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



FORM 10-K

(Mark One)ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934For the year ended December 31, 2008oro

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 registeredCommon Stock, par value $0.01

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 the
definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

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, 2008, the
registrant's most recently completed second fiscal quarter, as reported by the New York Stock Exchange, was approximately $6.1 billion.

Number
of shares of common stock outstanding as of January 31, 2009: 53,276,191

Documents Incorporated by Reference

Applicable
portions of the Proxy Statement for the Annual Meeting of Stockholders of the Company to be held April 23, 2009 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", "Walter"), organized in 1987, is a leading producer and exporter of metallurgical coal
for the global steel industry and also produces steam coal, coal bed methane gas, metallurgical coke and other related products. The Company also operates a mortgage financing business, which is
expected to be divested in 2009, as discussed further below, and decided to close its Homebuilding business in December 2008.

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"), Taft Coal Sales & Associates ("Taft") and United Land Corporation ("United Land"). In 2008, JWR produced 6.0 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 6.6 billion cubic feet of natural gas in 2008. United
Land is the parent company of TRI and Taft. TRI, acquired in 2007, is a Brookwood, Alabama-based surface coal miner with an annual production capacity of approximately 0.8 million tons of
primarily low-sulfur steam coal for the industrial and electric utility markets. In 2008, TRI produced 0.8 million tons of steam coal. Taft, located in Jasper, Alabama, was acquired
on September 2, 2008 and operates a surface steam and industrial coal mine for the industrial and electric utility markets. Since the acquisition, Taft has produced 0.2 million tons of
steam coal. Sloss Industries Corporation ("Sloss") is a manufacturer of metallurgical coke, primarily for foundry and furnace use. In 2008, Sloss produced 0.4 million tons of metallurgical
coke.

Financing and Homebuilding.Our Financing segment, which includes Walter Mortgage Company ("WMC"), services non-conforming
instalment
notes and loans that are secured by mortgages and liens. The mortgage portfolio at December 31, 2008 was approximately $1.8 billion. Our Homebuilding segment includes Jim Walter
Homes, Inc. ("JWH"), which was an on-your-lot homebuilder.

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

2008 Developments

Natural Resources and Sloss

Kodiak Closure.On December 26, 2008, the Company announced the permanent closure of the underground coal mine owned by the
Kodiak Mining
Company, LLC ("Kodiak"), located in Shelby County, Alabama, as a result of high operational costs, difficult operating conditions and a challenging pricing environment for Kodiak's product. As
a result of the closure of the Kodiak mine in December 2008, historical results have been presented as discontinued operations. For additional discussion, see Note 3 of "Notes to the
Consolidated Financial Statements."

Acquisition of Coal Reserves.On December 11, 2008, we announced that JWR has leased approximately 46.0 million tons of
additional
high-quality Blue Creek Coal reserves contiguous to its Mine No. 4 and Mine No. 7 operations near Brookwood, Alabama. Terms of the leases, including royalty rates, are
consistent with the Company's existing lease agreements.

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Taft Acquisition.On September 2, 2008, we acquired Taft Coal Sales & Associates, a central Alabama surface coal
producer with steam,
industrial and metallurgical coal reserves, for $23.5 million, which includes the assumption of $3.4 million of debt. Taft operates a surface steam and industrial coal mine with annual
production capacity of approximately 0.6 million tons and has reserves of approximately 5.0 million tons at December 31, 2008. Included in Taft's reserves are approximately
0.6 million tons of metallurgical coal, which the Company plans to mine in future periods. Taft is based in Jasper, Alabama, approximately 40 miles northwest of Birmingham, and employs
approximately 100 people.

TRI Contractual Commitments.In 2008, TRI committed to sell 1.2 million tons of steam and industrial coal, or approximately
half of its
current annual production capacity for the next three calendar years, at approximately $100 per short ton FOB mine. This three-year commitment is expected to contribute significantly to
TRI's operating income and cash flows.

Financing and Homebuilding

Plan of Spin-off and Merger of our Financing Segment.On September 30, 2008, the Company outlined its plans to separate its
Financing business from the Company's core Natural Resources businesses through a spin-off to our shareholders and subsequent merger with Hanover Capital Mortgage Holdings, Inc.
("Hanover"), a New Jersey-based real estate investment trust ("REIT"). As a step toward the completion of this plan, on February 3, 2009, the Company formed Walter Investment
Management LLC ("Spinco"), a wholly owned, Delaware limited liability company, to receive our Financing business and facilitate the spin-off and merger. The subsidiaries and assets
that Spinco will own at the time of the spin-off and merger include all assets of our Financing business except for those associated with the workers' compensation program and various
other runoff insurance programs within Cardem Insurance Co., Ltd. Spinco's total assets and liabilities at the time of the spin-off and merger are expected to be
approximately $1.9 billion and $1.5 billion, respectively.

Following
the merger of Spinco with Hanover, the combined company will continue to operate as a publicly traded REIT and will be named Walter Investment Management Corporation ("Walter
Investment Management"). The spin-off and merger are expected to be completed in the second quarter of 2009. After the spin-off and merger, Walter's shareholders will own
approximately 95.17% of Walter Investment Management's publicly traded common stock, certain holders of options to acquire limited liability interest of Spinco outstanding immediately prior to the
effective time of the merger will own 3.33%, and shareholders of Hanover will own the remaining 1.5%. Walter Investment Management plans to apply to list its shares on the American Stock Exchange
under the ticker symbol "WAC".

The
transaction is subject to certain closing conditions including, but not limited to, approval of the merger by Hanover's shareholders and favorable rulings from the Internal Revenue
Service. Financing will continue to be reported as part of the Company's continuing operations until the date of the spin-off, at which time the historical results of the Financing segment
will be reported as discontinued operations.

Homebuilding Closure.In December 2008, the Company made the decision to close the Homebuilding business. This decision was
reached despite the
efforts of management and employees, including a major restructuring during 2008 that closed nearly half of the sales centers. Homebuilding will continue to be reported as part of the Company's
continuing operations until the closure is complete, at which time the historical results of the Homebuilding segment will be reported as discontinued operations. See also Note 4 of "Notes to
Consolidated Financial Statements."

Corporate Liquidity and Capital Activity

Share Repurchase Program.In 2008, the Company repurchased $64.6 million, or 1.6 million shares, of its outstanding
stock. On
December 31, 2008, we announced a $50.0 million expansion to the

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Company's
share repurchase program. The new program began on January 1, 2009, and, as of February 27, 2009, 1.4 million shares have been repurchased for $27.9 million.

Debt Amendment.In April 2008, the Company amended its 2005 Walter Credit Agreement, increasing the revolver capacity from
$225.0 million to
$475.0 million. Approximately $214.8 million of available revolver funds were used to repay and terminate the Financing segment's Mid-State Trust IX and Trust XIV mortgage
warehouse facilities, which were due to mature in 2008. As of the warehouse facilities' repayment and termination in April 2008, the Company's Financing segment had unencumbered mortgage assets
exceeding $330.0 million and is no longer reliant on the availability of mortgage warehouses or asset-backed securitization markets. In addition, the credit agreement amendment allows for the
spin-off of Financing and the closure of Homebuilding.

Share Issuance.In June 2008, the Company completed an offering of 3.2 million shares of its common stock for $90.75 per
share and received
$280.5 million of net proceeds from this offering, after deducting underwriting discounts and estimated offering expenses. The Company used the net proceeds
to (1) repay $77.9 million of the term loan outstanding under the 2005 Walter Credit Agreement and (2) repay $202.5 million of revolving credit facility borrowings under
the 2005 Walter Credit Agreement. In connection with this offering, the revolving credit commitments under the 2005 Walter Credit Agreement were reduced from $475.0 million to approximately
$373.8 million.

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 and Sloss

The following map provides the Company's Natural Resources and Sloss locations as of December 31, 2008. We operate two
metallurgical coal mines, the No. 7 Mine (which includes No. 7 East) and the No. 4 Mine, both owned by JWR, and three steam coal mines, TRI's East Brookwood Mine and Howton Mine
and Taft's Choctaw South Mine. In addition, the Company has mines that are ready for operations, including Taft's Reid School Mine and Choctaw West Mine and United Land Corporation's ("ULC's") Flat
Top Mine, as well as mines that are under development, including Taft's Gayosa South Mine, ULC's Highway 59 Mine, ULC's Beltona East Mine, ULC's Swann's
Crossing Mine and ULC's Morris Mine. All of our properties are located in the state of Alabama. This map does not include the Kodiak Mine, which was closed in December 2008.

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Map, Location and Access to Property

LOGO

Jim
Walter Resources' Mines Nos. 4 and 7, located near Brookwood, Alabama, are serviced by CSX rail. Both mines also have access to the Company's barge load out facility on the
Black Warrior River. Service via rail or the Black Warrior River culminates in delivery to the Port of Mobile, whereby shipments are delivered to our international customers via ocean vessels.

TRI's
East Brookwood and Howton mines, and ULC's Highway 59 and Swann's Crossing mines, all located in Tuscaloosa County near Brookwood, Alabama, have access to the
Company's barge load out facility on the Black Warrior River. Approximately half of TRI's coal is delivered via barges to a local power company. The remainder of TRI's coal is delivered to local
customers via truck. ULC's mines are yet to be developed.

Taft's
Choctaw South, Choctaw West and Gayosa mines, located near Parrish in Walker County, Alabama, have an onsite rail facility serviced by Norfolk Southern rail. Access to
Highway 269 provides delivery access to local customers via truck.

Taft's
Reid School Mine, located in Blount County, Alabama will have access to Highway 79 whereby coal shipments will be delivered to local customers via truck.

ULC's
Flat Top Mine is located in Adamsville, Alabama near Highway 78. This mine will deliver coal via trucks.

ULC's
Beltona East and Morris mines, located in Jefferson County, Alabama, will have access to Warrior Jasper Road whereby coal shipments will be delivered to local customers via truck

Sloss
Industries Corporation, located in Birmingham, Alabama, delivers metallurgical coke to its customers via rail and truck.

For
additional information regarding the Company's coal mineral reserves, coal ownership and leases, and average selling price per ton by mine, see Item 2., "Properties."

Jim Walter Resources, Inc.

The operations of JWR are conducted through its Mining Division, which mines and sells high quality metallurgical coal from two
underground mines, the No. 4 and No. 7 mines, and its De-Gas Division, which extracts and sells natural gas from the coal seams owned or leased by JWR.

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The Mining Division, headquartered in Brookwood, Alabama, currently has approximately 6.5 million tons of rated annual coal production capacity from its mines located in west
central Alabama between the cities of Birmingham and Tuscaloosa. Operating at about 2,000 feet below the surface, the No. 4 and No. 7 mines are some of the deepest underground
coal mines in North America. 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
Mining Division had net sales and revenues of $805.7 million, $556.7 million and $611.7 million in the years ended December 31, 2008, 2007 and 2006,
respectively.

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 $185 million to develop this new mine area
will result in longwall production beginning in 2009. Capital expenditures through December 31, 2008 related to this expansion project amounted to $160.4 million and are expected to be
approximately $23.0 million in 2009. 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.

JWR's
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. Historically, the Mining Division has operated one longwall mining system in each mine for primary production and four to
six continuous 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.

Beginning
in 2008, the Mining Division developed and mined an additional section in the No. 7 Mine known as the Southwest "A" panel. This panel has approximately
1.0 million tons of high-quality metallurgical coal, of which approximately 450,000 tons were mined in 2008. The remainder is expected to be mined in 2009, completing the production
of this additional section.

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 2008, JWR's two largest customers represented
approximately 14.8% and 11.2% of the Mining Division's sales, respectively. The Company believes that the loss of these 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 the demand for JWR's metallurgical coal. Foreign sales accounted for
approximately 96.5% 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

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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 442 wells producing approximately
11.8 billion cubic feet of natural gas in 2008. JWR generated 6.6 billion cubic feet in 2008, including 1.3 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. Natural gas production level is expected to be 7.0 to
7.2 billion cubic feet in 2009.

Tuscaloosa Resources, Inc.

In 2007, the Company acquired TRI. Founded in 1995, TRI is a producer of surface coal for the industrial and steam coal markets. Based
in Birmingham, Alabama, it employs approximately 100 people. TRI's mines, which have historically produced approximately 800,000 tons of
high BTU coal annually, are located near United Land's barge load-out facility and Jim Walter Resources' existing operations. The close proximity of TRI to the Company's existing
infrastructure is expected to provide opportunities for revenue and cost-related synergies, including opportunities to blend TRI's coal production with the Company's existing coal
products, such as pond fine material. TRI controls approximately 2.9 million tons of coal reserves at December 31, 2008.

Taft Coal Sales & Associates, Inc.

On September 2, 2008, the Company, through its wholly owned subsidiary United Land Corporation, acquired all of the outstanding
common shares of Taft. Located in Jasper, Alabama, Taft currently operates a surface steam and industrial coal mine and primarily mines coal for the industrial and electric utility markets. The
acquisition of Taft expands the Company's coal production base in the southern Appalachian coal region of Alabama and will be instrumental in helping to grow the Company's domestic Natural Resources
business. For additional information on this acquisition, see Notes 3 and 4 of "Notes to the Consolidated Financial Statements."

Sloss

Sloss is a manufacturing company that began operations at its current location in 1920. Founded in 1881, Sloss is headquartered in
Birmingham and has two major product lines: metallurgical coke, which includes coke for furnace and foundry applications, 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.
Sloss utilizes 120 coke ovens with the capacity to produce 420,000 tons of metallurgical coke and is the second largest merchant foundry coke producer in the United States. Slag fiber is an insulating
fiber utilized principally as a raw material by acoustical ceiling tile manufacturers.

Financing

The Financing segment is primarily comprised of WMC, a Delaware corporation that owns and services non-conforming
instalment notes and loans that are secured by mortgages and liens on residential property. Prior to May 1, 2008, the Financing business purchased and originated mortgage loans and purchased
instalment notes originated by its homebuilding affiliate, JWH. Since May 1, 2008, WMC has been engaged in servicing its portfolio of
mortgage assets, as well as financing the backlog of home mortgages originated prior to May 1, 2008. Currently, the servicing activities are solely dedicated to its portfolio of owned mortgage
assets. The portfolio of mortgage assets are primarily domiciled in the southeastern U.S., and therefore the servicing business and the field service representatives conducting that business are
located in that region.

At
December 31, 2008, the Company held fixed (98%) and variable-rate (2%) instalment notes ranging from 2.13% to 13.66% annual percentage rate, without points or
closing costs. See also Note 2

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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. 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. In August 2007, the Company terminated its third party
loan acquisition program in light of volatile market conditions for securitizations of subprime mortgages. On May 1, 2008, WMC made a decision to cease offering mortgage related financing
instruments to new JWH customers.

Historically,
WMC funded instalment notes, as well as mortgage loans it originated, using various warehouse lines of credit. Once a critical mass of assets had been accumulated, WMC
would securitize the assets using a grantor trust, structured as a financing, which required that the assets and liabilities be recorded on the balance sheet with no gain for tax purposes. These
business trusts acquired 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. In April 2008, primarily in light of the
difficult mortgage market, WMC repaid in full all amounts outstanding under its $350.0 million mortgage warehouse facilities and then terminated those facilities. For additional information on
the notes, the trusts and their related borrowings, see Notes 7 and 12 of "Notes to Consolidated Financial Statements."

On
September 30, 2008, the Company outlined its plans to separate its Financing business from the Company's core Natural Resources businesses, as discussed previously. For
additional information, see Note 3 of "Notes to Consolidated Financial Statements."

At
December 31, 2008, 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 placed through Best and provides
captive coverage for various other Company risks, including workers' compensation for Homebuilding. Following the spin-off of our Financing segment, the Company will retain the assets and
liabilities of Cardem associated with workers' compensation and other runoff insurance programs.

Homebuilding

Jim Walter Homes, Inc.

Jim Walter Homes, Inc. and its subsidiaries ("JWH"), headquartered in Tampa, Florida, marketed and supervised 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
historically concentrated on the low- to moderately-priced segment of the housing market. JWH's products consisted of over 60 models ranging in size from approximately 800 to over

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3,000
square feet. During the years ended December 31, 2008, 2007 and 2006, the average net contract price of all homes sold was $102,000, $98,000 and $90,000, respectively.

In
2008, JWH transitioned to a third-party financing model including the use of government-sponsored loan programs. Up until May 1, 2008, if JWH financed the new home purchase,
upon completion of construction to the agreed-upon percentage, in the ordinary course of business, JWH sold 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. However, after May 1, 2008, WMC no longer provides financing to customers of JWH, except for the
backlog of homes with signed contracts and those which were under construction as of May 1, 2008. Despite this transition, the continuing sluggish housing market and credit liquidity crisis
experienced in recent months in the United States resulted in declining unit deliveries.

Due
to unprecedented changes in the economy, specifically in the housing and credit markets over the course of 2008, on December 30, 2008, the decision was made to wind down the
operations and liquidate JWH. Prior to this decision, management took several steps to weather the economic storm. In February 2008, the Company closed 36 underperforming sales centers and eliminated
25% of its workforce as part of a restructuring effort to improve operating performance.

The
decision to liquidate JWH resulted in plans to wind down operations by canceling the majority of homes that had not started construction and to build out the remaining backlog of
units already under construction. The estimated backlog of homes as of December 31, 2008 included 421 units of which an estimated 160 will be built out with the remaining being canceled. The
average construction time for these homes should remain within historical averages of thirteen to twenty-one weeks.

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.

General Business Matters

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.

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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, including asset retirement obligations and for remediation of environmental conditions arising from past operations in the years ended December 31, 2008,
2007 and 2006 were approximately $9.3 million, $4.9 million and $4.9 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."

Employees

As of December 31, 2008, the Company and its subsidiaries employed approximately 2,600 people, of whom approximately 1,400 were
hourly workers and 1,200 were salaried employees. Unions represented approximately 1,400 employees under collective bargaining agreements, of which approximately 1,100 were covered by one contract
with the United Mine Workers of America that expires on December 31, 2011.

Item 1A.    Risk Factors

Our business and the investment in our securities are subject to various risks and uncertainties. In addition to the risks and
uncertainties set forth below related to our business, operations, financial position or future financial performance or cash flows, we may face other risks and uncertainties, some of which may be
unknown to us. These risks and uncertainties may cause an investment in our securities to decline and result in a loss.

Disruptions in the financial markets have created uncertainty and deteriorating economic conditions may adversely affect our business and financial condition.

The financial markets in the United States, Europe, South America and Asia have been experiencing extreme disruption in recent months.
As widely reported, these markets have experienced, among other things, extreme volatility in security prices, commodities and currencies; severely diminished liquidity and credit availability, rating
downgrades and declining valuations of certain investments. The current tightening of credit in financial markets, the inability to access capital markets, the bankruptcy, failure, collapse or sale of
various financial institutions and an unprecedented level of intervention from the United States federal government could have a material adverse effect on the demand for our products and on our
sales, pricing and profitability. Continuation or worsening of the current economic conditions, a prolonged global, national or regional economic recession or other similar events could have a
material adverse effect on the demand for our products and on our sales, pricing and profitability. We are unable to predict the likely duration and severity of the current disruption in financial
markets and adverse economic conditions in the U.S. and other countries and the impact these events may have on our operations and the industry in general.

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Our business may suffer as a result of a substantial or extended decline in pricing, demand and other factors beyond our control, which could negatively affect our operating
results and cash flows.

Our businesses are cyclical and have experienced significant difficulties in the past. Our financial performance depends, in large
part, on varying conditions in the domestic and international markets we serve, which fluctuate in response to various factors beyond our control. The prices at which we sell our 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 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
can significantly affect our financial results and impede growth. 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 2008 would have resulted in a reduction in pre-tax
income of $83.7 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 2008 would have resulted in a reduction in pre-tax income of approximately $1.3 million in that year, which includes the
benefit of hedges. Occasionally we utilize derivative commodity instruments to manage fluctuations in natural gas prices. If we choose not to engage in, or reduce our use of hedging arrangements in
the future, we may be more adversely affected by changes in natural gas pricing. Currently, we have hedged approximately 7% of our anticipated 2009 natural gas production at an average price of $9.06
per mmbtu.

The failure of our customers to honor or renew 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 our businesses
depends on our ability to retain our current clients, 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 and the level of competition we face. If current customers do not honor current contract commitments, terminate agreements or exercise force majeure provisions
allowing for the temporary suspension of performance, our revenues will be adversely affected and may negatively impact our collection of trade receivables from our customers. If we are unsuccessful
in renewing contracts with our long-term customers and they discontinue purchasing coal or methane gas from us, renew contracts on terms less favorable than in the past, 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.

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.

A majority of our coal mining operations are conducted in underground mines and the balance of our operations is surface mining
operations. 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:



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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 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.

Defects in title of any real property or leasehold interests in our properties could limit our ability to mine these properties or result in significant unanticipated costs.

