human Exposures. This EI effort was completed to assist the EPA in meeting goals set by the Government Performance Results Act ("GPRA") for RCRA by 2005. Sloss
implemented the approved EI Sampling Plan in April 2005. The EPA approved/finalized the EI determinations for Sloss' Birmingham facility in September 2005. In an effort to refocus the RFI, the EPA has
now provided technical comments on the Phase II RFI report and the report recently submitted as part of the EI effort. A Phase III work plan was submitted to the EPA during the first
quarter of 2007. The EPA commented on the Phase III plan and Sloss has responded. Subsequently, a meeting was held with the EPA during the third quarter of 2007 with the objective of
finalization of the Phase III Plan. However, additional requests by EPA have expanded and continue to expand the scope of the project and will necessitate additional sampling and testing.
Although no assurances can be given that the Company will not be required in the future to make material expenditures relating to the Sloss site or other sites, management does not believe at this
time that the cleanup costs, if any, associated with these sites will have a material adverse effect on
the financial condition of the Company, but such cleanup costs could be material to results of operations in a future reporting period.

Miscellaneous Litigation

Drummond Company, Inc. filed suit in state court in Tuscaloosa County, Alabama on October 29, 2001, against the Company and several of its
subsidiaries (Drummond Company, Inc. v. Walter Industries, Inc., et al., Case No. CV 2002-0673). Drummond claimed that it was entitled to exclusive surface mining
rights on certain lands owned by United Land Corporation, a wholly owned subsidiary of the Company. United Land filed a counterclaim seeking injunctive relief, substantial actual damages and punitive
damages against Drummond based on fraud. Drummond's claims have been denied by the Alabama Supreme Court. The Alabama Supreme Court ruled in favor of United Land's counter claims and the case was sent
back to the trial court. These counterclaims are currently on appeal to the Alabama Supreme Court from a summary judgment ruling against them by the trial court.

F-39

---



The
Company and its subsidiaries are parties to a number of other lawsuits arising in the ordinary course of their businesses. The Company records costs relating to these 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 of operations cannot be predicted with certainty as any such effect
depends on future results of operations and the amount and timing of the resolution of such matters. While the results of litigation cannot be predicted with certainty, the Company believes that the
final outcome of such other litigation will not have a materially adverse effect on the Company's consolidated financial statements.

Commitments and ContingenciesOther

In the opinion of management, accruals associated with contingencies incurred in the normal course of business are sufficient. Resolution of existing known
contingencies is not expected to significantly affect the Company's financial position and result of operations.

Operating Leases and Purchase Obligations

The Company accounts for operating leases in accordance with SFAS 13, "Accounting for Leases," which includes guidance for evaluating free rent periods,
amortization period of leasehold improvements and incentives related to leasehold improvements. The Company's operating leases are primarily for mining equipment, automobiles and office space.
Purchase obligations primarily represent commitments to purchase equipment and raw materials.

Rent
expense was $13.9 million, $11.8 million, and $11.9 million for the years ended December 31, 2007, 2006 and 2005, respectively. Future minimum payments
under non-cancelable operating leases and purchase obligations as of December 31, 2007 are (in thousands):

|           |  | Operating
Leases |       | Purchase
Obligations
|---------- |  | ---------------- | ----- | --------------------
|2008       |  | $                | 9,492 |                     
|2009       |  |                  | 6,884 |                     
|2010       |  |                  | 4,398 |                     
|2011       |  |                  | 2,575 |                     
|2012       |  |                  | 946   |                     
|Thereafter |  |                  | 89    |                     

NOTE 17Financial Instruments

Fair Value of Financial Instruments

The following methods and assumptions were used to estimate fair value disclosures:

Cash and cash equivalents, restricted short-term investments, trade receivables, other receivables and accounts
payableThe carrying amounts reported in the balance sheet approximate fair value.

