**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

**Forthe fiscal year ended September 30, 2006**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Commissionfile number: 333-117473**

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**MUELLER GROUP, LLC**

(Exact Name of Registrantas Specified in Its Charter)

| **Delaware**                                                     |   | **37-1387813**                           |
|------------------------------------------------------------------|--------|------------------------------------------|
| (State or Other  Jurisdiction of  Incorporation or Organization) |   | (I.R.S. Employer  Identification Number) |

 

**1200 Abernathy Road**

**Atlanta, GA 30328**

(Address of Principal Executive Offices)

Registrant’s telephonenumber: **(770) 206-4200**

Securities registeredpursuant to Section 12(b) of the Act: **None**

Securities registeredpursuant to Section 12(g) of the Act: **None**

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.

o Yes  x No

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.

o Yes  x No

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

x Yes  o No

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. x

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):  o Largeaccelerated filer  o Acceleratedfiler  x Non-acceleratedfiler

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

The Registrant’s votingstock was privately held as of March 31, 2006. As of December 15,2006, Mueller Group, LLC had 1 unit outstanding.

Certainitems have been omitted under the reduced disclosure format pursuant to GeneralInstruction I(2)(c) of Form 10-K for wholly-ownedsubsidiaries (reduced disclosure format).

 

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**Introductory Note**

In this Annual Report on Form 10-K (“annualreport”), (1) “Mueller Group,” the “Company,” “we,” “us” or “our” refer toMueller Group, LLC and its subsidiaries,including Mueller Co., United States Pipe and Foundry Company, LLC, and Anvil International, Inc.;(2) “Predecessor Mueller” refers to our subsidiaries of Mueller Co. andAnvil International, Inc. prior to the Acquisition (as defined below); (3) “MuellerWater” refers to our parent company, Mueller Water Products, Inc.; (4) “Walter”refers to the former parent of Mueller Water, Walter Industries, Inc. andits subsidiaries (other than us); and (5) “U.S. Pipe” refers to UnitedStates Pipe and Foundry Company, LLC, our subsidiary.

After the close of trading on December 14, 2006,Walter distributed to its shareholders approximately 1.65 shares of MuellerWater’s Series B common stock for each share of Walter common stock heldby the shareholders of record on December 6, 2006, resulting in thedistribution of 85,844,920 shares of Mueller Water’s Series B common stock.Prior to this distribution, Walter owned all of Mueller Water’s Series Bcommon stock, representing approximately 75% of Mueller Water’s economic valueand approximately 96% of the combined voting power of all of Mueller Water’svoting stock.

On October 3, 2005, Walter, through a wholly-ownedsubsidiary, acquired all outstanding shares of capital stock of PredecessorMueller and contributed U.S. Pipe (which Walter owned since 1969) toPredecessor Mueller through a series of transactions (the “Acquisition”). Foraccounting and financial statement presentation purposes, in accordance withthe accounting principles generally accepted in the United States of America (“GAAP”),U.S. Pipe is treated as the accounting acquiror of Predecessor Mueller.Accordingly, U.S. Pipe’s historical financial information is used for theCompany, and all historical financial data of the Company prior to October 3,2005 included in this annual report is that of U.S. Pipe.

Certain of the titles and logos of our productsreferenced in this annual report are our trademarks. Each trade name, trademarkor servicemark of any other company appearing in this annual report is theproperty of its holder.

Unless the contextindicates otherwise, whenever we refer in this annual report to a particularfiscal year, we mean the fiscal year ending September 30 in thatparticular calendar year. Effective December 30, 2005, U.S. Pipe changedits fiscal year to September 30, which coincides with Predecessor Mueller’sfiscal year end. We manage our business and report operations through threesegments, based largely on the products they sell and the markets they serve.Our segments are named after the lead brand in each segment: Mueller®, U.S.Pipe® and Anvil®. Such segments are consistent with the historical reportingfor both Predecessor Mueller and U.S. Pipe. Predecessor Mueller had twooperating segments, Mueller and Anvil, while U.S. Pipe operated within onesegment.

**Industry and MarketData**

In this annual report, we rely on and refer toinformation and statistics regarding economic conditions and trends, the flowcontrol product market, and our market share in the sectors of that market inwhich we compete. In particular, we have obtained general industry informationand statistics from the Congressional Budget Office and the U.S. Census Bureau.We believe that these sources of information and estimates are reliable andaccurate, but we have not independently verified them.

Although some of the companies that compete in ourparticular industry segments are publicly held as of the date of this annualreport, many are not. Accordingly, other than certain market data with respectto fire hydrants, ductile iron pipe, and water valves, no current publiclyavailable information is available with respect to the size of such markets orour relative market strength or competitive position. Our statements about ourrelative market strength and competitive position in this annual report withrespect to other products are based on our internal studies and our knowledgeof industry trends.

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**PART I**

**Item1.**                        Business

**Our Company**

We are a leading NorthAmerican manufacturer of a broad range of water infrastructure and flow controlproducts for use in water distribution networks, water and wastewater treatmentfacilities, gas distribution systems and fire protection piping systems. Webelieve we have the most comprehensive water infrastructure and flow controlproduct line in our industry and enjoy leading market positions based on theestimated market share of our key products, broad brand recognition and astrong reputation for quality and service within the markets we serve. Wemaintain one of the largest installed bases of products in the United States,including, as of September 30, 2006, approximately three million firehydrants and approximately nine million iron gate valves. Our products arespecified for use in all of the top fifty metropolitan areas in the UnitedStates.

Our large installed base,broad product range and well known brands have led to long-standingrelationships with the key distributors in our industry. Our diverse endmarkets, extensive distributor and end-user relationships, acquisition strategyand leading market position have contributed to strong operating margins andsales growth. Our net sales and operating income for the year ended September 30,2006 were $1,933.4 million and $129.0 million, respectively. Ouroperations generate significant cash flow, which will provide us withflexibility in our operating and financial strategy.

Wemanage our business and report operations through three segments, based largelyon the products they sell and the markets they serve: Mueller®, U.S. Pipe® andAnvil®. The table below illustrates each segment’s net sales to externalcustomers for the year ended September 30, 2006, as well as each segment’smajor products, brand names, market positions and end use markets.
|                                                                   | ** ** | **Mueller**                                                                                                            | ** ** | **U.S. Pipe**                                                | ** ** | **Anvil**                                                                      |
|-------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|
| ** **                                                        | ** ** | **(dollars in millions)**                                                                                              |
| **Net sales for the year ended  September 30, 2006**    |       | $804.1                                                                                                                 |       | $594.7                                                            |       | $534.6                                                                         |
| **Selected Product Lines (Market  Position in the U.S. and** |       |                                                                                                                   |       |                                                              |       |                                                                           |
| **Canada)(a)**                                                    |       | Fire Hydrants (#1)

Gate Valves (#1)

Butterfly and Ball Valves (#1)

Plug Valves (#2)

Brass Water Products (#2) |       | Ductile Iron Pressure Pipe (#1)                                   |       | Pipe Fittings and Couplings (#1)

Grooved Products (#2)                   |
| **Selected Brand**                                                |       |                                                                                                                   |       |                                                              |       |                                                                           |
| **Names**                                                         |       | Mueller®

Pratt®

James JonesTM                                                                          |       | U.S. Pipe®

TYTON®

FIELD LOK®

MJ FIELD LOK® |       | Anvil®

BeckTM

Gruvlok®                                         |
| **Primary End**                                                   |       |                                                                                                                   |       |                                                              |       |                                                                           |
| **Markets**                                                       |       | Water and  Wastewater Infrastructure                                                                                   |       | Water and  Wastewater Infrastructure                              |       | Fire Protection

Heating,  Ventilation and Air Conditioning (“HVAC”) |

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(a)              Market position information is based on management’sestimates of the overall market size and of the market share of our principalcompetitors for the relevant product lines. Where available, the managementestimates were based on data provided by third parties, including tradeassociations, distributors and customers. In other instances, the estimateswere based upon internal analysis prepared by our employees and managementbased on their expertise and knowledge of the industry.

Our segments are named after our leading brands ineach segment:

*Mueller.*   Salesof our Mueller segment products are driven principally by spending on water andwastewater infrastructure upgrade, repair and replacement and new water andwastewater infrastructure. 

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Mueller segment sales ofhydrants and iron gate valves are estimated to be approximately 50% for newinfrastructure, with the remainder for upgrade, repair and replacement.

*U.S.Pipe.*   U.S. Pipe products are sold primarily towater works distributors, contractors, municipalities, private utilities andother governmental agencies. A substantial percentage of ductile iron pressurepipe orders result from contracts that are bid by contractors or directlyissued by municipalities or private utilities. U.S. Pipe segment sales areestimated to be approximately 65% for new infrastructure, with the remainderfor upgrade, repair and replacement.

*Anvil.*   Anvilproducts are sold to a wide variety of end-users, which are primarilycommercial construction contractors. These products are typically sold to ourdistributors through Anvil’s four United States regional distributioncenters located in Illinois, Nevada, Pennsylvania and Texas and through Anvil’sCanadian distribution and sales division. A significant portion of Anvilproducts are used in the fire protection industry and in HVAC applications.

We believe that ourcurrent network of independent flow control distributors is the largest suchdistribution network in the United States and Canada. We also haveapproximately 500 inside and outside sales and sale support personnel who workdirectly with end-users, including municipalities. Our products are sold to awide variety of end-users, including municipalities, publicly and privately-ownedwater and wastewater utilities, gas utilities and construction contractors.

**Business Strategy**

Our business strategy is focused on sustaining ourmarket leadership and competitive differentiation, while growing revenues andenhancing profitability. Key elements of our strategy include:

*Capitalizingon Large, Attractive and Growing Water Infrastructure Industry.*   Weplan to capitalize on the expected water infrastructure market growth byleveraging our large and growing installed base, leading specificationposition, established and extensive distribution channels and a broad range ofleading water infrastructure and flow control products.

*AchievingOngoing Operating Synergies.*   We continue to seekopportunities to rationalize our manufacturing facilities and use oursignificant manufacturing expertise to further reduce our cost structure. Wehave implemented a synergy plan designed to streamline our manufacturingoperations, add incremental volume through combining sales efforts forcomplementary products and combine corporate-level functions to achieveoperating efficiencies. We expect to substantially complete the implementationof the synergy plan by early fiscal 2008. Through September 30, 2006, weachieved annual run-rate synergy benefits of approximately $35.0 million. Operatingincome for the year ended September 30, 2006 includes approximately $28.0million of net realized synergy benefits, excluding the restructuring chargesrelated to closing U.S. Pipe’s Chattanooga plant.

*StrengtheningRelationship with Key Distributors.*   We arefocused on enhancing close relationships with the strongest and fastest growingdistributors and on leveraging our extensive distributor network to increasesales of our existing products, introduce new products and rapidly expand salesof products of the businesses we acquire.

*Continuingto Focus on Operational Excellence.*   We will continueto pursue superior product engineering, design and innovation through ourtechnologically-advanced manufacturing processes such as lost foamcasting and automated Disa® molding machinery. We will also continue toevaluate sourcing products and materials internationally to lower our costs.

*FocusedAcquisition Strategy.**  *Wewill selectively pursue attractive acquisitions that enhance our existingproduct offerings, enable us to enter new markets, expand our technologicalcapabilities and 

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provide synergyopportunities. Over the past five years, we have acquired and successfullyintegrated eight businesses within the water infrastructure and flow controlmarkets.

*Selectively ExpandingInternationally.*   We intend to expand our currentinternational presence in sourcing and manufacturing products as well as in thesale of our products. We believe we can further utilize our manufacturingfacility in China which currently produces butterfly valve castings to produceadditional products. We are leveraging our Anvil Star (“Star”) operations,which we acquired in 2004 from Star Pipe, Inc., to establish a leadposition in the United States for the import and sale of piping componentproducts, including fittings and couplings manufactured in China and India.

**Product Segments**

We believe that we are the broadest full-line supplierof flow control products for water and wastewater infrastructure systems andpiping component systems in the United States and Canada. We have thecapability to manufacture flow control products for water and gas systems,ranging from fire hydrants to 1¤8 -inch pipefittings to 10-foot engineered valves. Our principal products are ductileiron pipe, fire hydrants, water and gas valves and a complete range of pipefittings, couplings, hangers and nipples. Our products are designed,manufactured and tested in compliance with industry standards.

We manage our business and report operations throughthree operating segments, based largely on the products they sell and themarkets they serve. Our segments are named after lead brands in each segment:Mueller®, through which we sell our hydrants and valves and other water andwastewater infrastructure and gas distribution products described below undervarious brand names including Mueller®, Henry PrattTM, Hersey® and James JonesTM;U.S. Pipe®, through which we sell ductile iron pipe under the brand name U.S.Pipe®; and Anvil®, through which we sell our pipe fittings and couplings, pipehangers, pipe nipples and related products under various brand names, includingAnvil®, BeckTM, Gruvlok® and Merit®.

Gross sales amounts areshown in the Mueller, U.S. Pipe and Anvil Products sections below and excludeestimated cash discounts and rebates, which are deducted from net sales forfinancial reporting purposes.

**Mueller Products**

***Fire******Hydrants.******  ***We believe ourMueller segment is the largest manufacturer of dry-barrel fire hydrants in theUnited States and Canada. New fire hydrant and fire hydrant part salesaccounted for approximately $197 million of our gross trade sales in 2006.Fire hydrants are sold for new water infrastructure development as well aswater infrastructure rehabilitation projects. During January 2006, weclosed the U.S. Pipe Chattanooga, Tennessee plant and transferred the hydrantproduction of that plant to Mueller’s Albertville, Alabama plant.

Our fire hydrants consist of an above-groundfire hydrant and a below-ground cast iron pipe that connects to a watermain. In dry-barrel hydrants, the valve connecting the barrel of the hydrantand the water main is located below ground at or below the frost line, whichkeeps the hydrant “dry” and the water source deep enough to ensure that thewater does not freeze. We market dry-barrel fire hydrants with the Mueller andU.S. Pipe brand names in the United States and the Mueller and Canada Valvebrand names in Canada, and manufacture them in our Albertville, Alabamafacility. We also make a limited number of wet barrel hydrants, where the valveis placed inside the above-ground hydrant and the barrel contains waterin it at all times. Wet barrel hydrants are made for the California and Hawaiimarkets and sold under the James Jones brand name.

Most municipalities have a limited number of hydrantbrands that are approved for installation within their system due to the needto maintain inventories of spare parts for emergency repairs and the desire to 

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ensure a uniform system.We believe that our large installed base of hydrants throughout the UnitedStates and Canada and our reputation for superior quality and performance,together with our incumbent specification position, have contributed to ourleading market share based on the estimated market share of our key products.Our large installed base of approximately three million hydrants also leads torecurring revenue.

***Water******and Gas Valves and Related Products.******  ***We believe ourMueller segment has the broadest product line of valves for residential waterand gas systems and that we are one of the largest manufacturers of butterflyvalves and water gate valves in the United States and Canada. Water and gasvalves and related products accounted for approximately $556 million ofour gross trade sales in 2006. Our significant industry-leading marketposition is the result of our strong brand recognition, superior quality andspecification acceptance. During January 2006, we closed the U.S. PipeChattanooga, Tennessee plant and transferred the valve production of that plantto Mueller’s Chattanooga, Tennessee plant.

All of our valve products are used to controltransmission of potable water, non-potable water or gas. Our product lineincludes butterfly, gate, tapping, check, plug and ball valves. Water valveproducts range in size from  3¤4inch to10 feet. The smaller iron gate-type valves are produced by ourChattanooga, Tennessee plant and the larger iron butterfly valves are producedby our Henry Pratt subsidiary. Brass valves are produced in our Decatur,Illinois and El Monte, California plants. Most of these valves are used inwater distribution. In October 2006, we announced the closure of the ElMonte plant and will transfer its brass valve production to our Decatur plantby July 2007.

We produce small iron valves, meter bars, and linestopper fittings for use in gas systems in our Decatur, Illinois andBrownsville, Texas plants. We also manufacture machines and tools for tapping,drilling, extraction, installation and stopping-off. These machines and toolsare designed to work with our water and gas fittings and valves as anintegrated system. We believe that we are one of the largest manufacturers inthe line stopper fittings and machines sector in the United States and Canada.

***Other******Mueller Products.******  ***Other Muellersegment products include: pipe repair products, such as repair clamps andcouplings used to repair leaks in water and gas distribution systems; municipalcastings, such as manhole covers and street drain grates; and patterns used bythe foundry and automotive industries. We market these products under theMueller®, Mueller CanadaTM, James JonesTM, and Viking Johnson® brand names. Theseproducts accounted for $58 million of Mueller segment’s gross trade salesin 2006.

**U.S. Pipe Products**

U.S. Pipe manufactures and sells a broad line ofductile iron pressure pipe, restraint joints, fittings and other cast ironproducts. Founded in 1899 and headquartered in Birmingham, Alabama, it is oneof the nation’s largest producers of ductile iron pressure pipe based onindustry shipping information provided by the Ductile Iron Pipe ResearchAssociation. In the year ended September 30, 2006, the nine months ended September 30,2005 and the year ended December 31, 2004, net sales and revenues amountedto $594.7 million, $456.9 million and $578.4 million,respectively. These sales also reflect sales of valve and hydrant product linesthat were transferred to our Mueller segment in January 2006.

U.S. Pipe manufactures andmarkets a complete line of ductile iron pipe ranging from 4 inches to 64 inchesin diameter as well as various metric sizes, in lengths up to 20 feet. Ductileiron pressure pipe is used primarily for drinking (potable) water distributionsystems, small water system grids, reinforcing distribution systems (includinglooping grids and supply lines) and is used for major water and wastewatertransmission and collection systems.

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***Anvil Products***

Anvil manufactures a variety of pipe fittings andcouplings, pipe hangers, pipe nipples and related products. Anvil’s total salesof these products were $534.6 million in 2006, of which approximately $170 million were sales of products imported orotherwise not manufactured by Anvil.

*PipeFittings and Couplings.**  *We are one of the largest manufacturers of threadedand grooved pipe fittings and couplings in the United States and Canada. Pipefittings and couplings join two pieces of pipe together. Listed below are thefour primary categories of pipe fittings and couplings that we manufacture.

*MalleableIron Fittings and Unions.**  *Malleable iron is a cast iron that is heat-treated tomake it stronger, which allows us to use a thinner wall and results in alighter product. Malleable iron is primarily used to join pipe in various gas,plumbing and HVAC applications. We manufacture these products at our Columbia,Pennsylvania foundry.

*CastIron Fittings.**  *Webelieve we are one of the largest manufacturers of cast iron fittings in theUnited States. Cast iron is the most economical threaded fittings material andis typically used in low pressure applications such as sprinkler systems andother fire protection systems. We manufacture cast iron fittings primarily inour Columbia, Pennsylvania foundry. We believe that the substantial majority ofour cast iron product is used in the fire protection industry, with theremainder used in steam and other HVAC applications.

*ThreadedSteel Pipe Couplings.**  *Webelieve we are one of the largest manufacturers of threaded steel pipecouplings in the United States and Canada. Threaded steel pipe couplings areused in the plumbing and electrical markets to join pipe and conduit and bypipe mills as threaded end protectors. We manufacture steel couplings at ourWaynesboro, Pennsylvania and Simcoe, Ontario facilities.

*GroovedFittings and Couplings.**  *We believe we are one of the largest manufacturers ofgrooved products in the United States and Canada. Unlike typical pipeconnections, where pipes are connected by screwing them into a fitting orwelding them together, grooved products use a threadless pipe-joining methodthat does not require welding. We manufacture our grooved couplings andfittings under the Gruvlok® name in our Columbia, Pennsylvania foundry. Inaddition, we purchase privately labeled products to complement our groovedproduct offerings including grooved copper and stainless steel fittings. Theseadditional purchased products complement our offering of grooved products andenable us to better serve our customers’ project requirements.

*PipeHangers.**  *Webelieve we are one of the largest manufacturers of pipe hangers in the United Statesand Canada. Pipe hangers are used to attach the pipe to the building structureand are used in sprinkler systems, HVAC applications and in power andpetrochemical plants. We manufacture our standard pipe hangers in Henderson,Tennessee and Columbia, Pennsylvania and we produce special order, orengineered, pipe hangers in North Kingston, Rhode Island. We have retained astrong core engineering staff and believe that we are the leader in technicalcompetency in this sector.

*PipeNipples.**  *Webelieve we are also one of the largest manufacturers of pipe nipples in theUnited States and Canada. The pipe nipple product line is a complementaryproduct offering and is packaged (1) with cast iron for the fireprotection market, (2) with malleable iron for the industrial market, (3) withour forged steel product line for the oilfield and chemical markets and (4) asa general plumbing market item. We produce the majority of our pipe nippleproducts at Beck Manufacturing’s facilities in Greencastle, Pennsylvania andSanta Fe Springs, California. Seamless pipe nipples are produced at ourLongview, Texas facility. Pipe nipples for the Canadian market are manufacturedat our Simcoe, Ontario facility.

*Other Piping SystemProducts.**  *Inaddition to our key products that we have described above, we sell (1) productssourced outside the United States and Canada through our Star business, whichwe acquired 

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in January 2004,(2) products that we purchase from third parties and (3) many otherproducts that we manufacture, including (A) oilfield products, such asforged steel pipe fittings, hammer unions, bull plugs and swage nipples whichare used to connect pipe in oil and gas applications and (B) electricalproducts, such as standard steel and PVC conduit couplings and elbows used tocarry wire and cable in electrical applications.

**Sales, Marketingand Distribution**

***Mueller Products***

Our Mueller segment sells its products to a widevariety of end-users, including municipalities, publicly and privately ownedwater and wastewater utilities, gas utilities and construction contractors.These products are usually sold to our distributors; distributors then sellthese products to contractors who have won a contract to construct, replace orupgrade a water, wastewater or gas system for an end-user or non-residentialfacility. In some cases, end-users of Mueller segment products, includingmunicipalities and utilities, buy products directly from Mueller, most often aspart of a program to repair, replace or upgrade existing infrastructure. Salesof our Mueller segment products are heavily influenced by the specifications inthose contracts.

Mueller has a sales force of approximately 95dedicated employee sales representatives in the field and about 65 non-employeemanufacturers’ representatives as well as a team of approximately 120 in-housemarketing and sales professionals. Our field sales and manufacturersrepresentatives call on municipalities, water companies and other end-users toensure that Mueller products, or specifications that exclusively read ontoMueller products, are specified. In addition, to ensure consistency,municipalities often require that contractors use the same products that havebeen historically used in that municipality.

For the Mueller segment,the large installed base, broad product range and well known brands have led toour strong, long-standing relationships with all of the leading distributors inthe industries Mueller serves. For most of the Mueller segment products, whichare sold through independent distributors, end-users choose the brand orestablish product specifications. We generally ship Mueller products, includinghydrants and water and gas valves, directly to distributors from our plants.Mueller’s distribution network covers all of the major markets in the UnitedStates and Canada. We typically do not have long-term contracts with ourdistributors, although we have long-term relationships with most of our topdistributors. The top two distributors for Mueller accounted, in the aggregate,for approximately 44% of our sales in 2006. The loss of either of thesedistributors could have a material adverse effect on our business. See “RiskFactors—We depend on a group of major distributors for a significant portion ofour sales; any loss of these distributors could reduce our sales and continuingconsolidation could cause price pressure.”

***U.S. Pipe Products***

U.S. Pipe products are sold primarily to water worksdistributors, contractors, municipalities, private utilities and othergovernmental agencies. A substantial percentage of ductile iron pressure pipeorders result from contracts that are bid by contractors or directly issued bymunicipalities or private utilities. An increasing portion of ductile ironpressure pipe sales is made through independent water works distributors. U.S.Pipe maintains numerous supply depots in leased space throughout the country,which are used as a source of pipe for start-up projects, to support ongoingprojects and to aid in completing projects.

U.S. Pipe has a sales force of approximately 70dedicated employee sales representatives in the field and inside salesrepresentatives and sales engineers who sell pipe products throughout theUnited States. The organization is divided into four geographic territorieseach managed by a regional sales manager. International orders are solddirectly by U.S. Pipe sales personnel as well as through third-partyrepresentatives.

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U.S. Pipe’s top customer,with whom we do not have a written contract, represented 29%, 27% and 28% ofnet sales for the year ended September 30, 2006, the nine months ended September 30,2005 and the year ended December 31, 2004, respectively. We believe theloss of this single customer could have a material adverse effect on theresults of operations of the Company. See “Risk Factors—We depend on a group ofmajor distributors for a significant portion of our sales; any loss of thesedistributors could reduce our sales and continuing consolidation could causeprice pressure.”