Our right to mine some of our reserves may be materially adversely affected by defects in title or boundaries. In order to obtain
mining contracts or leases or to conduct our mining operations on property where these defects exist, we may in the future have to incur unanticipated costs or could even lose our right to mine, which
could adversely affect our profitability.

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 overland conveyor, 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 metallurgical
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.

We face significant competition 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

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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. In addition, these factors
may negatively impact our collection of trade receivables from our customers. These factors could reduce our profitability or result in lower coal sales.

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

Our business requires 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.

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

The majority of our employees within the Natural 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.

We require a skilled workforce to run our business. If we cannot hire qualified people to meet replacement or expansion needs, we may not be able to achieve planned results.

The demand for coal in recent years has caused a significant constriction of the labor supply resulted in 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 workers 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.

We have reclamation and mine closure obligations. If the assumptions underlying our accruals are inaccurate, we could be required to expend greater amounts than anticipated.

The Surface Mining Control and Reclamation Act established operational, reclamation and closure standards for all aspects of surface
mining as well as most aspects of deep mining. We accrue for the costs of final mine closure. Estimates of our total reclamation and mine-closing liabilities are based upon permit
requirements and our experience. The amounts recorded are dependent upon a number of variables, including the estimated future retirement costs, estimated proven reserves, assumptions

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involving
profit margins, inflation rates, and the assumed credit-adjusted risk-free interest rates. Furthermore, these obligations are unfunded. If these accruals are insufficient or our
liability in a particular year is greater than currently anticipated, our future operating results could be adversely affected.

Factors impacting our 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. Reserve 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 or an inability to acquire additional reserves could adversely affect our operating results and profitability.

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 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.

Global
climate change continues to attract considerable public and scientific attention with widespread concern about the impacts of human activity, especially the emissions of
greenhouse gases (GHGs), such as carbon dioxide and methane. Combustion of fossil fuels, such as the coal and gas we produce, results in the creation of carbon dioxide that is currently emitted into
the atmosphere by coal and gas end users. Numerous proposals have been made and are likely to continue to be made at the international, national, regional, and state levels of government that are
intended to limit emissions of GHGs. 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

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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. GHGs are in place, a 2007 U.S. Supreme Court case upheld the authority of the Environmental
Protection Agency (EPA) to regulate GHG's under the Clean Air Act and a number of states have filed lawsuits seeking to force the EPA to adopt GHG regulations. In July 2008, the EPA published an
Advance Notice of Proposed Rulemaking seeking comments and discussion of the complex issues associated with the possible regulation of greenhouse gases under the Clean Air Act. These regulations or
other efforts to stabilize or reduce greenhouse gas emissions, could adversely impact the price of and demand for coal.

Coalbed
methane must be expelled from our underground coal mines for mining safety reasons. Our gas operations capture coalbed methane from our underground coal mines, although some
coalbed methane is vented into the atmosphere when the coal is mined. If regulation of GHG emissions does not exempt the release of coalbed methane, we may have to curtail coal production, pay higher
taxes, or incur costs to purchase credits that permit us to continue operations as they now exist at our underground coal mines. The amount of coalbed methane we capture is recorded, on a voluntary
basis, with the U.S Department of Energy. We have recorded the amounts we have captured since 1992 and Jim Walter Resources, Inc. has registered as an offset provider of credits with the
Chicago Climate Exchange. If regulation of GHGs does not give us credit for capturing methane that would otherwise be released into the atmosphere at our coal mines, any value associated with our
historical or future credits would be reduced or eliminated.

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 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. The additional requirements of the MINER Act and implementing federal regulations include, among other things, expanded
emergency response plans, providing additional quantities of breathable air for emergencies, installation of refuge chambers in underground coal mines, installation of two-way
communications and tracking systems for underground coal mines, new standards for sealing mined out areas of underground coal mines, more available mine rescue teams and enhanced training for
emergencies.

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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.

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.

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, 2008, we
estimate that our pension plans' aggregate accumulated benefit obligation had a present value of approximately $185.2 million, and our fair value of plan assets was approximately
$128.3 million. As of December 31, 2008, we estimate that our postretirement health care and life insurance plans' aggregate accumulated benefit obligation would have had a present value
of approximately $369.1 million, and such benefits are not required to be funded. In respect of the funding obligations for our pension plans, we must make minimum cash contributions on a
quarterly basis. The current volatile economic environment and the rapid deterioration in the equity markets have caused investment income and the values of investment assets held in our pension trust
to decline and lose value. As a result, we may be required to increase the amount of cash contributions we make into the pension trust in the future in order to meet the funding level requirements of
the Pension Act. Our estimated minimum funding obligation relating to these plans in 2009 is $29.6 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" in our Annual Report on
Form 10-K and in the notes to our consolidated financial statements. 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.

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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, 2009, our withdrawal liability for the multiemployer pension
plans amounts to $204.3 million.

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, certain of our subsidiaries are 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 1.89% and 4.22% for 2008 and 2007, respectively, we have recorded
liabilities of $37.6 million and $33.7 million as of December 31, 2008 and 2007, respectively. A one-percentage-point increase in the discount rate on the discounted
claims liability at December 31, 2008 would decrease our liability by $0.2 million, while a one-percentage-point decrease in the discount rate would increase our liability by
$0.2 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.

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 2005 Credit Agreement contains 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. Specifically, our ability to make investments, cash acquisitions and
repurchase shares and pay dividends is more restrictive if our consolidated senior secured leverage ratio, as defined, is greater than 1.50 to 1.00. In addition, our 2005 Credit Agreement requires 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 the financial ratios, tests or covenants related to our existing or future indebtedness can be affected by events beyond our control, and there is a risk that we will not meet those
tests. A breach of any such covenants could result in a default under the 2005 Credit Agreement or under any other debt instrument that we may enter into in the future. 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 could declare it immediately due and payable.

Currently the majority of our coal and gas producing properties are located predominately in four counties in central Alabama, making us vulnerable to risks associated with
having our production concentrated in one area.

The vast majority of our mining properties are geographically concentrated in four counties in Alabama. As a result of this
concentration, we may be disproportionately exposed to the impact of delays or interruptions of production caused by significant governmental regulation, transportation

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capacity
constraints, curtailment of production, natural disasters or interruption of transportation or other events which impact this area.

Our success depends on attracting and retaining key personnel.

Our success depends partly upon the efforts and abilities of our key personnel and our ability to attract and retain key personnel. Our
management teams have significant experience in the industries in which we operate and have made an important contribution to our growth and success. Although we have been successful in attracting and
retaining such people in the past, competition for highly skilled individuals is intense. There can be no assurance that we will continue to be successful in attracting and retaining such individuals
in the future. The loss of the services of any of these individuals could have an adverse effect on our business, results of operations and cash flows.

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.

The price of our common stock may be volatile and may be affected by market conditions beyond our control.

Our share price is likely to fluctuate in the future because of the volatility of the stock market in general and a variety of factors,
many of which are beyond our control, including:



Market
fluctuations could result in extreme volatility in the price of shares of our common stock, which could cause a decline in the value of your investment. You should also be aware
that price

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volatility
may be greater if the public float and trading volume of shares of our common stock is low. In addition, if our operating results and net income fail to meet the expectations of stock
analysts and investors, we may experience an immediate and significant decline in the trading price of our stock.

Our ability to pay regular dividends to our stockholders is subject to the discretion of our board of directors and may be limited by our holding company structure, the
covenants in our debt instruments and applicable provisions of Delaware law.

Our board of directors may, in its discretion, decrease the level of dividends or discontinue the payment of dividends entirely. In
addition, as a holding company, we will be dependent upon the ability of our subsidiaries to generate earnings and cash flows and distribute them to us so that we may pay our obligations and expenses
and pay dividends to our stockholders. Our ability to pay future dividends and the ability of our subsidiaries to make distributions to us will be subject to our and their respective operating
results, cash requirements and financial condition, the applicable laws of the State of Delaware (which may limit the amount of funds available for distribution), compliance with covenants and
financial ratios related to existing or future indebtedness and other agreements with third parties. If, as a consequence of these various limitations and restrictions, we are unable to generate
sufficient distributions from our business, we may not be able to make, or may have to reduce or eliminate, the payment of dividends on our shares.

Our stockholder rights agreement could discourage potential acquisition proposals and could deter a change of control.

On November 21, 2008, we adopted a rights agreement which, in certain circumstances, including a person or group acquiring, or
the commencement of a tender or exchange offer that would result in a person or group acquiring, beneficial ownership of more than 20% of the outstanding shares of common stock, would entitle each
right holder, other than the person or group triggering the plan, to receive, upon exercise of the right, shares of common stock having a value equal to twice the exercise price of a right. This
rights agreement provides us with a defensive mechanism that decreases the risk that a hostile acquirer will attempt to take control of the Company without negotiating directly with our Board of
Directors. This and other provisions of our rights agreement may discourage third parties from attempting to purchase our Company, which may adversely affect the price of our common stock.

We may incur substantial expenses and payments if the spin-off and merger of our financing business merger does not occur.

We have announced the spin-off and a merger of our finance business with Hanover Capital Mortgage Holdings, Inc.
("HCM") a publicly traded real estate investment trust. It is possible that the merger may not be completed. The closing of the merger depends on the satisfaction or waiver of specified conditions.
Some of these conditions are beyond our control. For example, the closing of the merger is conditioned on approval by HCM's stockholders. If this approval is not received the merger cannot be
completed even if all of the other conditions to the merger are satisfied or waived. If the merger is not completed, we will have incurred substantial expenses without realizing the expected benefits
of the transactions. In addition, we may also be subject to additional risks if the merger is not completed, including:



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If the spin-off does not constitute a tax-free spin-off or the merger does not constitute a tax-free reorganization under the
Code, then one or more of the Company and its stockholders may be responsible for the payment of U.S. federal income taxes.

The spin-off and merger of our financing business are conditioned upon, among other things, Walter's receipt of a ruling
from the IRS to the effect that (among other things) the spin-off would be tax-free to the Company and its stockholders for U.S. federal income tax purposes under
Section 355 of the Code. Although a private letter ruling from the IRS is generally binding upon the IRS, if the factual representations or assumptions made in the letter ruling request are
untrue or incomplete in any material respect, then the Company will not be able to rely on the ruling.

In
addition, the IRS will not rule on whether a distribution satisfies certain requirements necessary to obtain tax-free treatment under Section 355 of the Code.
Therefore, the spin-off and merger are also conditioned on the Company's receipt of an opinion from its accountants as to the satisfaction of these required qualifying conditions for the
application to the spin-off of Section 355 of the Code. The tax opinion is not binding on the IRS or the courts. Lastly, the spin-off and merger are conditioned, among
other things, on the Company's receipt of an opinion from its legal counsel and counsel representing Hanover Capital Mortgage Holdings, Inc. ("HCM"), each to the effect that the merger will be
treated as a tax-free reorganization within the meaning of Section 368 of the Code. On February 17, 2009, the merger agreement was amended to eliminate the right to waive the
condition to closing relating to receipt by the Company of rulings from the IRS and an opinion from the Company's accountants in respect of the tax-free nature of the spin-off
and certain other federal income tax consequences of the spin-off and merger. These opinions will rely on, among other things, current law and certain representations and assumptions as to
factual matters made by the Company and HCM. Any change in applicable law or the failure of any factual representation or assumption to be true and complete in all material respects, could adversely
affect the conclusions reached in these opinions. The opinions will not be binding on the IRS or the courts, and the IRS and the courts may not agree with the opinions.

Following the spin-off and merger of the financing business, the surviving corporation may not be able to satisfy certain indemnification obligations to the
Company.

The surviving corporation following the merger of the financing business with Hanover Capital Mortgage Holdings, Inc. ("HCM"),
as successor to the financing business, will be party to certain agreements with the Company, including a tax sharing agreement, transition services and a joint litigation agreement. Under the terms
of the tax sharing agreement, to the extent that the Company or the surviving corporation takes any action that would be inconsistent with the treatment of the spin-off of the financing
business from the Company as a tax-free
transaction under Section 355 of the Code, then any tax resulting from such actions will be attributable to the acting company and will result in indemnification obligations that could be
significant. Under the terms of the transition services agreement, the Company and the financing business will provide certain services to each party for a limited duration. Under the terms of the
joint litigation agreement, the surviving corporation, as successor to the financing business, will indemnify the Company for certain liabilities arising from businesses and operations of the
financing business at the time of the spin-off. The ability to satisfy these indemnities if called upon to do so will depend upon the future financial strength of the surviving company. If
the surviving corporation is unable to satisfy its obligations under its indemnity to us, we may have to satisfy those obligations.

Our financing business is 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.

Our financing business specializes in originating 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.

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We
are subject to various risks associated with the lower credit homeowners, 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 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 installment notes that was
anticipated as a result. In 2008, Hurricanes Gustav and Ike also impacted the financing business, with recorded estimated losses of $3.9 million during its third quarter ended
September 30, 2008, for these hurricane impacts.

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.

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

The financing business 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

20

---



distributions
from these mortgage assets may adversely affect our mortgage servicing business and net income and may affect our overall financial condition.

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

We are subject to a number of federal, state and local laws that affect 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.

Economic conditions in Texas, North Carolina, Louisiana, Mississippi, Alabama and Florida have a material impact on our financing business' profitability because it conducts
a significant portion of our business in these markets.

The mortgage assets of the financing business currently are concentrated in the Texas, North Carolina, Louisiana, Mississippi, Alabama
and Florida markets. In the past, 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 hinder the ability of our customers to repay their obligations in areas in which we conduct the majority of our financing
operations. Our concentration of mortgage assets in such markets may have a negative impact on our operating results.

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 the financing business operates, including Louisiana, Mississippi, Alabama, Florida and
Texas, present increased risks of natural disaster and adverse weather. Natural disasters or adverse weather in the areas in which we finance or insure homes or in nearby areas, have in the past, and
may in the future, lead to significant insurance claims, cause increases in delinquencies and defaults in our mortgage portfolio and weaken the demand for new homes in affected areas, which could
adversely affect its results. In addition, the rate of delinquencies may be higher after natural disasters or adverse weather conditions. For example, during the third quarter of 2008 and 2005
Hurricanes Ike, Gustav and 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 $3.9 million provision related to Hurricanes Ike and Gustav in 2008 and a provision of $1.3 million related to Hurricane Katrina in 2005, for
estimated losses on installment notes that were anticipated as a result of the hurricanes. 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.

21

---



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

The financing business is subject to a number of federal, state and local laws that affect 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 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 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 Products, Inc. ("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.

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
installment 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 installment 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.

Recently announced closure of the Homebuilding businesses may negatively impact results of operations.

Any costs, taxes, charges and write-offs that result from a closure of our homebuilding operations will have a negative
impact on our results of operations. Additionally, in connection with the

22

---



wind-down
and closure of the homebuilding operations, we may agree to provide indemnities with respect to, or remain liable for, warranty, contractual, health and welfare benefit
obligations, taxes and other liabilities of our Homebuilding business. These retained liabilities and indemnification obligations may be material and may result in us incurring additional expenses
even after a wind-down and closure is completed, which could have a negative impact on our results of operations.

Item 1B.    Unresolved Staff Comments:



23

---



Item 2.    Description of Property

The administrative headquarters and production facilities of the Company and its subsidiaries as of December 31, 2008 are
summarized as follows:

Square FootageLand
AcreageFacility/Location

Principal Products/Operations

Leased

OwnedNatural ResourcesJim Walter ResourcesBrookwood, AL


Administrative headquarters








42,000Brookwood, AL


Central shop, supply center and training center








131,100Brookwood, AL


Real estate- Owned


7,000Brookwood, AL


Coal mines


34,259





460,600United Land CorporationBirmingham, AL


Administrative headquarters





800Brookwood, AL


Mine support facilities


40Kodiak(1)Shelby County, AL


Mine support facilities








13,100Shelby County, AL


Administrative headquarters





2,700Shelby County, AL


Supply shop








9,800Shelby County, AL


Real estate


76Tuscaloosa ResourcesMt. Brook, AL


Administrative headquarters





1,681Brookwood, AL


Mine support facilities





576


5,576Brookwood, AL


Real estateLeased


2,240Taft Coal Sales & AssociatesJasper, AL


Administrative headquarters





3,680Walker County, AL


Mine support facilities








1,800Walker County, AL


Supply shop








4,075Walker County, AL


Real estateOwned


1,468Walker County, AL


Real estateLeased


2,664SlossBirmingham, AL


Administrative headquarters








12,000Birmingham, AL


Furnace & foundry coke battery


511





148,000Birmingham, AL


Slag fiber


5





63,000Birmingham, AL


Closed facility


3





53,000Birmingham, AL


Closed facility


2





10,000Alexandria, IN


Closed facility


33





112,000HomebuildingTampa, FL


Administrative headquarters





24,200FinancingTampa, FL


Administrative headquarters





22,300Richland Hills, TX


Call Center / Divisional office for Walter Mortgage Company





4,028OtherTampa, FL


Administrative headquarters





31,574


---

24

---





Recoverable
coal reserves as of December 31, 2008 were as follows.

ESTIMATED RECOVERABLE (1) COAL RESERVES
AS OF DECEMBER 31, 2008
(In Thousands of Tons)

RESERVES(2)













QUALITYCLASSIFICATIONS(3)



Compliant

WII'S INTEREST

(Wet Basis)Status of
Operation

Recoverable(1)
Reserves











Average Coal
Seam Thickness
(in Feet)Mine

Assigned(2)

Unassigned(2)

Measured

Indicated

Type(4)

Y / N

Owned

Leased(5)

Ash

Sulfur

BTU/lb.

Reportable Acres

Coal BedsJWR's No. 4 Mine(6,7,8)

Operational


71,801


71,801





69,230


2,571

Steam and/or
Metallurgical

Yes





71,801


9.00


0.80


13,909


16,296

Mary Lee and Blue Creek


4.67JWR's No. 5 Mine(9)

Closed Dec.
2006


















Yes






















JWR's No. 7 Mine(10,11)

Operational


80,282


80,282





68,779


11,503

Steam and/or
Metallurgical

Yes


1,144


79,138


9.00


0.65


13,952


17,963

Mary Lee and Blue Creek


4.75TRI's(12) East Brookwood Mine(14)

Operational


2,232


2,232





2,232




Steam and/or
Metallurgical

No


2,232





12.06


1.08


12,775


128

Upper & Lower
Brookwood,
Milldale, Carter &
Johnson


12.50TRI's(12) Howton Mine(14)

Operational


411


411





411




Steam and/or
Metallurgical

No


319


92


12.20


1.23


12,705


111

Guide, Lower
Brookwood,
Milldale, Carter


5.50TRI's(12) Panther 3 Mine(15)

Idled


289


289





289




Steam

No


289





8.93


1.47


13,636


161

Carter, Johnson


1.99Taft's(13) Choctaw South Mine(14)

Operational


3,180


3,180





3,180




Steam and/or
Metallurgical

No





3,180


12.27


1.96


12,797


331

Pratt, Nickle Plate,
Top American,
Bot. American &
American No. 3


6.89Taft's(13) Choctaw West Mine(15)

Ready for Operation


855


855





855




Steam and/or
Metallurgical

No





855


11.73


1.40


12,280


102

Pratt, Nickle Plate,
Top American,
Bot. American &
American No. 3


6.19Taft's(13) Reid School Mine(15)

Ready for
Operation


569


569





569




Steam and/or
Metallurgical

YesBlack
Creek Only





569


3.36


1.13


14,927


130

Lick Creek
Jefferson & Black
Creek


4.40Taft's(13) Gayosa South Mine(15)

Development


389


389





389




Steam and/or
Metallurgical

No





389


14.69


1.32


12,484


70

Pratt, Nickle Plate,
Top American,
Bot. American


4.79United Land Corp. Flat Top Mine(15)

Ready for
Operation


2,285


2,285





2,285




Steam

No


2,285





10.89


2.13


13,590


356

Pratt, Nickle Plate,
Top American


5.80United Land Corp. Highway 59 Mine(15)

Development


799


799





799




Steam and/or
Metallurgical

No


799





7.81


1.21


13,404


128

Lower
Brookwood,
Mildale, Carter &
Johnson


7.84United Land Corp. Beltona East Mine(15)

Development


1,117


1,117





1,117




Steam and/or
Metallurgical

YesBlack
Creek Only


1,117





7.79


2.58


14,162


184

Lick Creek
Jefferson & Black Creek


4.88United Land Corp. Swann's Crossing Mine(15)

Development


1,376


1,376





1,376




Steam and/or
Metallurgical

No


1,376





12.57


1.29


12,395


98

Guide 1 & 2,
Lower
Brookwood,
Mildale, Carter


9.51United Land Corp. Morris Mine(15)

Development


1,985


1,985





579


1,406

Steam

No


1,985





20.80


1.60


12,175


249

Upper & Lower
New Castle,
Marylee, Blue Creek


5.46Total(16)