Instalment notes receivableThe estimated fair value of the beneficial interests in the instalment notes receivable is
estimated to be $0.3 million and $0.2 million as of December 31, 2007 and 2006, respectively. This value represents the fair value of the residuals from the instalment notes
receivable, as determined by discounting the net cash flows expected to be generated from the instalment notes receivable after giving effect to the legal restrictions on those cash flows to first pay
the mortgage-backed/asset-backed notes. The discounted cash flows were determined using assumptions for the prepayment speeds, default rates, losses and a risk-adjusted market discount
rate. The value of mortgage-backed assets such as instalment notes receivable is very sensitive to changes in interest rates.

F-40

---



DebtThe estimated fair value of mortgage-backed/asset-backed notes approximated $1.6 billion and $1.8 billion
for the period ended at December 31, 2007 and 2006, based on current yields for comparable debt issues or prices for actual transactions. These obligations are expected to be satisfied using
the proceeds from the instalment notes receivable that back these obligations and are non-recourse to the Company. The value of mortgage-backed debt obligations is very sensitive to
changes in interest rates.

The
estimated fair value of the Company's 3.75% convertible senior subordinated notes due May 1, 2024 was estimated based on several standard market variables including the
Company's common stock price, its volatility and yields on comparable debt. The estimated fair value of the Company's convertible notes was $3.1 million at December 31, 2007 and
approximated book value at December 31,
2006. The estimated fair value of the Company's term loan was $210.0 million at December 31, 2007 and approximated book value at December 31, 2006.

Interest rate hedgesInterest rate hedges are discussed in more detail in Note 12.

Commodity hedgesAt December 31, 2007, the Company had two contracts outstanding: one to hedge 0.3 mmbtus or 17% of
anticipated sales for the first quarter of 2008 at a price of $8.76 per mmbtu and another to hedge 0.5 mmbtus or 25% of anticipated sales for the first quarter of 2008 at a price of $8.60 per mmbtu.
The fair value of these contracts at December 31, 2007 was an asset of $0.9 million and was recognized immediately in income instead of deferred into the first quarter of 2008. At
December 31, 2006, the Company had one contract outstanding to hedge 0.6 mmbtus or 35% of anticipated sales in the first quarter of 2007 at a price of $10.54 per mmbtu, expiring in the first
quarter 2007. The fair value of this contract at December 31, 2006 was an asset of $2.6 million.

NOTE 18Segment Analysis

The Company's reportable segments are strategic business units that offer different products and services and have separate management teams. The business units
have been aggregated into five reportable segments: Natural Resources, Sloss, Homebuilding, Financing, and Other. The Natural Resources segment is comprised of coal mining, methane gas operations and
royalties and land sales generated by certain land holdings. In the fourth quarter of 2007, the Company began reporting United Land (parent of Kodiak and TRI) as a part of Natural Resources due to its
natural resource holdings. Prior to the fourth quarter of 2007, United Land was included in the Other segment. Results for 2006 and 2005 have been revised to reflect this change. Sloss manufactures
foundry and furnace coke and slag fiber. The Financing segment provides mortgage financing on homes constructed by the Homebuilding segment and purchases mortgages originated by others. The Company
markets and supervises the construction of detached, single-family residential homes, primarily in the southern United States, through the Homebuilding segment. The Other segment includes the other
land divisions and corporate expenses.

The
accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on operating earnings
of the respective business segments.

F-41

---



Summarized financial information concerning the Company's reportable segments is shown in the following tables (in thousands):