***Anvil Products***

Our Anvil segment sells its products to distributorswho subsequently sell these products to a wide variety of end-users, including,primarily, commercial construction contractors. These products are typicallysold to our distributors through Anvil’s four regional distribution centerslocated in key geographic areas throughout the United States and through Anvil’sCanadian distribution and sales division. We generally ship Anvil segmentproducts, including pipe fittings, couplings, hangers and nipples, from ourplants to four regional service centers that we operate in the United States,and we ship products from these distribution centers to distributors carryingthese products. Our regional service centers are strategically located toprovide 24-hour delivery to the majority of the Anvil customers. Inaddition, we operate 24 smaller warehouses throughout the United States andCanada and one in Europe to support the Anvil segment operations. We havehistorically stocked some products manufactured by third parties in thesedistribution centers in order to provide a broader product offering. In 2006,products manufactured by third parties accounted for approximately 34% of totalsales for the Anvil Segment.

Most Anvil products are not specified. Anvil’s salesforce of approximately 110 dedicated employee sales representatives in thefield and about 150 in-house marketing and sales professionals markets Anvilproducts to distributors. Sales of Anvil products are generally influenced bythe distributors, as end-user customers will buy from a distributor’s availableofferings based on price and quality.

Anvil generally does nothave long-term contracts with any distributors, although Anvil has long-termrelationships with most of our top distributors. The top three distributors forAnvil accounted, in the aggregate, for approximately 13% of Anvil’s sales in2006. The loss of any one of these distributors could have a material adverseeffect on our business. See “Risk Factors—We depend on a group of majordistributors for a significant portion of our sales; any loss of thesedistributors could reduce our sales and continuing consolidation could causeprice pressure.”

**Backlog**

Except for our U.S. Pipesegment and the Mueller segment’s Henry Pratt subsidiary, our backlog is notsignificant. Our Mueller and Anvil segments generally manufacture products fromraw materials in stock and deliver them to customers within approximately twoweeks from receipt of the order, depending upon customer deliveryspecifications. At September 30, 2006, our U.S. Pipe segment had a backlogof ductile iron pipe and fittings of approximately $62.0 million, comparedto a backlog of ductile iron pipe, fittings, valves and hydrants for thatsegment at September 30, 2005 of approximately $81.0 million. AtSeptember 30, 2006, the Henry Pratt division of our Mueller segment had abacklog of approximately $61.8 million.

**Manufacturing**

*Mueller*

Our Mueller segment operates 16 manufacturingfacilities in the United States, Canada and China. Their manufacturingoperations include foundry, machining, fabrication, assembly, testing andpainting operations. We believe that our existing manufacturing capacity issufficient for our near-term requirements and we have no current plans toexpand capacity. However, we plan to maximize operational 

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efficiencies throughoutall of our plants, and may relocate certain manufacturing operations to otherfacilities as part of these plans. These actions may result in future facilityclosures.

Mueller foundries use twocasting techniques, green sand and lost foam. At present, we utilize the lostfoam technology for hydrants in our Albertville, Alabama facility and for gatevalve production in our Chattanooga, Tennessee facility. The lost foam processhas several advantages over the green sand process for high-volume products,including a reduction in the number of manual finishing operations, lower scraplevels and the ability to reuse the sand. The selection of the appropriatecasting method, pattern, core-making equipment, sand and other raw materialsdepends on the final product and its complexity, specifications, and functionas well as intended production volumes.

***U.S. Pipe***

Our U.S. Pipe segment operates 4 manufacturingfacilities in the United States, which primarily manufacture ductile ironpressure pipe. U.S. Pipe utilizes the DeLavaud centrifugal casting processwhich consists of introducing molten iron into a rapidly turning steel mold andrelying on the centrifugal force to uniformly distribute the iron around theinner surface of the mold to produce high-quality ductile iron pressure pipe.

U.S. Pipe has announcedthe development of a new, state-of-the-art pipe manufacturing plant in additionto its existing facilities. U.S. Pipe is now considering where best to locatethe new facility, and the timing of the development so as to achieve maximumimproved production efficiency and enhanced product quality.

***Anvil***

Our Anvil segment operates11 manufacturing facilities. Their manufacturing operations include foundry,machining, fabrication, assembly, testing and painting operations. Anvilemploys highly automated Disa® molding machines to produce products in itsColumbia, Pennsylvania foundry facility.

**Raw Materials**

Our products are made from several basic rawmaterials, including sand, resin, brass ingot, steel pipe, and scrap steel andiron. These materials are readily available and are competitively priced.Historically, we have been able to obtain an adequate supply of raw materialsand do not anticipate any shortage of these materials.

We generally purchase raw materials at spot prices andgenerally do not have the ability to hedge our exposure to price changes. Ourbusiness could be adversely affected by increases in the cost of our rawmaterials, as we may not be able to fully pass these costs on to our customers.Management estimates that raw materials and purchased components used in themanufacturing processes of Mueller and Anvil currently account forapproximately 25% of the cost of goods sold for Mueller and Anvil. Further,management estimates that scrap metal and ferrous alloys used in the U.S. Pipemanufacturing process accounted for up to 40% of the U.S. Pipe cost tomanufacture ductile iron pipe for the year ended September 30, 2006.

In fiscal year 2006, due to significant increases inthe price of copper in calendar year 2005, the spot price of brass ingot, usedin the manufacture of the Mueller segment’s brass products and brasscomponents, increased by approximately 80%. The Mueller segment was able topass much of these cost increases through to its customers by means of priceincreases in the middle of the fiscal year of approximately 22% on certain brass products, andapproximately 12% on hydrants and iron gate valves containing brass components.These product price increases were in addition to the regular, annual Muellersegment product increases made earlier in the fiscal year.

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Historically, the prices of steel scrap and scrap ironused by the Mueller and Anvil segments and scrap iron used by the U.S. Pipesegment have increased, with sharp increases in these raw materials pricesoccurring in fiscal years 2003 through 2005. In fiscal year 2006, although theprices of these raw materials remained at the relatively high levels set in the2005 fiscal year, the prices were unchanged, when averaged over the fiscalyear.

We can give no assurancesthat the price of steel scrap and scrap iron will remain at the current pricinglevels or that we will be able to increase prices to our customers to offsetany future cost increases. See “Risk Factors—Our business is subject to risk ofprice increases and fluctuations and delay in the delivery of raw materials andpurchased components.”

**Research andDevelopment**

We have a dedicated team of research and development(R&D) professionals, who focus on the development of new products as wellas on the support, modification and improvement of existing products.Presently, we employ 36 people, including 21 degreed professionals(metallurgists and engineers), dedicated to R&D activities. Our R&Defforts are operated primarily out of our facility in Smithfield, Rhode Island.In addition, our U.S. Pipe segment employs an R&D team in its facility inBessemer, Alabama.

Ideas are generated by manufacturing, marketing orR&D personnel. In order for a project to move beyond the idea stage, allthree disciplines must agree on the suitability of the product and determine anestimated payback. After the approval, it typically takes 6 to 12 monthsto tool, test and start production. The R&D team typically works on variousproducts at one time.

Our total R&Dexpenditures were approximately $5.7 million for the year ended September 30,2006, $0.4 million for the nine months ended September 30, 2005, and$1.5 million for the year ended December 31, 2004.

**Patents, Licensesand Trademarks**

We have a significantnumber of active patents and trademarks relating to the design of our productsand trademarks for our brands and products. Most of the patents for technologyunderlying our products have been in the public domain for many years, andexisting third-party patents are not considered, either individually orin the aggregate, to be material to our business. However, the pool ofproprietary information, consisting of know-how and trade secrets relating tothe design, manufacture and operations of our products is consideredparticularly important and valuable. We generally own the rights to theproducts that we manufacture and sell and are not dependent in any material wayupon any license or franchise to operate. U.S. Pipe has granted numeroustrademark licenses around the world with respect to its uniform family ofductile pipe accessories, such as joint restraint systems.

**Seasonality**

See “Item 7.—Management’sDiscussion and Analysis—Effect of Inflation; Seasonality.”

**Competition**

The domestic and international markets for flowcontrol products are competitive. However, for most of our product offerings,there are only a few competitors. Although many of our competitors arewell-established companies with strong brand recognition, we believe that wemaintain a strong competitive position for each of our key product offerings.Management considers our installed base, product quality, service, brandrecognition, price, effectiveness of distribution and technical support to beprimary competitive factors.

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The competitive environment for our Mueller segmentproducts is mature and stable with limited movement in market share over time.Management believes that our Mueller hydrants and valves enjoy strongcompetitive positions based largely on their quality and dependability. Theprincipal competitors for Mueller segment hydrants and iron gate valves areMcWane, Inc. and American Flow Control. The primary competitors forMueller’s brass products are A.Y. McDonald and Ford Meter Box.

The ductile iron pressure pipe industry, in which U.S.Pipe operates, is highly competitive, with a small number of manufacturers ofductile iron pressure pipe and fittings. Major competitors of U.S. Pipe includeMcWane, Inc., Griffin Ductile Iron Pipe Company and American Cast IronPipe Company. Additional competition for ductile iron pressure pipe comes frompipe composed of other materials, such as polyvinylchoride (PVC), high densitypolyethylene (HDPE), concrete, fiberglass, reinforced plastic and steel.Although ductile iron pressure pipe is typically more expensive than competingforms of pipe, ductile iron has the advantages of quality, longevity, strength,ease of installation and lack of maintenance problems.

The market for Anvilsegment products is highly competitive, price sensitive and vulnerable to theincreased acceptance of foreign products. For domestic manufacturing and sales,Anvil’s primary competitor for malleable and cast iron fittings is WardManufacturing; for ductile and grooved fittings, Anvil’s significantcompetitors are Victaulic and Tyco Engineered Products; and for pipe hangers,Anvil’s principal competitors are ERICO, Tolco/Nibco and Carpenter andPaterson. Anvil products have mechanical and industrial applications, such asHVAC systems, and fire protection applications, such as sprinkler systems. Weestimate that 72% of these products are used in mechanical applications and theremainder in fire protection systems. While the mechanical market has generallyresisted acceptance of foreign products, the fire protection market has broadlyaccepted foreign products as a substitute for domestic piping system products.Fire protection products are sold primarily on price and are sold at lowerprices by foreign manufacturers.

**EnvironmentalMatters**

The Company is subject to a wide variety of laws andregulations concerning the protection of the environment, both with respect tothe construction and operation of many of its plants and with respect toremediating environmental conditions that may exist at its own and otherproperties. The Company believes that it is in substantial compliance withfederal, state and local environmental laws and regulations. The Companyaccrues for environmental expenses resulting from existing conditions thatrelate to past operations when the costs are probable and reasonably estimable.Expensescharged to the statement of operations for compliance of ongoing operations andfor remediation of environmental conditions arising from past operations wereapproximately $2.3 million, $4.4 million and $9.5 million in the year ended September 30,2006, the nine months ended September 30, 2005 and the year ended December 31,2004, respectively. The Company capitalizes environmental expendituresthat increase the life or efficiency of property or that reduce or preventenvironmental contamination. Capital expenditures for environmentalrequirements are anticipated to average approximately $7.0 million peryear in the next five years. Capitalexpenditures for environmental requirements were approximately $4.7 million,$1.7 million and $2.7 million in the year ended September 30, 2006,the nine months ended September 30, 2005 and the year ended December 31,2004, respectively.

The Company has implemented an Administrative ConsentOrder (ACO) for its Burlington, New Jersey plant that was required underthe New Jersey Environmental Cleanup Responsibility Act (now known as theIndustrial Site Recovery Act). The ACO required soil and ground water cleanup,and the Company has completed, and has received final approval on, the soilcleanup required by the ACO. U. S. Pipe is continuing to addressground water issues at this site. Further remediation could be required. Theseremediation costs are expected to be minimal. Long-term ground water monitoringwill be required to verify natural attenuation. It is not known how long groundwater monitoring will be required. 

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Management does notbelieve monitoring or further cleanup costs, if any, will have a materialadverse effect on the financial condition or results of operations of theCompany.

The Federal Comprehensive Environmental Response,Compensation and Liability Act (CERCLA) generally imposes liability, which maybe joint and several and is without regard to fault or the legality of wastegeneration or disposal, on certain classes of persons, including owners andoperators of sites at which hazardous substances are released into theenvironment (or pose a threat of such release), persons that disposed orarranged for the disposal of hazardous substances at such sites, and personswho owned or operated such sites at the time of such disposal. CERCLAauthorizes the Environmental Protection Agency (EPA), the states and, in somecircumstances, private entities to take actions in response to public health orenvironmental threats and to seek to recover the costs they incur from the sameclasses of persons. Certain governmental authorities can also seek recovery fordamages to natural resources. Currently, U.S. Pipe has been identified as apotentially responsible party (PRP) by the EPA under CERCLA with respect tocleanup of hazardous substances at a superfund site located in Anniston,Alabama, and U.S. Pipe is among many PRP’s at the site, a significant number ofwhich are substantial companies.

The PRP’s have negotiated an Administrative Order ofConsent (ACO) with the EPA. Based on these negotiations, management estimatedthe Company’s share of liability for cleanup, after allocation among severalPRP’s, would be approximately $4.0 million, which was accrued in 2004. Inthe fourth quarter of 2006, U.S. Pipe and Phelps Dodge (a co-signer of the ACO)agreed that Phelps Dodge would assume U.S. Pipe’s obligations and liabilitiesrelating to the ACO. As a result, the Company recognized a pre-tax benefit relatedto the settlement of this obligation, which was not material to the Company’sfinancial statements. Phelps Dodge had previously entered into similaragreements with all other signatories to the ACO.

Solutia, Inc and Pharmacia Corporation filed suit againstU.S. Pipe and Walter on January 5, 2003 for contribution and cost recoveryby Solutia with respect to costs incurred and to be incurred by Solutia inperforming remediation of polychlorinated biphenyls (PCBs) and heavy metalsmandated by EPA in Anniston, Alabama with respect to the ACO described above. TheACO provides protection against contribution claims by third parties, such asSolutia. Management believes that the likelihood of liability in thecontribution litigation is remote. The Magistrate has entered an Order stayingdiscovery in this matter but has allowed Solutia to proceed with “on-site”sampling discovery.

The Company’s U.S. Pipe subsidiary has been named in apurported civil class action case originally filed on April 8, 2005 in theCircuit Court of Calhoun County, Alabama, and removed to the U.S. DistrictCourt for the Northern District of Alabama under the Class Action Fairness Act.The putative plaintiffs in the case filed an amended complaint with the U.S. DistrictCourt on December 15, 2006. The case was filed against U.S. Pipe and otherfoundries in the Anniston, Alabama area alleging state law tort claims(negligence, failure to warn, wantonness, nuisance, trespass and outrage)arising from creation and disposal of “foundry sand” alleged to contain harmfullevels of PCBs and other toxins, including arsenic, cadmium, chromium, lead andzinc. The plaintiffs are seeking damages for real and personal property damageand for other unspecified personal injury. Management believes this matter isstill in early stages of litigation and no substantial discovery has takenplace. In addition, management believes that both procedural and substantivedefenses would likely be available should this class action be allowed toproceed. At present, management has no reasonable basis to form a view withrespect to the probability of liability in this matter.

The Company and U.S. Pipe recently received a letterfrom attorneys representing a purported group of residents of the NorthBirmingham area of Jefferson County, Alabama alleging personal injury, propertydamage, nuisance, and trespass involving the release of toxic emissions intothe North Birmingham environment causing injury. The Company is named inthis potential litigation because 

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of its ownership interestsin U.S. Pipe. The allegations against U. S. Pipe result from the use of coaltar products and their emissions into the North Birmingham environment.

Although the Company now produces a small amount ofno-lead brass products, most of the Company’s brass valve products containapproximately 5.0% lead. Environmental advocacy groups, relying on standardsestablished by California’s Proposition 65, are seeking to eliminate or reducethe content of lead in water infrastructure products offered for sale inCalifornia. Some of the Company’s subsidiaries have entered into settlementagreements with these environmental advocacy groups to modify products or offersubstitutes for sale in California. Legislation to substantially restrict leadcontent in water infrastructure products has been introduced in the UnitedStates Congress. Congress or state jurisdictions other than California mayenact legislation similar to Proposition 65 to restrict the content of lead inwater products, which could require the Company to incur additional capitalexpenses to modify production. We undertook a capital project to implement ano-lead brass production line that required the Company to incur approximately$8.0 million in incremental capital spending, which was spent during the yearended September 30, 2006. Also, we began implementation of a project toconsolidate our two existing brass foundries into one facility that requiredthe Company to incur approximately $11.2 million in incremental spending, ofwhich $5.8 million was spent during the year ended September 30, 2006. Thefoundry consolidation project is expected to be completed during 2007.

The Company’s Anvil segment entered into a ConsentOrder with the Georgia Department of Natural Resources regarding allegedhazardous waste violations at Anvil’s former foundry facility in Statesboro,Georgia. Pursuant to the Consent Order, Anvil agreed to pay a monetary fine of$50,000 and pay an additional $50,000 to fund a supplemental environmental project.Anvil has also agreed to perform various investigatory and remedial actions atthe foundry and its landfill. The total costs are estimated to be between$1.2 million and $1.4 million. The Company maintains an adequatereserve to cover these estimated costs.

Over the next two years, the Company could potentiallyincur between $20.0 million and $24.0 million of capital costs at itsiron foundries to comply with the United States Environmental Protection Agency’sNational Emissions Standards for Hazardous Air Pollutants which were issued April 22,2004.

Although no assurances can be given that the Companywill not be required in the future to make material expenditures relating toenvironmental laws or legally mandated site clean-up, management does not believeat this time that the compliance and cleanup costs, if any, associated with thecurrent laws and sites for which the Company has cleanup liability or any otherfuture sites will have a material adverse effect on the financial condition orresults of operations of the Company, but such cleanup costs could be materialto results of operations in a reporting period.

In 2004, the Company entered into a settlement andrelease agreement with a former insurer whereby the former insurer paid$1.9 million, net of legal fees, to the Company for historical insuranceclaims, previously expensed as incurred by the Company. Such claims had notpreviously been submitted to the insurance company for reimbursement. TheCompany released the insurer of both past and future claims, and recorded a$1.9 million reduction to selling, general and administrative expenses in2004.

In 2005, the Company entered into a settlement andrelease agreement with a former insurer whereby the former insurer agreed topay $5.1 million, net of legal fees, to the Company for historicalinsurance claims previously expensed as incurred by the Company. Such claimshad not previously been submitted to the insurance company for reimbursement.The Company released the insurer of both past and future claims. During 2005,the Company received $2.8 million in cash and the remainder was receivedduring the quarter ended March 31, 2006. The Company recorded a$5.1 million reduction to selling, general and administrative expenses in2005.

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Under the terms of the agreement whereby TycoInternational Ltd. (“Tyco”) sold the Mueller and Anvil businesses in August 1999to prior owners (the “August 1999 Tyco Transaction”), Tyco agreed toindemnify the Company’s predecessor-in-interest (“Predecessor Mueller”), and,by legal succession, the Company and its affiliates, for all “ExcludedLiabilities”. Excluded Liabilities include, among other things, substantiallyall environmental liabilities relating to the time prior to the August 1999Tyco Transaction. The indemnity survives indefinitely, is not subject to anydeductibles or caps, and continues with respect to the Company’s currentoperations, other than those operations acquired since the August 1999Tyco Transaction, including the operations of the U.S. Pipe segment. If Tycoever becomes financially unable to, or otherwise fails to comply with the termsof the indemnity, the Company may be responsible for the Tyco-indemnifiedobligations. In addition, Tyco’s indemnity does not cover environmentalliabilities to the extent caused by the Company or Predecessor Mueller or theoperation of the Company’s business after the August 1999 TycoTransaction, nor does it cover environmental liabilities arising with respectto businesses or sites acquired after the August 1999 Tyco Transaction.

See “—Legal Proceedings”for descriptions of material litigation and other legal proceedings relating toenvironmental matters.

**Regulatory Matters**

The production andmarketing of our products is subject to the rules and regulations of variousfederal, state and local agencies, including laws governing our relationshipswith distributors. Regulatory compliance has not had a material effect on ourresults to date. We are not aware of any pending legislation that is likely tohave a material adverse effect on our operations. See “—Legal Proceedings,” “RiskFactors—Our brass valve products contain lead, which may replaced in the future”and “Risk Factors—Certain of our brass valve products may not be in compliancewith NSF standards, which could limit the ability of municipalities to buy ourproducts.”

**Employees**

We employ approximately 6,800 people, of whomapproximately 88% work in the United States. The hourly employees at ourprincipal United States manufacturing plants and foundries in Albertville,Alabama; Bessemer, Alabama; North Birmingham, Alabama; Union City, California;Aurora, Illinois; Decatur, Illinois; Burlington, New Jersey; Columbia,Pennsylvania; Chattanooga, Tennessee; Houston, Texas; and Henderson, Tennesseeare represented by unions, as are the hourly employees at two of our fourdistribution centers. Our operations in Canada at St. Jerome and at Simcoe arealso unionized.

The contracts with our union employees at our eightlargest manufacturing facilities expire at different times: Decatur in June 2007,Bessemer in October 2007, Union City in December 2007, Burlington andColumbia in April 2008, Albertville in September 2008, NorthBirmingham in January 2009 and Chattanooga in September 2010.

Union contracts at other Mueller and Anvil facilitiesexpire as follows: Aurora in August 2007, Henderson in December 2007,Simcoe in November 2008 and Houston in January 2009.

In addition, approximately 125 of our employees arerepresented by various unions at our Anvil facilities located in BritishColumbia; Montreal, Quebec; Bloomington, Minnesota; Cincinnati, Ohio; Taylor,Michigan; and University Park, Illinois.

We believe that relationswith our employees, including those represented by unions, are good. The lastmajor union strike was in 1989 at the U.S. Pipe Bessemer, Alabama facility. Thestrike lasted six weeks.

**GeographicInformation**

More than 99% of our salesfor fiscal year 2006 are to our U.S. and Canadian customers.

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**Item 1A.**                RiskFactors

**Risks Relating toOur Business**

**Our business may suffer as a result of a downturn ingovernment spending related to infrastructure upgrades, repairs andreplacements, or in the cyclical residential or non-residential buildingmarkets.**

Our business is primarilydependent upon spending on water and wastewater infrastructure upgrades,repairs and replacement, new water and wastewater infrastructure spending(which is dependent upon residential construction) and spending onnon-residential construction. We are also subject to general economic conditions,the need for construction projects, interest rates and government incentivesprovided for public work projects. In addition, a significant percentage of ourproducts are ultimately used by municipalities or other governmental agenciesin public water transmission and collection systems. As a result, our salescould decline as a result of declines in the number of projects planned bypublic water agencies, government spending cuts, general budgetary constraints,difficulty in obtaining necessary permits or the inability of governmententities to issue debt. It is not unusual for water projects to be delayed andrescheduled for a number of reasons, including changes in project prioritiesand difficulties in complying with environmental and other governmentregulations. Spending growth in the infrastructure upgrades, repairs andreplacement sector may slow in the future if state and local governments’budgets are negatively impacted by downturns in the economy. If favorableeconomic conditions exist, state and local governments may choose not toaddress deferred infrastructure needs. Although the residential building markethas experienced growth in recent years, this growth may not continue in thefuture. The residential and non-residential building markets are cyclical. Anysignificant decline in the residential or non-residential building markets orgovernmental spending on infrastructure could lead to a significant decline inour sales, profitability and cash flows.

**Our industry isvery competitive and some of our products are commodities.**

The domestic and international markets for flowcontrol products are competitive. While there are only a few competitors formost of our product offerings, many of them are well-established companies withstrong brand recognition. In particular, our malleable iron and cast iron pipefitting products, which together comprised 5% of our annual sales over the lasttwo years, face competition from less expensive imports and our pipe nipple andhanger products and our pipe fittings and couplings products, which togethercomprised 16% of our annual sales over the last two years, compete on the basisof price and are sold in fragmented markets with low barriers to entry,allowing less expensive domestic and foreign products to gain market share andreduce our margins. Also, competition for ductile iron pressure pipe sold byour U.S. Pipe segment comes not only from ductile pipe produced by aconcentrated number of domestic manufacturers, but also from pipe composed ofother materials, such as polyvinylchloride (PVC), high density polyethylene(HDPE), concrete, fiberglass, reinforced plastic and steel.

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**Foreign competition is intense and could harm oursales, profitability and cash flows.**

In addition to domesticcompetition, we face intense foreign competition. The intensity of foreigncompetition is affected significantly by fluctuations in the value of the U.S.dollar against foreign currencies, by the relative cost to ship competitiveproducts into the North American markets and by the level of import dutiesimposed by the U.S. Department of Commerce on certain products. Foreigncompetition is likely to further increase and certain product prices willcontinue to face downward pressure as our domestic competitors shift theiroperations or outsource manufacturing requirements overseas or source suppliesfrom foreign vendors in an effort to reduce expenses.