167,570


167,570





152,090


15,480






11,546


156,024











36,307


25

---



---

Production and average coal selling price per ton for each of the three years in the period ended December 31, 2008 were as followings
(production in thousands):

|                             |  |  |       |  |   |        |  |  |       |  |   |       |  |  |       |  |   |        | 
|---------------------------- |  |  | ----- |  | - | ------ |  |  | ----- |  | - | ----- |  |  | ----- |  | - | ------ | 
|
|
|JWR's No. 4 Mine             |  |  | 3,188 |  | $ | 137.74 |  |  | 3,074 |  | $ | 92.39 |  |  | 2,187 |  | $ | 100.16 | 
|JWR's No. 5 Mine(2)          |  |  |      |  | $ |       |  |  |      |  | $ | 76.48 |  |  | 821   |  | $ | 102.87 | 
|JWR's No. 7 Mine             |  |  | 2,854 |  | $ | 127.17 |  |  | 2,764 |  | $ | 91.88 |  |  | 2,646 |  | $ | 106.22 | 
|TRI's East Brookwood Mine(3) |  |  | 529   |  | $ | 64.48  |  |  | 172   |  | $ | 61.42 |  |  | NA    |  |   | NA     | 
|TRI's Howton Mine(3)         |  |  | 297   |  | $ | 66.03  |  |  | 75    |  | $ | 62.06 |  |  | NA    |  |   | NA     | 
|Taft's Choctaw South Mine(4) |  |  | 219   |  | $ | 64.45  |  |  | NA    |  |   | NA    |  |  | NA    |  |   | NA     | 
|                             |  |  |       |  |   |        |  |  |       |  |   |       |  |  |       | 
|Total                        |  |  | 7,087 |  |   |        |  |  | 6,085 |  |   |       |  |  | 5,654 |  |   |        | 
|                             |  |  |       |  |   |        |  |  |       |  |   |       |  |  |       | 

---

Item 3.    Legal Proceedings

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

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



26

---





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, 2008High

Low1st Fiscal quarter

$
62.90

$
32.742nd Fiscal quarter


108.77


64.583rd Fiscal quarter


109.77


42.094th Fiscal quarter


45.31


12.20




Year ended December 31, 2007High

Low1st Fiscal quarter

$
28.50

$
24.092nd Fiscal quarter


32.22


26.743rd Fiscal quarter


31.91


21.624th Fiscal quarter


38.50


27.24


During the year ended December 31, 2008 the Company declared and paid a dividend of $0.05 per share to shareholders of record on
February 20 and May 9 declared and paid a dividend of $0.10 per share to shareholders of record on September 12 and November 7. 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.
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 25, 2008, there were 106 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, 2008:

|                                                        |  |                                     |  |  |           |  |   |       |  |  |           | 
|------------------------------------------------------- |  | ----------------------------------- |  |  | --------- |  | - | ----- |  |  | --------- | 
|
|Equity compensation plans approved by Security holders: |  |                                     |  |  |           |  |   |       |  | 
|                                                        |  | 2002 Long-term Incentive Award Plan |  |  | 1,522,950 |  | $ | 30.09 |  |  | 2,146,724 | 
|                                                        |  | 1995 Long-term Incentive Stock Plan |  |  | 184,765   |  |   | 7.42  |  |  |          | 
|                                                        |  | 1996 Employee Stock Purchase Plan   |  |  |          |  |   |      |  |  | 1,500,143 | 

Sales of Unregistered Securities

In 2004, 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.

27

---



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 payments. 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 payments.

Common Stock Offering

In June 2008, the Company completed an offering of 3.2 million shares of its common stock, from which it received
$280.5 million of net proceeds. The Company used these
proceeds to repay a portion of the term loan and revolving credit facility borrowings under the Company's Amended 2005 Walter Credit Agreement.

Purchase of Equity Securities by the Company and Affiliated Purchasers

|                                      |  |  |           |  |   |       |  |  |           |  |   |      | 
|------------------------------------- |  |  | --------- |  | - | ----- |  |  | --------- |  | - | ---- | 
|
|January 1, 2008January 31, 2008      |  |  | 11,400    |  | $ | 31.83 |  |  | 11,400    |  | $ | 19.0 | 
|February 1, 2008
February 29,2008(2) |  |  | 26,800    |  | $ | 52.41 |  |  |          |  | $ | 19.0 | 
|March 1, 2008March 31, 2008          |  |  |          |  | $ |      |  |  |          |  | $ | 19.0 | 
|April 1, 2008April 30, 2008          |  |  |          |  | $ |      |  |  |          |  | $ | 19.0 | 
|May 1, 2008May 31, 2008              |  |  |          |  | $ |      |  |  |          |  | $ | 19.0 | 
|June 1, 2008June 30, 2008            |  |  |          |  | $ |      |  |  |          |  | $ | 19.0 | 
|July 1, 2008July 31, 2008            |  |  |          |  | $ |      |  |  |          |  | $ | 19.0 | 
|August 1, 2008August 31, 2008        |  |  |          |  | $ |      |  |  |          |  | $ | 19.0 | 
|September 1, 2008
September 30, 2008 |  |  | 237,127   |  | $ | 59.43 |  |  | 237,127   |  | $ | 4.9  | 
|October 1, 2008October 31, 2008      |  |  | 1,184,872 |  | $ | 36.09 |  |  | 1,184,872 |  | $ | 12.2 | 
|November 1, 2008
November 30, 2008   |  |  | 197,600   |  | $ | 37.36 |  |  | 197,600   |  | $ | 4.8  | 
|December 1, 2008
December 31, 2008   |  |  |          |  | $ |      |  |  |          |  | $ | 54.8 | 
|                                      |  |  |           |  |   |       |  |  |           |  |  
|                                      |  |  | 1,657,799 |  |   |       |  |  | 1,630,999 |  |   |      | 
|                                      |  |  |           |  |   |       |  |  |           |  |  

---

28

---



Item 6.    Selected Financial Data

The following data, insofar as it relates to each of the years ended December 31, 2008, 2007, 2006, 2005 and 2004 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, 2008. The information presented below is
for continuing operations only 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.

29

---



|                                                                                            |                                       |   |           |           |   |           |           |   |           |           |   |           |           |   |           |           | 
|------------------------------------------------------------------------------------------- | ------------------------------------- | - | --------- | --------- | - | --------- | --------- | - | --------- | --------- | - | --------- | --------- | - | --------- | --------- | 
|
|
|
|Net sales and revenues                                                                      |                                       | $ | 1,487,070 |           | $ | 1,239,821 |           | $ | 1,272,908 |           | $ | 1,098,225 |           | $ | 951,178   |          
|Income from continuing operations(1)                                                        |                                       | $ | 368,134   |           | $ | 125,002   |           | $ | 156,297   |           | $ | 42,974    |           | $ | 53,282    |          
|Basic income per share from continuing operations                                           |                                       | $ | 6.84      |           | $ | 2.40      |           | $ | 3.55      |           | $ | 1.12      |           | $ | 1.38      |          
|Number of shares used in calculation of basic income per share from continuing operations   |                                       |   | 53,791    |           |   | 52,016    |           |   | 44,030    |           |   | 38,485    |           |   | 38,582    |          
|Diluted income per share from continuing operations                                         |                                       | $ | 6.74      |           | $ | 2.38      |           | $ | 3.07      |           | $ | 0.96      |           | $ | 1.22      |          
|Number of shares used in calculation of diluted income per share from continuing operations |                                       |   | 54,585    |           |   | 52,490    |           |   | 52,078    |           |   | 49,209    |           |   | 46,255    |          
|Capital expenditures                                                                        |                                       | $ | 143,494   |           | $ | 151,913   |           | $ | 90,528    |           | $ | 104,084   |           | $ | 29,654    |          
|Net property, plant and equipment                                                           |                                       | $ | 515,418   |           | $ | 414,463   |           | $ | 292,334   |           | $ | 244,512   |           | $ | 175,757   |          
|Total assets(2)                                                                             |                                       | $ | 3,061,326 |           | $ | 2,741,633 |           | $ | 2,649,763 |           | $ | 2,436,236 |           | $ | 2,433,302 |          
|Debt:                                                                                       |                                       |   |           |           |   |           |           |   |           |           |   |           |           |   |           |          
|                                                                                            | Mortgage-backed/asset-backed notes    |   | $         | 1,372,821 |   | $         | 1,706,218 |   | $         | 1,736,706 |   | $         | 1,727,329 |   | $         | 1,763,827 | 
|                                                                                            | 2005 Walter term loan                 |   | $         | 138,934   |   | $         | 218,517   |   | $         | 248,706   |   | $         | 448,875   |   | $         |          | 
|                                                                                            | 2005 Walter revolving credit facility |   | $         | 40,000    |   | $         |          |   | $         |          |   | $         |          |   | $         |          | 
|                                                                                            | Convertible senior subordinated notes |   | $         |          |   | $         | 785       |   | $         | 785       |   | $         | 175,000   |   | $         | 175,000   | 
|                                                                                            | Miscellaneous debt                    |   | $         | 46,451    |   | $         | 6,558     |   | $         |          |   | $         |          |   | $         |          | 
|Quarterly cash dividend per common share                                                    |                                       | $ | 0.10      | (4)       | $ | 0.05      | (3)       | $ | 0.04      |           | $ | 0.04      |           | $ | 0.03      |          

---

30

---





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.

31

---



The
allowance for losses on instalment notes receivable was $19.0 million at December 31, 2008 compared to $14.0 million at December 31, 2007. See
Note 7 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
ReceivableDecember 31, 2008

$
18,969


1.07
%
$
16,338


0.92
%December 31, 2007

$
13,992


0.76
%
$
12,908


0.70
%December 31, 2006

$
13,011


0.73
%
$
8,540


0.48
%


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

December 31,2008

2007

2006Total number of accounts outstanding


36,767


39,053


40,991Delinquencies as a percent of number of accounts outstanding31-60 Days


1.32
%

1.36
%

1.43
%61-90 Days


0.60
%

0.51
%

0.55
%91-Days or more


2.23
%

1.82
%

1.95
%4.15
%

3.69
%

3.93
%Instalment notes receivable outstanding(1)($ in millions)

$
1,789

$
1,851

$
1,793Delinquencies as a percent of amounts outstanding(1)31-60 Days


1.58
%

1.55
%

1.59
%61-90 Days


0.72
%

0.64
%

0.65
%91-Days or more


3.05
%

2.40
%

2.19
%5.35
%

4.59
%

4.43
%


---

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. During the three years ended December 31, 2008, results of aerial surveys have indicated that perpetual records require adjustments ranging from +3.5% to
-5.5% of the ending inventory balance. As a result of these historical results, the Company has recognized a reduction to the ending coal inventory at December 31, 2008 in the
amount of $0.3 million, or 1.1% of the ending balance, as the estimate of the probable valuation inaccuracy inherent in the inventory balance. A 1.0% gain or loss of the inventory balance at
December 31, 2008 potentially resulting from these inherent inaccuracies in the measurement processes would result in an increase or decrease, respectively, to

32

---



income
of approximately $0.3 million. 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.

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 BenefitsDecember 31,
2008

December 31,
2007

December 31,
2008

December 31,
2007Weighted average assumptions used to determine benefit obligations:Discount rate


6.50
%

6.50
%

6.50
%

6.50
%Rate of compensation increase


3.70
%

3.60
%




Weighted average assumptions used to determine net periodic cost:Discount rate


6.50
%

5.90
%

6.50
%

5.90
%Expected return on plan assets


8.90
%

8.90
%




Rate of compensation increase


3.60
%

3.50
%









December 31,2008

2007Pre-65

Post-65

Pre-65

Post-65Assumed health care cost trend rates:Health care cost trend rate assumed for next year


7.60
%

8.40
%

8.60
%

9.40
%Rate to which the cost trend rate is assumed to
decline (the ultimate trend rate)


5.00
%

5.00
%

5.00
%

5.00
%Year that the rate reaches the ultimate trend rate


2014


2014


2013


2013


The
discount rate used to determine pension and other post-retirement expense is 6.50% for both 2008 and 2007. The rate of return on plan assets used to determine pension
expense is 8.90% for both 2008 and 2007. 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

33

---



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
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 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, 2008 (in thousands):

Increase (Decrease)1-Percentage
Point Increase

1-Percentage
Point DecreaseHealthcare cost trend:Effect on total of service and interest cost components

$
3,773

$
(3,045
)Effect on postretirement benefit obligation


43,495


(36,324
)Discount rate:Effect on postretirement service and interest cost components


(178
)

(35
)Effect on postretirement benefit obligation


(40,206
)

46,669Effect on current year postretirement expense


(3,068
)

3,371Effect on pension service and interest cost components


27


(95
)Effect on pension benefit obligation


(18,473
)

22,032Effect on current year pension expense


(1,914
)

2,220Expected return on plan assets:Effect on current year pension expense


(1,271
)

1,271Rate of compensation increase:Effect on pension service and interest cost components


410


(372
)Effect on pension benefit obligation


3,230


(2,983
)Effect on current year pension expense


767


(703
)


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, 2008, a
one-percentage-point increase in the discount rate on the discounted Black Lung liability would decrease the liability by $1.2 million, while a one-percentage-point
decrease in the discount rate would increase the liability by $1.5 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, 2008, a
one-percentage-point increase in the discount rate on the discounted workers' compensation liability would decrease the liability by $0.2 million, while a
one-percentage-point decrease in the discount rate would increase the liability by $0.2 million.

34

---



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 remediation
costs. These accruals are recorded when the costs are determined to be probable and are reasonably estimable. The Company believes it has adequately accrued for these potential liabilities; however,
facts and circumstances may change that could cause the actual liabilities to differ from 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 related to its uncertain tax positions, including related interest and penalties, in accordance with FASB Interpretation"FIN 48: Accounting for
Uncertainty in Income Taxes an interpretation of FASB Statement No. 109."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 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. Accruals for catastrophic uninsured losses at
plant or mine facilities would be made on an ad hoc basis based on relevant facts and circumstances at the time such losses were determined to be probable and reasonably estimable.

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. 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 and, in the case of goodwill, at least annually. 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, 2008, 2007 and 2006 due to the operating losses
incurred by this segment. No impairment charges were recorded in 2006 or 2007. In 2008, the Company recognized total impairment charges of $13.5 million for Homebuilding's
long-lived assets. These charges occurred during the year as a result of (1) the decision to close certain non-performing sales centers in the first quarter of 2008,
(2) a deterioration in the housing market and general economy resulting in unfavorable future forecasted cash flows in the third quarter of 2008, and, finally, (3) due to the decision to
close the business on December 30, 2008. As a result of the decision to close the business, all of the long-lived

35

---



assets
will be sold or otherwise disposed, as the assets cease to be used during the wind down period in 2009.

The
estimates of fair value used to determine the amount of the impairment charges were primarily based on management's estimates and judgments, including management's knowledge of the
marketplace in which each of the properties are located (there are approximately 80 locations) and recent transactions of assets of a similar nature. Although the net book value of
long-lived assets of Homebuilding has been reduced from $26.0 million at December 31, 2007 to $10.4 million at December 31, 2008, primarily as a result of these
impairment charges, further charges or losses could be necessary if the Company is unable to recover the net book value. Management believes that gains or losses resulting from the sale or impairments
of remaining long-lived assets will not be material to the future financial condition, operating results or cash flows of the Company.

As
previously noted above and discussed in Note 3 of "Notes to the Consolidated Financial Statements", the Company acquired Taft in September 2008. A significant portion of the
purchase price was allocated to the mineral interests, valued at $44.0 million. The value of the mineral interests was based, in part, on the market price of similar coals at the date of
acquisition and the forecasts that existed as of that date. Subsequent to the acquisition, the market price and future forecasted market prices for similar coal dropped significantly, triggering an
impairment test of the mineral interests under the guidance of SFAS 144,"Accounting for the Impairment or Disposal of
Long-lived Assets."The results of the impairment test indicated that there was an asset impairment since the fair value of the mineral interests were significantly
below the carrying value. As a result, the Company recorded a $32.4 million impairment charge in the 2008 fourth quarter. The estimated fair value of the mineral interests is extremely
sensitive to the estimated market price of similar coals. For example, a 10% increase or decrease in the market pricing used as of December 31, 2008 would have increased or decreased,
respectively, the estimated fair value by approximately $5.0 million.

In
2008, the Company recorded a charge of $10.9 million for the impairment of Financing's goodwill. As discussed in Note 3 of "Notes to the Consolidated Financial
Statements", the Company announced its plans to separate its Financing segment via a spin-off to Walter shareholders and merger with Hanover. As a result of this decision, the Company
analyzed goodwill for potential impairment. The fair value of the reporting unit was determined using a discounted cash flow approach which indicated that the carrying value exceeded the fair value
and that the implied value of goodwill was $0. The discount rate of interest used to determine both the fair value of the reporting unit and the implied value of goodwill was a contributing factor in
this impairment charge. The continued increase in perceived risk in the financial services markets resulted in a significant increase in the discount rate applied to the projected future cash flows,
as compared to the discount rate applied to similar analyses performed in previous periods. As a result of this write- off, the Company no longer has any goodwill on its balance sheet.

DISCONTINUED OPERATIONS

As more fully discussed in Note 3 of "Notes to Consolidated Financial Statements," the Company announced the permanent closure
of the underground coal mine owned by the Kodiak Mining Company LLC. ("Kodiak") in December 2008, due to high operational costs, difficult operating conditions and a challenging pricing
environment for Kodiak's product. 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"). Also, the Company completed the spin-off of Mueller Water on December 14, 2006. As such, the operating
results, assets and liabilities, and cash flows of Kodiak, Crestline and Mueller Water 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 Kodiak, Crestline and Mueller Water businesses.

36

---



RESULTS OF CONTINUING OPERATIONS

2008 Summary Operating Results

For the Year Ended December 31, 2008Natural
Resources

Sloss

Financing

Homebuilding

Other

Cons
Elims

Total($ in thousands)Net sales

$
959,853

$
205,398

$
13,425

$
116,312

$
1,602

$
(32,756
)
$
1,263,834Interest income on instalment notes








187,094











187,094Miscellaneous income


28,532


832


2,183


2,229


2,366





36,142Net sales and revenues


988,385


206,230


202,702


118,541


3,968


(32,756
)

1,487,070Cost of sales


530,320


128,653


5,537


96,732


228


(31,637
)

729,833Interest expense(1)








102,115











102,115Interest rate hedge ineffectiveness








16,981











16,981Depreciation


51,476


4,152


416


2,814


914





59,772Selling, general, & administrative


23,020


13,398


30,055


42,851


33,555


33


142,912Provision for losses on instalment notes








21,315











21,315Postretirement benefits


29,128


(645
)

(456
)

(607
)

(926
)




26,494Amortization of intangibles


273





1,005











1,278Provision for estimated hurricane insurance losses








3,853











3,853Restructuring & impairment charges


32,387





10,895


20,676








63,958Operating income (loss)

$
321,781

$
60,672

$
10,986

$
(43,925
)
$
(29,803
)
$
(1,152
)

318,559Other debt interest




















(26,223
)Income from continuing operations before income taxes



















$
292,336


---

Year Ended December 31, 2008 as Compared to the Year Ended December 31, 2007

Overview

The Company's income from continuing operations for the year ended December 31, 2008 was $368.1 million or $6.74 per
diluted share, which compares to $125.0 million, or $2.38 per diluted share in 2007.

Principal
factors impacting income from continuing operations in 2008 compared to 2007 include:



37

---





Outlook and Strategic Initiatives

Natural Resources and Sloss



38

---





39

---





Homebuilding and Financing



40

---





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

41

---



Segment Analysis

Natural Resources

Natural Resources, which includes the operations of Jim Walter Resources and United Land (parent company of Taft and TRI), reported net
sales and revenues of $988.4 million in 2008, an increase of $349.5 million from $638.9 million in 2007. The increase in revenues was driven primarily by increased metallurgical
coal pricing and volumes versus 2007. Also contributing to the higher 2008 revenues, sales of steam and industrial coal increased from 0.2 million tons to 1.1 million tons due to the
inclusion of TRI for a full year and Taft for four months of 2008.

For the year ended
December 31,2008

2007Average metallurgical coal selling price (per ton)

$
130.95

$
92.21Tons of metallurgical coal sold (in millions)


6.3


6.0Average natural gas selling price (per MCF)

$
8.39

$
7.81Billion cubic feet of natural gas sold


6.6


7.2Number of natural gas wells


442


408


For
2008, Natural Resources' operating income was $321.8 million, compared to operating income of $165.8 million in 2007. Results in 2008 benefited from
record metallurgical coal pricing, which was partially offset by higher production costs. Production costs per ton for the year ended December 31, 2008 were higher than the same period in 2007
due to inflationary increases in labor and materials as well as a higher mix of continuous miner tons versus longwall tons. The Company expects a reduction of production costs in 2009 with an
anticipated increase in longwall tons. In addition, 2008 operating income positively benefited from a 5% increase in production over the prior year but decreased due to higher depreciation. Operating
results in 2008 were reduced by a $32.4 million impairment of mineral interests. See "Critical Accounting Estimates" included herein.