|                                       |                                                                                          | For the years ended December 31,                           |  
|-------------------------------------- | ---------------------------------------------------------------------------------------- | ---------------------------------------------------------- | -
|
|Sales and revenues:                    |                                                                                          |                                                            |  
|                                       | Natural Resources                                                                        |                                                            | $
|                                       | Sloss                                                                                    |                                                            |  
|                                       |                                                                                          |                                                            |  
|                                       | Natural Resources and Sloss                                                              |                                                            |  
|                                       | Financing                                                                                |                                                            |  
|                                       | Homebuilding                                                                             |                                                            |  
|                                       |                                                                                          |                                                            |  
|                                       | Financing and Homebuilding Group                                                         |                                                            |  
|                                       | Other                                                                                    |                                                            |  
|                                       | Consolidating eliminations                                                               |                                                            |  
|                                       |                                                                                          |                                                            |  
|                                       |                                                                                          | Sales and revenues(a)(b)                                   |  
|                                       |                                                                                          |                                                            |  
|Segment operating income (loss)(c)(d): |                                                                                          |                                                            |  
|                                       | Natural Resources                                                                        |                                                            | $
|                                       | Sloss                                                                                    |                                                            |  
|                                       |                                                                                          |                                                            |  
|                                       | Natural Resources and Sloss                                                              |                                                            |  
|                                       | Financing(e)                                                                             |                                                            |  
|                                       | Homebuilding                                                                             |                                                            |  
|                                       |                                                                                          |                                                            |  
|                                       | Financing and Homebuilding Group                                                         |                                                            |  
|                                       | Other                                                                                    |                                                            |  
|                                       | Consolidating eliminations                                                               |                                                            |  
|                                       |                                                                                          |                                                            |  
|                                       | Segment operating income (loss)                                                          |                                                            |  
|                                       | Less other debt interest and debt conversion costs                                       |                                                            |  
|                                       |                                                                                          |                                                            |  
|                                       | Income (loss) from continuing operations before income tax expense and minority interest |                                                            |  
|                                       | Income tax expense                                                                       |                                                            |  
|                                       |                                                                                          |                                                            |  
|                                       |                                                                                          | Income from continuing operations before minority interest |  
|                                       |                                                                                          |                                                            |  
|Depreciation:                          |                                                                                          |                                                            |  
|                                       | Natural Resources                                                                        |                                                            | $
|                                       | Sloss                                                                                    |                                                            |  
|                                       |                                                                                          |                                                            |  
|                                       | Natural Resources and Sloss                                                              |                                                            |  
|                                       | Financing                                                                                |                                                            |  
|                                       | Homebuilding                                                                             |                                                            |  
|                                       |                                                                                          |                                                            |  
|                                       | Financing and Homebuilding Group                                                         |                                                            |  
|                                       | Other                                                                                    |                                                            |  
|                                       |                                                                                          |                                                            |  
|                                       |                                                                                          | Total                                                      |  
|                                       |                                                                                          |                                                            |  
|Capital expenditures:                  |                                                                                          |                                                            |  
|                                       | Natural Resources                                                                        |                                                            | $
|                                       | Sloss                                                                                    |                                                            |  
|                                       |                                                                                          |                                                            |  
|                                       | Natural Resources and Sloss                                                              |                                                            |  
|                                       | Financing                                                                                |                                                            |  
|                                       | Homebuilding                                                                             |                                                            |  
|                                       |                                                                                          |                                                            |  
|                                       | Financing and Homebuilding Group                                                         |                                                            |  
|                                       | Other                                                                                    |                                                            |  
|                                       |                                                                                          |                                                            |  
|                                       |                                                                                          | Total                                                      |  
|                                       |                                                                                          |                                                            |  

F-42

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|Identifiable assets: |                                   |       |   |           |           |   |           |           |   |          
|-------------------- | --------------------------------- | ----- | - | --------- | --------- | - | --------- | --------- | - | ---------
|                     | Natural Resources                 |       | $ | 630,522   |           | $ | 598,905   |           | $ | 437,209  
|                     | Sloss                             |       |   | 58,270    |           |   | 57,686    |           |   | 69,981   
|                     |                                   |       |   |           |           |   |          
|                     | Natural Resources and Sloss       |       |   | 688,792   |           |   | 656,591   |           |   | 507,190  
|                     | Financing                         |       |   | 1,973,340 |           |   | 1,940,103 |           |   | 1,796,377
|                     | Homebuilding                      |       |   | 64,748    |           |   | 71,388    |           |   | 69,916   
|                     |                                   |       |   |           |           |   |          
|                     | Financing and Homebuilding Group  |       |   | 2,038,088 |           |   | 2,011,491 |           |   | 1,866,293
|                     | Other                             |       |   | 40,401    |           |   | 5,706     |           |   | 103,288  
|                     | Assets of discontinued operations |       |   |          |           |   | 10,327    |           |   | 2,927,133
|                     |                                   |       |   |           |           |   |          
|                     |                                   | Total |   | $         | 2,767,281 |   | $         | 2,684,115 |   | $        
|                     |                                   |       |   |           |           |   |          