**Wedepend on a group of major distributors for a significant portion of our sales;any loss of thesedistributors could reduce our sales and continuing consolidation could causeprice pressure.**

Approximately 38% of our2006 sales were to our ten largest distributors, and approximately 32% of oursales were to our three largest distributors: Home Depot, Ferguson Enterprisesand Groeniger. Our business relationships with most of our major distributorbranches may be terminated at the option of either party upon zero to60 days’ notice.

While our relationshipswith our ten largest distributors have been long-lasting, distributors in ourindustry have experienced significant consolidation in recent years, and ourdistributors may be acquired by other distributors who buy products from ourcompetitors. Our ability to retain these customers in the face of othercompetitors generally depends on a variety of factors, including the qualityand price of our products and our ability to market these products effectively.As consolidation among distributors continues, pricing pressure may result,which could lead to a significant decline in our profitability. For example,Home Depot acquired National Waterworks in 2005 and then acquired Hughes Supplyin March 2006. As a result, two of our three previous largest distributorshave been combined under common control. Moreover, the loss of either of HomeDepot or Ferguson Enterprises as a distributor could significantly reduce ourlevels of sales and profitability.

**Our brass valve products contain lead, which may bereplaced in the future.**

Our brass valve products,which constituted approximately 6% of our annual sales, contain approximately5.0% lead. Environmental advocacy groups, relying on standards established byCalifornia’s Proposition 65, are seeking to eliminate or reduce the content oflead in some of these products, including water meters and valves, and to limittheir sale in California. Some of our business units have entered intosettlement agreements with these environmental advocacy groups that haverequired them to either modify some of these products or offer substitutes forthem with respect to products sold in California. Modifications of orsubstitutions for our products to meet or conform with regulatory requirementswill require us to purchase more expensive raw materials, and we may not beable to pass these costs on to our customers. Legislation to substantiallyrestrict lead content in water products has been introduced in the UnitedStates Congress. Congress may adopt legislation that would require us to reduceor eliminate lead in our brass products which could require us to incursubstantial additional production expenses. In addition, advocacy groups orother parties may file suit against us under Proposition 65, which could resultin additional costs in connection with marketing and selling our brass productsin California.

**Ourbusiness is subject to risk of price increases and fluctuations and delay inthe delivery of rawmaterials and purchased components.**

Our business is subject tothe risk of price increases and fluctuations and periodic delays in thedelivery of raw materials and purchased components that are beyond our control.Our operations require substantial amounts of raw materials or purchasedcomponents, such as steel pipe and scrap steel and iron, brass ingot, sand,resin, and natural gas. Management estimates that scrap metal and ferrousalloys used in the U.S. Pipe manufacturing process account for approximately40% of the U.S. Pipe cost to manufacture 

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ductileiron pipe and raw materials and purchased components used in our manufacturingprocesses currently account for approximately 25% of the Mueller and Anvil costof goods sold. Fluctuations in the price and delivery of these materials may bedriven by the supply/demand relationship for a material and factors particularto that material. In addition, if any of our suppliers seeks bankruptcy reliefor otherwise cannot continue its business as anticipated or we cannot renew oursupply contracts on favorable terms, the availability of raw materials could bereduced or the price of raw materials could increase.

The availability and priceof certain raw materials or purchased components, such as steel scrap, brassingot and natural gas are subject to market forces largely beyond our control,including North American and international demand, freight costs, speculationand foreign exchange rates. We generally purchase raw materials at spot pricesand generally do not have the ability to hedge our exposure to price changes.We are not always able, and may not be able in the future, to pass on increasesin the price of these raw materials to our customers. In particular, when rawmaterial prices increase rapidly or to significantly higher than normal levels,we may not be able to pass price increases through to our customers on a timelybasis, if at all, which could lead to significant reductions of our operatingmargins and cash flow. Any fluctuations in the price or availability of rawmaterials or purchased components could significantly reduce our levels ofproduction and sales or impair our profitability.

**Interruptionof normal operations at our key manufacturing facilities may impair ourproduction capabilities.**

Someof our key products, including hydrants, valves and ductile iron pipe, aremanufactured at large manufacturing facilities. The operations at our majormanufacturing facilities may be impaired by various operating risks, including,but not limited to:

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

·       interruptions in rawmaterials and energy supply;

·       adversegovernment regulation;

·       breakdownsor equipment failures;

·       violationsof our permit requirements or revocation of permits;

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

·       shortagesof equipment or spare parts; and

·       labordisputes.

To date, we havesuccessfully managed non-material occurrences of the foregoing events withoutsignificant disruption of our operations. More acute occurrences of theseevents could cause a decrease in, or the elimination of, the revenues generatedby our key facilities or a substantial increase in the costs of operating suchfacilities that, in turn, could, impair our cash flows and results ofoperations.

**We may be unsuccessful in identifying or integratingsuitable acquisitions, which could impair our growth.**

A part of our growthstrategy depends on the availability of acquisition candidates with businessesthat can be successfully integrated into our existing business and that willprovide us with complementary manufacturing capabilities, products or services.However, we may be unable to identify targets that will be suitable foracquisition. In addition, if we identify a suitable acquisition candidate, ourability to successfully implement the acquisition will depend on a variety offactors, including our ability to finance the acquisition. Our ability tofinance our acquisitions is subject to a number of factors, including theavailability of adequate cash from operations or of acceptable financing termsand the terms of our debt instruments. In addition, there are many challengesto integrating acquired companies and businesses in our company, includingeliminating redundant operations, facilities and systems, coordinating 

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managementand personnel, retaining key employees, managing different corporate culturesand achieving cost reductions and cross-selling opportunities. We may not beable to meet these challenges in the future.

**Businesses we have acquired or will acquire may notperform as expected.**

Businesses we haverecently acquired or may acquire in the future may not perform as expected.Acquired businesses may perform below expectations after the acquisition forvarious reasons, including legislative or regulatory changes that affect theareas in which a business specializes, the loss of key customers after theacquisition has closed, general economic factors that affect a business in adirect way and the cultural incompatibility of an acquired management team withus. Any of these factors could impair our results of operations.

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

We have recorded asignificant amount of goodwill and other identifiable intangible assets. As of September 30,2006, goodwill and other identifiable intangible assets were approximately$724.1 million and $835.4 million, respectively (or approximately 55%of our total assets). Goodwill and identifiable intangible assets of theCompany were recorded at fair value on the date of acquisition and goodwill ofU.S. Pipe remains at historical cost. In accordance with Financial AccountingStandards Board Statement of Financial Accounting Standards (SFAS) No. 142,*Goodwill and Other Intangible Assets*,are reviewed at least annually for impairment. Impairment may result from,among other things, deterioration in our performance, adverse marketconditions, adverse changes in applicable laws or regulations, includingchanges that restrict the activities of or affect the products and servicessold by our business, and a variety of other factors. The amount of anyquantified impairment must be expensed immediately as a charge to results ofoperations. Depending on future circumstances, it is possible that we may neverrealize the full value of our intangible assets. Any future determination ofimpairment of a significant portion of goodwill or other identifiableintangible assets would result in a non-cash impairment charge.

**We have a significant amount of debt.**

As of September 30,2006, our total debt was $1,011.0 million. We may incur significant additionalindebtedness from time to time. The level of our indebtedness could haveimportant consequences, including:

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

·       limitingcash flow available for general corporate purposes, including capital expendituresand acquisitions, because a substantial portion of our cash flow fromoperations must be dedicated to servicing our debt;

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

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

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

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

Our ability to pay or torefinance our indebtedness will depend upon our future operating performance,which will be affected by general economic, financial, competitive,legislative, regulatory, business and other factors beyond our control. Thereis a risk that our business will not generate sufficient cash flow fromoperations, that currently anticipated revenue growth and operatingimprovements will not be realized or that future borrowings will not beavailable to us in an amount sufficient to enable us to pay our indebtedness,or to fund our other liquidity needs. If we are unable to meet our debt serviceobligations or fund our other liquidity needs, we could attempt to restructureor refinance our indebtedness or seek additional equity capital, but we may notbe able to accomplish those actions on satisfactory terms, if at all.

**Restrictivecovenants in our debt instruments may limit our ability to engage in certaintransactions and maydiminish our ability to make payments on our indebtedness.**

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

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

The National SanitaryFoundation (NSF) is a non-profit entity that was contracted by theU.S. Environmental Protection Agency (EPA) to promulgate standards for thewater industry. NSF has issued NSF 61, which governs the leachingcharacteristics of valves and devices that are part of drinking waterdistribution networks, including certain of our products made from brass. Inrecent years, a growing majority of states have adopted, by statute orregulation, a requirement that water distribution systems utilize products thatcomply with NSF 61 and/or are certified as NSF 61 compliant. We, along withothers in the industry, are engaged in the lengthy process of attempting toobtain certification of NSF 61 compliance for all of our relevantproducts. Our sales of brass valve products were approximately 6% our 2006sales. To date we have obtained certification of approximately 95% of our brassvalve and fitting products. Approximately 26% of our certified products use “lowlead” brass to comply with current NSF 61 requirements. We intend to havea certified version of all brass products after completion of the closure ofthe Mueller segment’s James Jones facility and subsequent transfer ofproduction to the Decatur, Illinois facility. In the event that some of ourbrass valve products are found not to be in compliance with NSF 61, thoseproducts may not be accepted by various municipalities or we may be forced tomodify non-

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conformingproducts with substitute materials which may require increased cost, therebyimpairing our profitability. In addition, if our competitors develop a completeline of NSF 61 compliant brass valve products before we do, we may beplaced at a competitive disadvantage which may, in turn, impair ourprofitability.

**Our business may be harmed by work stoppages andother labor relations matters.**

We are subject to a riskof work stoppages and other labor relations matters because our hourlyworkforce is highly unionized. As of September 30, 2006, approximately 84%of our hourly workforce was represented by unions. These employees arerepresented by locals from approximately six different unions, including theGlass, Molders, Pottery, Plastics and Allied Workers International Union, whichis our largest union. Our labor agreements will be negotiated as they expire atvarious times through September 2010. Work stoppages for an extendedperiod of time could impair our business. Labor costs are a significant elementof the total expenditures involved in our manufacturing process, and anincrease in the costs of labor could therefore harm our business. In addition,the freight companies who deliver our products to our distributors generallyuse unionized truck drivers, and our business could suffer if our contractorsface work stoppages or increased labor costs.

**Ourrevenues are influenced by weather conditions and the level of constructionactivity at differenttimes of the year; we may not be able to generate revenues that are sufficientto cover our expenses during certain periods of the year.**

Some of our products,including ductile iron pipe, are moderately seasonal, with lower sales in thewinter months. This seasonality in demand has resulted in fluctuations in ourrevenues and operating results. Because much of our overhead and expenses arefixed payments, seasonal trends can cause reductions in our profit margin andfinancial condition, especially during our slower periods.

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

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

**Werely on Tyco to indemnify us for certain liabilities and there is a risk thatTyco may become unableor fail to fulfill its obligations.**

Under the terms of thepurchase agreement (the “Tyco Purchase Agreement”) relating to the August 1999sale by Tyco International Ltd. (“Tyco”) of the Mueller and Anvilbusinesses to our prior owners, we are indemnified by Tyco for all liabilitiesarising in connection with the operation of these businesses prior to theirsale by Tyco, including with respect to products manufactured or sold prior tothe closing of that transaction. The indemnity survives forever and is notsubject to any dollar limits. In the past, Tyco has made substantial paymentsand/or assumed defense of claims pursuant to this indemnification provision.However, we may be responsible for these liabilities in the event that Tycoever becomes financially unable or fails to comply with, the terms of theindemnity. In addition, Tyco’s indemnity does not cover product liabilities tothe extent caused by our products manufactured after that transaction. On January 14,2006, Tyco’s board of directors announced that it approved a plan to separateTyco into three separate, publicly traded companies. At this time, we do notknow which of the new 

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entitieswill assume the indemnity provided under the terms of the Tyco PurchaseAgreement if this plan is implemented. Should the entity or entities thatassume Tyco’s obligations under the Tyco Purchase Agreement ever becomefinancially unable or fail to comply with the terms of the indemnity, we may beresponsible for such obligations or liabilities. For more information, see “Item3—Legal Proceedings.”

**Environmental,health and safety laws and regulations could subject us to liability for fines,clean-ups and otherdamages, require us to incur significant costs to modify our operations andincrease our manufacturing costs.**

We are subject to variouslaws and regulations relating to the protection of the environment and humanhealth and safety and must incur capital and other expenditures to comply withthese requirements. Failure to comply with any environmental, health or safetyrequirements could result in the assessment of damages, or imposition ofpenalties, suspension of production, a required upgrade or change to equipmentor processes or a cessation of operations at one or more of our facilities.Because these laws are complex, constantly changing and may be appliedretroactively, there is a risk that these requirements, in particular as theychange in the future, may impair our business, profitability and results ofoperations.

In addition, we will berequired to incur costs to comply with the EPA’s National Emissions Standardsfor Hazardous Air Pollutants (NESHAP) for iron and steel foundries and for ourfoundries’ painting operations. These costs may be substantial. See “Item 1—Business—EnvironmentalMatters.” We may be required to conduct investigations and perform remedialactivities that could require us to incur material costs in the future. Ouroperations involve the use of hazardous substances and the disposal ofhazardous wastes. We may incur costs to manage these substances and wastes andmay be subject to claims for damage for personal injury, property damages ordamage to natural resources.

Our U.S. Pipe segment hasbeen identified as a potentially responsible party liable under federalenvironmental laws for a portion of the clean-up costs with regard to twosites, one in Alabama and one in California, and is currently subject to anadministrative consent order requiring certain monitoring and clean-up withregard to its Burlington, New Jersey facility. Such clean-up costs could besubstantial and could have a negative effect on our profitability and cashflows in any given reporting period. As described in the immediately precedingrisk factor, we rely on Tyco to indemnify us for certain liabilities and thereis a risk that Tyco may become unable or fail to fulfill its obligation. Formore information about our environmental compliance and potential environmentalliabilities, see “Item 1—Business—Environmental Matters.”

**Compliancewith the securities laws and regulations is likely to make it more difficultand expensive for us toobtain directors and officers liability insurance and to attract and retainqualified members of our board of directors.**

We expect theSarbanes-Oxley Act and the rules and regulations subsequently implementedby the SEC and the PCAOB to make it more difficult and expensive for us toobtain director and officer liability insurance, and we may be required toaccept reduced coverage or incur substantially higher costs to obtain coverage.These new rules and regulations could also make it more difficult for usto attract and retain qualified members of our board of directors, particularlyto serve on our audit committee, and executive officers.

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

We are pursuing severalinitiatives designed to rationalize our manufacturing facilities and to use ourmanufacturing expertise to reduce our costs. In fiscal 2006, we achievedintegration synergies between our Mueller and U.S. Pipe segments by closing theU.S. Pipe Chattanooga, Tennessee production facility and integrating it intothe Mueller Chattanooga and Albertville, Alabama production facilities. We have

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initiatedthe implementation of plant and distribution combination and productionefficiency strategies within our Mueller and Anvil segments, which efforts willcontinue through fiscal years 2007 and the beginning of 2008. Our Muellersegment sales force has begun to integrate U.S. Pipe products as complementaryproduct offerings as part of their sales efforts. We also have begun to use ourcombined purchasing leverage to reduce raw material and overall product costs.If we fail to implement our integration and rationalization plans at theeconomic levels or within the time periods expected, we may not be able toachieve the projected levels of synergies and cost savings. In addition, weexpect to incur substantial severance, environmental and impairment costs inconnection with our integration and rationalization plans.

**If we fail to protect our intellectual property, ourbusiness and ability to compete could suffer.**

Our business depends uponour technology and know-how, which is largely developed internally. While webelieve that none of our operating units is substantially dependent on anysingle patent, trademark, copyright, or other form of intellectual property, werely on a combination of patent protection, copyright and trademark laws, tradesecrets protection, employee and third party confidentiality and nondisclosureagreements and technical measures to protect our intellectual property rights.There is a risk that the measures that we take to protect our intellectualproperty rights may not be adequate to deter infringement or misappropriationor independent third-party development of our technology or to prevent anunauthorized third party from obtaining or using information or intellectualproperty that we regard as proprietary or to keep others from using brand namessimilar to our own. The disclosure, misappropriation or infringement of ourintellectual property could harm our ability to protect our rights and ourcompetitive position In addition, our actions to enforce our rights may resultin substantial costs and diversion of management and other resources. We mayalso be subject to intellectual property infringement claims from time to time,which may result in our incurring additional expenses and diverting companyresources to respond to these claims.

**Iftransportation for our ductile iron pipe products becomes unavailable oruneconomic for ourcustomers, our ability to sell ductile iron pipe products would suffer.**

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

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

**Risks Relating to our Relationship with WalterIndustries**

**We may have substantial additional liability forfederal income tax allegedly owed by Walter.**

Each member of aconsolidated group for federal income tax purposes is severally liable for thefederal income tax liability of each other member of the consolidated group forany year in which it is a member of the group at any time during such year.Each member of the Walter controlled group, which included the Company(including our subsidiaries) through December 14, 2006, is also jointlyand severally liable for pension and benefit funding and terminationliabilities of other group members, as well as certain benefit plan taxes.Accordingly, the Company could be liable under such provisions in the event anysuch liability is incurred, and not discharged, by any other member of theWalter consolidated or controlled group for any period during which the Companywas included in the Walter consolidated or controlled group.

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A dispute exists withregard to federal income taxes allegedly owed by the Walter consolidated groupfor fiscal years 1980 through 1994 and 1999 through 2001. It is estimated thatthe amount of tax presently claimed by the IRS is approximately $34.0 millionfor issues currently in dispute in bankruptcy court and $80.4 million forthe 1999 through 2001 period, each of which is for matters unrelated to theCompany. These amounts are subject to interest and penalties. However, Walterhas advised the Company that its tax filing positions have substantial meritand intends to defend vigorously any claims asserted. Walter believes that ithas accruals sufficient to cover the estimated probable loss, includinginterest and penalties.

**Thetax allocation agreement between the Company and Walter gives Walter controlover our pre-IPO taxesand allocates to us certain tax risks associated with the spin-off of MuellerWater’s Series B common stock.**

Walter effectivelycontrolled all of our tax decisions for periods during which we were a memberof the Walter consolidated federal income tax group and certain combined,consolidated or unitary state and local income tax groups. Under the terms ofthe income tax allocation agreement between Walter and the Company dated as of May 26,2006 Walter had sole authority to respond to and conduct all tax proceedings(including tax audits) relating to our federal income and combined statereturns, to file all such returns on behalf of us and to determine the amountof our liability to (or entitlement to payment from) Walter for such periods.This arrangement may result in conflicts of interests between the Company andWalter. In addition, the tax allocation agreement provides that if the spin-offof Mueller Water’s Series B common stock by Walter is determined not to betax-free pursuant to Section 355 of the Internal Revenue Code of 1986, asamended, the Company generally will be responsible for any taxes incurred byWalter or its stockholders if such taxes result from certain of our actions oromissions and for a percentage of any such taxes that are not a result of ouractions or omissions or Walter’s actions or omissions taxes based upon ourmarket value relative to Walter’s market value.

**BecauseMueller Water has limited experience operating as a stand-alone entity, theCompany’s futurebusiness prospects are difficult to evaluate and the Company’s business couldsuffer as a result of the separation of Mueller Water’s and its subsidiary, theCompany’s, business from Walter Industries.**

As ofthe close of business on December 14, 2006, Walter distributed all of itsholding of Mueller Water’s Series B common stock to Walter shareholders,thus making Mueller Water a stand-alone entity. Mueller Water’s operations as astand-alone entity may place significant demands on its management,operational, and technical resources. Mueller Water’s future performance willdepend on its ability to function as a stand-alone entity and on its ability tofinance and manage expanding operations and to adapt its information systems tochanges in its business. Mueller Water and its subsidiary, the Company, rely oncontractual arrangements, including the transition services agreement betweenWalter and Mueller Water dated as of May 26, 2006, that require Walter andits affiliates to provide or procure certain critical transitional services andshared arrangements to Mueller Water and the Company such as:

·       certaintax and accounting services;

·       certainhuman resources services, including benefit plan administration;

·       communicationssystems;

·       insurance;and

·       supplyarrangements.

After the termination ofthese arrangements, Mueller Water and the Company may not be able to replacethese services and arrangements in a timely manner or on terms and conditions,including service levels and cost, as favorable as those Mueller Water and theCompany have received from Walter and its affiliates. There is a risk that theseparation from Walter will not be successful, which could significantly impairthe business, results and financial reporting ability of Mueller Water and theCompany.

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Furthermore, the financialinformation included in this document may not necessarily reflect what theoperating results and financial condition would have been had Mueller Waterbeen a separate, stand-alone entity during the periods presented or beindicative of future operating results and financial condition.

**Item1B.**               Unresolved StaffComments

None.

**Item2.**                        Properties

The following chartdescribes our principal properties.

**MuellerSegment**

| **Location**       | ** ** | ** **                                                       | ** ** | **Activity** | ** ** | **Size  (sq. ft.)** | ** ** | **Owned or  Leased** | ** ** |
|--------------------|------------|------------------------------------------------------------------|------------|--------------|------------|--------------------------|------------|---------------------------|------------|
| Albertville, AL    |       | Foundry, fabrication,  machine shop                              |       | 358,000      |       |                     | Leased     |                      |       |
| Aurora, IL         |       | Fabrication, machine  shop                                       |       | 146,880      |       |                     | Owned      |                      |       |
| Bethlehem, PA      |       | Fabrication, machine  shop                                       |       | 104,000      |       |                     | Leased     |                      |       |
| Brownsville, TX    |       | Machine shop                                                     |       | 48,540       |       |                     | Leased     |                      |       |
| Chattanooga, TN    |       | Foundry, fabrication,  machine shop                              |       | 578,164      |       |                     | Owned      |                      |       |
| Chattanooga, TN    |       | Machine shop                                                     |       | 26,500       |       |                     | Leased     |                      |       |
| Cleveland, NC      |       | Machine shop                                                     |       | 190,000      |       |                     | Owned      |                      |       |
| Cleveland, TN      |       | Fabrication, machine shop                                        |       | 70,000       |       |                     | Owned      |                      |       |
| Decatur, IL        |       | Foundry,  fabrication, machine shop, administrative headquarters |       | 467,044      |       |                     | Owned      |                      |       |
| Dixon, IL**        |       | Fabrication, machine  shop                                       |       | 146,880      |       |                     | Owned      |                      |       |
| El Monte, CA**     |       | Foundry, fabrication,  machine shop                              |       | 64,000       |       |                     | Owned      |                      |       |
| Hammond, IN        |       | Fabrication, machine  shop                                       |       | 51,160       |       |                     | Owned      |                      |       |
| Jingmen, China     |       | Machine shop                                                     |       | 154,377      |       |                     | Owned      |                      |       |
| Milton, Ontario*   |       | Closed                                                           |       | 127,000      |       |                     | Leased     |                      |       |
| Murfreesboro, TN   |       | Assembly                                                         |       | 11,400       |       |                     | Owned      |                      |       |
| Murfreesboro, TN   |       | Fabrication, assembly                                            |       | 12,000       |       |                     | Leased     |                      |       |
| Salem, VA*         |       | Closed                                                           |       | 5,250        |       |                     | Leased     |                      |       |
| St. Jerome, Quebec |       | Foundry, machine shop                                            |       | 55,000       |       |                     | Owned      |                      |       |

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*                    Closed infiscal 2006

**             Tobe closed in fiscal 2007

**U.S.Pipe Segment**

| **Location**      | ** ** | ** **                       | ** ** | **Activity** | ** ** | **Size  (sq. ft.)** | ** ** | **Owned or  Leased** | ** ** |
|-------------------|------------|----------------------------------|------------|--------------|------------|--------------------------|------------|---------------------------|------------|
| Birmingham, AL    |       | Administrative  headquarters     |       | 66,000       |       |                     | Owned      |                      |       |
| Bessemer, AL      |       | Foundry, machine  shop           |       | 648,000      |       |                     | Owned      |                      |       |
| N. Birmingham, AL |       | Foundry, machine  shop           |       | 360,000      |       |                     | Owned      |                      |       |
| Union City, CA    |       | Foundry, machine  shop           |       | 139,000      |       |                     | Owned      |                      |       |
| Burlington, NJ    |       | Foundry, machine shop,  assembly |       | 329,000      |       |                     | Owned      |                      |       |

 

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**AnvilSegment**

| **Location**          | ** ** | ** **                                              | ** ** | **Activity** | ** ** | **Size  (sq. ft.)** | ** ** | **Owned or  Leased** | ** ** |
|-----------------------|------------|---------------------------------------------------------|------------|--------------|------------|--------------------------|------------|---------------------------|------------|
| Portsmouth, NH        |       | Administrative  headquarters                            |       | 13,740       |       |                     | Leased     |                      |       |
| Aurora, OH            |       | Pipe cutting,  machine shop                             |       | 39,650       |       |                     | Leased     |                      |       |
| Columbia, PA          |       | Foundry, galvanizing,  painting, assembly, machine shop |       | 663,000      |       |                     | Owned      |                      |       |
| Greencastle, PA       |       | Bending, pipe  cutting, machine shop                    |       | 132,743      |       |                     | Owned      |                      |       |
| Henderson, TN         |       | Stamping,  fabrication, assembly, machine shop          |       | 236,479      |       |                     | Owned      |                      |       |
| Houston, TX           |       | Machine shop                                            |       | 45,988       |       |                     | Owned      |                      |       |
| Longview, TX          |       | Assembly, machine  shop                                 |       | 95,650       |       |                     | Owned      |                      |       |
| North Kingstown,  RI  |       | Painting,  fabrication, assembly, machine shop          |       | 134,498      |       |                     | Leased     |                      |       |
| Pottstown, PA         |       | Forming,  fabrication, assembly, machine shop           |       | 46,000       |       |                     | Owned      |                      |       |
| Santa Fe Springs,  CA |       | Pipe cutting,  machine shop                             |       | 37,815       |       |                     | Leased     |                      |       |
| Simcoe, Ontario       |       | Fabrication,  machine shop                              |       | 145,000      |       |                     | Owned      |                      |       |
| Waynesboro, PA        |       | Pipe cutting, machine  shop                             |       | 72,836       |       |                     | Owned      |                      |       |

 

**Corporate**

| **Location** | ** ** | ** **              | ** ** | **Activity** | ** ** | **Size  (sq. ft.)** | ** ** | **Owned or  Leased** | ** ** |
|--------------|------------|-------------------------|------------|--------------|------------|--------------------------|------------|---------------------------|------------|
| Atlanta, GA  |       | Corporate  headquarters |       | 24,728       |       |                     | Leased     |                      |       |
|              |            |                         |            |              |            |                          |            |                           |            |  |  |

 

Our leased properties have terms that expire between June 2008and September 2017.