Sloss

Net sales and revenues were $206.2 million for 2008, an increase of $71.3 million compared to 2007. This increase in
revenues is due to an increase in metallurgical coke pricing as shown in the table below, which more than offset a slight decrease in tons sold.

For the year ended
December 31,2008

2007Metallurgical coke tons sold


409,457


430,887Metallurgical coke average selling price per ton

$
393.66

$
223.08


Sloss
reported operating income of $60.7 million for the year ended December 31, 2008 compared to $11.9 million in the same period in 2007, an
increase of $48.8 million. Most of the increase results from the increase in metallurgical coke pricing as noted above, partially offset by higher raw material coal cost and a
$2.4 million charge related to the resolution of a legal matter. Given the current reduction in
domestic steel capacity utilization, the Company expects a reduction in sales volume and pricing for 2009 and thus, much lower operating income from Sloss in 2009.

Financing

Net sales and revenues were $202.7 million for the year ended December 31, 2008, a decrease of $17.0 million from
2007. This decrease is primarily attributable to lower payment income resulting from a smaller portfolio balance than 2007, lower prepayment-related interest income and a $3.8 million one time
favorable adjustment in 2007 not repeated in 2008.

42

---



Operating
income was $11.0 million in 2008, a decrease of $38.6 million from 2007. In addition to lower revenues, the decrease in operating income is primarily a result of
a $17.0 million charge for interest rate hedge ineffectiveness that was intended to hedge an April 2008 securitization of instalment notes receivable, a $10.9 million impairment of
goodwill, a $7.4 million increase in provision for losses on installment notes and a $3.9 million provision for estimated hurricane insurance losses. These unfavorable items were
partially offset by lower interest expense primarily due to a decrease in the average balance of mortgage-backed/asset-backed notes outstanding during the year. See the Liquidity and Capital Resources
discussion. The increase in the provision for loan losses is due to higher delinquencies and losses in 2008 resulting in an expectation of increased loan defaults, combined with the effect of
increased write downs of repossessed property due to declining conditions in the housing market in 2008.

Delinquencies
(the percentage of amounts outstanding over 30 days past due) were 5.4% at December 31, 2008, up from 4.6% at December 31, 2007. This increase was
primarily due to the Company's third party purchased loans, (including the ARM portion of the Company's portfolio) which exhibited higher levels of delinquencies and losses. 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 $118.5 million in 2008, a decrease of $127.4 million from 2007 primarily as a result of a
49.8% decrease in unit completions and an $11.8 million increase in the discount required to record to transfer the instalment notes receivable to Financing at estimated market value. As a
result of the current volatility and lack of liquidity in the residential mortgage market, the discount required to fairly value the instalment notes receivable increased significantly and resulted in
an additional discount within Homebuilding. The discount will be recognized as interest income over the life of the instalment notes receivable in the Financing segment.

For the year ended
December 31,2008

2007Unit completions


1,252


2,494Average revenue per home sold

$
89,747

$
97,773


The
operating loss was $43.9 million for 2008 compared to an operating loss of $5.3 million in 2007. The $38.6 million increase in operating loss was primarily due
to the effect of lower sales volumes net of cost of sales decreases in the net amount of $38.6 million, restructuring and impairment charges totaling $20.7 million, as further discussed
in Note 4 of the "Notes to Consolidated Financial Statements", partially offset by reduced salary related expenses ($13.0 million), lower depreciation ($2.4 million) and lower
advertising expense ($2.4 million). In December 2008, the Company decided to close Homebuilding. Results in 2009 will reflect the build-out of the homes in backlog, other costs to
close the business and gains or losses on the liquidation of property, and are not expected to be material to the Company.

Other

Net sales and revenues were $4.0 million for 2008 compared to $6.4 million in 2007. The operating loss in the "Other"
segment which is comprised of the Company's corporate expenses and land subsidiaries other than United Land, increased by $12.5 million during the year ended December 31, 2008 when
compared to the same period in 2007. The increased operating loss was primarily due to approximately $6.8 million of professional fees incurred in 2008 relating to the planned divestiture of
Financing and increased employee-related expenses.

43

---



2007 Summary Operating Results

For the Year Ended December 31, 2007Natural Resources

Sloss

Financing

Homebuilding

Other

Cons Elims

Total($ in thousands)Net sales

$
610,265

$
134,279

$
12,935

$
245,409

$
2,315

$
(4,792
)
$
1,000,411Interest income on instalment notes








202,654











202,654Miscellaneous income


28,596


639


4,147


539


4,051


(1,216
)

36,756Net sales and revenues


638,861


134,918


219,736


245,948


6,366


(6,008
)

1,239,821Cost of sales


389,223


110,659


6,753


185,574


(141
)

(5,742
)

686,326Interest expense(1)








119,102











119,102Depreciation


34,377


3,822


1,174


5,151


1,035





45,559Selling, general, & administrative


19,524


9,440


28,072


61,080


23,704


2,366


144,186Provision for losses on instalment notes








13,889











13,889Postretirement benefits


29,584


(864
)

(424
)

(592
)

(970
)




26,734Amortization of intangibles


351





1,581











1,932Operating income (loss)

$
165,802

$
11,861

$
49,589

$
(5,265
)
$
(17,262
)
$
(2,632
)

202,093Other debt interest




















(18,830
)Income from continuing operations before income taxes



















$
183,263


---

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 $125.0 million, or $2.38 per
diluted share, which compares to $156.3 million, or $3.07 per diluted share in 2006.

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



44

---





Consolidated Results of Continuing Operations

Net sales and revenues for the year ended December 31, 2007 were $1.2 billion. Revenues declined by $33.1 million,
or 2.6% 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. Results in 2006 included $23.4 million of
miscellaneous income relating to an insurance settlement for a 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 $23.4 million to $686.3 million and represented 68.6% of net sales in 2007 versus $662.9 million and 65.6% 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.

Depreciation
for the year ended December 31, 2007 was $45.6 million, an increase of $8.8 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 2007 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 recognized in 2006 by the
Financing and Homebuilding segments affects comparability.

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 a 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 31.8% in 2007 and 32.1% in 2006 differed from the Federal statutory rate primarily in both years 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.

45

---



Segment Analysis

Natural Resources

Natural Resources, which includes the operations of Jim Walter Resources and United Land (parent company of TRI), reported net sales
and revenues of $638.9 million for the year ended December 31, 2007, a decrease of $48.0 million from $686.9 million in 2006. The decrease was
primarily due to lower metallurgical coal prices, 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 a 2005 Mine No. 5 water ingress problem. Statistics in the following table relate to Jim Walter Resources, only.

For the year ended December 31,2007

2006Average coal selling price (per ton)

$
92.21

$
103.58Tons of coal sold (in millions)


6.0


5.6Average natural gas selling price (per MCF)

$
7.81

$
8.67Billion cubic feet of natural gas sold


7.2


7.7Number of natural gas wells


408


415


For
the year ended 2007, Natural Resources' operating income was $165.8 million, compared to operating income of $258.8 million in 2006. The decrease in operating income in
2007 reflects lower metallurgical coal and natural gas prices and lower natural gas volumes and higher coal production costs. 2006 included $23.4 million of operating income recognized for the
settlement of an insurance claim for a 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 primarily as a result of higher metallurgical coke volumes and, to a lesser degree, due to increased metallurgical coke pricing as shown below:

For the year ended
December 31,2007

2006Metallurgical coke tons sold


430,887


399,321Metallurgical coke average selling price per ton

$
223.08

$
222.04


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 metallurgical
coke volumes and pricing and lower raw material costs. Operating income for 2006 includes an impairment charge of $1.6 million relating to the sale of the Sloss' chemical division, which was
sold in November 2006. The 2006 sale of the chemical division did not have a material affect on the revenues, cash flows or operating income of Sloss in 2007 as compared to 2006 and is not expected to
have a significant effect on the future revenues, cash flows or operating results of Sloss, as compared to prior periods.

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.

46

---



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. 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
revenue per home sold, partially offset by lower unit completions as shown in the table below.

For the year ended
December 31,2007

2006Unit completions


2,494


2,663Average revenue per home sold

$
97,773

$
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 revenue per
home sold 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 cost 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.

FINANCIAL CONDITION

Cash and cash equivalents increased by $87.1 million from $30.6 million at December 31, 2007 to
$117.7 million at December 31, 2008 reflecting $354.3 million in cash flows provided by operating activities, partially offset by $78.1 million of cash flows used in
investing activities and $187.4 million of cash flows used in financing activities. See additional discussion in the Statement of Cash Flows section that follows.

Short-term
investments, restricted were $56.3 million at December 31, 2008, down $18.9 million from December 31, 2007, attributable to cash
collections on mortgages previously pledged as collateral against the warehouse facilities no longer being restricted as a result of the pay-off and termination of the warehouse facilities
in April 2008.

Net
instalment notes receivable were $1,769.7 million at December 31, 2008, down $67.4 million from December 31, 2007 as a result of payments received on
outstanding notes exceeding new loan originations. The reduction in new loan originations is the result of WMC no longer providing financing to new customers of Homebuilding effective May 1,
2008.

Net
receivables were $176.6 million at December 31, 2008, an increase of $95.6 million from December 31, 2007 primarily attributable to increased pricing on
customer sales within the Natural Resources and Sloss segments and timing of sales within the fourth quarter of 2008 as compared to the fourth quarter
of 2007. Also included in the increase is a net receivable of $26.9 million related to Black Lung Excise Tax refund claim, which was recorded in December 2008.

47

---



Inventories were $133.1 million at December 31, 2008, an increase of $35.8 million from December 31, 2007 primarily due to increased inventories at Sloss and
Natural Resources as well as an increase in repossessed property at Financing. The increase at Natural Resources includes increased supplies inventory required to support certain mining operations in
addition to slightly higher production costs on inventory available to complete customer orders. The increase in Sloss inventory primarily results from higher raw material coal costs and increases in
on-hand quantities needed to complete customer orders. These increases were partially offset by a reduction of homes under construction at Homebuilding

Net
property, plant and equipment was $515.4 million at December 31, 2008, up $101.0 million from December 31, 2007 primarily due to the Company's continued
investment in the replacement of equipment and expansion at Natural Resources' mining operations in addition to increases associated with the Company's acquisition of Taft.

Deferred
income tax assets were $206.7 million at December 31, 2008, up $111.4 million from December 31, 2007 primarily due to a net operating loss
carryforward resulting from a $167.0 million tax benefit recognized in 2008 from the deemed liquidation of the Homebuilding business for tax purposes. The NOL carryforward benefit is expected
to be fully utilized in 2009.

Mortgage-backed/asset-backed
notes were $1,372.8 million at December 31, 2008, down $333.4 million from December 31, 2007 as a result of debt principal
payments, which included the $214.0 million pay-off and termination of the warehouse facilities in April 2008.

Accumulated
postretirement benefits obligation was $369.1 million at December 31, 2008, up $34.0 million from December 31, 2007 primarily due to unfavorable
development in the cost of healthcare benefits for participants in the United Mine Workers of America postretirement benefit plan, which caused a $21.2 million actuarially-determined increase
to the liability as of December 31, 2008. This adjustment is recognized as a decrease to stockholders' equity. Furthermore, an additional
liability of $6.1 million for the 3-month transition from a September 30 to a December 31 measurement date was recorded directly as a decrease to stockholders' equity
in 2008, as required by SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans."Also in 2008, the
Company assumed $3.0 million of accumulated postretirement benefits obligation due to the Taft acquisition.

Other
liabilities were $293.8 million at December 31, 2008, up $77.8 million from December 31, 2007. This increase is primarily due a $44.9 million
increase in the pension liability primarily due to a significant decline in the fair value of the pension plan assets since 2007. In addition, the increase in other liabilities relates to a
$29.7 million liability assigned to Taft's unfavorable coal supply agreements at September 2, 2008.

LIQUIDITY AND CAPITAL RESOURCES

Overview

The Company's principal sources of short-term funding are its existing cash balances, operating cash flows and borrowings
under its revolving credit facility. The Company's principal source of long-term funding is its bank term loan. As of December 31, 2008, total debt decreased $333.9 million
as compared to December 31, 2007. 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. The majority of homes constructed and sold by the Homebuilding segment were internally financed through May 1, 2008. However, effective May 1, 2008, the
Financing segment no longer funds any mortgage financing for customers of the Homebuilding segment. Furthermore, the Company

48

---



decided
to close Homebuilding in December 2008. The following discussion relates to houses built prior to May 1, 2008 and the signed contract backlog as of May 1, 2008.

Historically,
the Homebuilding segment incurred construction costs to build the home, which were financed with resources provided by Walter, including existing cash balances, cash flows
generated from operations or borrowings under credit facilities. When the home was completed, the Homebuilding business tendered it to the customer. Upon tender, Homebuilding recognized the sale of
the home and sold the instalment note contract to WMC, which recognized an increase in instalment notes receivable. No cash was generated from this transaction. WMC then borrowed 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 paid interest and other funding costs
under the warehouse facilities using collections from instalment notes receivable. Historically, once there were approximately $200.0 million to $300.0 million of accumulated borrowings
under the warehouse facilities, WMC packaged the instalment notes and pledged them as collateral to complete a mortgage-backed/asset-backed securitized debt offering. WMC historically received 90% to
95% of the face value of the instalment notes receivable as proceeds from the securitized debt offering. WMC used these proceeds to pay-off the warehouse facilities and any excess cash
flow would be available for general corporate purposes of the Company.

The
Company believes that, based on current forecasts and anticipated market conditions, operating cash flows and available sources of liquidity will be sufficient to meet substantially
all operating needs, to make planned capital expenditures and to make all required interest and principal 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 prices of coal and natural gas, coal production, costs of raw materials, interest rates and the general
economy. Currently there is an unprecedented uncertainty in the financial markets, less availability and higher costs of credit, potential counterparty defaults, and commercial and investment bank
failures. While we have no indication that the uncertainty in the financial markets would impact our current credit facility or our current credit providers, the possibility does exist.

2005 Walter Credit Agreement

In 2005, Walter entered into a $675.0 million credit agreement ("2005 Walter Credit Agreement") which included, prior to its
amendment in April 2008, (1) an amortizing term loan facility with an initial aggregate principal amount of $450.0 million, $138.9 million of which was outstanding as of
December 31, 2008 with a weighted average interest rate of 3.588%, and (2) an initial $225.0 million revolving credit facility which provides for loans and letters of credit. The
2005 Walter Credit Agreement is a secured obligation of the Company and substantially all of its wholly owned domestic subsidiaries. The term loan requires quarterly principal payments of
$0.4 million through October 3, 2012, at which time the remaining outstanding principal is due.

On
April 30, 2008, Walter amended the 2005 Walter Credit Agreement to allow an additional $250.0 million of borrowings under the revolving credit facility, thereby
increasing the revolving credit facility to $475.0 million. Available funds of $214.8 million were used to repay principal, interest and fees and terminate the Mid-State
Trust IX and Mid-State Trust XIV mortgage warehouse facilities, which were due to mature in 2008. The amendment also increased the interest rate on the revolving credit facility and the
term loan to LIBOR plus 300 basis points. The commitment fee
on the unused portion of the revolving facility also increased from 0.375% per year to 0.5% per year. In addition, the amended 2005 Walter Credit Agreement contains a reducing revolver commitment
feature, where the total available revolver commitment may not exceed $400.0 million at March 31, 2009, $350.0 million at June 30, 2009, $300.0 million at
September 30, 2009, and $250.0 million at December 31, 2009.

49

---



Certain
other terms, including affirmative and negative covenants as well as restrictions on the Company's ability to engage in specified activities, were also amended and include, but
are not limited to, increased indebtedness and approval of certain activities associated with the Company's strategic initiatives in the Homebuilding and Financing businesses.

In
connection with the amendment to the 2005 Walter Credit Agreement, the Company incurred $3.9 million of refinancing fees. These fees were deferred and are being amortized over
the remaining life of the revolving credit facility.

During
2008, the Company borrowed $340.0 million under the revolving credit facility. On June 16, 2008, the Company completed an offering of shares of its common stock and
received $280.5 million of net proceeds, as more fully discussed in Note 14. The net proceeds from the offering were used to repay $77.9 million on the outstanding term loan and
$202.5 million on the revolving credit facility. Additional repayments on the revolving credit facility during 2008 totaled $97.5 million, such that the balance outstanding was
$40.0 million at December 31, 2008.

Under
the terms of the Company's amended 2005 Walter Credit Agreement, availability under the revolving credit facility was reduced from $475.0 million to $373.8 million in
connection with the completion of the stock offering. As of December 31, 2008, the Company had $58.2 million in outstanding stand-by letters of credit and
$275.6 million of availability for future borrowings under the revolving credit facility.

In
connection with the repayments discussed above, the Company recognized an additional amortization of $3.1 million in 2008 of previously deferred financing fees. This
amortization charge is included in interest expense in the 2008 statement of operations.

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

At December 31, 2008, non-recourse mortgage-backed/asset-backed notes outstanding totaled $1.4 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.

Prior
to April 30, 2008, Trust IX and Trust XIV were borrowers under a $150.0 million and a $200.0 million Variable Funding Loan Agreement ("warehouse facilities"),
respectively, providing temporary financing to WMC for its purchases of instalment notes from Homebuilding and for its mortgage loans originations. At the beginning of 2008, there were
$189.2 million of borrowings outstanding under these warehouse facilities. On April 30, 2008, the Company repaid all outstanding borrowings and terminated these facilities using proceeds
from the amended 2005 Walter Credit Agreement, as discussed above. During 2008 and 2007, mortgage securitization markets generally, and subprime mortgage 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. However, with
the termination of the warehouse facilities, the Company is no longer reliant on the availability of mortgage warehouse facilities or the mortgage-backed securitization market.

Effective
May 1, 2008, WMC no longer funds new originations for customers of Homebuilding. However, the backlog of homes with signed contracts and those which were under
construction as of May 1, 2008, have been and will continue to be funded by WMC. As of December 31, 2008, an estimated 20 homes remain in the backlog, representing a total of
approximately $2.7 million in value that will be funded by WMC in 2009. The Company will finance these WMC instalment notes receivable with operating cash flows or borrowings under the 2005
Walter Credit Facility.

50

---



Prior
to their termination on April 1, 2008, the Company held multiple interest rate hedge agreements with various counterparties with an aggregate notional value of
$215.0 million, the objective of which was to protect against changes in the benchmark interest rate on the 2008 forecasted issuance of mortgage-backed notes in a securitization (the
"Securitization Hedges"). At March 31, 2008, these Securitization Hedges no longer qualified for hedge accounting treatment because the Company no longer planned to access the distressed
securitization market. As a result, the Company recognized a loss on interest rate hedge ineffectiveness of $17.0 million in the first quarter of 2008. On April 1, 2008,
the Company settled the Securitization Hedges for a payment of $17.0 million. No similar hedges are outstanding at December 31, 2008.

Statements of Cash Flows

The following table sets forth, for the periods indicated, selected consolidated cash flow information (in thousands):

For the year ended
December 31,2008

2007Cash flows provided by operating activities

$
354,322

$
147,815Cash flows used in investing activities


(78,082
)

(148,823
)Cash flows used in financing activities


(187,408
)

(84,101
)Cash flows provided by (used in) continuing operations


88,832


(85,109
)Cash flows used in discontinued operations


(1,774
)

(11,647
)Net increase (decrease) in cash and cash equivalents

$
87,058

$
(96,756
)


Cash
balances were $117.7 million and $30.6 million at December 31, 2008 and December 31, 2007, respectively. The increase in cash in 2008 results from cash
provided by operating activities of $354.3 million, proceeds totaling $280.5 million from the June 2008 stock offering, $18.9 million from short-term investments,
restricted, and $14.6 million from the receipt of payments on purchased loans. These sources of cash were partially offset by net payments of mortgage-backed/asset-backed notes of
$333.5 million, capital expenditures of $101.8 million, purchases of stock of $64.6 million, net payments on other debt that totaled $58.7 million, the acquisition of Taft
for $17.1 million, net of cash acquired, and cash dividend payments of $16.2 million.

Net
cash provided by operating activities of continuing operations was $354.3 million for the year ended December 31, 2008 compared to $147.8 million for 2007. The
increase of $206.5 million is primarily attributable to $225.8 million of increased income from continuing operations, adjusted for non-cash items, $145.0 million for
increases in receivables and inventories in 2008 as compared to the decreases in 2007, offset in part by $96.8 million for a decrease in instalment notes receivable, net in 2008 as compared to
the increase in 2007.

Cash
flows used in investing activities of continuing operations for the year ended December 31, 2008 were $78.1 million compared to $148.8 million for the same
period in 2007. Significant cash flows used in investing activities in 2008 included $101.8 million for additions to property, plant and equipment as the Company continued to invest in the
replacement of equipment and expansion of Natural Resources' mining operations and $17.1 million, net of cash acquired, for the acquisition of Taft. Significant cash flows used in investing
activities in the 2007 period included $151.9 million of additions to property plant and equipment, primarily in the Natural Resources segment, the purchase of loans for $39.9 million
and the acquisition of TRI for $11.7 million, net of cash acquired.