---

For the years ended December 31,2007

2006

2005Natural Resources

$
29,584

$
19,764

$
16,448Sloss


(864
)

(680
)

(563
)Financing


(424
)

(1,544
)

(240
)Homebuilding


(592
)

(3,224
)

(468
)Other


(970
)

(776
)

(776
)$
26,734

$
13,540

$
14,401


NOTE 19Related Party Transactions

The Company owns a 50% interest in the joint venture Black Warrior Methane ("BWM"), which is accounted for under the proportionate consolidation method. The
Company has granted the rights to produce and sell methane gas from its coal mines to BWM. The Company also supplies labor and equipment to BWM and charges the joint venture for such costs on a
monthly basis. The total of these charges for 2007, 2006 and 2005 were $2.1 million, $2.1 million and $2.6 million, respectively.

F-43

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NOTE 20Accounting Pronouncements Not Yet Adopted

In 2006 the FASB issued SFAS No. 157, "Fair Value Measurements," which provides a definition of fair value, establishes a framework for measuring fair
value and expands financial statement disclosure requirements. SFAS No. 157 requires companies to base fair values on what they would receive from a sale to a third party in the open market.
The Company does not expect the adoption of this statement, which became effective January 1, 2008, to have a material effect on its consolidated financial statements.

In
2006 the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans," which requires the Company to measure plan assets and
liabilities as of the fiscal year-end reporting date. The Company uses a September 30 measurement date
and will be required to adopt this provision December 31, 2008. The Company does not expect the adoption of this statement to have a material effect on its consolidated financial statements.

In
2007 the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities," which allows reporting entities to choose to measure many financial
instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to reduce volatility in reported earnings that result from
measuring related assets and liabilities differently without having to apply complex hedge accounting provisions, using the guidance in SFAS No. 133 (as amended), "Accounting for Derivative
Instruments and Hedging Activities." The Company has not elected the fair value option, as provided in this statement. As such, the Company does not expect the adoption of this statement, which became
effective January 1, 2008, to have a material effect on its consolidated financial statements.

In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements," that amends ARB 51, "Consolidated Financial Statements," to
establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is
an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. The Company has not yet determined what impact the adoption of this
requirement, which becomes effective January 1, 2009, will have on its consolidated financial statements.

Also
in December 2007, the FASB issued SFAS No. 141(R), "Business Combinations," a replacement of SFAS No. 141, "Business Combinations." The objective of this Statement is
to improve the relevance, representational faithfulness and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects.
This Statement establishes principles and requirements for how the acquirer recognizes and measures the identifiable assets acquired and liabilities assumed, measures the goodwill acquired or gain
from a bargain purchase, and determines what information to disclose. The Company has not yet determined what impact the adoption of this requirement, which becomes effective January 1, 2009,
will have on its consolidated financial statements with respect to future acquisitions.

NOTE 21Subsequent Event

On February 19, 2008, the Company announced a restructuring of JWH Holding Company, LLC, the Company's Financing and Homebuilding business.
Thirty-six underperforming Jim Walter Homes sales centers have closed or will close as part of the restructuring. As a result of this restructuring, the Company expects to record a
restructuring charge in the range of $6.0 million to $8.0 million, with the majority of this amount expected to be recognized in the first quarter 2008, resulting from a
25 percent reduction in workforce and asset impairments.