We also operate four leased regional distributioncenters in the United States for our Anvil products. See “Business—Sales, Marketingand Distribution.” The United States centers are located in University Park,Illinois; Sparks, Nevada; Columbia, Pennsylvania; Grand Prairie, Texas and havelease terms that expire between February 2007 and December 2013. Inaddition, we operate 24 smaller warehouses throughout the United States andCanada to support our Anvil operations.

Our Mueller segment operates two regional distributioncenters in Canada. The centers are located in Barrie, Ontario and Calgary,Alberta and have lease terms that expire between March 2011 and May 2011.

We consider our plants andequipment to be well-maintained and believe our plants will have sufficientcapacity to meet our present and anticipated future needs for the next fiveyears. All of our domestic facilities, leases and leasehold interests areencumbered by liens securing our obligations under the 2005 Mueller CreditAgreement.

**Item 3.**                        LegalProceedings

We are involved in variouslegal proceedings which have arisen in the normal course of our operations,including the proceedings summarized below. The effect of the outcome of thesematters on the Company’s future results of operations cannot be predicted withcertainty as any such effect depends on future results of operations and theamount and timing of the resolution of such matters. Other than the litigationdescribed below, we do not believe that any of our outstanding litigation wouldhave a material adverse effect on our business, operations or prospects.

U.S. Pipe has implementedan Administrative Consent Order (ACO) for its Burlington, New Jersey plant thatwas required under the New Jersey Environmental Cleanup Responsibility Act (nowknown as the Industrial Site Recovery Act). The ACO required soil and groundwater cleanup. U.S. Pipe has completed, and has received final approval for thesoil cleanup required by the ACO. U.S. Pipe is continuing to address groundwater issues at this site. Further remediation could be required. These 

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remediationcosts are expected to be minimal. Long term ground water monitoring will berequired to verify natural attenuation. It is not known how long ground watermonitoring will be required. Management does not believe monitoring or furthercleanup costs, if any, will have a material adverse effect on the financial conditionor results of operations of the Company and its subsidiaries.

The Federal ComprehensiveEnvironmental Response, Compensation and Liability Act (CERCLA), generallyimposes liability, which may be joint and several and is without regard tofault or the legality of waste generation or disposal, on certain classes ofpersons, including owners and operators of sites at which hazardous substancesare released into the environment (or pose a threat of such release), personsthat disposed or arranged for the disposal of hazardous substances at suchsites, and persons who owned or operated such sites at the time of suchdisposal. CERCLA authorizes the EPA, the States and, in some circumstances,private entities to take actions in response to public health or environmentalthreats and to seek to recover the costs they incur from the same classes ofpersons. Certain governmental authorities can also seek recovery for damages tonatural resources.

Currently, U.S. Pipe hasbeen identified as a potentially responsible party (PRP) by the EPA underCERCLA with respect to cleanup of hazardous substances in Anniston, Alabama.U.S. Pipe is among many PRP’s at such sites and a significant number of the PRP’sare substantial companies. The PRP’s have negotiated an ACO with the EPA andthe PRP’s have agreed to divide clean-up costs pro-rata subject to lateradjustment based on the relative contribution by each PRP to the contamination.Management previously estimated the Company’s share of liability for cleanup,after allocation among several PRP’s, to be approximately $4.0 million, whichwas accrued in 2004. In the fourth quarter of 2006, U.S. Pipe and Phelps Dodge(a co-signer of the ACO) agreed that Phelps Dodge would assume U.S. Pipe’sobligations and liabilities relating to the ACO. As a result, the Companyrecognized a pre-tax benefit related to the settlement of this obligation,which was not material to the Company’s financial statements. Phelps Dodge hadpreviously entered into similar agreements with all other signatories to theACO.

Solutia, Inc. andPharmacia Corporation (“Solutia”) filed suit against United States Pipe andFoundry Company and Walter on January 5, 2003 (Solutia, Inc. andPharmacia Corporation v. United States Pipe and Foundry Company, WalterIndustries, Inc., et al, Case No. CV-03-PWG-1345-E)in U.S. District Court for the Northern District of Alabama. This is acivil action for contribution and cost recovery by Solutia with respect tocosts incurred and to be incurred in performing remediation of polychlorinatedbiphenyls (PCB) and heavy metals mandated by EPA in Anniston, Alabama withrespect to the ACO described above. The ACO provides protection againstcontribution claims by third parties, such as Solutia. Management believes thatthe likelihood of liability in the contribution litigation is remote.

The Company’s U.S. Pipe subsidiary has been named in apurported civil class action case originally filed on April 8, 2005 in theCircuit Court of Calhoun County, Alabama, and removed to the U.S. DistrictCourt for the Northern District of Alabama under the Class Action Fairness Act.The putative plaintiffs in the case filed an amended complaint with the U.S.District Court on December 15, 2006. The case was filed against U.S. Pipeand other foundries in the Anniston, Alabama area alleging state law tortclaims (negligence, failure to warn, wantonness, nuisance, trespass andoutrage) arising from creation and disposal of “foundry sand” alleged tocontain harmful levels of PCBs and other toxins, including arsenic, cadmium,chromium, lead and zinc. The plaintiffs are seeking damages for real andpersonal property damage and for other unspecified personal injury. Managementbelieves this matter is still in early stages of litigation and no substantialdiscovery has taken place. In addition, management believes that bothprocedural and substantive defenses would likely be available should this classaction be allowed to proceed. At present, management has no reasonable basis toform a view with respect to the probability of liability in this matter.

The Company and U.S. Piperecently received a letter from attorneys representing a purported group ofresidents of the North Birmingham area of Jefferson County, Alabama allegingpersonal injury, 

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propertydamage, nuisance, and trespass involving the release of toxic emissions intothe North Birmingham environment causing injury. The Company is named inthis litigation because of its ownership interest in U.S. Pipe. The allegationsagainst U. S. Pipe result from the use of coal tar products and their emissionsinto the North Birmingham environment.

The Los Angeles Departmentof Water and Power, ex rel. Nora Armenta (“Armenta”) filed suit against oursubsidiaries, James Jones Company and Mueller Co. (Superior Court, Los AngelesCounty, California; Case No. BC 173487) on June 27, 1997. In arelated case, on September 15, 2004, the City of Banning and otherCalifornia municipalities (collectively, “City of Banning”) filed suit againstthe Company’s subsidiaries, James Jones Company and Mueller Co. (SuperiorCourt, Los Angeles County; Case No. BC 321513). The Armenta matter isa false claims lawsuit brought on behalf of cities, water districts andmunicipalities against Mueller Co., James Jones Company and others allegingthat the defendants sold allegedly non-conforming public water system parts tovarious government entities. The lawsuit seeks consequential damages, penaltiesand punitive damages relating to the repair and replacement of the watersystems to remove the allegedly non-conforming parts. While James Jones Companyhas always been a defendant in the Armenta action, in January 2004,Mueller Co. was dismissed as a defendant; however the dismissal was reversed bythe California Court of Appeals in August 2006. On September 15,2004, the Armenta trial court ruled against the intervention of approximately30 municipalities that had failed to intervene within the time deadlinespreviously specified by the court. The trial court also ruled that the majorityof municipalities that had purchased James Jones products from contractors ordistributors were not in privity with the James Jones Company and were notentitled to punitive damages. Following the Armenta court’s ruling, on September 15,2004, the water districts and municipalities filed the City of Banning actionagainst the James Jones Company and Watts (former parent company of James JonesCompany), alleging fraud and intentional misrepresentation. This lawsuit isbased on the same underlying facts as the Armenta lawsuit. Any liabilityassociated with these lawsuits is covered by the Tyco indemnity, describedbelow, and the defense is being paid for and conducted by Tyco, all inaccordance with the indemnity obligation of Tyco.

In the acquisitionagreement pursuant to which Tyco International sold the Company’s Mueller andAnvil segments to the prior owners of these businesses in August 1999,Tyco agreed to indemnify the Company and its affiliates for all “ExcludedLiabilities.” Excluded Liabilities include, among other things, substantiallyall liabilities relating to the time prior to the August 1999 Tycotransaction. The indemnity survives indefinitely and is not subject to anydeductibles or caps. However, the Company may be responsible for these liabilitiesin the event that Tyco ever becomes financially unable to or otherwise fails tocomply with, the terms of the indemnity. In addition, Tyco’s indemnity does notcover liabilities to the extent caused by the Company or the operation of itsbusiness after the August 1999 Tyco transaction, nor does it coverliabilities arising with respect to businesses or sites acquired after the August 1999Tyco transaction.

Some of our subsidiarieshave been named as defendants in a small number of asbestos-related lawsuits.We do not believe these lawsuits, either individually or in the aggregate, arematerial to our financial position or results of operations.

The Company and itssubsidiaries are parties to a number of other lawsuits arising in the ordinarycourse of their businesses. We provide for costs relating to these matters whena loss is probable and the amount is reasonably estimable. The effect of theoutcome of these matters on our future results of operations cannot bepredicted with certainty as any such effect depends on future results ofoperations and the amount and timing of the resolution of such matters. Whilethe results of litigation cannot be predicted with certainty, we believe thatthe final outcome of such other litigation will not have a materially adverseeffect on our consolidated financial statements.

**Item 4.**                        Submissionof Matters to a Vote of Security Holders

Omitted under the reduceddisclosure format pursuant to General Instruction I(2)(c) of Form 10-Kfor wholly-owned subsidiaries (reduced disclosure format).

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**PART II**

**Item 5.**                        Marketfor Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

All of the registrant’sequity is owned by Mueller Water Products, Inc., and there is no marketfor those interests.

**Item 6.**                        SelectedFinancial Data

Omitted under the reduced disclosure format pursuantto General Instruction I(2)(c) of Form 10-K for wholly-ownedsubsidiaries (reduced disclosure format).

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**Item 7.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations

*The following discussion should be read in conjunctionwith the audited consolidated financial statements and notes thereto thatappear elsewhere in this annual report. This discussion contains forward-lookingstatements reflecting current expectations that involve risks anduncertainties. Actual results and the timing of events may differ significantlyfrom those projected in such forward-looking statements due to a numberof factors, including those set forth in the section entitled “Risk Factors.”*

**Overview**

*Organization*

Mueller Group, LLC is awholly-owned subsidiary of Mueller Water Products, Inc. (“Mueller Water”),a Delaware corporation. Mueller Water is the surviving corporation of themerger on February 2, 2006 of Mueller Water Products, LLC (Commission FileNumber: 333-116590) and Mueller Water Products Co-Issuer, Inc. withand into Mueller Holding Company, Inc., a Delaware corporation. On June 1,2006, Mueller Water completed its initial public offering (IPO) of its Series Acommon stock (NYSE: MWA). On December 14, 2006, Walter Industries, Inc.(“Walter”), a diversified New York Stock Exchange traded company (NYSE: WLT),distributed all of Mueller Water’s outstanding Series B common stock(NYSE: MWA-B) to Walter’s shareholders. From October 3, 2005 through December 14,2006, Mueller Water was a wholly-owned subsidiary of Walter.

On October 3, 2005, through a series oftransactions (the “Acquisition”), Walter, through a wholly-owned subsidiary,acquired all outstanding shares of capital stock of our parent company, MuellerWater Products, Inc. (“Predecessor Mueller Water”), which immediately wasconverted into Mueller Water Products, LLC, a Delaware limited liabilitycompany and contributed United States Pipe and Foundry Company, LLC (“U.S. Pipe”),owned by Walter since 1969, to the acquired company’s wholly-owned subsidiary,Mueller Group, LLC (“Predecessor Mueller Group”). In accordance with generallyaccepted accounting principles, for accounting purposes U.S. Pipe is treated asthe acquirer of Predecessor Mueller Group. Accordingly, effective October 3,2005, U.S. Pipe’s basis of accounting is used for the Company and all financialdata for periods prior to October 3, 2005 of the Company included in thisreport on Form 10-K, is that of U.S. Pipe. The results of operationsof Predecessor Mueller Group are included in the Consolidated Statements ofOperations beginning October 3, 2005.

The Company was originally organized as United StatesPipe and Foundry Company, Inc. (“Inc.”) and was a wholly-owned subsidiaryof Walter. On September 23, 2005, Inc. was dissolved and UnitedStates Pipe and Foundry Company, LLC was organized in the state of Alabama, andthe operations of Inc. were conducted under the form of a limited liabilitycompany.

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

Consistent with generallyaccepted accounting principles, the discussion of the Company’s results ofoperations for the year ended September 30, 2006 includes the financialresults of Predecessor Mueller Group from the Acquisition date. The inclusionof these results, plus the continuing integration process, may render directcomparison with the results for prior periods less meaningful. Accordingly, thediscussion below addresses, where appropriate, trends that we believe aresignificant, separate and apart from the impact of the Acquisition.Supplemental information with comparisons of the year ended September 30,2006 Statements of Operations data to the pro forma twelve months ended September 30,2005 Statements of Operations data is provided below under the subheadings “Supplemental

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Information—Resultsof Operations for the Year Ended September 30, 2006 Compared to ProForma Results of Operations for the Twelve Months Ended September 30, 2005”

*Business*

We are a leading North American manufacturer of a broad range ofwater infrastructure and flow control products for use in water distributionnetworks, water and wastewater treatment facilities, gas distribution andpiping systems. We manage our business and report operations through threeoperating segments, based largely on the products they sell and the marketsthey serve. Our segments are named after lead brands in each segment:

·       *Mueller.*   The Mueller segment producesand sells hydrants, valves and related products primarily to the water andwastewater infrastructure markets. Sales of our Mueller segment products aredriven principally by spending on water and wastewater infrastructure upgrade,repair and replacement and new water and wastewater infrastructure. Subsequentto the Acquisition, effective January 1, 2006, U.S. Pipe transferred itsvalve and hydrant business to our Mueller segment. Mueller segment sales areestimated to be approximately 50% for new infrastructure, with the remainderfor upgrade, repair and replacement. A significant portion of Mueller’s salesare made through its broad distributor network. For most of our Mueller segmentproducts, which are sold through independent distributors, end-users choose thebrand or establish product specifications. We believe our reputation forquality, extensive distributor relationships, installed base and coordinatedmarketing approach have helped our Mueller segment products to be “specified”as an approved product for use in most major metropolitan areas throughout theUnited States.

·       *U.S. Pipe.  *The U.S. Pipe segment produces andsells ductile iron pressure pipe, restraint joints and fittings and relatedproducts to the water infrastructure market. U.S. Pipe products are soldprimarily to water works distributors, contractors, municipalities, privateutilities and other governmental agencies. A substantial percentage of ductileiron pressure pipe orders result from contracts that are bid by contractors ordirectly issued by municipalities or private utilities. To support ourcustomers’ inventory and delivery requirements, U.S. Pipe utilizes numerousstorage depots throughout the country.

·       *Anvil.  *The Anvil segment produces, sources and sells pipe, fittings, pipehangers and pipe nipples and a variety of related products primarily to thecommercial fire protection piping systems and HVAC applications market. Salesof our Anvil segment products are driven principally by spending onnon-residential construction projects.

*Developments andTrends*

The Acquisition of Predecessor Mueller Water on October 3,2005 and the spin-off of Mueller Water by Walter on December 14, 2006, aswell as other developments, trends and factors may impact our future resultsincluding the following:

·       Recent price increases in brassingot, which contains approximately 85% copper, have increased the overall costof manufacturing certain Mueller segment products, including certain hydrantand valve components and brass products. During fiscal 2006, the Muellersegment was able to pass much of these cost increases through to its customersby means of price increases in the middle of the fiscal year of approximately22% on certain brass products, and approximately 12% on hydrants and iron gatevalves containing brass components. These product price increases were inaddition to the regular, annual Mueller segment product increases of 5% to 8%made earlier in the fiscal year. We expect these price increases to offsethigher material costs and improve margins. During early 2007, the cost ofcopper has stabilized; however, it may rise again in the future and we may needto implement further pricing actions to offset higher raw material costs.

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·       As presented herein, the operatingresults from the Acquisition of Predecessor Mueller Group were consolidatedwith those of U.S. Pipe’s results from October 3, 2005, the date ofAcquisition.

·       In the quarter ended December 31,2005, the Company entered into the 2005 Mueller Credit Agreement. Proceeds ofthe 2005 Mueller Credit Agreement were approximately $1,053.4 million, net ofapproximately $21.6 million of underwriting fees and expenses which areamortized over the life of the loans. The proceeds were used to refinancePredecessor Mueller Group’s 2004 Credit Facility (“2004 Mueller Credit Facility”),redeem Predecessor Mueller Group’s second priority senior secured floating ratenotes, and finance the acquisition of Predecessor Mueller Water by Walter.During the period subsequent to September 30, 2005, and prior to Walteracquiring Predecessor Mueller Water on October 3, 2005, PredecessorMueller Group expensed $18.4 million of deferred financing fees related to the2004 Mueller Credit Facility and wrote off $2.4 million of deferred financingfees related to the second priority senior secured floating rate notes. Theseexpenses are excluded from the results of operations for the periods presented.

·       OnJune 1, 2006, the Company used $245.6 million of the $368.7 millioncontributed to it by Mueller Water from the proceeds from its IPO for a partialredemption of the outstanding 2005 Mueller Term Loan. On July 3, 2006, theCompany used $123.1 million of the cash contributed to it by Mueller Water asfollows: $110.3 million for the partial redemption of the 10% seniorsubordinated notes; $1.8 million for accrued interest on the 10% seniorsubordinated notes; and $11.0 million for prepayment premiums and other debtrepayment costs.

·       In the period subsequent to September 30,2005 and prior to Walter acquiring Predecessor Mueller Water on October 3,2005, Predecessor Mueller Group expensed transaction fees of approximately$20.1 million and transaction bonuses of $10.0 million. These fees werecontingent upon completion of the sale of Predecessor Mueller Water to Walter.Non-contingent legal and other fees and expenses of approximately $3.1 millionassociated solely with the Acquisition were expensed by Predecessor MuellerGroup during the fiscal year ended September 30, 2005. These expenses areexcluded from the results of operations for the periods presented.

·       We have implemented asynergy plan, which was formalized prior to the acquisition of PredecessorMueller Group, designed to streamline our manufacturing operations, addincremental volume through combining sales efforts for complementary productsand create savings through a coordinated purchasing plan to reduce raw materialand overall production costs. We expect to substantially complete the implementationof the synergy plan by early fiscal 2008. Through September 30, 2006, weachieved annual run-rate synergy benefits of approximately $35.0 million. Operatingincome for the year ended September 30, 2006 includes approximately $28.0million of net realized synergy benefits, excluding the restructuring chargesrelated to closing U.S. Pipe’s Chattanooga plant.

As part of the synergy plan, we announced and have initiatedseveral plant closures and transferred production to existing facilities:

·        *Closure of the U.S. PipeChattanooga, Tennessee Plant.  *Effective January 1, 2006, we transferred the valve andhydrant production of the U.S. Pipe Chattanooga, Tennessee plant to Muellersegment’s Chattanooga, Tennessee and Albertville, Alabama plants. The closureof the U.S. Pipe Chattanooga, Tennessee facility occurred in fiscal 2006. Exitcosts totaling $49.9 million were recorded as components of operating incomefor the year ended September 30, 2006 as follows: $21.3 million charged tocost of sales related to inventory obsolescence and additional facilityexpenses and $28.6 million of restructuring costs primarily related to fixedasset impairments, severance, and net pension curtailment settlement.

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·        *Closure of the Mueller segment’s Henry Pratt (“Pratt”) ValveManufacturing Facility in Dixon, Illinois.  *On January 26,2006 we announced the closure of this facility. The eventual closure of thefacility is expected occur in fiscal year 2007. The process of transferring theDixon plant’s operations to other Pratt facilities has begun. Severance costsassociated with this plant closure of approximately $1.0 million and fixedasset impairment charges of approximately $1.7 million were recorded asadjustments to goodwill in the year ended September 30, 2006. Costsassociated with relocating equipment will be expensed as incurred.

·        *Closure of the Mueller Canada Milton, Ontario (“Milton”) Valve andHydrant Manufacturing Facility.  *On April 20, 2006, weannounced the closure of this facility. Production was transferred to otherMueller facilities, and the Milton facility was closed in fiscal 2006.Severance costs associated with this plant closure of approximately $2.5million, fixed asset impairment charges of approximately $0.2 million, andlease run-out costs of $0.6 million were recorded as adjustments to goodwill inthe year ended September 30, 2006. Costs associated with relocating theMilton warehouse and equipment were expensed as incurred.

·        *Closure of the Mueller segment’s James Jones (“Jones”) Brass Productsand Hydrant Manufacturing Facility in El Monte, California.*   OnOctober 24, 2006, we announced the closure of this facility by June 2007.The transfer of production to other Mueller facilities in Decatur, Illinois andAlbertville, Alabama will begin in the first half of fiscal 2007. Severancecosts associated with this plant closure of approximately $0.2 million andfixed asset impairment charges of approximately $0.5 million were recorded asadjustments to goodwill in the year ended September 30, 2006. Costsassociated with relocating the equipment will be expensed as incurred.

·        TheCompany has other plans that were formalized prior to the Acquisition torationalize facilities and substantial cash expenditures in the form ofseverance and new equipment may be required to implement these plans.

·       TheIPO of Mueller Water’s Series A common stock was completed on June 1,2006. On December 14, 2006, after the close of trading, Walter distributedapproximately 85.8 million shares of Series B common stock of MuellerWater to holders of Walter’s common stock on the record date of December 6,2006. The Series B Common Shares represent approximately 75 % of theoutstanding shares of Mueller Water, and approximately 96% of the combinedvoting power of all of Mueller Water’s common stock.

·       On January 4, 2006, theCompany acquired Hunt Industries, Inc. (“Hunt”) for $6.8 million in cash.Hunt, based in Murfreesboro, Tennessee, is a manufacturer of meter pits andmeter yokes which are sold by the Company’s Mueller segment.

·       OnJanuary 27, 2006, the Company acquired the operating assets of CCNE,L.L.C. (“CCNE”), a Connecticut-based manufacturer and seller of check valves tothe water and wastewater treatment markets, for $8.8 million in cash. TheCompany acquired certain identifiable intangible assets in conjunction with theCCNE acquisition, resulting in additional annual amortization expense ofapproximately $1.5 million over the next four and a half years.

·       Mueller Water has entered intoa tax allocation agreement (“Tax Allocation Agreement”) with Walter inconnection with the IPO of Mueller Water’s Common Stock and the spin-off ofMueller Water by Walter. Pursuant to the Tax Allocation Agreement, MuellerWater and Walter will make payments to each other to compensate the payee forincome taxes owed and paid by the payee, subject to certain adjustments, thatwould not have been payable by that party had each party filed separatefederal, state and local income tax returns for those periods prior to thespin-off in which Mueller Water filed combined, consolidated or unitary (as applicable)federal, state and local 

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returns as a consolidatedsubsidiary of Walter. With respect to our tax assets, our right toreimbursement from Walter will be determined based on the usage of such taxassets by the Walter consolidated federal income tax group or the combined,consolidated or unitary state or local income tax group. For all periods priorto the spin-off, Walter will continue to have all the rights of a parent of aconsolidated group, will be the sole and exclusive agent for us in any and allmatters relating to the combined, consolidated or unitary federal, state andlocal income tax liabilities of us, will have sole and exclusive responsibilityfor the preparation and filing of consolidated federal income and consolidatedor combined state and local tax returns (or amended returns), and will have thepower to contest or compromise any asserted tax adjustment or deficiency and tofile, litigate or compromise any claim for refund on behalf of us related toany such combined, consolidated or unitary (as applicable) federal, state orlocal tax return.