Cash
flows used in financing activities of continuing operations for the year ended December 31, 2008 were $187.4 million compared to $84.1 million in the same
period in 2007. Cash flows used in

51

---



financing
activities in 2008 included: retirements of other debt of $398.7 million, partially offset by proceeds from other debt of $340.0 million, retirement of
mortgage-backed/asset-backed notes of $358.5 million, partially offset by the issuance of mortgage-backed/asset-backed notes of $25.0 million purchases of stock under the stock
repurchase program of $64.6 million and dividends paid of $16.2 million, offset in part by proceeds from the June 2008 stock offering of $280.5 million. Cash flows used in
financing activities in 2007 included retirements of mortgage-backed/asset-backed notes of $219.8 million, partially offset by the issuance of mortgage-backed/asset-backed notes of
$189.2 million, retirements of corporate debt of $44.7 million, dividends paid of $10.4 million and purchases of stock under the stock repurchase program of $5.6 million.

Capital
expenditures totaled $143.5 million in 2008 related principally to the Mine No. 7 East expansion project and other mine development activities at Natural Resources.
Included in 2008 capital expenditures is $41.7 million of equipment financed with a long-tem financing arrangement. The Company estimates that capital expenditures for 2009 will
approximate $100.0 million. Of this amount, $23.0 million relates to the Mine No. 7 East expansion project. Actual expenditures in 2009 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, 2008. This table does not include interest payable on these
obligations. In 2008, the Company paid approximately $18.6 million of interest on the term loan, revolver and other debt financings. In 2009, the Company estimates total cash interest payments
related to these obligations 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)Total

2009

2010

2011

2012

2013

Thereafter2005 Walter term loan

$
138,934

$
1,436

$
1,436

$
1,436

$
134,626

$


$
2005 Walter revolving credit facility


40,000





40,000











Other debt(1)


46,451


12,044


7,622


7,916


8,523


8,563


1,783Operating leases


18,480


8,191


5,999


2,832


1,140


264


54Unconditional purchase obligations(2)


90,506


47,320


11,529


11,529


11,529


8,599


Total contractual cash obligations

$
334,371


68,991


66,586


23,713


155,818


17,426

$
1,837Other long-term liabilities(3)





29,586


21,101


22,892


24,009


25,171Total cash obligations(4)




$
98,577

$
87,687

$
46,605

$
179,827

$
42,597


---

52

---





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.

Pension Benefits

As a result of the unprecedented distress in the credit and capital markets, the fair value of the Company's pension plan assets has
declined substantially since December 31, 2007. A sustained decline in the fair value of pension plan assets will result in increased pension contributions in 2009 and future years. The
Company's minimum pension plan funding requirement for 2009 is $10.3 million, which the Company expects to fully fund. The Company also expects to pay $19.3 million in 2009 for benefits
related to its other postretirement healthcare plan.

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 has the following financial instruments that are exposed to interest rate risk (dollars in thousands):

Carrying value as of
December 31,See
Note

Financial Instrument

2008

2007Asset (Liability)(1)

2005 Walter term loan

$
(138,934
)
$
(218,517
)(1)

2005 Walter revolving credit facility


(40,000
)

(2)

$75.0 million notional of Walter term loan hedges





(202
)(3)

Other debt


(46,451
)

(6,558
)(4)

Instalment notes receivable


1,769,688


1,837,059(4)

Mortgage-backed/asset-backed notes


(1,372,821
)

(1,706,218
)(5)

$215.0 million notional of Securitization Hedges





(9,160
)


---

53

---





A
ten percent decrease in interest rates from the December 31, 2008 and 2007 rates would result in an increase to annual pre-tax income from these financial
instruments of approximately $0.6 million and $2.4 million, respectively, while a ten percent increase in rates would decrease annual pre-tax income approximately
$0.6 million and $2.4 million, respectively.

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 6.6 million mmbtu (equivalent of 6.8 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 2008 and 2007, the Company hedged approximately 73% and 57%, 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 outlows of $3.6 million in 2008 and cash
inflows of $8.7 million in 2007, impacting net sales and revenues.

At
December 31, 2008, swap contracts to hedge approximately 0.5 million mmbtu of anticipated natural gas sales in 2009 and at December 31, 2007, swap contracts to
hedge approximately 0.8 million mmbtu of anticipated natural gas sales in 2008, were outstanding as more fully described in Note 17 of "Notes to Consolidated Financial Statements." A ten
percent favorable or unfavorable change in the natural gas prices would not have a material effect in the fair value of the swap contracts outstanding at December 31, 2008 and 2007.

NEW ACCOUNTING PRONOUNCEMENTS

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 used a
September 30 measurement date and was required to adopt this provision on December 31, 2008. The adoption of this statement did not 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 does not
expect the adoption of this statement, which became effective January 1, 2009, to have a material effect on its consolidated financial statements.

54

---



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 can not determine what impact the adoption of
this requirement, which became 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.

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

Quarter endedFiscal Year 2008(1)

March 31

June 30

September 30

December 31Net sales and revenues

$
292,781

$
365,150

$
381,821

$
447,318Income from continuing operations

$
3,172

$
52,147

$
55,552

$
257,263Loss from discontinued operations


(2,673
)

(1,371
)

(552
)

(16,958
)Net income

$
499

$
50,776

$
55,000

$
240,305Diluted income (loss) per share:(2)Income from continuing operations

$
0.06

$
0.97

$
0.98

$
4.68Loss from discontinued operations


(0.05
)

(0.03
)

(0.01
)

(0.31
)Net income

$
0.01

$
0.94

$
0.97

$
4.37




Quarter endedFiscal Year 2007(1)

March 31

June 30

September 30

December 31Net sales and revenues

$
319,586

$
296,515

$
311,392

$
312,328Income from continuing operations

$
34,277

$
21,682

$
26,296

$
42,747Loss from discontinued operations


(4,652
)

(3,631
)

(1,933
)

(2,787
)Net income

$
29,625

$
18,051

$
24,363

$
39,960Diluted income (loss) per share:(2)(3)Income from continuing operations

$
0.65

$
0.41

$
0.50

$
0.81Loss from discontinued operations


(0.09
)

(0.07
)

(0.04
)

(0.05
)Net income

$
0.56

$
0.34

$
0.46

$
0.76


---

55

---



Fourth quarter 2008 results include the following large, unusual items:



Fourth
quarter 2007 results include the following large, unusual items:



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 2009 Proxy Statement.

Item 9A.    Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An evaluation was performed under the supervision and with the participation of our management, including our Vice Chairman (principal
executive and financial officer), of the effectiveness of our disclosure controls and procedures as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934
as amended ("Exchange Act") as of the end of the period covered by this annual report on Form 10-K. Based on that evaluation, our management, including our principal executive and
financial officer, concluded that our disclosure controls and procedures are effective as of December 31, 2008 to ensure that information required to be disclosed by us in reports that we file
or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and (2) accumulated and communicated
to our management, including our principal executive and financial officer, as appropriate to allow timely

56

---



decisions
regarding required disclosures. There has been no change in our internal control over financial reporting during the year ended December 31, 2008 that has materially affected, or is
reasonably likely to materially affect, internal control over financial reporting.

Management's Report on Internal Control over Financial Reporting

Management, under the supervision of our Vice Chairman (principal executive and financial officer), 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, 2008. 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. Based on this
assessment, management has concluded that, as of December 31, 2008, 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 year ended December 31, 2008 that have materially affected, or are reasonably likely to materially affect the Company's internal control over
financial reporting.

Item 9B.    Other Information

None

57

---





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

PositionVictor P. Patrick


51

Vice Chairman, Chief Financial Officer and General CounselMark J. O'Brien


66

Chairman and Chief Executive Officer, JWH Holding Company, LLCGeorge R. Richmond


58

Chief Executive Officer, Jim Walter Resources, Inc.Charles E. Cauthen


50

Chief Financial Officer, JWH Holding Company, LLC and President, Walter Mortgage CompanyMiles C. Dearden, III


49

Senior Vice President, TreasurerLisa A. Honnold


41

Senior Vice President, ControllerLarry E. Williams


61

Senior Vice President, Human ResourcesCharles C. Stewart


53

President, Sloss Industries Corporation and United Land Corporation


Our
executive officers as of February 27, 2009 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 over 43 years experience in mining, having joined Jim Walter Resources, Inc. in 1978 after
13 years in various apprentice and engineering capacities for Great Britain's National Coal Board (now known as British Coal). Jim Walter Resources, Inc. is the largest producer of Blue
Creek coal and
currently operates two of North America's deepest vertical underground coal mines in Alabama's Black Warrior Coal Basin, No. 4 Mine, and No. 7 Mine.

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 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.

58

---



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. Mr. Stewart has a B.S in Mineral Engineering from the University of Alabama and previously served in various mining and engineering capacities for Jim Walter Resources for
25 years, culminating in his appointment as Vice President of Engineering.

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 "2009 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 2009 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 2009 Proxy Statement.

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

Incorporated by reference to the 2009 Proxy Statement.

Item 14.    Principal Accounting Fees and Services

Incorporated by reference to the 2009 Proxy Statement.

Part IV

Item 15.    Exhibits, Financial Statement Schedules



59

---







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.February 27, 2009

/s/ VICTOR P. PATRICK Victor 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.

February 27, 2009

/s/ HOWARD L. CLARK JR. Howard L. Clark, Jr., Director*February 27, 2009

/s/ JERRY W. KOLB Jerry W. Kolb, Director*February 27, 2009

/s/ PATRICK A. KRIEGSHAUSER Patrick A. Kriegshauser, Director*February 27, 2009

/s/ JOSEPH B. LEONARD Joseph B. Leonard, Director*February 27, 2009

/s/ MARK J. O'BRIEN Mark J. O'Brien, Director, Chairman and Chief Executive Officer, JWH Holding Company, LLC*February 27, 2009

/s/ BERNARD G. RETHORE Bernard G. Rethore, Director*


60

---



February 27, 2009

/s/ GEORGE R. RICHMOND George R. Richmond, Director, President
and Chief Executive Officer, Jim Walter
Resources*February 27, 2009

/s/ MICHAEL T. TOKARZ Michael T. Tokarz, Chairman*February 27, 2009

/s/ A.J. WAGNER A.J. Wagner, Director*February 27, 2009

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


*By:

/s/ VICTOR P. PATRICK Victor P. Patrick
Attorney-in-Fact


61

---





INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Walter Industries, Inc. and SubsidiariesReports of Independent Registered Certified Public Accounting Firms

F-2Consolidated Balance SheetsDecember 31, 2008 and 2007

F-5Consolidated Statements of Operations for Each of the Three Years in the Period Ended December 31, 2008

F-6Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income for Each of the Three Years in the
Period Ended December 31, 2008

F-7Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended December 31, 2008

F-8Notes to Consolidated Financial Statements

F-10


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 sheets of Walter Industries, Inc. and subsidiaries as of December 31, 2008 and 2007, and the related consolidated
statements of operations, changes in stockholders' equity and comprehensive income, and cash flows for each of the two years in the period ended December 31, 2008. 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 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 audits provide 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, 2008 and 2007,
and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting
principles.

As
discussed in Note 11 to the consolidated financial statements, the Company adopted FASB Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes," in 2007. As discussed in Note 13 to the consolidated financial statements, the Company adopted the measurement provisions of Statement of Financial
Accounting Standards No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans," in 2008.

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, 2008, 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 26, 2009 expressed an unqualified opinion thereon.

/s/
Ernst & Young LLP

Tampa,
Florida
February 26, 2009

F-2

---



Report of Independent Registered Certified Public Accounting Firm

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, 2008, 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.

In
our opinion, Walter Industries, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008,
based on the COSO criteria.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Walter Industries, Inc.
and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of operations, changes in stockholders' equity and comprehensive income, and cash flows for each of
the two years in the period
ended December 31, 2008 and our report dated February 26, 2009 expressed an unqualified opinion thereon.

/s/
Ernst & Young LLP

Tampa,
Florida
February 26, 2009

F-3

---



Report of Independent Registered Certified Public Accounting Firm

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

In
our opinion, the consolidated statements of operations, changes in stockholders' equity and comprehensive income, and cash flows for the year ended December 31, 2006 present
fairly, in all material respects, the results of operations and cash flows of Walter Industries, Inc. and its subsidiaries for the year 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 audit. We conducted our audit 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 audit provides 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. and Kodiak Mining Company, LLC as described in Note 3 as to which the date is
March 7, 2008 and February 26, 2009, respectively, and as it relates to the change in segments as described in Note 18, as to which the date is March 7, 2008

F-4

---





WALTER INDUSTRIES, INC. AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS        (in thousands, except share amounts)

December 31,2008

2007ASSETSCash and cash equivalents

$
117,672

$
30,614Short-term investments, restricted


56,275


75,198Instalment notes receivable, net of allowance of $18,969 and $13,992, respectively


1,769,688


1,837,059Receivables, net


176,601


81,011Inventories


133,129


97,324Prepaid expenses


26,418


36,005Property, plant and equipment, net


515,418


414,463Deferred income taxes


206,733


95,380Other assets


59,392


63,684Goodwill





10,895Assets of discontinued operations


6,667


25,648$
3,067,993

$
2,767,281LIABILITIES AND STOCKHOLDERS' EQUITYAccounts payable

$
72,801

$
71,930Accrued expenses


91,213


83,050Accrued interest


11,362


13,940Debt:Mortgage-backed/asset-backed notes


1,372,821


1,706,218Other debt


225,385


225,860Accumulated postretirement benefits obligation


369,055


335,034Other liabilities


293,759


216,007Liabilities of discontinued operations


1,328


529Total liabilities


2,437,724


2,652,568Commitments and Contingencies (Note 16)Stockholders' equity:Common stock, $0.01 par value per share:Authorized200,000,000 sharesIssued54,143,958 and 51,991,134 shares, respectively


541


520Capital in excess of par value


714,174


497,032Retained earnings (deficit)


50,990


(290,986
)Accumulated other comprehensive income (loss):Pension and other post-retirement benefit plans, net of tax


(137,364
)

(87,071
)Unrealized gain (loss) on hedges, net of tax


1,928


(4,782
)Total stockholders' equity


630,269


114,713$
3,067,993

$
2,767,281


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

F-5

---



WALTER INDUSTRIES, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF OPERATIONS        (in thousands, except per share amounts)

For the years ended December 31,2008

2007

2006Net sales and revenues:Net sales

$
1,263,834

$
1,000,411

$
1,009,781Interest income on instalment notes


187,094


202,654


199,659Miscellaneous income


36,142


36,756


63,4681,487,070


1,239,821


1,272,908Cost and expenses:Cost of sales (exclusive of depreciation)


729,833


686,326


662,877Depreciation


59,772


45,559


36,764Selling, general and administrative


142,912


144,186


141,265Provision for losses on instalment notes


21,315


13,889


9,062Postretirement benefits


26,494


26,734


13,540Interest expensemortgage-backed/asset-backed notes


102,115


119,102


118,743Interest rate hedge ineffectiveness


16,981





Interest expenseother debt


26,223


18,830


38,009Amortization of intangibles


1,278


1,932


2,405Restructuring and impairment charges


63,958





1,639Provision (credit) for estimated hurricane insurance losses


3,853





(1,046
)Debt conversion expense








19,3701,194,734


1,056,558


1,042,628Income from continuing operations before income tax expense (benefit)


292,336


183,263


230,280Income tax expense (benefit)


(75,798
)

58,261


73,983Income from continuing operations


368,134


125,002


156,297Income (loss) from discontinued operations


(21,554
)

(13,003
)

42,072Net income

$
346,580

$
111,999

$
198,369Basic income (loss) per share:Income from continuing operations

$
6.84

$
2.40

$
3.55Income (loss) from discontinued operations


(0.40
)

(0.25
)

0.96Net income

$
6.44

$
2.15

$
4.51Diluted income (loss) per share:Income from continuing operations

$
6.74

$
2.38

$
3.07Income (loss) from discontinued operations


(0.39
)

(0.25
)

0.80Net income

$
6.35

$
2.13

$
3.87


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

F-6

---





WALTER INDUSTRIES, INC. AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY  AND COMPREHENSIVE INCOME  FOR THE THREE YEARS ENDED DECEMBER 31, 2008  (in thousands)

Total

Common
Stock

Capital in
Excess of
Par Value

Comprehensive
Income

Retained
Earnings
(Deficit)

Treasury
Stock

Accumulated
Other
Comprehensive
Income (Loss)Balance at December 31, 2005

$
288,616

$
598

$
1,210,751




$
(602,002
)
$
(259,317
)
$
(61,414
)Adjustment to initially apply SEC SAB No. 108


5,069











5,069Adjusted balance at December 31, 2005


293,685


598


1,210,751





(596,933
)

(259,317
)

(61,414
)Comprehensive income:Net income


198,369







$
198,369


198,369Other comprehensive income, net of tax:Cumulative foreign currency translation adjustment


1,053








1,053








1,053Decrease in additional pension liability, net of $0.3 million tax provision


703








703








703Net unrealized gain on hedges, net of $2.8 million tax provision


4,113








4,113








4,113Comprehensive income










$
204,238Adjustment to initially apply FASB Statement No. 158


(74,513
)
















(74,513
)Sale of common stock


168,680


26


168,654Stock issued upon conversion of convertible notes


176,108


98


176,010Gain on sale of investment in Mueller Water Products, Inc. through initial public offering


132,048





125,088











6,960Stock dividend for spin-off of Mueller Water Products, Inc.


(919,933
)




(944,393
)










24,460Stock issued upon exercise of stock options


4,735


6


4,729Tax benefit on the exercise of stock options


8,310





8,310Dividends paid, $0.16 per share


(6,825
)




(6,825
)Stock-based compensation


15,375





15,375Balance at December 31, 2006


1,908


728


757,699





(398,564
)

(259,317
)

(98,638
)Adjustment to initially apply FIN 48


(4,421
)










(4,421
)Adjusted balance at January 1, 2007


(2,513
)

728


757,699





(402,985
)

(259,317
)

(98,638
)Comprehensive income:Net income


111,999







$
111,999


111,999Other comprehensive income, net of tax:Change in pension and postretirement benefit plans, net of $9.7 million tax provision


15,231








15,231








15,231Net unrealized loss on hedges, net of $4.3 million tax benefit


(8,446
)







(8,446
)







(8,446
)Comprehensive income










$
118,784Retirement of treasury stock





(207
)

(259,902
)







260,109Purchases of stock under stock repurchase program


(5,627
)

(1
)

(5,626
)Stock issued upon exercise of stock options


1,447





1,447Tax benefit on the exercise of stock options


2,015





2,015Dividends paid, $0.20 per share


(10,411
)




(10,411
)Stock-based compensation


11,810





11,810Other


(792
)













(792
)Balance at December 31, 2007


114,713


520


497,032





(290,986
)




(91,853
)Comprehensive income:Net income


346,580







$
346,580


346,580Other comprehensive income, net of tax:Change in pension and postretirement benefit plans, net of $32.3 million tax benefit


(50,961
)







(50,961
)







(50,961
)Net unrealized gain on hedges, net of $4.5 million tax provision


6,710








6,710








6,710Comprehensive income










$
302,329Effects of changing the pension plan measurement date pursuant to FASB Statement No. 158:Service cost, interest cost, and expected return on plan assets for October 1December 31, 2007, net of $3.0 million tax
benefit


(4,604
)










(4,604
)Amortization of prior service cost and actuarial gain/loss for October 1December 31, 2007, net of $0.5 million tax provision


668

















668Proceeds from public stock offering


280,464


32


280,432Purchases of stock under stock repurchase program


(64,644
)

(16
)

(64,628
)Stock issued upon exercise of stock options


7,993


4


7,989Stock issued upon conversion of convertible notes


785


1


784Dividends paid, $0.30 per share


(16,233
)




(16,233
)Stock-based compensation


10,439





10,439Other


(1,641
)




(1,641
)Balance at December 31, 2008

$
630,269

$
541

$
714,174




$
50,990

$


$
(135,436
)


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

F-7

---





WALTER INDUSTRIES, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS        (in thousands)

For the years ended December 31,2008

2007

2006OPERATING ACTIVITIESNet income

$
346,580

$
111,999

$
198,369Loss (income) from discontinued operations


21,554


13,003


(42,072
)Income from continuing operations


368,134


125,002


156,297Adjustments to reconcile income from continuing operations to net cash provided by operating activities:Provision for losses on instalment notes receivable


21,315


13,889


9,062Depreciation


59,772


45,559


36,764Non-cash restructuring and impairment charges


61,459





1,639Provision for (benefit from) deferred income taxes


(92,520
)

(7,066
)

15,242Other


12,276


27,241


13,602Decrease (increase) in assets, net of effect of acquisitions:Receivables


(96,506
)

9,282


(28,598
)Inventories


(34,340
)

4,825


14,943Prepaid expenses


23,878


8,021


(4,484
)Instalment notes receivable, net


31,415


(65,432
)

(33,755
)Increase (decrease) in liabilities, net of effect of acquisitions:Accounts payable


(816
)

2,439


(86
)Accrued expenses


2,833


(12,832
)

16,773Accrued interest


(2,578
)

(3,113
)

(3,344
)Cash flows provided by operating activities


354,322


147,815


194,055INVESTING ACTIVITIESAcquisitions, net of cash acquired


(17,932
)

(11,650
)

10,500Purchases of loans





(39,900
)

(103,823
)Principal payments received on purchased loans


14,641


34,081


45,954Additions to property, plant and equipment


(101,813
)

(151,913
)

(90,528
)Cash proceeds from sale of property, plant and equipment


8,167


3,258


4,273Decrease (increase) in short-term investments, restricted


18,923


14,584


35,185Other


(68
)

2,717


11,159Cash flows used in investing activities


(78,082
)

(148,823
)

(87,280
)FINANCING ACTIVITIESIssuance of mortgage-backed/asset-backed notes


25,000


189,200


401,876Payments on mortgage-backed/asset-backed notes


(358,458
)

(219,793
)

(392,647
)Proceeds from issuance of other debt


340,000





Retirement of other debt


(398,709
)

(44,679
)

(200,169
)Sale of common stock


280,464





168,680Cash spun-off to Mueller Water Products, Inc.