F-44

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EXHIBIT INDEX

|Exhibit Number |  |   |  | Description                                                                                                                                                                                                                                                                                                                           
|-------------- |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2(a)(i)        |  |  |  | Amended Joint Plan of Reorganization of Walter Industries, Inc. and certain of its subsidiaries, dated as of December 9, 1994 (1)                                                                                                                                                                                                     
|2(a)(ii)       |  |  |  | Modification to the Amended Joint Plan of Reorganization of Walter Industries, Inc. and certain of its subsidiaries, as filed in the Bankruptcy Court on March 1, 1995 (2)                                                                                                                                                            
|2(a)(iii)      |  |  |  | Findings of Fact, Conclusions of Law and Order Confirming Amended Joint Plan of Reorganization of Walter Industries, Inc. and certain of its subsidiaries, as modified (3)                                                                                                                                                            
|3(i)           |  |  |  | Amended and Restated Certificate of Incorporation of the Company (4)                                                                                                                                                                                                                                                                  
|3(ii)          |  |  |  | Amended and Restated By-Laws (5)                                                                                                                                                                                                                                                                                                      
|4              |  |  |  | Form of Specimen Certificate for Registrant's Common Stock (incorporated by reference to Exhibit 4(b) to Registration Statement on Form S-1 filed by the Registrant (No. 033-59013) (6)                                                                                                                                               
|10.1*          |  |  |  | Director and Officer Indemnification Agreement, dated as of March 3, 1995, among the Company and the Indemnitee parties thereto (7)                                                                                                                                                                                                   
|10.2*          |  |  |  | Walter Industries, Inc. Executive Change-in-Control Severance Agreement (8)                                                                                                                                                                                                                                                           
|10.3*          |  |  |  | Walter Industries Executive Deferred Compensation and Supplemental Retirement Plan (8)                                                                                                                                                                                                                                                
|10.4*          |  |  |  | Walter Industries, Inc. Directors' Deferred Fee Plan (9)                                                                                                                                                                                                                                                                              
|10.5*          |  |  |  | Walter Industries, Inc. Supplemental Pension Plan (8)                                                                                                                                                                                                                                                                                 
|10.6*          |  |  |  | Walter Industries, Inc. Executive Incentive (10)                                                                                                                                                                                                                                                                                      
|10.7*          |  |  |  | Amended 1995 Long-Term Incentive Stock Plan of Walter Industries, Inc. (11)                                                                                                                                                                                                                                                           
|10.8*          |  |  |  | 2002 Long-Term Incentive Award Plan of Walter Industries, Inc. (12)                                                                                                                                                                                                                                                                   
|10.9*          |  |  |  | Restricted Stock Unit Award Agreement                                                                                                                                                                                                                                                                                                 
|10.10*         |  |  |  | Non-Statutory Stock Option Agreement (8)                                                                                                                                                                                                                                                                                              
|10.11*         |  |  |  | Walter Industries, Inc. Amended and Restated Employee Stock Purchase Plan (13)                                                                                                                                                                                                                                                        
|10.12          |  |  |  | Walter Credit Agreement dated as of October 3, 2005 among Walter Industries, Inc. as borrower, Bank of America, N.A., as Administrative Agent, Morgan Stanley Senior Funding, Inc, as Syndication Agent and SunTrust Bank, BNP Paribas and
Calyon New York Branch, as co-documentation agents and the other lenders named therein (14)
|10.12.1        |  |  |  | Amendment No. 1 to Walter Credit Agreement dated as of January 24, 2006 (15)                                                                                                                                                                                                                                                          
|10.12.2        |  |  |  | Amendment No. 2 to Walter Credit Agreement dated as of February 14, 2006 (16)                                                                                                                                                                                                                                                         
|10.12.3        |  |  |  | Amendment No. 3 to Walter Credit Agreement dated as of September 14, 2006 (17)                                                                                                                                                                                                                                                        