·       Mueller Water and Walterhave also entered into a transition services agreement, effective as of May 26,2006, pursuant to which Mueller Water and Walter and certain of theirrespective subsidiaries will provide to each other certain services, includingthe provision by Walter to Mueller Water of certain tax and accountingservices, certain occupancy rights, certain human resources services (includingbenefit plan administration), certain communications systems and certaininsurance. Services under the agreement are to be provided at a pricesufficient to cover the provider’s reasonable estimate of its actual costs and,if applicable, consistent with the prices such provider would charge to an affiliate,in each case without taking into account any profit margin or projected savingsfrom increased efficiency. The term of the services to be provided varies on aservice-by-service basis.

·       On December 14, 2006, theCompany and Walter entered into a joint litigation agreement, whereby theCompany and Walter allocated responsibilities with respect to pending andfuture litigation and claims, agreed to share insurance coverages andthird-party indeminification rights, where appropriate, and agreed generally tocooperate with each other regarding such litigation claims and rights goingforward.

·       Effective December 14, 2006,the Company and Walter entered into assignment and assumption agreements withregard to the employment agreements between Walter and each of Gregory E.Hyland and Raymond P. Torok. As of December 14, 2006, the employment of Messrs. Hylandand Torok with Walter was terminated and these executives became full-timeexecutives at the Company. In addition, on December 15, 2006, inconjunction with the spin-off of Mueller Water by Walter, Mueller Waterapproved the grant of stock options and restricted stock units for MuellerWater’s Series A common stock pursuant to Mueller Water’s 2006 StockIncentive Plan to replace the legacy share-based compensation instruments heldby Walter employees that became Company employees upon the Walter spin-off ofMueller Water. As a result, grants of approximately 464,000 non-qualified stockoptions with exercise prices ranging from approximately $2.00 to $21.00, andgrants of approximately 414,000 restricted stock units, were approved byMueller Water.

·       Asof September 30, 2006, scrap metal costs for our U.S. Pipe segmentdeclined nearly 17% from their peak in 2004. The average cost of scrap iron perton produced during the three months ended September 30, 2006 increasednearly 24% compared to the average cost during the three months ended September 30,2005. Recently scrap costs have decreased: the average cost of scrap iron perton produced during the month of September 2006 decreased 5.2% over theaverage cost during the three months ended June 30, 2006.

·       Inthe fiscal year ended September 30, 2006 and the twelve months ended September 30,2005 (on a pro forma basis), approximately 38% and 37%, respectively, of oursales were to our ten largest distributors, and approximately 32% and 30%,respectively, of our sales were to our three largest distributors: Home Depot,Ferguson Enterprises and Groeniger. While our relationships with our 

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ten largest distributorshave been long-lasting, distributors in our industry have experiencedsignificant consolidation in recent years. As consolidation among distributorscontinues, pricing pressure may result, which could lead to a significantdecline in our profitability. For example, Home Depot acquired NationalWaterworks in 2005 and then acquired Hughes Supply in March 2006. As aresult, two of our three previous largest distributors have been combined undercommon control. Moreover, the loss of either of Home Depot or FergusonEnterprises as a distributor could significantly reduce our levels of sales andprofitability.

·       U.S. Pipe is considering theconstruction of a “mini mill” which will be designed to produce the Company’shigh-volume ductile iron pipe at costs lower than existing facilities. Constructionof this facility could take approximately two to three years at an estimatedcapital cost of $40 million to $45 million. The timing and capital estimates,however, could change significantly depending on the final design andconstruction costs. U.S. Pipe plans to finance the construction throughoperating cash flow, existing cash on hand, local government incentives andfunds available under the 2005 Mueller Credit Agreement.

·       During the quarter ended December 31,2005, the Company’s U.S. Pipe segment had favorable demand for its ductile ironpipe products as a result of a reduction in the supply of PVC pipe. During thistime period, Hurricane Katrina affected the supply of petroleum, which is aprimary raw material used in the PVC manufacturing process.

·       The Company has historically recorded related party corporatecharges from Walter for services performed for the U.S. Pipe segment in theU.S. Pipe segment results. The related party corporate charges will cease on December 14,2006 due to the spin-off of the Company, and such corporate charges will nolonger be reflected in the U.S. Pipe segment results.

**Forward-Looking Statements.**

This report contains certain statements that may bedeemed “forward-looking statements” within the meaning of Section 21E ofthe Securities Exchange Act of 1934. All statements, other than statements ofhistorical fact, that address activities, events or developments that we or ourmanagement intends, expects, projects, believes or anticipates will or mayoccur in the future are forward-looking statements. Such statements are basedupon certain assumptions and assessments made by our management in light oftheir experience and their perception of historical trends, current conditions,expected future developments and other factors they believe to be appropriate.The forward-looking statements included in this report are also subject to anumber of material risks and uncertainties, including but not limited toeconomic, competitive, governmental and technological factors affecting ouroperations, markets, products, services and prices. Such forward-lookingstatements are not guarantees of future performance, and actual results,developments and business decisions may differ from those envisaged by suchforward-looking statements.

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**Results ofOperations**

***FiscalYear Ended September 30, 2006 As Compared to the Twelve Months Ended September 30,2005***

| ** **                                                         | ** ** | **Fiscal year and  twelve months ended September 30,** | ** ** | ** **                            | ** ** | ** **                  | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-----------------------------|------------|
| ** **                                                         | ** ** | **2006**                                                                             | ** ** | **2005**                              | ** ** | **2006 vs. 2005** | ** ** |
| ** **                                                         | ** ** | ** **                                                                           | ** ** | **Percentage  of net  sales(1)** | ** ** | ** **                  | ** ** | **Percentage  of net  sales(1)** | ** ** | **Increase/  (decrease)** | ** ** | **Percentage  increase/  (decrease)** | ** ** |
| ** **                                                         | ** ** | **(dollars in millions)**                                                  | ** ** |
| Net sales                                                          |       |                                                                                 |       |                                  |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                            |       | $                                                                                    | 804.1      |                                  |       | 41.6                        | %          |   | $ | — |   |   | — | % |   |   | $ | 804.1 |   |   |   |   |   |   |
| U.S. Pipe                                                          |       | 594.7                                                                                |       |                                  | 30.8       |                        |       | 598.1 |   |   | 100.0 |   |   |   | (3.4 | ) |   |   | (0.6 | )% |   |
| Anvil                                                              |       | 534.6                                                                                |       |                                  | 27.6       |                        |       | — |   |   | — |   |   |   | 534.6 |   |   |   |   |   |   |
| Consolidated                                                       |       | $                                                                                    | 1,933.4    |                                  |       | 100.0                       |       |   | $ | 598.1 |   |   | 100.0 |   |   |   | $ | 1,335.3 |   |   |   |   |   |   |
| Gross profit                                                       |       |                                                                                 |       |                                  |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                            |       | $                                                                                    | 223.0      |                                  |       | 27.7                        |       |   | $ | — |   |   | — |   |   |   | $ | 223.0 |   |   |   |   |   |   |
| U.S. Pipe                                                          |       | 62.5                                                                                 |       |                                  | 10.5       |                        |       | 67.4 |   |   | 11.3 |   |   |   | (4.9 | ) |   |   | (7.3 | ) |   |
| Anvil                                                              |       | 122.6                                                                                |       |                                  | 22.9       |                        |       | — |   |   | — |   |   |   | 122.6 |   |   |   |   |   |   |
| Consolidating eliminations                                         |       | (0.4                                                                                 | )          |                                  | —     |                        |       | — |   |   | — |   |   |   | (0.4 | ) |   |   |   |   |   |
| Consolidated                                                       |       | $                                                                                    | 407.7      |                                  |       | 21.1                        |       |   | $ | 67.4 |   |   | 11.3 |   |   |   | $ | 340.3 |   |   |   |   |   |   |
| Selling, general and  administrative                               |       |                                                                                 |       |                                  |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                            |       | $                                                                                    | 78.3       |                                  |       | 9.7                         |       |   | $ | — |   |   | — |   |   |   | $ | 78.3 |   |   |   |   |   |   |
| U.S. Pipe                                                          |       | 43.2                                                                                 |       |                                  | 7.3        |                        |       | 39.1 |   |   | 6.5 |   |   |   | 4.1 |   |   |   | 10.5 |   |   |
| Anvil                                                              |       | 90.8                                                                                 |       |                                  | 17.0       |                        |       | — |   |   | — |   |   |   | 90.8 |   |   |   |   |   |   |
| Corporate                                                          |       | 29.8                                                                                 |       |                                  | 1.5        |                        |       | — |   |   | — |   |   |   | 29.8 |   |   |   |   |   |   |
| Consolidated                                                       |       | $                                                                                    | 242.1      |                                  |       | 12.5                        |       |   | $ | 39.1 |   |   | 6.5 |   |   |   | $ | 203.0 |   |   |   |   |   |   |
| Related party corporate  charges                                   |       |                                                                                 |       |                                  |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                            |       | $                                                                                    | —     |                                  |       | —                      |       |   | $ | — |   |   | — |   |   |   | $ | — |   |   |   |   |   |   |
| U.S. Pipe                                                          |       | 7.7                                                                                  |       |                                  | 1.3        |                        |       | 7.3 |   |   | 1.2 |   |   |   | 0.4 |   |   |   | 5.5 |   |   |
| Anvil                                                              |       | —                                                                               |       |                                  | —     |                        |       | — |   |   | — |   |   |   | — |   |   |   |   |   |   |
| Corporate                                                          |       | 0.3                                                                                  |       |                                  | —     |                        |       | — |   |   | — |   |   |   | 0.3 |   |   |   |   |   |   |
| Consolidated                                                       |       | $                                                                                    | 8.0        |                                  |       | 0.4                         |       |   | $ | 7.3 |   |   | 1.2 |   |   |   | $ | 0.7 |   |   |   | 9.6 |   |   |
| Facility rationalization,  restructuring and related costs    |       |                                                                                 |       |                                  |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                            |       | $                                                                                    | —     |                                  |       | —                      |       |   | $ | — |   |   | — |   |   |   | $ | — |   |   |   |   |   |   |
| U.S. Pipe                                                          |       | 28.6                                                                                 |       |                                  | 4.8        |                        |       | — |   |   | — |   |   |   | 28.6 |   |   |   |   |   |   |
| Anvil                                                              |       | —                                                                               |       |                                  | —     |                        |       | — |   |   | — |   |   |   | — |   |   |   |   |   |   |
| Consolidated                                                       |       | $                                                                                    | 28.6       |                                  |       | 1.5                         |       |   | $ | — |   |   | — |   |   |   | $ | 28.6 |   |   |   |   |   |   |
| Income (loss) from  operations                                     |       |                                                                                 |       |                                  |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                            |       | $                                                                                    | 144.7      |                                  |       | 18.0                        |       |   | $ | — |   |   | — |   |   |   | $ | 144.7 |   |   |   |   |   |   |
| U.S. Pipe                                                          |       | (17.0                                                                                | )          |                                  | (2.9       | )                           |       | 21.0 |   |   | 3.5 |   |   |   | (38.0 | ) |   |   |   |   |   |
| Anvil                                                              |       | 31.8                                                                                 |       |                                  | 5.9        |                        |       | — |   |   | — |   |   |   | 31.8 |   |   |   |   |   |   |
| Corporate                                                          |       | (30.1                                                                                | )          |                                  | (1.6       | )                           |       | — |   |   | — |   |   |   | (30.1 | ) |   |   |   |   |   |
| Consolidating eliminations                                         |       | (0.4                                                                                 | )          |                                  | —     |                        |       | — |   |   | — |   |   |   | (0.4 | ) |   |   |   |   |   |
| Consolidated                                                       |       | $                                                                                    | 129.0      |                                  |       | 6.7                         |       |   | $ | 21.0 |   |   | 3.5 |   |   |   | $ | 108.0 |   |   |   |   |   |   |
| Interest expense arising from related party payable to Walter |       | $                                                                                    | —     |                                  |       | —                      |       |   | $ | (21.1 | ) |   | (3.5 | ) |   |   | $ | 21.1 |   |   |   |   |   |   |
| Interest expense, net of interest income                           |       | (101.4                                                                               | )          |                                  | (6.0       | )                           |       | (0.4 | ) |   | (0.1 | ) |   |   | (101.0 | ) |   |   |   |   |   |
| Income (loss) before income taxes                                  |       | 27.6                                                                                 |       |                                  | 0.7        |                        |       | (0.5 | ) |   | (0.1 | ) |   |   | 28.1 |   |   |   |   |   |   |
| Income tax expense                                                 |       | 11.0                                                                                 |       |                                  | 0.4        |                        |       | 3.9 |   |   | 0.7 |   |   |   | 7.1 |   |   |   |   |   |   |
| Net income (loss)                                                  |       | $                                                                                    | 16.6       |                                  |       | 0.3                         |       |   | $ | (4.4 | ) |   | (0.7 | ) |   |   | $ | 21.0 |   |   |   |   |   |   |

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(1)           Percentages areby segment, if applicable.

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*NetSales.**  *Consolidated net sales for the year ended September 30,2006 were $1,933.4 million, an increase of $1,335.3 million from$598.1 million in the comparable prior year period. The increase wasprimarily related to the October 3, 2005 Acquisition of PredecessorMueller, which accounted for almost all of the overall increase.

Mueller segment netsales for the year ended September 30, 2006 were $804.1 million.

U.S. Pipe segmentnet sales for the year ended September 30, 2006 were $594.7 million, adecrease of $3.4 million, or 0.6% from $598.1 million in the prioryear period. This slight decrease was driven primarily by the transfer of $43.3million of the U.S. Pipe segment valve and hydrant business to the Muellersegment. Offsetting this decrease were increases in ductile iron pipe sellingprices and higher shipments in the first quarter of the current year.

Anvil segment net sales for the year ended September 30,2006 were $534.6 million.

*GrossProfit.**  *Consolidated gross profit for the yearended September 30, 2006 was $407.7 million, an increase of$340.3 million compared to $67.4 million in the comparable prior yearperiod. The Acquisition of Predecessor Mueller contributed $345.2 million.Included in cost of sales for the year ended September 30, 2006 was $70.2million of purchase accounting adjustments related to valuing inventoryacquired in the Acquisition at fair value and $21.3 million of inventorywrite-offs and unabsorbed overhead costs resulting from the closure of the U.S.Pipe Chattanooga manufacturing facility.

Mueller segmentgross profit for the year ended September 30, 2006 was $223.0 million.Included in cost of sales for the year ended September 30, 2006 was $52.9million of purchase accounting adjustments related to valuing inventory at fairvalue.

U.S. Pipe segmentgross profit for the year ended September 30, 2006 was $62.5 million, adecrease of $4.9 million, or 7.3%, compared to $67.4 million in theprior year period. Gross margin decreased to 10.5% in the current periodcompared to 11.3% in the prior year period. On October 26, 2005 theCompany announced that the U.S. Pipe Chattanooga plant would be closed duringfiscal 2006 and that production of the U.S. Pipe valves and hydrants would betransferred to the Mueller manufacturing facilities at Albertville, Alabama andChattanooga, Tennessee. In addition to transferring production to Muellerfacilities, the sales responsibility for U.S. Pipe valve and hydrant productsales was transferred to the Mueller segment. In conjunction with thistransfer, it was determined that certain U.S. Pipe inventory would notultimately be sold. As a result, inventory obsolescence write-offs of $11.4million were recorded to cost of sales during 2006.

In addition, because of the plant closure process,actual production capacity at the U.S. Pipe Chattanooga facility wassignificantly lower than normal capacity, resulting in facility expenses of$9.0 million and $0.9 million of other costs associated with the plant closurecharged directly to cost of sales, which was expensed in 2006.

Excluding the charges for inventory write-offs of$11.4 million, facility expenses of $9.0 million and other costs of $0.9million, U.S. Pipe gross margins would have been $83.8 million, or 14.1% forthe current period, compared to 11.3% in the prior year period. This increaseis primarily due to higher ductile iron pipe selling prices.

Anvil segment gross profit for the year ended September 30,2006 was $122.6 million. Included in cost of sales for the year ended September 30,2006 was $17.3 million of purchase accounting adjustments related to valuinginventory acquired in the Acquisition at fair value.

*Selling, General &Administrative.**  *Consolidated expenses for theyear ended September 30, 2006 were $242.1 million, an increase of$203.0 million, compared to $39.1 million in the comparable prioryear period. The prior year period included a favorable $5.1 million insuranceclaim settlement. The Acquisition of Predecessor Mueller accounted for $198.9million of the increase. Expenses as a percentage 

37

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of net salesincreased to 12.5% in the current period compared to 6.5% in the prior yearperiod. Excluding the $5.1 million favorable insurance settlement, prioryear expenses were 7.4% as a percentage of net sales.

Muellersegment expenses for the year ended September 30, 2006 were $78.3 million.

U.S. Pipe segment expenses for the year ended September 30,2006 were $43.2 million, compared to $39.1 million for the prior yearperiod. As a percentage of net sales, expenses increased to 7.3% in the currentperiod compared to 6.5% in the prior year period. The prior period expense wasfavorably impacted by a $5.1 million insurance claim settlement. In addition,current year costs include higher management incentive accruals and increasedoutside sales commissions.

Anvil segment expenses forthe year ended September 30, 2006 were $90.8 million.

Corporate segment expensesfor the year ended September 30, 2006 were $29.8 million.

*Related Party CorporateCharges.  *Certain costs incurred by Walter suchas insurance, executive salaries, professional service fees, human resources,transportation, and other centralized business functions are allocated to itssubsidiaries. Costs incurred by Walter that cannot be directly attributed toits subsidiaries are allocated to its subsidiaries based on estimated annualrevenues.

*Facility Rationalization,Restructuring and Related Costs.**  *TheCompany expensed $28.6 million of restructuring costs for the year ended September 30,2006, related to the closure of the U.S. Pipe Chattanooga, Tennessee plant.These costs are comprised of fixed asset impairments of $21.5 million,severance for terminated hourly and salaried employees of $3.8 million, andpension and other post-employment benefit costs of $3.3 million.

*Interest Expense Arisingfrom Related Party Payable to Walter.  *Interestexpense was allocated to the Company up to the date of the Acquisition basedupon the outstanding balance of the intercompany note. The intercompany note toWalter of $443.6 million was forgiven by Walter prior to October 3, 2005.There was no intercompany interest expense for the year ended September 30,2006 and $21.1 million for the twelve months ended September 30, 2005.

*Interest Expense, Net ofInterest Income.**  *Interest expense, net ofinterest income, for the current period was $101.4 million compared to$0.4 million for the prior period:

| ** **                                                       | ** ** | **Twelve months ended  September 30, 2006** | ** ** | **Twelve months ended  September 30, 2005** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                       | ** ** | **(dollars in millions)**                             | ** ** | ** **                                                      | ** ** |
| Interest expense,  net of interest income:                       |       |                                                            |       |                                                            |       |   |   |   |   |
| Contractual  interest expense                                    |       |                                                            | $          | 94.4                                                            |       |   |   | $ | 0.4 |   |   |
| Deferred  financing fee amortization                             |       |                                                            | 3.1        |                                                            |       |   | — |   |   |
| Early debt  redemption penalty                                   |       |                                                            | 11.0       |                                                            |       |   | — |   |   |
| Write off of  deferred financing fees and fair value adjustments |       |                                                            | (1.7       | )                                                               |       |   | — |   |   |
| Bridge loan fee                                                  |       |                                                            | 2.5        |                                                            |       |   | — |   |   |
| Interest rate  swap gains                                        |       |                                                            | (0.4       | )                                                               |       |   | — |   |   |
| Interest expense                                                 |       |                                                            | 108.9      |                                                            |       |   | 0.4 |   |   |
| Interest income                                                  |       |                                                            | (7.5       | )                                                               |       |   | — |   |   |
| Total interest expense,  net of interest income                  |       |                                                            | $          | 101.4                                                           |       |   |   | $ | 0.4 |   |   |

 

*Income Tax Expense.**  *The provision for income taxes forthe current period was an expense of $11.0 million as compared to anexpense of $3.9 million in the comparable prior year period. The effectivetax rate for the year ended September 30, 2006 was 39.9%. The estimatedeffective tax rate differs from the statutory rate primarily due tomanufacturing production deductions and state income taxes. The effective 

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tax rate for thetwelve months ended September 30, 2005 was 780% and was impacted byrecording the reversal of a $3.6 million valuation allowance against statedeferred tax assets at the U.S. Pipe segment.

***Nine Months Ended September 30, 2005 As Comparedto the Nine Months Ended September 30, 2004***

The Company had only one segment, U.S. Pipe, prior to theAcquisition of Predecessor Mueller on October 3, 2005. In December 2005,U.S. Pipe changed its fiscal year-end to September 30, which coincideswith the fiscal year end of Predecessor Mueller. The results of operations for the nine months ended September 30,2005 are compared to the comparable nine month period ended September 30,2004 as follows:

| ** **                                    | ** ** | **For the nine months  ended  September 30,** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **2005**                                                          | ** ** | **2004** | ** ** |
| ** **                                    | ** ** | **(dollars in millions)**                               | ** ** |
| Net revenues                                  |       | $                                                                 | 456.9      |   | $ | 437.2 |   |
| Cost of sales                                 |       | 402.2                                                             |       | 402.9 |   |
| Gross profit                                  |       | 54.7                                                              |       | 34.3 |   |
| Selling, general  and administrative expenses |       | 25.9                                                              |       | 25.0 |   |
| Related party  corporate charges              |       | 5.4                                                               |       | 5.7 |   |
| Restructuring and  impairment charges         |       | —                                                            |       | 0.1 |   |
| Operating income                              |       | 23.4                                                              |       | 3.5 |   |
| Interest expense                              |       | (15.5                                                             | )          | (13.4 | ) |
| Income (loss) before income tax expense       |       | 7.9                                                               |       | (9.9 | ) |
| Income tax  expense (benefit)                 |       | 2.8                                                               |       | (3.9 | ) |
| Net income (loss)                             |       | $                                                                 | 5.1        |   | $ | (6.0 | ) |

 

*NetRevenues.**  *Netrevenues were $456.9 million for the nine months ended September 30,2005 compared to $437.2 million in the comparable prior year period. Theincrease was primarily due to a 20% increase in ductile iron pipe selling prices,partially offset by a 11% decrease in ductile iron pipe shipments mainly due toindustry-wide delays in construction projects, some of which were due toweather-related problems. Prices were higher than the prior year as theindustry has been increasing prices to offset higher scrap metal costs. Scrapmetal costs increased from an average of $209 per ton in the nine months ended September 30,2004 to an average of $223 per ton in the nine months ended September 30,2005. Our pricing actions since September 2003 have offset scrap metal andother manufacturing cost increases.

*GrossProfit.**  *Grossmargins increased to 12.0% for the nine months ended September 30, 2005compared to 7.8% for the nine months ended September 30, 2004 as a resultof higher ductile iron pipe selling prices, partially offset by higher scrapmetal costs.

*OperatingIncome.**  *Operatingincome totaled $23.4 million for the nine months ended September 30,2005 compared to $3.5 million in the comparable prior year period. Theincrease in operating income of $19.9 million was primarily due to higherpricing and an additional $3.2 million of insurance claim settlements,partially offset by lower volumes and higher scrap metal costs.

*InterestExpense.**  *Interestexpense primarily relates to interest expense on the intercompany payable toWalter.

*IncomeTax Expense (Benefit).**  *Asmore fully described in Note 6 to the financial statements, income taxexpense was calculated as if U.S. Pipe filed on a stand alone basis for thenine months ended September 30, 2005, with the exception that the taxsharing agreement in place with Walter provided for U.S. Pipe to receive animmediate benefit for its tax losses for Federal purposes. Under thishistorical tax 

39

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policy, income tax expensewas 35.4% of the pre-tax income for the nine months ended September 30,2005 compared to an income tax benefit of 39.4% of the pre-tax loss for thenine months ended September 30, 2004. The decrease results from therecording of a valuation allowance in the fourth quarter of 2004 for stateincome tax attributes.

On a pro forma basis,assuming U.S. Pipe’s deferred tax assets were evaluated for realization withoutregard to utilization by Walter, income tax expense would have been$1.6 million, or 20.3% of pre-tax income, for the nine months ended September 30,2005 compared to a pro forma income tax expense of $7.2 million, or 72.7%of pre-tax loss for the nine months ended September 30, 2004. Thechange in the pro forma effective tax rate results from the utilization in 2005of a pro forma net operating loss carryforward generated for the nine monthsended September 30, 2004, for which a valuation allowance would have beenestablished during 2004.