(82,145
)Dividends paid


(16,233
)

(10,411
)

(6,825
)Purchases of stock under stock repurchase program


(64,644
)

(5,627
)

Other


5,172


7,209


21,242Cash flows used in financing activities


(187,408
)

(84,101
)

(89,988
)Cash flows provided by (used in) continuing operations


88,832


(85,109
)

16,787CASH FLOWS FROM DISCONTINUED OPERATIONSCash flows provided by (used in) operating activities


2,695


(7,169
)

50,616Cash flows used in investing activities


(4,469
)

(4,478
)

(90,791
)Cash flows provided by financing activities








13,391Cash flows used in discontinued operations


(1,774
)

(11,647
)

(26,784
)Net increase (decrease) in cash and cash equivalents

$
87,058

$
(96,756
)
$
(9,997
)Cash and cash equivalents at beginning of year

$
30,614

$
127,369

$
64,405Add: Cash and cash equivalents of discontinued operations at beginning of year





1


72,960Net increase (decrease) in cash and cash equivalents


87,058


(96,756
)

(9,997
)Less: Cash and cash equivalents of discontinued operations at end of year








1Cash and cash equivalents at end of year

$
117,672

$
30,614

$
127,369


F-8

---



WALTER INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(in thousands)

For the years ended December 31,2008

2007

2006SUPPLEMENTAL DISCLOSURES:Interest paid, net of capitalized interest

$
137,871

$
125,694

$
148,703Income taxes paid (refunded), net

$
27,680

$
54,818

$
32,495Non-Cash Investing Activities:Acquisition of Taft in 2008 and TRI in 2007:Fair value of assets acquired

$
71,679

$
26,260Fair value of liabilities assumed


(51,579
)

(14,216
)Less: Cash acquired


(3,011
)

(394
)Net cash paid

$
17,089

$
11,650Non-Cash Financing Activities:One-year property insurance policy financing agreement

$
13,884

$
5,277Equipment acquired with specific financing arrangements

$
41,681Non-cash conversion of Senior Subordinated Convertible Notes into common stock

$
785




$
174,215Non-cash dividend to spin-off Mueller Water Products, Inc.







$
944,393


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

F-9

---





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, metallurgical coke, mortgage financing and home construction. See Note 3.

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, 2008, 33%, 15%, 9%, and 6% (December 31, 2007, 33%, 15%, 9%, 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Revenue is recognized when the following criteria have been met: persuasive evidence of an arrangement exists; the price to the
buyer is fixed or determinable; delivery has occurred; and collectability is reasonably assured. Delivery is considered to have occurred at the time title and risk of loss transfers to the customer.
For coal shipments via rail, delivery generally occurs when the railcar is loaded. For coal shipments via ocean vessel, delivery generally occurs when the vessel is loaded. For the Company's natural
gas operations, delivery occurs when the gas has been transferred to the customer's pipeline.

Miscellaneous
income in 2008 includes interest income of $17.1 million related to a Black Lung Excise Tax refund claim. 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.

F-10

---



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") services instalment notes and mortgages originated by Jim Walter Homes
("JWH"). Through May 1, 2008, JWH offered financing to homebuyers and WMC originated and purchased loans that are secured by mortgages and liens. Subsequent to May 1, 2008, except for
homes under contract as of that date, WMC will no longer purchase instalment notes from JWH or originate loans for JWH customers. References to instalment notes or mortgage instalment notes include
mortgage loans offered by WMC.

Instalment
notes 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 similar credit ratings to JWH's customers. The Company estimates this rate by adding a credit
spread and a margin to a benchmark funding rate in order to cover costs and expected losses. This rate is periodically compared to rates charged by competitors and other lenders to customers of
similar credit quality to validate that the methodology results in a market rate of interest. 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 pay-offs 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
instalment notes 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. Prior to 2008, in each of the years ended December 31, 2007 and 2006, WMC purchased fixed and variable rate mortgage loans and offered mortgage loans that have fixed monthly
payments and repayment terms similar to instalment notes. The interest income earned by WMC is recognized using the interest method. WMC has the ability to levy costs to protect its collateral
position upon default, such as attorney fees and late charges, as allowed by state law. The various legal instruments used allow for different fee structures to be charged to the customer, for example
late fees and prepayment fees. These fees are recognized as revenue.

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 are no longer over ninety days past due. 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 Homebuilding 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 are occasionally made, however, most involve some form of seller financing. Since the real

F-11

---



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.

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 administrative expenses in the statement of operations.
The amount of advertising expense recognized in 2008, 2007 and 2006 was $2.7 million, $5.0 million and $5.2 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.

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 inventory costs include labor, supplies, equipment
costs, operating overhead, freight, royalties and other related costs. 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, which is based on historical recovery rates and current market conditions. 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
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

F-12

---



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 20 years for machinery and equipment, 3 to 50 years for land improvements and buildings, and mine life
for mineral interests and 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 they are 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 amortized 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, 2008. The Company will recognize a liability in the period in which it is determined
that 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, 2008, 2007 and 2006, the Company capitalized interest costs in the amount of $3.9 million, $10.9 million and $0.5 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. This amount was recorded in 2007 as the amount was determined to be immaterial to those prior years on both a quantitative basis and on a qualitative basis.

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 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. Fair value is
generally determined using market quotes, if available, or a discounted cash flow approach. There were no significant impairments of long-lived assets during the years ended
December 31, 2007 and 2006. However, during the year ended December 31, 2008, the Company recorded impairment charges relating to certain long-lived assets of the Natural
Resources, Homebuilding and Financing segments. See Note 4 for discussion.

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

F-13

---



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 31,2008

2007Undiscounted aggregated estimated claims to be paid

$
43,584

$
39,773Workers' compensation liability recorded on a discounted basis

$
37,592

$
33,696


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 that year until all claims are paid.
The weighted average rate used for discounting the liability at December 31, 2008 was 1.89%. A one-percentage-point increase in the discount rate on the discounted claims liability
would decrease the liability by $0.2 million, while a one-percentage-point decrease in the discount rate would increase the liability by $0.2 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% both for 2008 and 2007 was $8.6 million and $8.2 million as of December 31, 2008 and 2007, 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 $1.2 million, while a one-percentage-point decrease
in the discount rate would increase the liability by $1.5 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 Financing segment recorded
a provision of $3.9 million for claim losses as a result of damage from Hurricanes Ike and Gustav in 2008 that impacted the Company's market area. The credit of $(1.0) million in 2006 relates
to a revision of the estimated claim losses for Hurricanes Katrina and Rita in 2005.

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. 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

F-14

---



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 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 and recognized as miscellaneous income in the statement of operations in
the same period as the underlying transactions. 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, 2008, 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.

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, compensation expense was not required for 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. 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.

Environmental Expenditures

The Company capitalizes environmental expenditures that increase the life or efficiency of property or that reduce or prevent
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.

F-15

---



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.

NOTE 3Discontinued Operations & Acquisitions

Planned Separation and Merger of Financing

On September 30, 2008, the Company outlined its plans to separate its Financing business from the Company's core Natural
Resources businesses through a spin-off to shareholders and subsequent merger with Hanover Capital Mortgage Holdings, Inc. ("Hanover"), a New Jersey-based real estate investment
trust ("REIT"). As a step toward the completion of this plan, on February 3, 2009, the Company formed Walter Investment Management LLC ("Spinco"), a wholly owned, Delaware limited
liability company, to receive the Financing business and facilitate the spin-off and merger. The subsidiaries and assets
that Spinco will own at the time of the spin-off and merger include all assets of Financing except for those associated with the workers' compensation program and various other runoff
insurance programs within Cardem Insurance Co., Ltd. At December 31, 2008, Financing's total assets and liabilities were $1.9 billion and $1.5 billion, respectively.

Following
the merger of Spinco with Hanover, the combined company will continue to operate as a publicly traded REIT and will be named Walter Investment Management Corporation ("Walter
Investment Management"). The spin-off and merger are expected to be completed in mid 2009. After the spin-off and merger, Walter's shareholders will own approximately 95.17% of
Walter Investment Management's publicly traded common stock, certain holders of options to acquire limited liability interest of Spinco outstanding immediately prior to the effective time of the
merger will own 3.33%, and shareholders of Hanover will own the remaining 1.5%.

The
transaction is subject to certain closing conditions including, but not limited to, approval of the merger by Hanover's shareholders and favorable rulings from the Internal Revenue
Service. Financing will continue to be reported as part of the Company's continuing operations until the date of the spin-off, at which time the historical results of Financing will be
reported as discontinued operations.

Discontinued Operations

Kodiak Mining Co.In December 2008, the Company announced the permanent closure of the underground coal mine owned by its
subsidiary, Kodiak
Mining Company, LLC ("Kodiak") due to high operational costs, difficult operating conditions and a challenging pricing environment for Kodiak's product. As such, the Company has reported the
results of operations, assets, liabilities and cash flows of Kodiak as discontinued operations for all periods presented. Kodiak's results were previously reported in the Natural Resources segment.

Crestline Homes.In 2007, the Company sold 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 2007 and 2006. 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.

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

F-16

---



wholly
owned subsidiary, United States Pipe and Foundry Company, LLC, ("U.S. Pipe") was contributed to Mueller Water.

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. 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.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.

The
table below presents the significant components of operating results included in income (loss) from discontinued operations (primarily Kodiak, Crestline and Mueller Water) for the
years ended December 31, 2008, 2007 and 2006 (in thousands).

For the years ended December 31,2008

2007

2006Net sales and revenues

$
15,570

$
13,909

$
1,829,312Income (loss) from discontinued operations before income tax expense and minority interest

$
(33,571
)
$
(21,234
)
$
93,270Income tax (expense) benefit


12,017


8,231


(40,054
)Minority interest








(11,144
)Income (loss) from discontinued operations

$
(21,554
)
$
(13,003
)
$
42,072


F-17

---



The
assets and liabilities of Kodiak included as discontinued operations in the consolidated balance sheet as of December 31, 2008 and 2007 are shown below (in thousands).

December 31,2008

2007Current and other long-term assets

$
4,745

$
5,076Property, plant and equipment, net(1)


1,922


20,572Total assets

$
6,667

$
25,648Accounts payable

$
466

$
142Accrued expenses


112


22Other long-term liabilities


750


365Total liabilities

$
1,328

$
529


---

Acquisitions

Taft Coal Sales & Associates.On September 2, 2008, the Company, through its wholly owned subsidiary United Land
Corporation, acquired
all of the outstanding common shares of Taft Coal Sales & Associates ("Taft") for $23.5 million which includes a cash payment of $20.1 million, including $0.3 million of
acquisition costs and the assumption of $3.4 million of debt, which was immediately paid off. The fair value of assets acquired and liabilities assumed totaled $71.7 million and
$51.6 million, respectively. Taft, located in Jasper, Alabama, operates a surface steam and industrial coal mine and primarily mines coal for the industrial and electric utility markets. The
acquisition of Taft, included in the Natural Resources segment, expands the Company's coal production base in the southern Appalachian coal region of Alabama.

The
financial results of Taft have been included in the Company's consolidated financial statements beginning on September 2, 2008. The assets acquired and liabilities assumed
were recorded at their estimated fair values as of the acquisition date. Fair values were determined by using the income, cost and market price valuation methods as deemed appropriate by management.
The purchase price allocation, while substantially complete, is subject to future adjustments based on the resolution of certain contractual obligations and contingencies. The resolution of these
items is expected to be resolved during 2009. The following table summarizes the allocation of the purchase price based on the fair value of the net assets acquired and liabilities assumed at the
acquisition date (in thousands):

AmountCash

$
3,011Receivables


2,370Inventory


1,865Other assets


547Land


2,505Mineral interests


44,044Mine equipment


16,929Buildings


408Total assets

$
71,679Accounts payable


1,687Other accrued expenses


8,091Notes payable


3,363Deferred tax liability


8,710Unfavorable coal supply agreements


29,728Total liabilities


51,579Purchase price paid

$
20,100


F-18

---



Tuscaloosa Resources, Inc.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 and the remainder was paid in 2008. 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 has been finalized as all adjustments based on the resolution of a working capital adjustment,
certain loss contingencies and tax matters, as provided in the purchase agreement, have been resolved.

NOTE 4Restructurings and Impairments

Natural ResourcesAs previously discussed in Note 3, the Company acquired Taft in September 2008. A significant portion of the purchase price
was allocated to the mineral interests, valued at $44.0 million. The initial value assigned to the mineral interests was determined using a discounted cash flow approach incorporating
market-based assumptions when available. One of the significant assumptions used to determine the discounted cash flows associated with the minerals was
the market price of similar coals at the date of acquisition and the future market pricing forecasts that existed as of that date. Subsequent to September 2, 2008, the market price and future
forecasted market prices for similar coals dropped significantly, triggering an impairment test of the mineral interests under the guidance of SFAS 144,"Accounting for
the Impairment or Disposal of Long-Lived Assets."The results of the impairment test indicated that there was an asset impairment and, as a result, the Company
recorded a $32.4 million impairment charge in the 2008 fourth quarter.

HomebuildingIn February 2008, the Company announced a restructuring of Homebuilding, resulting in the closure of 36 underperforming Jim Walter Homes
sales centers. As such, the Company recorded a restructuring charge of $6.8 million in the 2008 first quarter, of which $4.3 million related to the impairment of property, plant and
equipment, $1.7 million related to severance obligations due to a 25% reduction in workforce and $0.8 million related to lease obligations of closed sales centers.

During
the third quarter of 2008, Homebuilding recorded a charge of $6.5 million, of which $6.0 million related to the impairment of property, plant and equipment and
$0.5 million related to additional severance obligations. As a result of continued losses in the Homebuilding segment, the Company reviewed its long-lived assets for potential
impairment at September 30, 2008. Projected undiscounted cash flows generated from the operating sales centers were lower than the net book value of the model park assets at those sales
centers. As a result, the estimated fair values of the model parks were compared to book values, resulting in an impairment charge of $6.0 million. The estimated fair values were determined
based on Homebuilding's sales of similar assets in 2008.

In
December 2008, the Company made the decision to close Homebuilding. As a result, the Company recorded a charge of $7.4 million, of which $3.2 million related to the
impairment of property, plant and equipment, $3.3 million related to severance obligations, and $0.9 million related to other asset write-downs. The asset impairment charges reflect a
further decline in estimated fair values since September 30, 2008.

FinancingDuring 2008, the Company recorded a charge of $10.9 million for the impairment of Financing's goodwill. As discussed in
Note 3, the Company announced plans to separate its Financing segment via a spin-off to Walter shareholders and merger with Hanover. As a result of this decision, the Company
analyzed goodwill for potential impairment. The fair value of the reporting unit was determined using a discounted cash flow approach which indicated that the carrying value exceeded the

F-19

---



fair
value and that the implied value of goodwill was $0. The discount rate of interest used to determine both the fair value of the reporting unit and the implied value of goodwill was a contributing
factor in the determination of this impairment charge. The continued increase in perceived risk in the financial services markets resulted in a significant increase in the discount rate applied to
projected future cash flows, as compared to the discount rate applied to similar analyses performed in previous periods.

The
charges as described above appear as restructuring and impairment charges in the 2008 statement of operations.

The
following table summarizes the impairment and restructuring activity for the year ended December 31, 2008 (in thousands):

Balance at
January 1,
2008

Restructuring
and Impairment
Charges

Cash
Payments

Asset
Impairments

Balance at
December 31,
2008FinancingImpairment of goodwill

$


$
10,895

$


$
(10,895
)
$
HomebuildingImpairments of property, plant and equipment





13,522





(13,522
)

Severance obligations





5,506


(1,863
)




3,643Writedown of other assets





864





(864
)

Lease obligations





785


(636
)




149Natural ResoursesImpairments of mineral interests





32,386





(32,386
)

Total

$


$
63,958

$
(2,499
)
$
(57,667
)
$
3,792


The
remaining liabilities related to the restructuring are expected to be paid in 2009.

NOTE 5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 shares of the Company's common stock, as restated to reflect the modification for the Mueller Water spin-off, 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 were 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 or over three years in equal annual increments. 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

F-20

---



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 SFAS 123(R).

For
the years ended December 31, 2008, 2007 and 2006, the Company recorded stock-based compensation expense related to equity awards of Walter Industries, Inc. in its
continuing operations of approximately $9.5 million, $9.1 million, and $8.1 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 $3.3 million, $3.2 million, and $2.9 million for such years, respectively.

A
summary of activity related to stock options under the Equity Award Plans during the year ended December 31, 2008, 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, 2007


1,716,277

$
22.98Granted


113,918


61.79Exercised


(431,041
)

18.58Cancelled


(32,262
)

26.11Outstanding at December 31, 2008


1,366,892

$
27.52


7.17

$
2,436Exercisable at December 31, 2008


819,101

$
22.16


6.58

$
2,436


Weighted
average assumptions used to determine the grant-date fair value of options granted under the Equity Award Plans were:

For the year ended December 31,2008

2007

2006Risk free interest rate


2.81
%

4.72
%

4.67
%Dividend yield


0.60
%

0.78
%

0.30
%Expected life (years)


5.10


4.29


5.20Volatility


41.52
%

34.49
%

36.76
%Forfeiture rate


2.41
%

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.

F-21

---



A
summary of activity related to restricted stock units under the Equity Award Plans during the year ended December 31, 2008, is as follows:

Shares

Aggregate
Intrinsic Value
($000)

Weighted
Average
Contractual Term
in YearsOutstanding at December 31, 2007


325,034Granted


112,590Exercised


(78,498
)Cancelled


(18,303
)Outstanding at December 31, 2008


340,823

$
5,968


2.56


The
weighted-average grant-date fair values of stock options granted during the years ended December 31, 2008, 2007 and 2006 were $23.86, $9.43 and $11.48,
respectively. The weighted-average grant-date fair values of restricted stock units granted during the years ended December 31, 2008, 2007 and 2006 were $74.69, $28.02 and $32.85,
respectively. The total amount of cash received from exercise of stock options was $8.0 million, $1.4 million and $4.7 million for the years ended December 31, 2008, 2007
and 2006, respectively. The total intrinsic value of stock awards exercised or converted during 2008 was $19.5 million and $4.0 million, respectively, and the total intrinsic value of
stock awards exercised or converted during 2007 was $7.0 million and $26.4 million, respectively. The collective intrinsic value of stock award exercised or converted during 2006 was
$26.4 million. The total fair value of shares vested during the years 2008, 2007 and 2006 were $5.9 million, $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 $8.0 million,
$6.8 million and $10.9 million as of December 31, 2008, 2007 and 2006, respectively; these costs are to be recognized over a weighted average period of 1.8 years,
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 JWH Holding
Company, 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 the Financing and Homebuilding businesses. The exercise price of these options
was equal to the fair value at date of grant. These options vest over a three-year period and expire in ten years. As of December 31, 2008, none of the options have been forfeited
or exercised. Exercisable options totaled 67% and 33% as of December 31, 2008 and 2007, 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
%


F-22

---



Compensation
expense for the years ended December 31, 2008 and 2007, totaled $0.9 million and $2.6 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 these share based compensation arrangements in the Company's
continuing operations in the statements of operations was $0.4 million in 2008 and $1.0 million in 2007 and 2006. As of December 31, 2008, there was $0.1 million of
unrecognized compensation cost that is expected to be recognized in the first quarter of 2009. In conjunction with the planned spin-off of Financing and the closure of Homebuilding, these
awards have been terminated by agreement in 2009, in the case of Homebuilding, and will be cancelled and replaced at the time of the spin-off, which is expected to occur in the second
quarter of 2009, in the case of Financing.

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, 2008, 2007 and 2006 were
approximately 38,000, 50,000 and 35,000, respectively, and the Company's contributions recognized as expense were approximately $0.2 million, $0.2 million and $0.3 million,
respectively, during such years.