E-1

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|10.12.4 |  |  |  | Amendment No. 4 to Walter Credit Agreement dated as of October 9, 2007 (18)                                                                                                                                                                                                                                                                                                         
|------- |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.13   |  |  |  | Second Amended and Restated Variable Funding Loan Agreement, dated as of June 15, 2006, by and among YC SUSI Trust, Atlantic Asset Securitization LLC, Mid-State Trust IX, Treasury Bank, a Division of Countrywide Bank FSA, The Bank of New
York, Bank of America, N.A., Calyon New York Branch and Ambac Assurance Corporation and other signatories thereto (17)                
|10.13.1 |  |  |  | Omnibus Amendment to Second Amended and Restated Variable Funding Loan Agreement, dated as of July 30, 2007, by and among YC SUSI Trust, Atlantic Asset Securitization LLC, Mid-State Trust IX, Treasury Bank, a Division of Countrywide Bank
FSA, The Bank of New York, Bank of America, N.A., Calyon New York Branch and Ambac Assurance Corporation and other signatories thereto
|10.14   |  |  |  | Amended and Restated Variable Funding Loan Agreement dated as of June 15, 2006, by and among Three Pillars Funding, LLC, Mid-State Trust XIV, Treasury Bank, a Division of Countrywide Bank, FSB, The Bank of New York, SunTrust Capital Markets,
 Inc. and SunTrust Bank (17)                                                                                                      
|10.14.1 |  |   |  | Amendment No. 1 to Amended and Restated Variable Funding Loan Agreement dated as of November 27, 2006, by and among Three Pillars Funding, LLC, Mid-State Trust XIV, Treasury Bank, a Division of Countrywide Bank, FSB, The Bank of New
York, SunTrust Capital Markets, Inc. and SunTrust Bank (17)                                                                                
|10.14.2 |  |  |  | Amendment No. 2 to Amended and Restated Variable Funding Loan Agreement dated as of April 26, 2007, by and among Three Pillars Funding, LLC, Mid-State Trust XIV, Treasury Bank, a Division of Countrywide Bank, FSB, The Bank of New York,
SunTrust Capital Markets, Inc. and SunTrust Bank                                                                                        
|10.14.3 |  |  |  | Omnibus Amendment to Amended and Restated Variable Funding Loan Agreement dated as of July 2, 2007, by and among Three Pillars Funding, LLC, Mid-State Trust XIV, Treasury Bank, a Division of Countrywide Bank, FSB, The Bank of New York,
SunTrust Capital Markets, Inc. and SunTrust Bank                                                                                        
|10.14.4 |  |  |  | Amendment No. 3 to Amended and Restated Variable Funding Loan Agreement dated as of October 25, 2007, by and among Three Pillars Funding, LLC, Mid-State Trust XIV, Treasury Bank, a Division of Countrywide Bank, FSB, The Bank of New
York, SunTrust Capital Markets, Inc. and SunTrust Bank                                                                                      
|10.15*  |  |  |  | Agreement dated as of August 1, 2006, between the Company and Victor P. Patrick (19)                                                                                                                                                                                                                                                                                                
|10.16*  |  |  |  | Agreement, dated as of August 1, 2006, between the Company and Joseph J. Troy (19)                                                                                                                                                                                                                                                                                                  
|10.17*  |  |  |  | Agreement dated March 13, 2006, between the Company and George R. Richmond (20)                                                                                                                                                                                                                                                                                                     

E-2

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|10.18* |  |  |  | Agreement dated as of March 2, 2006, between JWH Holding Company, LLC and Mark J. O'Brien (21)                                                     
|------ |  | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|10.19* |  |  |  | Agreement dated as of November 2, 2006, between JWH Holding Company, LLC and Charles E. Cauthen (17)                                               
|10.20* |  |  |  | JWH Holding Company, LLC Economic Profit Plan Document (17)                                                                                        
|10.21* |  |  |  | The 2007 Long-Term Incentive Award Plan of JWH Holding Company, LLC (22)                                                                           
|10.22* |  |  |  | JWH Holding Company, LLC Option Agreement (22)                                                                                                     
|12.1   |  |  |  | Ratio of Earnings to Fixed Charges                                                                                                                 
|21     |  |  |  | Subsidiaries of the Company                                                                                                                        
|23.1   |  |  |  | Consent of Independent Registered Certified Public Accounting Firm                                                                                 
|23.2   |  |  |  | Consent of Independent Registered Certified Public Accounting Firm                                                                                 
|24     |  |  |  | Power of Attorney                                                                                                                                  
|31.1   |  |  |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley. Act of 2002Chief Executive Officer and Chief Financial Officer                       
|32.1   |  |  |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350Chief Executive Officer and Chief Financial Officer

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The
Exhibits identified above with an asterisk (*) are management contracts or compensatory plans or arrangements.

E-3

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E-4

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