**SupplementalInformation—Results of Operations for the Fiscal Year Ended September 30,2006 Compared to Pro Forma Results of Operations for the Twelve Months Ended September 30,2005**

The unaudited pro forma results of operations for thetwelve months ended September 30, 2005 is presented as if the Acquisitionof Predecessor Mueller and borrowings under the 2005 Mueller Credit Agreementhad taken place on October 1, 2004 and were carried forward through September 30,2005.

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**Pro Forma Resultsof Operations**

***Actual Fiscal YearEnded September 30, 2006 As Compared to the Pro Forma Twelve Months Ended September 30,2005***

| ** **                                                 | ** ** | **Fiscal year and  twelve months ended September 30,** | ** ** | **Actual 2006 vs.**         | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                 | ** ** | **Actual 2006**                                                                 | ** ** | **Pro Forma 2005**          | ** ** | **Pro Forma 2005** | ** ** |
| ** **                                                 | ** ** | ** **                                                                           | ** ** | **Percentage  of net  sales(1)** | ** ** | ** ** | ** ** | **Percentage  of net  sales(1)** | ** ** | **Increase/  (decrease)** | ** ** | **Percentage  increase/  (decrease)** | ** ** |
| ** **                                                 | ** ** | **(dollars in millions)**                                                  | ** ** |
| Net sales                                                  |       |                                                                                 |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                    |       | $                                                                                    | 804.1      |                                  |       | 41.6 | % |   | $ | 664.0 |   |   | 38.0 | % |   |   | $ | 140.1 |   |   |   | 21.1 | % |   |
| U.S. Pipe                                                  |       | 594.7                                                                                |       |                                  | 30.8       |   |   | 598.1 |   |   | 34.2 |   |   |   | (3.4 | ) |   |   | (0.6 | ) |   |
| Anvil                                                      |       | 534.6                                                                                |       |                                  | 27.6       |   |   | 485.0 |   |   | 27.8 |   |   |   | 49.6 |   |   |   | 10.2 |   |   |
| Consolidated                                               |       | $                                                                                    | 1,933.4    |                                  |       | 100.0 |   |   | $ | 1,747.1 |   |   | 100.0 |   |   |   | $ | 186.3 |   |   |   | 10.7 |   |   |
| Gross profit                                               |       |                                                                                 |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                    |       | $                                                                                    | 223.0      |                                  |       | 27.7 |   |   | $ | 221.3 |   |   | 33.3 |   |   |   | $ | 1.7 |   |   |   | 0.8 |   |   |
| U.S. Pipe                                                  |       | 62.5                                                                                 |       |                                  | 10.5       |   |   | 67.4 |   |   | 11.3 |   |   |   | (4.9 | ) |   |   | (7.3 | ) |   |
| Anvil                                                      |       | 122.6                                                                                |       |                                  | 22.9       |   |   | 120.4 |   |   | 24.8 |   |   |   | 2.2 |   |   |   | 1.8 |   |   |
| Consolidating eliminations                                 |       | (0.4                                                                                 | )          |                                  | —     |   |   | — |   |   | — |   |   |   | (0.4 | ) |   |   |   |   |   |
| Consolidated                                               |       | $                                                                                    | 407.7      |                                  |       | 21.1 |   |   | $ | 409.1 |   |   | 23.4 |   |   |   | $ | (1.4 | ) |   |   | (0.3 | ) |   |
| Selling,  general and administrative                       |       |                                                                                 |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                    |       | $                                                                                    | 78.3       |                                  |       | 9.7 |   |   | $ | 80.5 |   |   | 12.1 |   |   |   | $ | (2.2 | ) |   |   | (2.7 | ) |   |
| U.S. Pipe                                                  |       | 43.2                                                                                 |       |                                  | 7.3        |   |   | 39.1 |   |   | 6.5 |   |   |   | 4.1 |   |   |   | 10.5 |   |   |
| Anvil                                                      |       | 90.8                                                                                 |       |                                  | 17.0       |   |   | 81.6 |   |   | 16.8 |   |   |   | 9.2 |   |   |   | 11.3 |   |   |
| Corporate                                                  |       | 29.8                                                                                 |       |                                  | 1.5        |   |   | 25.0 |   |   | 1.4 |   |   |   | 4.8 |   |   |   | 19.2 |   |   |
| Consolidated                                               |       | $                                                                                    | 242.1      |                                  |       | 12.5 |   |   | $ | 226.2 |   |   | 12.9 |   |   |   | $ | 15.9 |   |   |   | 7.0 |   |   |
| Related party corporate  charges                           |       |                                                                                 |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                    |       | $                                                                                    | —     |                                  |       | — |   |   | $ | — |   |   | — |   |   |   | $ | — |   |   |   |   |   |   |
| U.S. Pipe                                                  |       | 7.7                                                                                  |       |                                  | 1.3        |   |   | 7.3 |   |   | 1.2 |   |   |   | 0.4 |   |   |   | 5.5 |   |   |
| Anvil                                                      |       | —                                                                               |       |                                  | —     |   |   | — |   |   | — |   |   |   | — |   |   |   |   |   |   |
| Corporate                                                  |       | 0.3                                                                                  |       |                                  | —     |   |   | — |   |   | — |   |   |   | 0.3 |   |   |   |   |   |   |
| Consolidated                                               |       | $                                                                                    | 8.0        |                                  |       | 0.4 |   |   | $ | 7.3 |   |   | 0.4 |   |   |   | $ | 0.7 |   |   |   | 9.6 |   |   |
| Facility  rationalization, restructuring and related costs |       |                                                                                 |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                    |       | $                                                                                    | —     |                                  |       | — |   |   | $ | 1.7 |   |   | 0.3 |   |   |   | $ | (1.7 | ) |   |   |   |   |   |
| U.S. Pipe                                                  |       | 28.6                                                                                 |       |                                  | 4.8        |   |   | — |   |   | — |   |   |   | 28.6 |   |   |   |   |   |   |
| Anvil                                                      |       | —                                                                               |       |                                  | —     |   |   | — |   |   | — |   |   |   | — |   |   |   |   |   |   |
| Consolidated                                               |       | $                                                                                    | 28.6       |                                  |       | 1.5 |   |   | $ | 1.7 |   |   | 0.1 |   |   |   | $ | 26.9 |   |   |   |   |   |   |
| Income (loss) from  operations                             |       |                                                                                 |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                    |       | $                                                                                    | 144.7      |                                  |       | 18.0 |   |   | $ | 139.1 |   |   | 8.0 |   |   |   | $ | 5.6 |   |   |   | 4.0 |   |   |
| U.S. Pipe                                                  |       | (17.0                                                                                | )          |                                  | (2.9       | ) |   | 21.0 |   |   | 3.5 |   |   |   | (38.0 | ) |   |   |   |   |   |
| Anvil                                                      |       | 31.8                                                                                 |       |                                  | 5.9        |   |   | 38.8 |   |   | 8.0 |   |   |   | (7.0 | ) |   |   | (18.0 | ) |   |
| Corporate                                                  |       | (30.1                                                                                | )          |                                  | (1.6       | ) |   | (25.0 | ) |   | (1.4 | ) |   |   | (5.1 | ) |   |   | (20.4 | ) |   |
| Consolidating eliminations                                 |       | (0.4                                                                                 | )          |                                  | —     |   |   | — |   |   | — |   |   |   | (0.4 | ) |   |   |   |   |   |
| Consolidated                                               |       | $                                                                                    | 129.0      |                                  |       | 6.7 |   |   | $ | 173.9 |   |   | 10.0 |   |   |   | $ | (44.9 | ) |   |   | (25.8 | ) |   |
| Interest expense,  net of interest  income                 |       | (101.4                                                                               | )          |                                  | (6.0       | ) |   | (118.3 | ) |   | (7.6 | ) |   |   | 16.9 |   |   |   | 14.3 |   |   |
| Income before  income taxes                                |       | 27.6                                                                                 |       |                                  | 0.7        |   |   | 55.6 |   |   | 2.3 |   |   |   | (28.0 | ) |   |   | (50.4 | ) |   |
| Income tax expense                                         |       | 11.0                                                                                 |       |                                  | 0.4        |   |   | 23.9 |   |   | 1.2 |   |   |   | (12.9 | ) |   |   | (54.0 | ) |   |
| Net income                                                 |       | $                                                                                    | 16.6       |                                  |       | 0.3 |   |   | $ | 31.7 |   |   | 1.2 |   |   |   | $ | (15.1 | ) |   |   | (47.6 | ) |   |

----

(1)           Percentages are by segment, if applicable.

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Management’s discussion below reflects its analysis ofthe pro forma data presented above. Management believes that the pro formacomparisons will assist in understanding trends in the Company’s business inthe factors that management considers critical to assessing the Company’soperating and financial performance.

*NetSales.**  *Consolidated net sales for the year ended September 30,2006 were $1,933.4 million, an increase of $186.3 million from$1,747.1 million in the prior year period.

Mueller segment netsales for the year ended September 30, 2006 were $804.1 million, an increaseof $140.1 million, or 21.1% from $664.0 million in the prior year period. Thisincrease was primarily driven by higher pricing and volumes in hydrants, watervalves and brass water products, plus the addition of the U.S. Pipesegment’s valve and hydrant volume, transferred to the Mueller segmenteffective January 1, 2006.

U.S. Pipe segment net sales for the year ended September 30,2006 were $594.7 million, a decrease of $3.4 million, or 0.6% from$598.1 million in the prior year period. This slight decrease was drivenprimarily by the transfer of $43.3 million of the U.S. Pipe segment valve andhydrant business to the Mueller segment. Offsetting this decrease wereincreases in ductile iron pipe selling prices.

Anvil segment net sales for the year ended September 30,2006 were $534.6 million, an increase of $49.6 million, or 10.2% from $485.0million in the prior year period. This increase was primarily the result ofcontinued strength in the non-residential construction, oilfield and mechanicalmarkets, growth in the sales of foreign-sourced products, moderate priceincreases achieved on Company-manufactured products sold in the U.S., and therelatively strong buying power of the Canadian dollar relative to the U.S.dollar.

*GrossProfit.**  *Consolidated gross profit for the yearended September 30, 2006 was $407.7 million, a decrease of$1.4 million compared to $409.1 million in the prior year period.Included in cost of sales for the year ended September 30, 2006 was $70.2million of purchase accounting adjustments related to valuing inventoryacquired in the Acquisition at fair value and $21.3 million of inventorywrite-offs and unabsorbed overhead costs resulting from the closure of the U.S.Pipe Chattanooga manufacturing facility.

Mueller segmentgross profit for the year ended September 30, 2006 was $223.0 million, anincrease of $1.7 million, or 0.8% from $221.3 million in the prior year period.Gross margin decreased to 27.7% in the current period compared to 33.3% in theprior year period. The current period includes $52.9 million related tothe amortization expense resulting from the purchase accounting adjustment toincrease acquired inventories to fair value on the date of acquisition.Excluding the effects of this purchase accounting adjustment, gross profit inthe current period would have been $275.9 million and gross margin would havebeen 34.3% compared to 33.3% in the prior year period. This increase wasprimarily due to higher pricing and volumes, particularly in hydrants, watervalves and brass water products, partially offset by higher raw material costs.

U.S. Pipe segment gross profit for the year ended September 30,2006 was $62.5 million, a decrease of $4.9 million, or 7.3%, compared to$67.4 million in the prior year period. Gross margin decreased to 10.5% inthe current period compared to 11.3% in the prior year period. On October 26,2005 the Company announced that the U.S. Pipe Chattanooga plant would be closedduring fiscal 2006 and that production of the U.S. Pipe valves and hydrants wouldbe transferred to the Mueller manufacturing facilities at Albertville, Alabamaand Chattanooga, Tennessee. In addition to transferring production to Muellerfacilities, the sales responsibility for U.S. Pipe valve and hydrant productsales was transferred to the Mueller segment. In conjunction with thistransfer, it was determined that certain U.S. Pipe inventory would notultimately be sold. As a result, inventory obsolescence write-offs of $11.4million were recorded to cost of sales during 2006.

In addition, because of the plant closure process,actual production capacity at the U.S. Pipe Chattanooga facility wassignificantly lower than normal capacity, resulting in facility expenses of 

42

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$9.0 million and $0.9million of other costs associated with the plant closure charged directly tocost of sales, which was expensed in 2006.

Excluding the charges for inventory write-offs of$11.4 million, facility expenses of $9.0 million and other costs of $0.9million, U.S. Pipe gross margins would have been $83.8 million, or 14.1% forthe current period, compared to 11.3% in the prior year period. This increaseis primarily due to higher ductile iron pipe selling prices.

Anvil segment gross profit for the year ended September 30,2006 was $122.6 million, an increase of $2.2 million, or 1.8%, compared to$120.4 million in the prior year period. The current period includes $17.3million related to the amortization expense resulting from the purchaseaccounting adjustment related to valuing inventory acquired in the Acquisitionat fair value. Excluding the effects of this purchase accounting adjustment,gross profit would have been $139.9 million and gross margin would have been26.2% compared to 24.8% in the prior year period. This improvement wasprimarily due to moderate price increases on the sale of Company-manufacturedproducts and the relative strength of the Canadian dollar.

*Selling,General & Administrative.**  *Consolidatedexpenses for the year ended September 30, 2006 were $242.1 million, anincrease of $15.9 million, compared to $226.2 million in the prioryear period. The prior period included a favorable $5.1 million insurance claimsettlement. Expenses as a percentage of net sales improved to 12.5% in thecurrent period compared to 12.9% in the prior year period. Excluding the $5.1million favorable insurance settlement, prior year expenses were 13.2% as apercentage of net sales.

Mueller segmentexpenses for the year ended September 30, 2006 were $78.3 million, animprovement of $2.2 million, or 2.7%, compared to $80.5 million in the prioryear period. This improvement is primarily due to a $0.7 million foreigncurrency gain during the current year. Expenses as a percentage of net salesimproved to 9.7% in the current year period compared to 12.1% in the prior yearperiod. This is primarily due to maintaining a stable SG&A expense levelwhile achieving higher sales.

U.S. Pipe segment expenses for the year ended September 30,2006 were $43.2 million, compared to $39.1 million for the prior yearperiod. As a percentage of net sales, expenses increased to 7.3% in the currentperiod compared to 6.5% in the prior year period. The prior period expense wasfavorably impacted by a $5.1 million insurance claim settlement. In addition,current year costs include higher management incentive accruals and increasedoutside sales commissions.

Anvil segment expenses for the year ended September 30,2006 were $90.8 million, an increase of $9.2 million, or 11.3%, compared to$81.6 million in the prior year period. Expenses as a percentage of net salesincreased slightly to 17.0% in the current period compared to 16.8% in theprior year period. This increase is primarily due to higher sales commissions($2.0 million) and the relative strength of the Canadian dollar ($1.3 million).Also, in the prior year period, segment expenses included a $2.2 million gainon the disposal of fixed assets, while the current year period includes a $1.0million loss primarily resulting from impairment charges for a certain piece ofequipment.

Corporate segment expenses for the year ended September 30,2006 were $29.8 million, an increase of $4.8 million compared to $25.0 millionin the prior year period. This is primarily due to $2.7 million of increasedcosts compared to the prior year period related to efforts to implement certainSarbanes-Oxley requirements, $1.9 million of share-based compensation costs,increased legal, audit and consulting fees of $1.6 million primarily due to thechange in corporate ownership and structure, and increased workers’ compensationaccruals of $0.9 million. These increases are partially offset by a $0.3million decrease in compensation costs related to changes in personnel, adecrease of $1.4 million of employee compensation costs associated with a taxgross-up related to certain share-based compensation at Predecessor Mueller anda decrease of $1.4 million for fees associated with the sale of PredecessorMueller to Walter.

*RelatedParty Corporate Charges.*   Certain costs incurred by Walter such as insurance,executive salaries, professional service fees, human resources, transportation,and other centralized business 

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functions are allocated toits subsidiaries. Costs incurred by Walter that cannot be directly attributedto its subsidiaries are allocated to its subsidiaries based on estimated annualrevenues. While these charges will no longer be allocated to the Company afterthe spin-off, the Company will incur these charges at the corporate level.

*FacilityRationalization, Restructuring and Related Costs.**  *TheCompany expensed $28.6 million of restructuring costs for the year ended September 30,2006, related to the closure of the U.S. Pipe Chattanooga, Tennessee plant.These costs are comprised of fixed asset impairments of $21.5 million,severance for terminated hourly and salaried employees of $3.8 million, andpension and other post-employment benefit costs of $3.3 million, . The prioryear period includes $1.7 million of severance expense related to the closureof a Mueller segment manufacturing facility in Colorado.

*Interest Expense, Net ofInterest Income.**  *Interest expense, net ofinterest income, for the current period was $101.4 million and includes$94.4 million of interest expense on the $1,050.0 million senior secured termloan entered into on October 3, 2005 and the 10% Senior Subordinated Notesassumed by the Company as part of the October 3, 2005 Acquisition;$2.5 million in commitment fees for a bridge loan which were expensed atthe expiration of the bridge loan period during the current period; $3.1million of amortization of deferred financing fees; and $9.3 million of lossesassociated with the early debt redemption; partially offset by $0.4 million ofgains on interest rate swaps; $4.7 million of interest income earned onunrestricted cash balances for the current period, and $2.8 million of interestincome earned on a note receivable from Walter. Interest expense, net ofinterest income, for the prior year period was $118.3 million. The decrease isprimarily due to the inclusion in the prior year period of $21.1 million ofinterest expense arising from a related party payable to Walter.

**Financial Condition**

Cash and cash equivalents increased from zero at September 30,2005 to $79.1 million at September 30, 2006, reflecting $121.9 million incash flows provided by operations and $38.6 million in cash flows provided byfinancing activities, partially offset by $81.4 million of cash flows usedin investing activities. At September 30, 2005, U.S. Pipe was awholly-owned subsidiary of Walter and all of its net cash activity wastransferred to Walter on a daily basis.

Net receivables, consisting principally of tradereceivables, were $322.9 million at September 30, 2006, an increase of$204.4 million from September 30, 2005. The Acquisition accounted for anincrease of $177.4 million. The remainder of the increase is due to highersales levels of ductile iron pipe for the quarter ended September 30, 2006compared to the quarter ended September 30, 2005 due primarily to higherpricing.

Inventories were $454.6 million at September 30,2006, an increase of $307.4 million from September 30, 2005. TheAcquisition accounted for an increase of $373.2 million, partially offset by$70.2 million of purchase accounting adjustments related to valuinginventory acquired in the Acquisition at fair value and an $11.4 millioninventory obsolescence write-down recorded during the year ended September 30,2006. The inventory obsolescence write-down was a result of the decision toclose the U.S. Pipe Chattanooga, Tennessee plant and transfer the valveand hydrant production of the plant to Mueller’s Chattanooga, Tennessee andAlbertville, Alabama plants. The remaining net increase of $15.9 millionis driven by a $17.3 million increase at the Mueller segment’s U.S.manufacturing plants primarily due to higher raw material costs.

Current deferred income taxes, net, were $42.6 millionat September 30, 2006, an increase of $31.5 million from September 30,2005. The Acquisition accounted for a decrease of $0.4 million. The remainderof the increase was primarily due to increases in temporarily non-deductibleaccruals and reserves and a net operating loss carryforward from the three dayperiod ending October 3, 2005.

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Prepaid expenses, consisting principally ofmaintenance supplies and tooling parts and prepaid insurance premiums, were$33.7 million at September 30, 2006, an increase of $32.2 million from September 30,2005. The Acquisition accounted for $31.1 million of the increase. This waspartially offset by $1.3 million of prepaid tooling amortization expense.

Property, plant and equipment was $337.0 million at September 30,2006, an increase of $187.8 million from September 30, 2005, primarily dueto assets acquired in the Acquisition of $214.2 million and capitalexpenditures of $71.1 million, partially offset by net fixed asset impairmentsand retirements of $28.0 million and fixed asset depreciation expense of$68.5 million.

Deferred financing fees, net, were $14.6 million at September 30,2006. There were no deferred financing fees at September 30, 2005. Allfees are related to the 2005 Mueller Credit Agreement entered into inconjunction with the October 3, 2005 Acquisition.

Identifiable intangibles, net, were $835.4 million at September 30,2006. There were no such intangibles at September 30, 2005. Certainintangibles were identified during the allocation of the purchase of theAcquisition: (a) indefinite-lived intangible assets consisting of tradenames and trademarks of $403.0 million; and (b) definite-livedintangible assets consisting of customer relationships of $397.6 millionand technology of $56.3 million. An additional $6.7 million was booked fortechnology acquired in the purchase of CCNE during the quarter ended March 31,2006. Amortization expense resulting from finite-lived intangible assets forthe year ended September 30, 2006 was $28.2 million.

Goodwill was $724.1 million at September 30,2006, an increase of $665.7 million from September 30, 2005. This increaseis primarily due to goodwill identified during the allocation of the purchaseprice of the Acquisition of $660.3 million and $6.8 million related to theacquisition of Hunt Industries, partially offset by a $1.4 million taxadjustment.

Other long-term assets were $2.2 million at September 30,2006, consisting of interest rate swap assets. There were no interest rateswaps at September 30, 2005.

Accounts payable were $124.8 million at September 30,2006, an increase of $72.3 million from September 30, 2005. TheAcquisition accounted for $63.3 million of the increase.

Accrued expenses and other liabilities were $122.1million at September 30, 2006, an increase of $87.4 million comparedto September 30, 2005. The Acquisition accounted for an increase of $90.7million. The offsetting decrease is primarily due to a decline in current stateand federal income tax liability.

Long-term debt outstanding at September 30, 2006was $1,011.0 million. There was no debt payable to non-affiliates at September 30,2005. The Acquisition increased debt by $1,411.1 million. The Company has madeprincipal payments, primarily generated from the proceeds of Mueller Water’sIPO in June 2006, of $391.5 million and write-offs of fair market valueadjustments and debt discount of $8.5 million related to the early retirementof a portion of the 10% Senior Subordinated Notes.

Payable to our former parent, Walter, was $3.6 millionat September 30, 2006 compared to $443.6 million at September 30,2005. In conjunction with the contribution of U.S. Pipe to Group at October 3,2005, the intercompany balance of $443.6 million was forgiven and contributedto the capital structure of the Company. The current year balance of $3.6million represents a net payable to Walter for certain costs incurred by Walterthat benefited the Company and are required to be settled in cash.

Accrued pension liability, net decreased $9.9 millionto $43.7 million at September 30, 2006. The Acquisition accounted for anincrease of $40.1 million. The offsetting decrease is primarily due to pensionfunding contributions of $26.7 million and adjustments to additional minimumpension liability (pre-tax) of $39.3 million, net of normal provision for netperiodic benefit cost of $12.3 million and $5.0 million of costs related to theclosure of the U.S. Pipe Chattanooga, Tennessee plant.

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Non-current deferred income taxes, net, was aliability of $294.0 million at September 30, 2006, compared to an asset of$9.5 million at September 30, 2005. The Acquisition accounted for anincrease of $290.2 million.

Other long-termliabilities were $20.9 million at September 30, 2006, an increase of $8.3million compared to September 30, 2005. The Acquisition accounted for anincrease of $8.9 million.

***Statements of Cash Flows***

Historically, our financing requirements have beenfunded primarily through borrowings from Walter. As of October 3, 2005,the Company’s financing requirements are funded through cash generated byoperating activities and borrowings under our revolving credit facility.

The following discussion of information related to theCompany’s Consolidated Statements of Cash Flows includes comparison ofcash flows over a twelve-month period to cash flows over a nine-month period.

*Cashflows from operating activities.**  *Netcash provided by operations was $121.9 million for the twelve months endedSeptember 30, 2006, compared to net cash used of $5.0 million for the ninemonths ended September 30, 2005. The difference was due primarily to theoperations of Predecessor Mueller Group, acquired on October 3, 2005.

*Cashflows used in investing activities.**  *Inthe twelve months ended September 30, 2006 net cash used in investingactivities was $81.4 million compared to $4.3 million of net cash providedin the nine months ended September 30, 2005. The difference was dueprimarily to the operations of Predecessor Mueller Group, acquired on October 3,2005.

*Cash flows from financingactivities.**  *Net cash provided by financingactivities was $38.6 million for the twelve months ended September 30,2006, compared to net cash provided in the nine months ended September 30,2005 of $0.7 million. A contribution from Mueller Water from proceeds fromits June 2006 IPO provided $368.7 million, which was primarily usedto prepay a portion of the outstanding 2005 Mueller Term Loan and the 10%Senior Subordinated Notes.