NOTE 6Restricted Short-Term Investments

Restricted short-term investments at December 31, 2008 and 2007 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")
($49.0 million and $68.8 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 ($7.3 million and $6.4 million at December 31, 2008 and 2007, respectively).

NOTE 7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.

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 2.13% to 13.66% 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

F-23

---



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.

After
May 1, 2008, WMC no longer provides financing to new customers of JWH. See Note 12.

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

December 31,2008

2007Instalment notes receivable

$
1,572,173

$
1,616,753Mortgage loans


216,484


234,298Less: Allowance for losses


(18,969
)

(13,992
)Instalment notes receivable, net(1)(2)(3)(4)

$
1,769,688

$
1,837,059


---

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

For the years ended December 31,2008

2007

2006Balance at beginning of year

$
13,992

$
13,011

$
12,489Provisions charged to income


21,315


13,889


9,062Charge-offs, net of recoveries


(16,338
)

(12,908
)

(8,540
)Balance at end of year

$
18,969

$
13,992

$
13,011


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-24

---



NOTE 8Receivables

Receivables are summarized as follows (in thousands):

December 31,2008

2007Trade receivables

$
113,136

$
60,534Other receivables


68,806


23,218Less: Allowance for losses


(5,341
)

(2,741
)Receivables, net

$
176,601

$
81,011


At
December 31, 2008, other receivables includes $29.4 million relating to a Black Lung Excise Tax refund claim.

NOTE 9Inventories

Inventories are summarized as follows (in thousands):

December 31,2008

2007Finished goods

$
45,641

$
25,298Goods in process


9,743


19,598Raw materials and supplies


29,547


16,021Repossessed houses held for resale


48,198


36,407Total inventories

$
133,129

$
97,324


NOTE 10Property, Plant and Equipment

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

December 31,2008

2007Land

$
56,302

$
55,569Land improvements


18,872


20,659Mineral interests


34,069


23,781Buildings and leasehold improvements


70,630


69,536Mine development costs


99,400


56,274Machinery and equipment


489,984


351,038Construction in progress


74,570


110,080Total


843,827


686,937Less: Accumulated depreciation


(328,409
)

(272,474
)Net

$
515,418

$
414,463


F-25

---



NOTE 11Income Taxes

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

For the years ended December 31,2008

2007

2006Current

Deferred

Total

Current

Deferred

Total

Current

Deferred

TotalFederal

$
2,999

$
(91,104
)
$
(88,105
)
$
52,820

$
(8,180
)
$
44,640

$
51,892

$
8,395

$
60,287State and local


13,723


(1,416
)

12,307


12,507


1,114


13,621


6,849


6,847


13,696Total

$
16,722

$
(92,520
)
$
(75,798
)
$
65,327

$
(7,066
)
$
58,261

$
58,741

$
15,242

$
73,983


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

For the years ended December 31,2008

2007

2006Income from continuing operations before income tax expense (benefit)

$
292,336

$
183,263

$
230,280Tax provision (benefit) at statutory tax rate of 35%

$
102,318

$
64,142

$
80,598Effect of:Worthless stock deduction


(167,002
)




Excess depletion benefit


(20,837
)

(12,897
)

(14,667
)State and local income tax, net of federal effect


6,219


8,025


8,636Domestic production benefits





(824
)

(5,698
)Non-deductible debt conversion expense








6,779Other


3,504


(185
)

(1,665
)Tax expense (benefit) recognized

$
(75,798
)
$
58,261

$
73,983


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

|                                                               |                                                      |                                |         |         |          |         |         |          |  
|-------------------------------------------------------------- | ---------------------------------------------------- | ------------------------------ | ------- | ------- | -------- | ------- | ------- | -------- | -
|
|
|Deferred tax assets:                                           |                                                      |                                |         |         |          |         |        
|                                                               | Allowance for loan losses                            |                                | $       | 7,157   |          | $       | 6,271   |         
|                                                               | Inventories                                          |                                |         | 2,761   |          |         | 1,598   |         
|                                                               | Net operating loss/capital loss/credit carryforwards |                                |         | 102,093 |          |         | 7,122   |         
|                                                               | Accrued expenses                                     |                                |         | 21,722  |          |         | 26,310  |         
|                                                               | Stock award compensation                             |                                |         | 9,660   |          |         | 7,577   |         
|                                                               | Workers' compensation obligations                    |                                |         | 12,032  |          |         | 9,859   |         
|                                                               | Unfavorable coal supply agreements                   |                                |         | 10,443  |          |         |        |         
|                                                               | Contingent interest                                  |                                |         | 26,610  |          |         | 25,544  |         
|                                                               | Postretirement benefits other than pensions          |                                |         | 145,016 |          |         | 131,522 |         
|                                                               | Pension obligations                                  |                                |         | 27,124  |          |         | 9,725   |         
|                                                               |                                                      |                                |         |         |         
|                                                               |                                                      |                                | 364,618 |         |          | 225,528 |        
|Less: valuation allowance                                      |                                                      |                                |        |         |          | (6,639  | )      
|                                                               |                                                      |                                |         |         |         
|                                                               |                                                      | Total deferred tax assets      |         |         | 364,618  |         |         | 218,889  |  
|                                                               |                                                      |                                |         |         |         
|Deferred tax liabilities:                                      |                                                      |                                |         |         |          |         |        
|                                                               | Interest income on instalment notes                  |                                |         | (71,287 | )        |         | (86,947 | )       
|                                                               | Prepaid expenses                                     |                                |         | (22,304 | )        |         | (7,778  | )       
|                                                               | Depreciation                                         |                                |         | (69,612 | )        |         | (38,328 | )       
|                                                               |                                                      |                                |         |         |         
|                                                               |                                                      | Total deferred tax liabilities |         |         | (163,203 | )       |         | (133,053 | )
|                                                               |                                                      |                                |         |         |         
|Net deferred tax assets applicable to continuing operations(1) |                                                      | $                              | 201,415 |         | $        | 85,836  |        
|                                                               |                                                      |                                |         |         |         

---

F-26

---



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

|                                   |  |   |        |   |   |       |   |   |       |  
|---------------------------------- |  | - | ------ | - | - | ----- | - | - | ----- | -
|
|
|Balance at beginning of period     |  | $ | 6,639  |   | $ | 6,708 |   | $ | 7,128 |  
|Additions charged to tax provision |  |   | 3,220  |   |   |      |   |   |      |  
|Reductions                         |  |   | (9,859 | ) |   | (69   | ) |   | (420  | )
|                                   |  |   |        |   |   |       |  
|Balance at end of period           |  | $ |       |   | $ | 6,639 |   | $ | 6,708 |  
|                                   |  |   |        |   |   |       |  

The
Company recorded a benefit of $167.0 million from a worthless stock deduction as a result of the deemed liquidation of the Company's Homebuilding business on
December 31, 2008. The change in valuation allowances recorded as a component of income tax expense at December 31, 2008 consists primarily of an increase due to current year state tax
benefits from losses at Homebuilding and a decrease in the NOL carryforward due to the deemed liquidation of the Homebuilding business.

The
Company has Federal net operating loss carryforwards of approximately $306.4 million that expire beginning 2028 and Alabama net operating loss carryforwards at Sloss
Industries Corporation of approximately $7.8 million that would expire beginning in 2020. The Company believes that the losses will be utilized within the carryforward period due to expected
profitability of operations and tax planning strategies.

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 to eleven years depending on jurisdiction.

The
Internal Revenue Service ("IRS") has completed its audits of the Company's federal income tax returns for the years ended May 31, 2000 through December 31, 2005. The
IRS only 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 unresolved issues 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

F-27

---



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"), which prescribes the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. 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 beginning of year         |  | $ | 49,975 |   | $ | 53,287 |  
|Increases/(Decreases) for tax positions taken in prior years |  |   | 2,597  |   |   | (4,190 | )
|Increases in tax positions for the current year              |  |   | 876    |   |   | 1,305  |  
|Increases/(Decreases) for changes in temporary differences   |  |   | 1,191  |   |   | (427   | )
|Decreases relating to settlements with taxing authorities    |  |   | (4,978 | ) |   |       |  
|                                                             |  |   |        |   |  
|Gross unrecognized tax benefits at end of year               |  | $ | 49,661 |   | $ | 49,975 |  
|                                                             |  |   |        |   |  

The
total amount of net unrecognized tax benefits that, if recognized, would affect the effective tax rate by $35.5 million at December 31, 2008. 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, 2008, 2007 and 2006,
interest expense includes $6.4 million, $9.2 million and $4.7 million, respectively, for interest accrued on the liability for unrecognized tax benefits. As of December 31,
2008, the Company had accrued interest and penalties related to the unrecognized tax benefits of $82.7 million. Due to the expected spin-off of the financing business, it is

F-28

---



reasonably
possible that the Company's gross unrecognized tax benefits balance may change within the next twelve months by $9.6 million.

NOTE 12Debt

Debt consisted of the following (in thousands):

|                                    |                                          |       |           |         |           |           |         |           |  |         |   |  |         |  | 
|----------------------------------- | ---------------------------------------- | ----- | --------- | ------- | --------- | --------- | ------- | --------- |  | ------- | - |  | ------- |  | 
|
|
|
|Mortgage-Backed/Asset Backed Notes: |                                          |       |           |         |           |           |         |           |  |         |   |  |        
|                                    | Trust IV Asset Backed Notes              |       | $         | 144,950 |           | $         | 171,536 |           |  | 8.33    | % |  | 2030    | 
|                                    | Trust VI Asset Backed Notes              |       |           | 121,776 |           |           | 135,242 |           |  | 7.42    | % |  | 2035    | 
|                                    | Trust VII Asset Backed Notes             |       |           | 106,874 |           |           | 115,126 |           |  | 6.34    | % |  | 2036    | 
|                                    | Trust VIII Asset Backed Notes            |       |           | 120,506 |           |           | 134,235 |           |  | 7.79    | % |  | 2038    | 
|                                    | Trust IX Variable Funding Loan           |       |           |        |           |           | 95,100  |           |  |         |   |  |         | 
|                                    | Trust X Asset Backed Notes               |       |           | 183,489 |           |           | 201,540 |           |  | 6.30    | % |  | 2036    | 
|                                    | Trust XI Asset Backed Notes              |       |           | 167,448 |           |           | 179,350 |           |  | 5.51    | % |  | 2038    | 
|                                    | Trust XIV Variable Funding Loan          |       |           |        |           |           | 94,100  |           |  |         |   |  |         | 
|                                    | 2004-1 Trust Asset Backed Notes          |       |           | 160,277 |           |           | 173,712 |           |  | 6.64    | % |  | 2037    | 
|                                    | 2005-1 Trust Asset Backed Notes          |       |           | 172,921 |           |           | 190,122 |           |  | 6.15    | % |  | 2040    | 
|                                    | 2006-1 Trust Asset Backed Notes          |       |           | 194,580 |           |           | 216,155 |           |  | 6.28    | % |  | 2040    | 
|                                    |                                          |       |           |         |           |           |         |           |  |         |  
|                                    |                                          |       | 1,372,821 |         |           | 1,706,218 |         |           |  |         |   |  |        
|                                    |                                          |       |           |         |           |           |         |           |  |         |  
|Other debt:                         |                                          |       |           |         |           |           |         |           |  |         |   |  |        
|                                    | 2005 Walter term loan(1)                 |       |           | 138,934 |           |           | 218,517 |           |  | 3.59    | % |  | 2012    | 
|                                    | 2005 Walter revolving credit facility    |       |           | 40,000  |           |           |        |           |  | 2.80    | % |  | 2010    | 
|                                    | Convertible senior subordinated notes(2) |       |           |        |           |           | 785     |           |  |         |   |  |         | 
|                                    | Other(3)                                 |       |           | 46,451  |           |           | 6,558   |           |  | Various |   |  | Various | 
|                                    |                                          |       |           |         |           |           |         |           |  |         |  
|                                    |                                          |       | 225,385   |         |           | 225,860   |         |           |  |         |   |  |        
|                                    |                                          |       |           |         |           |           |         |           |  |         |  
|                                    |                                          | Total |           | $       | 1,598,206 |           | $       | 1,932,078 |  |         |   |  |         |  | 
|                                    |                                          |       |           |         |           |           |         |           |  |         |  

The
Company's debt repayment schedule, excluding interest, as of December 31, 2008 is as follows (in thousands):

|                                      |  |   |        |  |   |        |  |   |       |  |   |         |  |   |       |  |   |       | 
|------------------------------------- |  | - | ------ |  | - | ------ |  | - | ----- |  | - | ------- |  | - | ----- |  | - | ----- | 
|
|
|2005 Walter term loan                 |  | $ | 1,436  |  | $ | 1,436  |  | $ | 1,436 |  | $ | 134,626 |  | $ |      |  | $ |      | 
|2005 Walter revolving credit facility |  |   |       |  |   | 40,000 |  |   |      |  |   |        |  |   |      |  |   |      | 
|Other debt                            |  |   | 12,044 |  |   | 7,622  |  |   | 7,916 |  |   | 8,523   |  |   | 8,563 |  |   | 1,783 | 
|                                      |  |   |        |  |   |        |  |   |       |  |   |         | 
|                                      |  | $ | 13,480 |  | $ | 49,058 |  | $ | 9,352 |  | $ | 143,149 |  | $ | 8,563 |  | $ | 1,783 | 
|                                      |  |   |        |  |   |        |  |   |       |  |   |         | 

---

F-29

---



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

At December 31, 2008, non-recourse mortgage-backed/asset-backed notes outstanding totaled $1.4 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. Prior to April 30, 2008, Trust IX and Trust XIV were borrowers under a $150.0 million and a $200.0 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. On April 30, 2008, the Company repaid all outstanding borrowings and
terminated these facilities using proceeds from the amended 2005 Walter Credit Agreement. With the termination of the warehouse facilities, the Company is no longer reliant on the availability of
mortgage warehouse facilities or the mortgage-backed securitization market.

Effective
May 1, 2008, WMC no longer funds new originations for customers of the Homebuilding segment. However, the backlog of homes with signed contracts and those which were
under construction as of May 1, 2008, will be funded by WMC. As of December 31, 2008, an estimated 20 homes remain in the backlog, representing a total of approximately
$2.7 million in value, to be funded by WMC in 2009. The Company will finance these WMC instalment notes receivable with operating cash flows or funds provided by the 2005 Walter Credit
Agreement.

2005 Walter Credit Agreement

In 2005, Walter entered into a $675.0 million credit agreement ("2005 Walter Credit Agreement") which included, prior to its
amendment in April 2008 (1) an amortizing term loan facility with an initial aggregate principal amount of $450.0 million, $138.9 million of which
was outstanding as of December 31, 2008 with a weighted average interest rate of 3.59%, and (2) an initial $225.0 million revolving credit facility which provides for loans and
letters of credit. The 2005 Walter Credit Agreement is a secured obligation of the Company and substantially all of its wholly owned domestic subsidiaries. The term loan requires quarterly principal
payments of $0.4 million through October 3, 2012, at which time the remaining outstanding principal is due.

On
April 30, 2008, Walter amended the 2005 Walter Credit Agreement to allow an additional $250.0 million of borrowings under the revolving credit facility, thereby
increasing the revolving credit facility to $475.0 million. Available funds of $214.8 million were used to repay principal, interest and fees and terminate the Mid-State
Trust IX and Mid-State Trust XIV mortgage warehouse facilities, which were due to mature in 2008. The amendment also increased the interest rate on the revolving credit facility and the
term loan to LIBOR plus 300 basis points. The commitment fee on the unused portion of the revolving facility also increased from 0.375% per year to 0.5% per year. In addition, the amended 2005 Walter
Credit Agreement contains a reducing revolver commitment feature, where the total available revolver commitment may not exceed $400.0 million at March 31, 2009, $350.0 million at
June 30, 2009, $300.0 million at September 30, 2009, and $250.0 million at December 31, 2009.

Certain
other terms, including affirmative and negative covenants as well as restrictions on the Company's ability to engage in specified activities, were also amended and include, but
are not limited to, increased indebtedness and approval of certain activities associated with the Company's strategic initiatives in the Homebuilding and Financing businesses.

In
connection with the amendment to the 2005 Walter Credit Agreement, the Company incurred $3.9 million of refinancing fees. These fees were deferred and are being amortized over
the remaining life of the revolving credit facility.

F-30

---



During 2008, the Company borrowed $340.0 million under the revolving credit facility. On June 16, 2008, the Company completed an offering of shares of its common stock and
received $280.5 million of net proceeds, as more fully discussed in Note 14. The net proceeds from the offering were used to repay $77.9 million on the outstanding term loan and
$202.5 million on the revolving credit facility. Additional repayments on the revolving credit facility during 2008 totaled $97.5 million, leaving a balance of $40.0 million at
December 31, 2008.

Under
the terms of the Company's amended 2005 Walter Credit Agreement, availability under the revolving credit facility was reduced from $475.0 million to $373.8 million in
connection with the completion of the stock offering. As of December 31, 2008, the Company had $58.2 million in outstanding stand-by letters of credit and
$275.6 million of availability for future borrowings under the revolving credit facility.

In
connection with the repayments discussed above, the Company recognized additional amortization of $3.1 million of previously deferred financing fees. This amortization charge
is included in interest expense in the 2008 statement of operations.

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.

Other Debt

In October 2008, the Company entered into a $32.3 million equipment financing arrangement for certain previously procured mining
equipment. This facility requires monthly payments using a commercial mortgage style amortization, carries an interest rate of 1-month LIBOR plus 375 basis points, will mature in the first
quarter of 2014 and is secured by the financed equipment. At December 31, 2008, there was $31.9 million outstanding at an interest rate of 4.21%. In addition, in 2008, the Company
entered into a $9.4 million capital lease arrangement to procure certain mining equipment. The capital lease covers a sixty month period and has an implicit interest rate of 9.78%. At
December 31, 2008 there was a balance remaining of $9.1 million.

Interest Rate Hedge Agreements

Prior to their termination on April 1,2008, the Company held multiple interest rate hedge agreements with various counterparties
with an aggregate notional value of $215.0 million, the objective of which was to protect against changes in the benchmark interest rate on the forecasted issuance of mortgage-backed notes in a
securitization (the "Securitization Hedges"). At March 31, 2008, these Securitization Hedges no longer qualified for hedge accounting treatment because the Company no longer planned to access
the distressed securitization market. As a result, the Company recognized a loss on interest rate hedge ineffectiveness of $17.0 million in the first quarter of 2008. On April 1, 2008,
the Company settled the Securitization Hedges for a payment of $17.0 million. No similar hedges remain outstanding at December 31, 2008.

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 was 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

F-31

---



payments
on its 2005 Walter Credit Agreement. The structure of the hedge was a three-year collar contract with a floor of 4.25% and a cap of 5.69%. The collar agreement called for the
Company to make fixed rate payments over the term of the hedge when stated three-month LIBOR rates were below the floor and to receive payments from the counter-party
when the three-month LIBOR was above the cap. In November 2008, the Company settled the interest rate hedge agreement as expected.

On
December 30, 2008, the Company entered into an interest rate hedge agreement with a notional value of $31.5 million. The objective of the hedge is to protect against the
variability in expected future cash flows attributable to changes in the benchmark interest rate related to 62 of the 64 monthly interest payments required under the equipment financing
arrangement for a new longwall shield system entered into on October 21, 2008. The interest rate on the debt is subject to change due to fluctuations in the benchmark interest rate of
1-month LIBOR. The structure of the hedge is a 62 month amortizing interest rate swap with a 5.59% fixed rate and fixed rate and floating rate payment dates effective
February 1, 2009. It is anticipated that the hedge will be settled upon maturity and will be 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 will be recorded in accumulated other comprehensive income (loss).

The
fair value of interest rate hedges outstanding at December 31, 2008 and 2007 was $0 and a liability of $9.4 million, respectively. During 2008, 2007 and 2006, the
Company recorded an unrealized gain (loss) from interest rate hedge agreements, net of tax, of $0 million, ($6.1) million and $0.2 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.

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 are no longer 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.

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 used a September 30 measurement date and was required to adopt this
provision on December 31, 2008. Upon adoption, the Company changed its valuation measurement date to December 31, 2008. As a result of the change in valuation date during 2008, plan year
2008 consisted of fifteen months beginning October 1, 2007 and ending December 31, 2008. Plan

F-32

---



year
2007 consisted of twelve months beginning October 1, 2006 and ending September 2007. The amounts recognized for all the Company's pension and postretirement benefit plans are as follows:

Pension Benefits

Other BenefitsDecember 31, 2008

December 31, 2007

December 31, 2008

December 31, 2007(in thousands)Accumulated benefit obligation

$
185,207

$
173,546

$
369,055

$
339,168Change in projected benefit obligation:Benefit obligation at beginning of year

$
189,547

$
189,443

$
339,168

$
334,513Service cost


5,012


4,058


3,765


3,130Interest cost


15,017


10,899


26,884


19,863Amendments


15








15,445Actuarial loss/(gain)


962


(5,254
)

21,918


(15,683
)Addition of plan, Taft








2,090


Benefits paid


(12,263
)

(9,599
)

(24,643
)

(18,100
)Special termination benefits








(127
)

Benefit obligation at end of year

$
198,290

$
189,547

$
369,055

$
339,168Change in plan assets:Fair value of plan assets at beginning of year

$
163,841

$
141,478

$


$
Actual (loss)/gain on plan assets


(47,049
)

22,970





Employer contributions


23,741


8,992


24,643


18,100Benefits paid


(12,263
)

(9,599
)

(24,643
)

(18,100
)Fair value of plan assets at end of year

$
128,270

$
163,841

$


$
Unfunded status of the plan

$
(70,020
)
$
(25,706
)
$
(369,055
)
$
(339,168
)Post-measurement date contributions


N/A


624


N/A


4,134Net amount recognized

$
(70,020
)
$
(25,082
)
$
(369,055
)
$
(335,034
)Amounts recognized in the consolidated balance sheet:Other liabilities

$
(70,020
)
$
(26,274
)
$


$
Accumulated postretirement benefits obligation








(369,055
)

(335,034
)Other assets





1,192





Net amount recognized

$
(70,020
)
$
(25,082
)
$
(369,055
)
$
(335,034
)Amounts recognized in accumulated other comprehensive income, pre-taxPrior service cost (credit)

$
1,795

$
2,160

$
2,850

$
(969
)Net actuarial loss


100,222


37,143


122,139


106,573Net amount recognized

$
102,017

$
39,303

$
124,989

$
105,604


F-33

---



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

Pension Benefits

Other BenefitsFor the years ended December 31,

For the years ended December 31,2008

2007

2006

2008

2007

2006Components of net periodic benefit cost:Service cost

$
4,010

$
4,058

$
3,745

$
3,012

$
3,130

$
2,122Interest cost


12,013


10,899


9,465


21,620


19,863


14,928Expected return on plan assets


(14,528
)

(12,237
)

(11,385
)







Amortization of prior service cost


305


415


415


(3,175
)

(3,550
)

(4,402
)Amortization of net loss


2,459


4,573


4,226


5,037


7,291


4,953Curtailment gain

















(4,061
)Net periodic benefit cost for continuing operations

$
4,259

$
7,708

$
6,466

$
26,494

$
26,734

$
13,540


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

December 31,2008

2007Projected benefit obligation

$
198,290

$
164,526Accumulated benefit obligation


185,207


148,525Fair value of plan assets


128,270


138,253


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 2009 are as follows (in thousands):

Pension Benefits

Other BenefitsPrior service cost

$
305

$
(2,959
)Net actuarial loss


9,356


6,297Net amount to be recognized

$
9,661

$
3,338


Changes
in plan assets and benefit obligations recognized in other comprehensive income as (income) loss in 2008 are as follows (in thousands):(1)

Pension Benefits

Other Benefits

TotalCurrent year net actuarial loss

$
66,146

$
21,869

$
88,015Amortization of actuarial loss


(3,074
)

(6,296
)

(9,370
)Amortization of prior service cost (credit)


(380
)

3,819


3,439Amendment


15





15Total


62,707


19,392


82,099Deferred taxes


(24,208
)

(7,598
)

(31,806
)Total recognized in other comprehensive (income) loss, net of taxes(1)

$
38,499

$
11,794

$
50,293


---

F-34

---



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 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 BenefitsDecember 31,

December 31,2008

2007

2006

2008

2007

2006Weighted average assumptions used to determine benefit obligations:Discount rate


6.50%


6.50%


5.90%


6.50%


6.50%


5.90%Rate of compensation increase


3.70%


3.60%


3.50%








Weighted average assumptions used to determine net periodic cost:Discount rate


6.50%


5.90%


5.40%


6.50%


5.90%


5.40%Expected return on plan assets


8.90%


8.90%


8.90%








Rate of compensation increase


3.60%


3.50%


3.50%













December 31,2008

2007

2006Pre-65

Post-65

Pre-65

Post-65

Pre-65

Post-65Assumed health care cost trend rates at December 31:Health care cost trend rate assumed for next year


7.60
%

8.40
%

8.60
%

9.40
%

8.60
%

9.40
%Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)


5.00
%

5.00
%

5.00
%

5.00
%

5.00
%

5.00
%Year that the rate reaches the ultimate trend rate


2014


2014


2013


2013


2012


2012


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-35

---



The
Company's pension plans' weighted-average asset allocations at December 31, 2008 and September 30, 2007, by asset category, are as follows:

2008

2007Asset Category:Equity securities


64
%

70
%Debt securities


35
%

29
%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
December 31, 2008 the Trust's strategic asset allocation was as follows:

Strategic Allocation

Tactical RangeAsset ClassTotal 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-36

---



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

Increase (Decrease)1-Percentage Point Increase

1-Percentage Point DecreaseHealth care cost trend:Effect on total of service and interest cost components

$
3,773

$
(3,045
)Effect on postretirement benefit obligation


43,495


(36,324
)Discount rate:Effect on postretirement service and interest cost components


(178
)

(35
)Effect on postretirement benefit obligation


(40,206
)

46,669Effect on current year postretirement benefits expense


(3,068
)

3,371Effect on pension service and interest cost components


27


(95
)Effect on pension benefit obligation


(18,473
)

22,032Effect on current year pension expense


(1,914
)

2,220Expected return on plan assets:Effect on current year pension expense


(1,271
)

1,271Rate of compensation increase:Effect on pension service and interest cost components


410


(372
)Effect on pension benefit obligation


3,230


(2,983
)Effect on current year pension expense


767


(703
)


The
Company's minimum pension plan funding requirement for 2009 is $10.3 million, which the Company expects to fully fund. The Company also expects to pay $19.3 million in
2009 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 as follows (in thousands):

Pension Benefits

Other Postretirement Benefits Before Medicare Subsidy

Medicare Part D Subsidy2009

$
13,455

$
20,613

$
1,3032010


15,299


22,480


1,3792011


12,613


23,341


1,4492012


13,399


25,481


1,4722013


14,100


26,675


1,503Years 2014 - 2018


80,310


148,376


7,589


The
Company and certain of its subsidiaries maintain profit sharing and 401(k) plans. The total cost of these plans in 2008, 2007 and 2006 was $2.1 million, $2.4 million
and $2.4 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, 2009, the calculation of the Company's combined withdrawal liability amounts to $204.3 million.

F-37

---



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 2008, 2007 and 2006 were $13.0 million, $10.4 million and $2.2 million, respectively. The increase in the 2007 multi-employer
benefits expense compared to 2006 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 June 16, 2008, the Company completed a public offering of 3,220,000 shares of its common stock at a price of $90.75 per
share. The Company received $280.5 million of net proceeds from this offering, after deducting underwriting discounts and offering expenses. The Company used the net proceeds from this offering
to repay $280.4 million of the borrowings outstanding under the Company's 2005 Walter Credit Agreement. See Note 12.

On
July 31, 2008, the Board of Directors approved an increase in the Company's regular quarterly dividend rate from $0.05 per common share to $0.10 per common share.

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. During 2008, the Company repurchased 354,256 shares under its $25.0 million share repurchase program, thereby fulfilling
the program's authorized allotment. On September 26, 2008, the Board of Directors approved a new $50.0 million share repurchase program, which is intended to replace the previously
authorized $25.0 million share repurchase program. Through December 31, 2008, the Company has repurchased 1,276,743 shares for $45.2 million under this program. On
December 31, 2008, the Company announced that its Board of Directors had authorized a $50.0 million expansion of the Company's share repurchase program. The new program began on
January 1, 2009 and purchases will be based on liquidity and market conditions. Through February 27, 2009, 1,371,756 shares for $27.9 million have been repurchased under this
program.

F-38

---



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, 2008, 2007
and 2006 are as follows (in thousands, except per share data):

For the years ended December 31,2008

2007

2006Basic

Diluted

Basic

Diluted

Basic

DilutedNumerator:Income from continuing operations

$
368,134

$
368,134

$
125,002

$
125,002

$
156,297

$
156,297Effect of dilutive securities:Interest related to 3.75% convertible senior subordinated notes, net of tax(a)











19





3,385$
368,134

$
368,134

$
125,002

$
125,021

$
156,297

$
159,682Income (loss) from discontinued operations

$
(21,554
)
$
(21,554
)
$
(13,003
)
$
(13,003
)
$
42,072

$
42,072Denominator:Average number of common shares outstanding


53,791


53,791


52,016


52,016


44,030


44,030Effect of dilutive securities:Stock options(b)





794





390





6423.75% convertible senior subordinated notes(a)











84





7,40653,791


54,585


52,016


52,490


44,030


52,078Income from continuing operations

$
6.84

$
6.74

$
2.40

$
2.38

$
3.55

$
3.07Income (loss) from discontinued operations


(0.40
)

(0.39
)

(0.25
)

(0.25
)

0.96


0.80Net income (loss) per share

$
6.44

$
6.35

$
2.15

$
2.13

$
4.51

$
3.87


---

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-39

---



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. The Company has reached an agreement for the settlement of these allegations. As a result, the Company recognized a charge of $2.4 million in 2008, which is
included in selling, general and administrative expenses in the statement of operations.

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 expanded the scope of the project which required additional sampling and testing.

The
Company has incurred costs to investigate the presence of contamination at the Sloss site and to define remediation actions to address this environmental liability in accordance with
the agreements reached with the EPA per the findings in the Phase I and Phase II investigations. In conjunction with the Phase III work plan, the Company continues to incur costs
related to defining remediation efforts and establishing a plan for remediation. At December 31, 2008, the Company has accrued an amount that is
probable and reasonably estimatable for the costs to be incurred to identify necessary remediation actions and establish a remediation plan. The amount of this accrual was not material to the
financial statements. While it is probable that the Company will incur additional future costs to remediate liabilities defined by the Phase III analysis, the amount of these costs cannot be
reasonably estimated at this time. 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.

F-40

---



Miscellaneous Litigation

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.

Purchase and Lease Obligations

The Company accounts for 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
leases are primarily for mining equipment, automobiles and office space. Purchase obligations primarily represent commitments to purchase equipment and raw materials.

Rent
expense was $9.1 million, $13.9 million, and $11.8 million for the years ended December 31, 2008, 2007 and 2006, respectively. Future minimum payments
under non-cancelable capitalized and operating leases and purchase obligations as of December 31, 2008 are (in thousands):

Capitalized
Leases

Operating
Leases

Purchase
Obligations2009

$
3,000

$
8,191

$
47,3202010


2,671


5,999


11,5292011


2,400


2,832


11,5292012


2,400


1,140


11,5292013


1,790


264


8,599Thereafter





54


Total


12,261


18,480


90,506Less: amount representing interest and other executory costs


(2,360
)Present value of minimum lease payments

$
9,901


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, receivables and accounts payable.The carrying amounts reported in the
balance sheet approximate fair value.

Instalment notes receivableInstalment notes receivable at December 31, 2008 and 2007 in the amounts of $1.8 billion and
$1.8 billion, respectively, are carried at cost. The estimated fair value of the instalment notes receivable is estimated to be $1.5 billion and $1.9 billion as of
December 31, 2008 and 2007, respectively. This value represents the estimated fair value of the instalment notes receivable, as

F-41

---



determined
by discounting the net cash flows estimated to be generated from the instalment notes receivable. 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.

DebtMortgage-backed/asset backed notes in the amount of $1.4 billion and $1.7 billon at December 31, 2008 and 2007, respectively, are
carried at cost. The estimated fair value of mortgage-backed/asset-backed notes is approximately $1.1 billion and $1.6 billion for the period ended December 31, 2008 and 2007,
respectively. For 2008, this value represents the estimated fair value of the mortgage-backed/asset backed notes, as determined by discounting the net cash outflows estimated to be used to repay the
debt. For 2007 this value is based on current yields for comparable debt issues or prices for actual transactions. During 2008, a discounted cash flow approach was used to determine fair value since
data for market trades of comparable transactions were unavailable. 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. In addition, the fair value of the
mortgage-backed/asset-backed notes may decrease if default rates on the instalment notes receivable increase.

The
Company's term loan in the amount of $138.9 million and $218.5 million at December 31, 2008 and 2007, respectively, is carried at cost. The estimated fair value
of the Company's term loan was $104.2 million and $210.0 million at December 31, 2008 and 2007, respectively based on similar transactions and yields in an active market for
similarly rated debt.

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 $0.0 and $3.1 million at December 31, 2008 and
2007, respectively. As of December 31, 2008, all convertible senior subordinated notes had been converted to shares of the Company's common stock.

The
Company's revolving credit facility of $40.0 million and $0.0 at December 31, 2008 and 2007, respectively, is carried at cost. The estimated fair value of the revolver
debt at December 31, 2008 was $28.4 million based on similar transactions and yields in an active market for similarly rated companies.

The
Company's equipment financing debt was entered into during 2008 and has a balance (carried at cost) of $31.9 million at December 31, 2008. The estimated fair value of
this equipment financing debt as of December 31, 2008 is $23.9 million based on comparable equipment financing transactions that similarly rated companies entered into at that date.

Commodity hedgesAt December 31, 2008, the Company had two contracts outstanding: one to hedge 0.3 mmbtus of natural gas or 17% of anticipated
sales for the first quarter of 2009 at a price of $9.27 per mmbtu and another to hedge 0.2 mmbtus of natural gas or 11% of anticipated sales for the first quarter of 2009 at a price of $8.75 per
mmbtu. The fair value of the unsettled commodity hedges at December 31, 2008 was an asset of $2.2 million and was recognized in accumulated other comprehensive income. 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.

The
net change in the unrealized gain on the commodity cash flow hedges was $1.3 million, net of taxes of $0.9 million and realized losses recognized in net income was
$2.5 million, net of taxes of $1.7 million, for the year ended December 31, 2008. In 2007, all gains and losses on the commodity cash flow hedges were recognized in net income and
totaled $5.3 million, net of taxes of $3.4 million.

F-42

---



The natural gas hedge agreements are valued using quoted dealer prices for similar contracts in active over-the-counter markets (Level 2 criteria). The
Company measures these financial instruments at fair value on a recurring basis. The following table summarizes the fair value of these financial instruments at December 31, 2008 by type of
inputs used (in thousands):

Assets

Total

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

Significant Other
Observable Inputs
(Level 2)

Significant
Unobservable Inputs
(Level 3)Natural gas hedge agreements

$
2,212

$


$
2,212

$



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. 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-43

---



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

For the years ended December 31,2008

2007

2006Sales and revenues:Natural Resources

$
988,385

$
638,861

$
686,925Sloss


206,230


134,918


133,033Natural Resources and Sloss


1,194,615


773,779


819,958Financing


202,702


219,736


219,551Homebuilding


118,541


245,948


242,729Financing and Homebuilding Group


321,243


465,684


462,280Other


3,968


6,366


4,773Consolidating eliminations and intersegment activity(a)


(32,756
)

(6,008
)

(14,103
)Net sales and revenues(b)

$
1,487,070

$
1,239,821

$
1,272,908Segment operating income (loss)(c)(d):Natural Resources

$
321,781

$
165,802

$
258,765Sloss


60,672


11,861


8,071Natural Resources and Sloss


382,453


177,663


266,836Financing(e)


10,986


49,589


53,987Homebuilding


(43,925
)

(5,265
)

(10,800
)Financing and Homebuilding Group


(32,939
)

44,324


43,187Other


(29,803
)

(17,262
)

(21,719
)Consolidating eliminations and intersegment activity


(1,152
)

(2,632
)

(645
)Segment operating income (loss)


318,559


202,093


287,659Less other debt interest and debt conversion costs


(26,223
)

(18,830
)

(57,379
)Income (loss) from continuing operations before income tax expense


292,336


183,263


230,280Income tax benefit (expense)


75,798


(58,261
)

(73,983
)Income from continuing operations

$
368,134

$
125,002

$
156,297Depreciation:Natural Resources

$
51,476

$
34,377

$
25,937Sloss


4,152


3,822


3,623Natural Resources and Sloss


55,628


38,199


29,560Financing


416


1,174


1,387Homebuilding


2,814


5,151


4,483Financing and Homebuilding Group


3,230


6,325


5,870Other


914


1,035


1,334Total

$
59,772

$
45,559

$
36,764Capital expenditures:Natural Resources

$
134,415

$
140,210

$
77,179Sloss


6,904


7,019


7,761Natural Resources and Sloss


141,319


147,229


84,940Financing


217


156


295Homebuilding


1,650


4,200


4,813Financing and Homebuilding Group


1,867


4,356


5,108Other


308


328


480Total

$
143,494

$
151,913

$
90,528


F-44

---



For the years ended December 31,2008

2007

2006Identifiable assets:Natural Resources

$
785,104

$
604,874

$
574,880Sloss


69,916


58,270


57,686Natural Resources and Sloss


855,020


663,144


632,566Financing


1,897,531


1,973,340


1,940,103Homebuilding


26,213


64,748


71,388Financing and Homebuilding Group


1,923,744


2,038,088


2,011,491Other


282,562


40,401


5,706Assets of discontinued operations


6,667


25,648


34,352Total

$
3,067,993

$
2,767,281

$
2,684,115


---

For the years ended December 31,2008

2007

2006Natural Resources

$
29,128

$
29,584

$
19,764Sloss


(645
)

(864
)

(680
)Financing


(456
)

(424
)

(1,544
)Homebuilding


(607
)

(592
)

(3,224
)Other


(926
)

(970
)

(776
)$
26,494

$
26,734

$
13,540


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. These charges for 2008, 2007 and 2006 were $2.0 million, $2.1 million and $2.1 million, respectively.

F-45

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NOTE 20Accounting Pronouncements Not Yet Adopted

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 does not expect the adoption of this statement, which becomes effective January 1, 2009, to have a material effect 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 can not determine 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.

F-46

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EXHIBIT INDEX

Exhibit Number



Description2(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)3.1



Amended and Restated Certificate of Incorporation of the Company (4)3.2



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)4.1



Rights Agreement, dated as of November 21, 2008, between Walter Industries, Inc. and Mellon Investor Services LLC,
as Rights Agent, which includes the Form of Right Certificate as Exhibit A and the Summary of Rights as Exhibit B (5)10.1*



Director and Officer Indemnification Agreement, dated as of March 3, 1995, among the Company and the Indemnitee parties
thereto (7)10.2*



Amended and Restated Executive Change-in-Control Severance Agreementform of10.3*



Walter Industries Executive Deferred Compensation and Supplemental Retirement Plan (8)10.4*



Amended and Restated Walter Industries, Inc. Directors' Deferred Fee Plan10.5*



Amended and Restated Walter Industries, Inc. Supplemental Pension Plan10.6*



Walter Industries, Inc. Executive Incentive Plan (10)10.6.1*



First Amendment to the Walter Industries, Inc. Executive Incentive Plan10.7*



Amended 1995 Long-Term Incentive Stock Plan of Walter Industries, Inc. (11)10.7.1*



Amendment to Amended 1995 Long-Term Incentive Stock Plan of Walter Industries, Inc.10.8*



Amended and Restated 2002 Long-Term Incentive Award Plan of Walter Industries, Inc.10.9*



Form of Restricted Stock Unit Award Agreement10.10*



Form of Non-Qualified Stock Option Agreement10.11*



Walter Industries, Inc. Amended and Restated Employee Stock Purchase Plan (13)


E-1

---



Exhibit Number



Description10.12



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)10.12.4



Amendment No. 4 to Walter Credit Agreement dated as of October 9, 2007 (18)10.12.5



Amendment No. 5 to Walter Credit Agreement dated as of April 30, 2008 (9)10.15*



Agreement dated as of August 1, 2006, between the Company and Victor P. Patrick (19)10.15.1*



Amendment dated as of December 22 2008, between the Company and Victor P. Patrick10.16*



Agreement, dated as of May 9, 2008, between the Company and Joseph J. Troy (12)10.17*



Agreement dated March 13, 2006, between the Company and George R. Richmond (20)10.17.1*



Amendment dated as of December 22, 2008, between the Company and George R. Richmond10.18*



Agreement dated as of December 23, 2008, between JWH Holding Company, LLC and Mark J. O'Brien (21)10.19*



Agreement dated as of December 23, 2008, between JWH Holding Company, LLC and Charles E. Cauthen (21)10.20*



JWH Holding Company, LLC Economic Profit Plan Document (17)10.21*



Amended and Restated 2007 Long-Term Incentive Award Plan of JWH Holding Company, LLC10.22*



JWH Holding Company, LLC Option Agreement (22)10.23*



Walter Industries, Inc. Involuntary Severance Benefit Plan10.23.1*



First Amendment to the Walter Industries, Inc. Involuntary Severance Benefit Plan21



Subsidiaries of the Company23.1



Consent of Ernst & Young LLP23.2



Consent of PricewaterhouseCoopers LLP24



Power of Attorney


E-2

---



Exhibit Number



Description31.1



Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002Chief Executive Officer and Chief Financial Officer32.1



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


---

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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