**Liquidity andCapital Resources**

The 2005 Credit Agreement and subordinated notesdescribed below are obligations of the Company and impose limitations on itsability to pay dividends to us. For example, the subordinated notes limit theamount of “restricted payments”, including dividends, that the Company canmake. Generally, under these notes the Company can pay dividends only if itsfixed charge coverage ratio (as defined) is 2.5 to 1 or better and only from anamount equal to 50% of its cumulative net income (as defined) since January 1,2004. The Company’s ability to generate net income will depend upon variousfactors that may be beyond our control. Accordingly, the Company may notgenerate sufficient cash flow or be permitted by the terms of its debt to paydividends or distributions to us in amounts sufficient to allow us to pay cashinterest on our outstanding indebtedness or to satisfy our other cash needs. Wewould then be required to secure alternate financing, which may not beavailable on acceptable terms, or at all.

The Company’s principalsources of liquidity have been, and are expected to be, cash flow fromoperations and borrowings under the 2005 Mueller Credit Agreement. Itsprincipal uses of cash will be debt service requirements as described below,capital expenditures, working capital requirements, dividends to Mueller Waterto finance Mueller Water’s cash needs and possible acquisitions.

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*Debt Service*

As of September 30, 2006, we had totalconsolidated indebtedness of approximately $1,011.0 million andapproximately $113.1 million of borrowings available under the revolver portionof the 2005 Mueller Credit Agreement, subject to customary conditions. As of September 30,2006, the Company had $31.9 million in letters of credit outstanding underthe 2005 Mueller Credit Agreement, which reduces availability for borrowingsthereunder. The significant debt service obligations under the credit facilityand indentures could have material consequences to our security holders. Ourkey financial covenants are dependent on attaining certain levels of EBITDA, asdefined in the respective debt arrangements. The most restrictive covenant ineffect at September 30, 2006 related to a coverage ratio, as defined inthe 2005 Mueller Credit Agreement, which required approximately $218 million ofEBITDA over the trailing twelve months, based on net debt outstanding at September 30,2006. We were in compliance with this covenant at September 30, 2006.

*2005Mueller Credit Agreement:**  *On October 3, 2005, theCompany entered into a credit agreement (the “2005 Mueller Credit Agreement”)consisting of a $145 million senior secured revolving credit facility maturingin October 2010 (the “2005 Mueller Revolving Credit Facility”) and a $1,050million senior secured term loan maturing in October 2012 (the “2005Mueller Term Loan”). The 2005 Mueller Credit Agreement is a secured obligationof the Company and substantially all of its wholly-owned domestic subsidiaries.The 2005 Mueller Term Loan requires quarterly principal payments of $2.0million through October 3, 2012, at which point in time the remainingprincipal outstanding is due. The commitment fee on the unused portion of the2005 Mueller Revolving Credit Facility is 0.50% and the interest rate is afloating interest rate of 2.25% over LIBOR. The 2005 Mueller Term Loan carriesa floating interest rate of 2.00% over LIBOR. As of September 30, 2006,the weighted average interest rate including interest rate swaps was 8.26% andthe weighted average interest rate excluding interest rate swaps was 8.45%.

Proceeds from the 2005 Mueller Credit Agreement were$1,053.4 million, net of $21.6 million of underwriting fees and expenses whichwill be amortized over the life of the loans. The proceeds were used to financethe acquisition of Predecessor Mueller Water by Walter and to refinanceexisting indebtedness.

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

The 2005 MuellerCredit Agreement also contains financial covenants requiring the Company tomaintain:

·       aninterest expense coverage ratio of at least 2.25 to 1.00 (increasing to 2.50 to1.00 beginning with the four quarter period ending December 31, 2007);

·       aconsolidated leverage ratio of not more than 5.50 to 1.00 (decreasing in annualincrements to 4.00 to 1.00 by the four quarter period ending December 31,2008); and

·       aconsolidated senior secured leverage ratio of not more than 4.25 to 1.00(decreasing in annual increments to 3.00 to 1.00 by the four quarter periodending December 31, 2008).

An amendment to the 2005 Mueller Credit Agreement madein January 2006 provides that in the event of an initial public offering,the Company may pay annual dividends of up to $8.5 million to Mueller Water topay its common shareholders.

On June 1, 2006, the Company used $245.6 millionof the $368.7 million contributed to it by Mueller Water from proceeds fromMueller Water’s IPO for a partial redemption of the outstanding 2005 MuellerTerm Loan.

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*10%Senior Subordinated Notes:  *In 2004, Predecessor MuellerGroup issued $315.0 million principal face amount of 10% senior subordinatednotes due 2012. The senior subordinated notes are guaranteed by each ofthe Company’s existing domestic restricted subsidiaries. The subordinated notescontain customary covenants and events of default, including covenants thatlimit the Company’s ability to incur debt, pay dividends and make investments.The effective interest rate was 7.29% as of the September 30, 2006 marketvalue of the notes.

On July 3, 2006, theCompany used $123.1 million of the $368.7 million contributed to it by MuellerWater from proceeds from Mueller Water’s IPO for a partial redemption of $110.3million of the senior subordinated notes, plus accrued interest of $1.8 millionand a prepayment premium of $11.0 million.

*CapitalExpenditures*

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

*Sources of Funds*

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

From time to time we mayexplore additional financing methods and other means to lower our cost ofcapital, which could include stock issuance or debt financing and theapplication of the proceeds therefrom to the repayment of bank debt or otherindebtedness. In addition, in connection with any future acquisitions, we mayrequire additional funding which may be provided in the form of additional debtor equity financing or a combination thereof. There can be no assurance thatany additional financing will be available to us on acceptable terms.

**Off-Balance SheetArrangements**

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

We utilize letters ofcredit and surety bonds in the ordinary course of business to ensure ourperformance of contractual obligations. As of September 30, 2006, we had$31.9 million of letters of credit and $14.2 million of surety bondsoutstanding.

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**ContractualObligations**

Ourcontractual obligations as of September 30, 2006 are as follows:

**PaymentsDue by Period**

| **Contractual Obligations**       | ** ** | ** **                          | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **After 5 Years** | ** ** | **Total** | ** ** |
|----------------------------------------|------------|-------------------------------------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|-----------------------------|------------|-----------|------------|
| ** **                             | ** ** | **(dollars in millions)** | ** ** |
| Long-term  debt                        |       |                                |       |                            |       |               |       |               |       |                        |       |      |       |   |   |   |   |   |   |
| Principal on long-term debt            |       |                                | $          | 8.0                             |       |               |       | $                  | 16.0       |                        |       |      | $          | 16.0 |   |   |   | $ | 958.4 |   |   | $ | 998.4 |   |
| Interest on long-term debt(1)          |       |                                | 79.7       |                            |       |               | 157.6      |               |       |                        | 155.0      |      |       |   | 68.5 |   |   | 460.8 |   |
| Capital lease  obligations             |       |                                | 1.0        |                            |       |               | 1.1        |               |       |                        | —     |      |       |   | — |   |   | 2.1 |   |
| Operating leases                       |       |                                | 8.1        |                            |       |               | 9.5        |               |       |                        | 5.2        |      |       |   | 5.4 |   |   | 28.2 |   |
| Unconditional  purchase obligations(2) |       |                                | 16.5       |                            |       |               | —     |               |       |                        | —     |      |       |   | — |   |   | 16.5 |   |
| Other long-term  obligations(3)        |       |                                | —     |                            |       |               | —     |               |       |                        | —     |      |       |   | — |   |   | — |   |
| Total contractual cash obligations     |       |                                | 113.3      |                            |       |               | 184.2      |               |       |                        | 176.2      |      |       |   | 1,032.3 |   |   | 1,506.0 |   |
| Other long-term liabilities(4)         |       |                                | 9.7        |                            |       |               | —     |               |       |                        | —     |      |       |   | — |   |   | 9.7 |   |
| Total cash  obligations                |       |                                | $          | 123.0                           |       |               |       | $                  | 184.2      |                        |       |      | $          | 176.2 |   |   |   | $ | 1,032.3 |   |   | $ | 1,515.7 |   |

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(1)          Interest on the seniorcredit facility is calculated using LIBOR of 5.37%, the rate in effect on September 30,2006. Each increase or decrease in LIBOR of 0.125% would result in an increaseor decrease in annual interest on the senior credit facility of$1.0 million. Because the interest rate under the senior credit facilitywill be variable, actual payments may differ. Interest does not includepayments that could be required under our interest-rate swap agreements, whichpayments will depend upon movements in interest rates and could varysignificantly. The payments to be received on the existing interest rate swapsare estimated to be approximately $7.7 million, net of LIBOR interestcalculated at 5.37% received from counterparties.

(2)          Includes contractualobligations for purchases of raw materials and capital expenditures.

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

(4)          Otherlong-term liabilities include pension and other post-employment benefitliabilities. While the estimated total liability is actuarially determined,there are no definitive payments by period as pension contributions depend ongovernment-mandated minimum funding requirements and other post-employment benefitsare paid as incurred. Accordingly, amounts by period included in this scheduleare estimates.

**Effect ofInflation; Seasonality**

We do not believe that general inflation (except forraw material cost increases on scrap steel, brass ingot and steel pipe) has hada material impact on our financial position or results of operations.

Our business is dependentupon the construction industry, which is very seasonal due to the impact ofwinter or wet weather conditions. Our net sales and operating income havehistorically been lowest, and our working capital needs have been highest, inthe three month periods ending around December 31 and 

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March 31,when the northern United States and all of Canada generally face weather thatrestricts significant construction activity and we build working capital inanticipation of the peak construction season, during which time our workingcapital needs tend to be reduced.

**Critical AccountingPolicies**

While all significant accounting policies are important to ourconsolidated financial statements, some of these policies may be viewed asbeing critical. Such policies are those that are both most important to theportrayal of our financial condition and require our most difficult, subjectiveand complex estimates and assumptions that affect the reported amounts ofassets, liabilities, revenues, expenses and related disclosure of contingentassets and liabilities. These estimates are based upon our historicalexperience and on various other assumptions that we believe to be reasonableunder the circumstances. Our actual results may differ from these estimatesunder different assumptions or conditions. We believe our most criticalaccounting policies are as follows:

***Pensions***

We sponsor a number of defined benefit retirement plans. We recordannual amounts relating to these plans based on calculations specified byaccounting principles generally accepted in the United States of America (“U.S.GAAP”), which include various actuarial assumptions including the following:

*U.S. Pipe Segment*

| ** **                                                                                            | ** ** | **Pension Benefits**    | ** ** | **Other Benefits**      | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                                                            | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** |
| Weighted-average assumptions used to determine benefit  obligations:                                  |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Discount rate                                                                                         |       |                         | 6.25       | %                            |       |   | 5.00 | % |   |   | 6.25 | % |   |   | 5.00 | % |   |
| Rate of compensation increase                                                                         |       |                         | 3.50       | %                            |       |   | 3.50 | % |   |   | — |   |   |   | — |   |   |
| Weighted-average  assumptions used to determine net periodic costs:                                   |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Discount rate:                                                                                        |       |                         | 5.00       | %                            |       |   | 6.00 | % |   |   | 5.00 | % |   |   | 6.00 | % |   |
| Expected return on plan assets                                                                        |       |                         | 8.90       | %                            |       |   | 8.90 | % |   |   | — |   |   |   | — |   |   |
| Rate of compensation increase                                                                         |       |                         | 3.50       | %                            |       |   | 3.50 | % |   |   | — |   |   |   | — |   |   |
| Assumed health  care cost trend rates:                                                                |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Health care cost trend rate assumed for next year—Pre 65                                    |       |                         | —     |                         |       |   | — |   |   |   | 10.00 | % |   |   | 10.00 | % |   |
| Health care cost trend rate assumed for next year—Post 65                                   |       |                         | —     |                         |       |   | — |   |   |   | 12.00 | % |   |   |   |   |   |
| Rate to which cost trend rate is assumed to decline (the  ultimate trend rate)—Pre 65            |       |                         | —     |                         |       |   | — |   |   |   | 5.00 | % |   |   | 5.00 | % |   |
| Rate to which cost trend rate is assumed to decline (the  ultimate trend rate)—Post 65 |       |                         | —     |                         |       |   | — |   |   |   | 7.00 | % |   |   |   |   |   |
| Year that the rate reaches the ultimate trend rate                                               |       |                         | —     |                         |       |   | — |   |   |   | 2014 |   |   |   | 2010 |   |   |

 

The discount rate used to determine net pensionperiodic costs was decreased to 5.00% for 2006 from 6.00% used in 2005. Thediscount rate is based on a proprietary bond defeasance model designed by the 

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plans’ investmentconsultant to create a portfolio of high quality corporate bonds which, ifinvested on the measurement date, would provide the necessary future cash flowsto pay accumulated benefits when due. The premise of the model is that annualbenefit obligations are funded from the cash flows generated from periodic bondcoupon payments, principal maturities and the interest on excess cash flows,i.e. carry forward balances.

The model uses a statistical program to determine theoptimal mix of securities to offset benefit obligations. The model is populatedwith an array of Moody’s Aa-rated corporate fixed income securities that areactively traded in the bond market on the measurement date. None of the securitiesused in the model had embedded call, put or convertible features, and none werestructured with par paydowns or deferred income streams. All of the securitiesin the model are considered appropriate for the analysis as they arediversified by maturity date and issuer and offer predictable cash flowstreams. For diversification purposes, the model was constrained to purchasingno more than 20% of any outstanding issuance. Carry forward interest iscredited at a rate determined by adding the appropriate implied forwardTreasury yield to the Aa-rated credit spread as of the measurement date.

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

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

| ** **                                                     | ** ** | **1-Percentage  Point Increase** | ** ** | **1-Percentage  Point Decrease** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| Health care cost  trend:                                       |       |                                  |       |                                  |       |   |   |   |   |
| Effect on total of service and interest cost  components       |       |                                  | $          | 0.1                                   |       |   |   | $ | (0.1 | ) |   |
| Effect on postretirement benefit obligation                    |       |                                  | 0.4        |                                  |       |   | (0.3 | ) |   |
| Discount rate:                                                 |       |                                  |       |                                  |       |   |   |   |   |
| Effect on postretirement service and interest cost  components |       |                                  | —     |                                  |       |   | — |   |   |
| Effect on postretirement benefit obligation                    |       |                                  | (1.8       | )                                     |       |   | 2.1 |   |   |
| Effect on current year postretirement benefits  expense        |       |                                  | (0.2       | )                                     |       |   | 0.2 |   |   |
| Effect on pension service and interest cost  components        |       |                                  | (0.2       | )                                     |       |   | 0.1 |   |   |
| Effect on pension benefit obligation                           |       |                                  | (23.7      | )                                     |       |   | 28.8 |   |   |
| Effect on current year pension expense                         |       |                                  | (1.4       | )                                     |       |   | 1.7 |   |   |
| Expected return  on plan assets:                               |       |                                  |       |                                  |       |   |   |   |   |
| Effect on current year pension expense                         |       |                                  | (1.8       | )                                     |       |   | 1.8 |   |   |
| Rate of  compensation increase:                                |       |                                  |       |                                  |       |   |   |   |   |
| Effect on pension service and interest cost  components        |       |                                  | 0.6        |                                  |       |   | (0.6 | ) |   |
| Effect on pension benefit obligation                           |       |                                  | 4.6        |                                  |       |   | (4.1 | ) |   |
| Effect on current  year pension expense                        |       |                                  | 1.0        |                                  |       |   | (1.0 | ) |   |
|                                                                |            |                                       |            |                                       |            |  |  |  |  |  |  |

 

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*Mueller and Anvil Segments*

| ** **                                                           | ** ** | **September 30, 2006** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------|------------|
| Weighted-Average Assumptions used to determine  benefit obligations: |       |                             |       |   |   |
| Discount rate                                                        |       |                             | 5.69       | % |   |
| Rate of compensation  increase                                       |       |                             | 3.50       | % |   |
| Weighted-Average Assumptions used to determine  net periodic costs:  |       |                             |       |   |   |
| Discount rate:                                                       |       |                             | 5.22       | % |   |
| Expected return on plan  assets                                      |       |                             | 7.66       | % |   |
| Rate of compensation increase                                        |       |                             | 3.50       | % |   |

 

The discount rate is based on a model portfolio of Aa-rated bondswith a maturity matched to the estimated payouts of future pension benefits.The expected return on plan assets is based on the Company’s expectation of thelong-term average rate of return on assets in the pension funds, which wasmodeled based on the current and projected asset mix of the funds andconsidering the historical returns earned on the type of assets in the funds.We review the actuarial assumptions on an annual basis and make modificationsto the assumptions based on current rates and trends when appropriate. Asrequired by U.S. GAAP, the effects of the modifications are amortized overfuture periods.

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

| ** **                                              | ** ** | **1-Percentage  Point Increase** | ** ** | **1-Percentage  Point Decrease** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| Discount rate:                                          |       |                                  |       |                                  |       |   |   |   |   |
| Effect on pension  service and interest cost components |       |                                  | $          | —                                |       |   |   | $ | — |   |   |
| Effect on pension  benefit obligation                   |       |                                  | (12.7      | )                                     |       |   | 16.2 |   |   |
| Effect on current year  pension expense                 |       |                                  | —     |                                  |       |   | — |   |   |
| Expected return on plan assets:                         |       |                                  |       |                                  |       |   |   |   |   |
| Effect on current year  pension expense                 |       |                                  | (0.8       | )                                     |       |   | 0.8 |   |   |
| Rate of compensation increase:                          |       |                                  |       |                                  |       |   |   |   |   |
| Effect on pension  service and interest cost components |       |                                  | —     |                                  |       |   | — |   |   |
| Effect on pension  benefit obligation                   |       |                                  | 0.4        |                                  |       |   | (0.4 | ) |   |
| Effect on current year pension expense                  |       |                                  | —     |                                  |       |   | — |   |   |
|                                                         |            |                                       |            |                                       |            |  |  |  |  |  |  |

 

***Workers’ Compensation***

*We are* self-insured for workers’compensation benefits for work-related injuries. Liabilities, including thoserelated to claims incurred but not reported, are recorded principally usingannual valuations based on discounted future expected payments and usinghistorical data or combined insurance industry data when historical data islimited. Pursuant to the terms of the Tyco Purchase Agreement, the Company isindemnified by Tyco for all liabilities related to Predecessor Mueller thatoccurred prior to August 16, 1999. Workers’ compensation liabilities wereas follows:

| ** **                                                          | ** ** | **September 30,  2006**        | ** ** | **September 30,  2005** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------------|------------|------------------------------|------------|
| ** **                                                          | ** ** | **(dollars in millions)** | ** ** |
| Undiscounted aggregated estimated claims to be paid                 |       |                                | $          | 25.0                         |       |   |   | $ | 14.4 |   |   |
| Workers’ compensation liability recorded on a discounted basis |       |                                | $          | 21.6                         |       |   |   | $ | 11.9 |   |   |

 

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 onewith a duration that corresponds to the weighted average expected payout periodfor each policy year. Once a discount rate is applied to a policy year, itremains the discount 

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rate for that policy year until all claimsare paid. The use of this method decreases the volatility of the liability relatedsolely to changes in the current year discount rate.

***Litigation, Investigations and Claims***

We are involved in litigation, investigations, and claims arisingout of the normal conduct of our business, including those relating tocommercial transactions, as well as environmental, health and safety matters.We estimate and accrue liabilities resulting from such matters based on avariety of factors, including outstanding legal claims and proposedsettlements; assessments by internal counsel of pending or threatenedlitigation; and assessments of potential environmental liabilities andremediation costs. We believe we have adequately accrued for these potentialliabilities; however, facts and circumstances may change and could cause theactual liability to exceed the estimates, or that may require adjustments tothe recorded liability balances in the future.

***Revenue Recognition***

We recognize revenue when delivery of a product has occurred andthere is persuasive evidence of a sales arrangement, sales prices are fixed anddeterminable, and collectibility from the customers is reasonably assured.Revenue from the sale of products is recognized when title passes upon deliveryto the customer. Sales are recorded net of cash discounts and rebates.

***Inventories***

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

***Income Taxes***

Deferred tax liabilities and assets are recognized for theexpected future tax consequences of events that have been included in thefinancial statements or tax returns. Deferred tax liabilities and assets aredetermined based on the differences between the financial statements and thetax basis of assets and liabilities, using tax rates in effect for the years inwhich the differences are expected to reverse. A valuation allowance isprovided to offset any net deferred tax assets if, based upon the availableevidence, it is more likely than not that some or all of the deferred taxassets will not be realized. If we were to reduce our estimates of futuretaxable income, we could be required to record a valuation allowance againstour deferred tax assets.

***Accounting for the Impairment of Long-Lived Assets IncludingGoodwill and Other Intangibles***

Long-lived assets, including goodwill and intangible assets thathave an indefinite life are tested for impairment annually (or more frequentlyif events or circumstances indicate possible impairments). Finite-livedintangible assets are amortized over their respective estimated useful livesand reviewed for impairment annually or more frequently if events orcircumstances indicate possible impairment. Any recognized intangible assetdetermined to have an indefinite useful life will not be amortized, but insteadtested for impairment in accordance with SFAS No. 142, *Goodwill and Other Intangible Assets,* until its life isdetermined to no longer be indefinite. We use an estimate of futureundiscounted net cash flows of the related asset or asset grouping over theremaining life in measuring whether long-lived assets other than goodwill andintangibles are impaired. If impaired, we may need to record impairment chargesto reduce the carrying value of our long-lived assets.

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***Share-BasedCompensation***

*The Company issues awards under the Mueller Water Products, Inc.2006 Stock Incentive Plan and the Mueller Water Products, Inc. 2006Employee Stock Purchase Plan. Beginning October 1, 2005, the Companyadopted SFAS No. 123(R),*Share-Based Payment*, which requires that compensationcosts related to share-based payment transactions be recognized in thefinancial statements over the period that an employee provides service inexchange for the award. The Company uses the modified prospective method ofadoption, under which we record compensation cost for new and modified awardsover the related vesting period of such awards. The Company had approximately1.2 million restricted stock units and 0.1 million stock optionsoutstanding at September 30, 2006.*

***DerivativeInstruments and Hedging Activities***

Changes in thefair value of derivatives are recorded each period in earnings, or accumulatedother comprehensive income (loss), if a derivative is designated and effectiveas part of a hedge transaction and meets the applicable requirements associatedwith SFAS No. 133, *Accounting for DerivativeInstruments and Hedging Activities*,**asamended. For a derivative to qualify as a hedge at inception and throughout thehedge period, we must formally document the nature and relationships betweenthe hedging instruments and hedged items, as well as its risk-managementobjectives, strategies for undertaking the various hedge transactions andmethod of assessing hedge effectiveness. Any financial instruments qualifyingfor hedge accounting must maintain a specified level of effectiveness betweenthe hedging instrument and the item being hedged, both at inception andthroughout the hedged period.

We currently useinterest rate swaps as required in the 2005 Mueller Credit Agreement to reducethe risk of interest rate volatility. The amount to be paid or received frominterest rate swaps is charged or credited to interest expense over the livesof the interest rate swap agreements.

Additionally, we utilize forward contracts to mitigate exposure tochanges in foreign currency exchange rates from third party and intercompanytransactions. The primary currency to which we are exposed and to which wehedge the exposure is the Canadian dollar. The effective portion of unrealizedgains and losses associated with forward contracts are deferred as a componentof accumulated other comprehensive income (loss) until the underlying hedgedtransactions are reported in our consolidated statement of earnings. Thebalance was less than $0.1 million at September 30, 2006.

**Recently IssuedAccounting Standards**

In July 2006, the FASB issued finalInterpretation (FIN) No. 48, *Accounting for Uncertaintyin Income Taxes*, which defines the minimum recognition threshold atax provision must meet before being recognized in the financial statements.This interpretation also provides guidance on derecognition of income taxassets and liabilities, classification of current and deferred income taxassets and liabilities, accounting for interest and penalties associated withtax positions, accounting for income taxes in interim periods, and income taxdisclosures. FIN No. 48 applies to all tax positions related to incometaxes subject to SFAS No. 109, *Accounting for IncomeTaxes*. The Company has not yet determined what effect, if any, theadoption of this interpretation, which becomes effective October 1, 2007,will have on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158,*Employers’ Accounting for Defined Benefit Pensionand Other Postretirement Plans—An Amendment of FASB Statements No. 87, 88,106, and 132(R)*, which requires companies to (a) recognize anet liability or asset to report the funded status of the Company’s definedbenefit pension and other postretirement benefit plans on the balance sheet and(b) to measure plan assets and benefit obligations as of the date of theCompany’s fiscal year-end statement of financial position. The Company has notyet determined what impact the adoption of this statement, which becomes 

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effective September 30,2007 for requirement (a) and September 30, 2009 for requirement (b),respectively, will have on its consolidated financial statements.

In September 2006,the FASB issued FASB Staff Position (FSP) No. AUG-AIR-1, *Accounting for Planned Major Maintenance Activities*. ThisFSP prohibits the use of the accrue-in-advance method of accounting for plannedmajor maintenance activities in annual and interim financial reporting periodsand should be applied retrospectively for all financial statements presented. ThisFSP becomes effective for the Company October 1, 2007. The Company doesnot expect the adoption of this FSP to have a material effect on itsconsolidated financial statements.

**Item 7A.**                Qualitativeand Quantitative Disclosure About Market Risk

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

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

***Interest Rate Risk***

At September 30,2006, the Company had fixed rate debt of $217.3 million and variable rate debtof $793.7 million.The pre-tax earnings and cash flows impact resulting from a 100 basispoint increase in interest rates on variable rate debt, holding other variablesconstant and excluding the impact of the hedging agreements described below, wouldbe approximately $7.9 million per year.

On October 27, 2005, the Company entered into sixinterest rate hedge transactions with a cumulative notional amount of $350million. The swap terms are between one and seven years with five separatecounter-parties. The objective of the hedges is to protect the Company againstrising LIBOR interest rates that would have a negative effect on the Company’scash flows due to changes in interest payments on its 2005 Mueller Term Loan.The structure of the hedges are a one-year 4.617% LIBOR swap of $25 million, athree-year 4.740% LIBOR swap of $50 million, a four-year 4.800% LIBOR swap of$50 million, a five-year 4.814% LIBOR swap of $100 million, a six-year4.915% LIBOR swap of $50 million, and a seven year 4.960% LIBOR swap of $75million. These swap agreements call for the Company to make fixed rate paymentsover the term at each swap’s stated fixed rate and to receive payments based onthree month LIBOR from the counter-parties. These swaps will be settled quarterlyover their lives and will be accounted for as cash flow hedges. As such,changes in the fair value of these swaps that take place through the date ofmaturity will be recorded in accumulated other comprehensive income (loss).These hedges comply with covenants contained in the 2005 Mueller CreditAgreement.

The Company has two interest rate hedge agreementswith a cumulative notional value amount of $100 million that existed as ofOctober 3, 2005: a $50 million two-year 3.928% LIBOR swap that matures in May 2007and a $50 million two-year 4.249% LIBOR swap that matures in April 2007.The changes in fair value of these two swaps were recorded immediately asinterest expense in the Statements of Operations until achieving hedgeeffectiveness in October 2005 and November 2005, respectively, atwhich times such changes in fair value were recorded in accumulated othercomprehensive income (loss).

The Company recorded an unrealized gain from itsinterest rate swap contracts, net of tax, of $1.0 million at September 30,2006 in accumulated other comprehensive income (loss).

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

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

***Currency Risk***

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

The portion of ourassets and liabilities based in our foreign locations are translated intoUnited States dollars at foreign currency exchange rates in effect as of theend of each period, with the effect of such translation reflected in othercomprehensive income (loss). Accordingly, our consolidated stockholders’ equitywill fluctuate depending upon the weakening or strengthening of the UnitedStates dollar against the respective foreign currency.

We have entered into forward exchange contractsprincipally to hedge currency fluctuations in transactions (primarily anintercompany loan and anticipated inventory purchases) denominated in foreigncurrencies, thereby limiting the risk that would otherwise result from changesin exchange rates. The majority of the Company’s exposure to currency movementsis in Canada. Gains and losses on the forward contracts are expected to beoffset by losses / gains in recognized net underlying foreign currencytransactions. As of September 30, 2006, the Company had entered intoforward contracts in a notional amount of $4.9 million to protect anticipatedinventory purchases over the next four months by its Canadian operations. Withthese hedges, the Company purchases U.S. dollars and sells Canadian dollars atan average exchange rate of $0.896.

On November 15, 2006, the Company entered intoforward contracts in a notional amount of $30.9 million to protect anticipatedinventory purchases over the next 11 months by its Canadian operations. Withthese hedges, the Company purchases U.S. dollars and sells Canadian dollars atan average exchange rate of $0.88.

The Company has also entered into hedges protecting intercompanyloan payments to be made over the next two years by its Canadian subsidiary toa U.S. subsidiary totaling $33.0 million. With these hedges, the Company sellsCanadian dollars for U.S. dollars at an exchange rate of $0.8681. Gains orlosses on these hedges will be recorded in earnings. The loss on the hedgesduring the year ended September 30, 2006 was $1.3 million.

***Raw Materials Risk***

Our products aremade from several basic raw materials, including steel pipe, scrap steel, iron,brass ingot, sand, resin and natural gas, whose prices fluctuate as marketsupply and demand change. Accordingly, product margins and the level ofprofitability can fluctuate if we are not able to pass raw material costs on toour customers. Management estimates for our Mueller and Anvil segments that rawmaterial accounted for approximately 25% of our cost of goods sold due toincreasing raw material prices in 2006. Management estimates U.S. Pipe’s scrapmetal and ferrous alloys used in the manufacturing 

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process accounted for 40% of the cost to manufacture ductile ironpipe as of September 30, 2006. Historically, we have been able to obtainan adequate supply of raw materials and do not anticipate any shortage of thesematerials. We generally purchase raw materials at spot prices but may, fromtime to time, enter into commodity derivatives to reduce our exposure tofluctuation in the price of raw materials.

In fiscal year 2006, dueto significant increases in the price of copper in calendar year 2005, the spotprice of brass ingot, used in the manufacture of the Mueller segment’s brassproducts and brass components, increased by approximately 80%. The Muellersegment was able to pass much of these cost increases through to its customersby means of price increases in the middle of the fiscal year of approximately 22% on certain brass products, andapproximately 12% on hydrants and iron gate valves containing brass components.

On October 2, 2006,the Company entered into a swap contract to hedge anticipated purchases ofnatural gas from November 2006 through September 2007 totaling 0.5million mmbtu, or approximately 34% of expected natural gas consumption, at aprice range of $6.30 to $7.91 per mmbtu. This swap contract effectivelyconverts a portion of forecasted purchases at market prices to a fixed pricebasis. Any change in the fair value of this swap contract will be recorded inaccumulated other comprehensive income (loss).

**UNAUDITEDINTERIM FINANCIAL INFORMATION:(in millions)**

| ** **                                                          | ** ** | **Quarter ended** | ** ** |
|---------------------------------------------------------------------|------------|------------------------|------------|
| **Twelve months ended September 30, 2006** | ** ** | ** **             | ** ** | **December 31** | ** ** | **March 31** | ** ** | **June 30** | ** ** | **September 30** | ** ** |
| Net sales                                                           |       |                   | $          | 480.4 |   |   |   | $ | 434.9 |   |   | $ | 500.0 |   |   | $ | 518.1 |   |   |
| Gross profit                                                        |       |                   | $          | 43.5 |   |   |   | $ | 94.6 |   |   | $ | 134.5 |   |   | $ | 135.1 |   |   |
| Operating income (loss)                                             |       |                   | $          | (39.5 | ) |   |   | $ | 27.5 |   |   | $ | 69.4 |   |   | $ | 71.6 |   |   |
| Net income (loss)                                                   |       |                   | $          | (40.9 | ) |   |   | $ | 1.0 |   |   | $ | 23.6 |   |   | $ | 32.9 |   |   |
|                                                                     |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                                                        | ** ** | **Quarter ended** | ** ** |
|-------------------------------------------------------------------|------------|------------------------|------------|
| **Nine months ended September 30, 2005** | ** ** | ** **             | ** ** | **March 31** | ** ** | **June 30** | ** ** | **September 30** | ** ** |
| Net sales and  revenues                                           |       |                   | $          | 124.7 |   |   | $ | 162.0 |   |   | $ | 170.2 |   |   |
| Gross profit                                                      |       |                   | $          | 10.6 |   |   | $ | 22.8 |   |   | $ | 21.3 |   |   |
| Operating income (loss)                                           |       |                   | $          | 3.7 |   |   | $ | 10.3 |   |   | $ | 9.4 |   |   |
| Net income (loss)                                                 |       |                   | $          | (1.2 | ) |   | $ | 3.6 |   |   | $ | 2.7 |   |   |
|                                                                   |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Item 8.**                        FinancialStatements and Supplementary Data

The consolidated financialstatements and supplementary data of Mueller Group, LLC are filed as part ofthis annual report beginning on page F-1 and incorporated byreference in this Item 8.

**Item 9.**                        Changesin and Disagreements with Accountants on Accounting and Financial Disclosure

**None**

**Item 9A.**                Controlsand Procedures

***Evaluation of Disclosure Controls and Procedures.***

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

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As of the end of the period covered by this report,the Company’s management evaluated the effectiveness of the design andoperation of disclosure controls and procedures pursuant to Rules 13a-15(e) and15d-15(e) of the Exchange Act. This evaluation was done under thesupervision and with the participation of management, including Dale B. Smith,President and Chief Executive Officer, and Jeffery W. Sprick, Chief FinancialOfficer and Chief Accounting Officer.

Based on this evaluation,the Company’s Chief Executive Officer and Interim Chief Financial Officer haveconcluded that the Company’s disclosure controls and procedures were effectiveas of September 30, 2006.

***Remediation of Prior Material Weakness in InternalControl over Financial Reporting***

A material weakness is a control deficiency or acombination of control deficiencies that results in more than a remotelikelihood that a material misstatement of the annual or interim consolidatedfinancial statements will not be prevented or detected.

As of September 30, 2005, the Company did notmaintain effective controls over the preparation, review and presentation anddisclosure of its consolidated financial statements, due to a lack of personnelwith experience in financial reporting and control procedures necessary for SECregistrants. Specifically, the Company’s controls failed to prevent or detectthe incorrect presentation of the following in the Predecessor Muellerconsolidated financial statements: (i) cash flows from the effect ofexchange rate changes on cash balances; (ii) cash flows from the loss ondisposal of property, plant and equipment; (iii) cash flows and balancesheet presentation of the dollar value of bank checks outstanding; (iv) thepresentation of current and non-current deferred income tax assets inPredecessor Mueller’s consolidated balance sheet; and (v) classificationof certain depreciation expense as selling, general and administrative expenseinstead of cost of sales in their consolidated statement of operations.Further, the Company’s controls failed to prevent or detect the incorrectpresentation of shipping and handling costs in the Company unauditedconsolidated statement of operations for the three months ended December 31,2004 as presented in the 10-Q for the period ended December 31,2005. The Company’s control deficiency resulted in the restatement ofPredecessor Mueller’s annual consolidated financial statements for fiscal 2004and 2003 and interim consolidated financial statements for the first threequarters of fiscal 2005, all interim periods of fiscal 2004, audit adjustmentsto the 2005 annual consolidated financial statements and the restatement of theCompany’s consolidated statement of operations for the three months ended December 31,2004. Additionally, this control deficiency could result in a misstatement ofthe presentation and disclosure of the Company’s consolidated financialstatements that would result in a material misstatement in the annual orinterim financial statements that would not be prevented or detected.Accordingly, management has determined that this control deficiency constitutesa material weakness. Management has concluded that based on the remediationactions described below, this material weakness did not exist at September 30,2006.

As of September 30, 2004****and2005, Predecessor Mueller reported the following control deficiencies that, inthe aggregate, constituted a material weakness in internal control overpreparation, review and presentation and disclosure of their consolidatedfinancial statements. Specifically Predecessor Mueller’s control deficienciesincluded: (i) a lack of personnel with experience in financial reportingand control procedures necessary for SEC registrants; (ii) a lack ofsufficient controls to prevent or detect, on a timely basis, unauthorizedjournal entries; (iii) a lack of sufficient controls over informationtechnology data conversion and program changes; (iv) a lack of sufficientcontrols over the development and communication of income tax provisions; (v) alack of effective controls surrounding “whistleblower” hotline complaints andinternal certifications to ensure that issues were communicated on a moretimely basis by management to the audit committee and the independentregistered public accounting firm; (vi) a lack of effective controls overrevenue recognition associated with full truckload shipments not immediatelydispatched by freight carriers; and (vii) a lack of formal controls andprocedures regarding 

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assessment of financialexposures and transactions, including consideration of accounting implicationsunder GAAP. These control deficiencies resulted in audit adjustments to theconsolidated financial statements for the year ended September 30, 2004.Additionally, these control deficiencies, in the aggregate, could result in amisstatement to accounts and disclosures that would result in a materialmisstatement to the annual or interim financial statements that would not beprevented or detected. Management has concluded that based on the remediationactions described below, this material weakness did not exist at September 30,2006.

In order to remediate the material weakness firstreported as of September 30, 2004, Predecessor Mueller: (i) reassignedits Chief Financial Officer, appointed an Interim Chief Financial Officer andhired additional accounting and finance staff; (ii) introduced increasedtraining for their existing financial and accounting and other staff; (iii) retainedthird-party consultants with significant SEC financial reporting experience toprovide assistance in complying with SEC reporting requirements; (iv) formeda disclosure committee to supervise the preparation of the Exchange Act Reportsand other public communications for itself and its parent; (v) improvedtheir controls over, and began developing written policies and procedures thatcover all significant accounting processes, including journal entries, thedevelopment and communication of income tax provisions, information dataconversion issues and program changes, revenue recognition and assessingfinancial exposures; (vi) improved and centralized controls overinformation technology; and (vii) implemented global complianceinitiatives under the direction of their Chief Compliance Officer includingcontrols surrounding “whistleblower” hotline complaints and internalcertifications. The Company continued these improvement efforts during thequarter ended September 30, 2006 and has concluded that it has remediatedthis material weakness.

In addition, duringthe quarter ended December 31, 2005, the Company made the followingchanges in internal control over financial reporting:

·       hireda Chief Financial Officer and Chief Accounting Officer, Jeffery W. Sprick, anda Corporate Controller with SEC financial reporting experience;

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

·       designatedthe Walter Industries Audit Committee, which is fully independent under New YorkStock Exchange listing rules and the rules of the SEC, as its auditcommittee (in April 2006, the Company formed its own audit committee,which is fully independent under the New York Stock Exchange and SEC rules);

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

·       reviewed,on a quarterly basis, foreign currency translation cash flow statement effects,the dollar value of bank checks outstanding, transactions related to property,plant and equipment, classification requirements of each component line itemand the individual elements that comprise each line item of the statement ofcash flows, in accordance with Statement of Financial Accounting Standards, No. 95,*Statement of Cash Flows*, theclassification of deferred income tax items in the balance sheet and cash flowstatement, as well as depreciation in the statement of operations, and theproper classification of shipping and handling costs within our consolidatedstatement of operations;

·       implementedon-going United States GAAP training programs, consisting of providingappropriate technical resources to our finance team and training on the use ofsuch resources, and issuing and updating our accounting policies.

During the quarter ended September 30,2006, management believes that the additional control procedures that have beenimplemented during the year have fully remediated the material weakness.

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***Changes in Internal Control over Financial Reporting***

There were no changes ininternal control over financial reporting during the quarter endedSeptember 30, 2006, that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control over financialreporting.

**Item 9B.**               OtherInformation

None

**PART III**

**Item 10.**                 Directorsand Executive Officers of the Registrant

Intentionally omitted aspermitted by General Instruction I(2)(c) of Form 10-K.

**Item 11.**                 ExecutiveCompensation

Intentionally omitted aspermitted by General Instruction I(2)(c) of Form 10-K.

**Item 12.**                 SecurityOwnership of Certain Beneficial Owners and Management

Intentionally omitted aspermitted by General Instruction I(2)(c) of Form 10-K.

**Item 13.**                 CertainRelationships and Related Party Transactions

Intentionally omitted aspermitted by General Instruction I(2)(c) of Form 10-K.

**Item 14.**                 PrincipalAccountant Fees and Services

Thefollowing table presents information concerning fees paid toPricewaterhouseCoopers LLP (“PwC”) in 2006 (dollars in millions):

| Audit fees(1)          |   | $ | 2.0 |   |
|------------------------|--------|---|-----|--------|
| Audit-related  fees(2) |   | $ | 1.5 |   |
| Tax fees(3)            |   | $ | 0.2 |   |
| Other(4)               |   | $ | 0.3 |   |

----

(1)          These are fees forprofessional services performed by PwC for the annual audit and quarterlyreviews of our consolidated financial statements.

(2)          These are fees forassurance and related services performed by PwC that are reasonably related tothe performance of the audit or review of our financial statements but notdescribed in item (1) above, primarily attributable to fees related toassurance services performed for Walter’s year-end reporting and preliminarySarbanes Oxley compliance work.

(3)          These are fees forprofessional services performed by PwC with respect to tax compliance, taxadvice and tax planning. This primarily includes tax review services performedin connection with our federal, state and foreign tax returns and tax adviceand assistance regarding statutory, regulatory or administrative developments.

(4)          Theseare fees for professional services performed by PwC primarily with respect toreview of various Form 8-K filings.

60

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**PART IV**

**Item 15.**                 Exhibitsand Financial Statements

**(a)**          FinancialStatements
|                                                                                                                                                                                                                                  | ** ** | **Page Number** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| Report of Independent  Registered Public Accounting Firm                                                                                                                                                                         |       | F-1                  |       |
| Consolidated Balance Sheets as of  September 30, 2006 and 2005                                                                                                                                                              |       | F-2                  |       |
| Consolidated Statements of  Operations for the fiscal year ended September 30, 2006, the nine months  ended September 30, 2005 and the fiscal year ended December 31,  2004                                       |       | F-3                  |       |
| Consolidated Statements of  Shareholder’s Deficit and Common Stock for the fiscal year ended  September 30, 2006, the nine months ended September 30, 2005 and  the fiscal year ended December 31, 2004 |       | F-4                  |       |
| Consolidated Statements of  Cash Flows for the fiscal year ended September 30, 2006, the nine months  ended September 30, 2005 and the fiscal year ended December 31,  2004                                       |       | F-5                  |       |
| Notes  to Consolidated Financial Statements                                                                                                                                                                                      |       | F-7                  |       |

 

**(b)**          Exhibits
| EXHIBIT NO. | ** ** | **DOCUMENT**                                                                                                                                                                                                                                                                                          |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1              |       | Agreement and Plan of Merger  dated as of June 17, 2005 among Mueller Water Products, Inc., Walter  Industries, Inc., JW MergerCo, Inc. and DLJ Merchant Banking II, Inc.,  as stockholders’ representative(6)                                                                         |
| 3.1              |       | Certificate of Formation of Mueller Group, LLC together with Certificate  of Conversion to Limited Liability Company of Mueller Group, Inc.(9)                                                                                                                                                        |
| 3.2              |       | Limited Liability Company Agreement of Mueller Group, LLC(9)                                                                                                                                                                                                                                          |
| 4.1              |       | Indenture, dated as of April 23, 2004, among Mueller Group, Inc.,  the Guarantors party thereto and Law Debenture Trust Company of New York for  the Second Priority Senior Secured Floating Rate Notes due 2011(2)                                                                              |
| 4.2              |       | Indenture, dated as of April 23, 2004, among Mueller Group, Inc.,  the Guarantors party thereto and Law Debenture Trust Company of New York for  the 10% Senior Subordinated Notes due 2012(1)                                                                                                   |
| 4.2.1            |       | First Supplemental  Indenture, dated as of October 3, 2005 by and among Mueller Group, LLC,  Mueller Group Co-Issuer, Inc. and Law Debenture Trust Company of New York(11)                                                                                                                       |
| 4.3              |       | Intercreditor Agreement, dated as of April 23, 2004, among Mueller  Group, Inc., Credit Suisse First Boston and Law Debenture Trust Company of  New York(1)                                                                                                                                      |
|             |       | The Company has not filed certain debt instruments with respect to  long-term debt that does not exceed ten percent of the total assets of the  Company and its subsidiaries on a consolidated basis. The Company hereby  agrees to furnish a copy of such instruments to the Commission upon request |
| 10.1             |       | Amended and Restated Mueller Water Products, Inc. Management Incentive  Plan effective as of February 10, 2003(1)**                                                                                                                                                                              |
| 10.2             |       | Second Amended and Restated Credit Agreement, dated as of April 23,  2004, among Mueller Group, Inc., the Guarantors party thereto and the lenders  party thereto(2)                                                                                                                             |
| 10.2.1           |       | First Amendment to the Second Amended and Restated Credit Agreement(3)                                                                                                                                                                                                                                |

61

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| 10.2.2 |   | Waiver dated as of February 4, 2005 under the Second Amended and  Restated Credit Agreement(4)                                                                                                                                                                                                                                                                              |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.3   |   | Credit Agreement, dated  as of October 3, 2005, among Mueller Group, LLC, Bank of America, N.A.,  as administrative agent, Morgan Stanley Senior Funding, Inc., as  syndication agent, Calyon New York Branch, Fifth Third Bank and JPMorgan  Chase Bank, N.A., as co-documentation agents, and the other lenders named  therein(8)                                    |
| 10.3.1 |   | Amendment No. 1 dated  January 24, 2006 to the Credit Agreement dated October 3, 2005 by and among  Mueller Group, LLC, Bank of America, N.A. as administrative agent, Morgan  Stanley Senior Funding, Inc., as syndication agent, Calyon New York Branch,  Fifth Third Bank and JP Morgan Chase Bank, N.A., as co-documentation agents  and the other lenders named therein(10) |
| 10.4   |   | First Amended and Restated Mueller Group, Inc. Key Employee Severance  Plan, effective as of March 1, 2003(7)**                                                                                                                                                                                                                                                             |
| 10.5   |   | Financial Advisory Agreement, dated July 23, 1999, between Hydrant  Acquisition Corp., Mueller Group, Inc. and Credit Suisse First Boston LLC (as  successor to Donaldson, Lufkin & Jenrette Securities Corporation)(2)                                                                                                                                            |
| 10.6.1 |   | Assignment of Financial Advisory Agreement, dated April 27, 2004,  between Hydrant Acquisition Corp, Credit Suisse First Boston LLC and DLJ  Merchant Banking II, Inc.(2)                                                                                                                                                                                                   |
| 10.6.2 |   | Amendment to Financial Advisory Agreement, dated September 23, 2004  between Mueller Holdings (N.A.), Inc., Mueller Group, Inc. and DLJ Merchant  Banking II, Inc.(9)                                                                                                                                                                                                  |
| 10.7   |   | Employment Agreement, dated as of June 17, 2005, between Mueller  Group, Inc. and Thomas E. Fish (*superseded by agreement  between Mr. Fish and Mueller Water Products, Inc. dated as of July 31,  2006*)(7)**                                                                                                                                              |
| 10.8   |   | Employment Agreement, dated as of June 17, 2005, between Mueller  Group, Inc. and Doyce Gaskin (*superseded by agreement  between Mr. Gaskin and Mueller Water Products, Inc. dated as of July 31,  2006*(7)**                                                                                                                                                    |
| 10.9   |   | Executive Employment  Agreement dated January 23, 2006 between Mueller Holding Company, Inc.  and Dale B. Smith(10)**                                                                                                                                                                                                                                                  |
| 14.1   |   | Code of Conduct(9)                                                                                                                                                                                                                                                                                                                                                               |
| 21.1   |   | Subsidiaries of Mueller Group, LLC.*                                                                                                                                                                                                                                                                                                                                             |
| 31.1   |   | Rule 13a-14(a) Certification of Chief Executive Officer*                                                                                                                                                                                                                                                                                                                         |
| 31.2   |   | Rule 13a-14(a) Certification of Chief Financial Officer*                                                                                                                                                                                                                                                                                                                         |
| 32.1   |   | Section 1350 Certification of Chief Executive Officer*                                                                                                                                                                                                                                                                                                                           |
| 32.2   |   | Section 1350 Certification of Chief Financial Officer*                                                                                                                                                                                                                                                                                                                           |

----

(1)          Previously filed onJuly 19, 2004 as an exhibit to Mueller Group, Inc.'s RegistrationStatement on Form S-4 (No. 333-117473).

(2)          Previously filed as anexhibit to Mueller Water Products, Inc.’s Registration Statement onForm S-1 (No. 333-116590) and incorporated herein by reference.

(3)          Previously filed as anexhibit to the Form 8-K of Mueller Group, Inc. filed on August 27, 2004.

62

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(4)          Previously filed as anexhibit to the Form 8-K of Mueller Group, Inc. filed on February 7,2005.

(5)          Previously filed as anexhibit to the Form 8-K of Mueller Group, Inc. filed on February 24,2005.

(6)          Previously filed as anexhibit to the Form 8-K of Mueller Water Products, Inc. filed on June 21,2005.

(7)          Previously filed as anexhibit to the Form 8-K of Mueller Group, Inc. filed on June 21,2005.

(8)          Previously filed as anexhibit to the Form 8-K of Mueller Group, LLC filed on October 6,2005.

(9)          Previously filed as anexhibit to the Form 10-K of Mueller Group, LLC filed on December 19,2005.

(10) Previously filed as an exhibit to the Form 8-K of MuellerGroup, LLC filed on January 27, 2006.

(11) Previously filed as an exhibit to the Form 10-Q of MuellerGroup, LLC filed on February 22, 2006.

*                    Filedherewith.

**             Managementcompensatory plan, contract or arrangement.

63

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Shareholders and Board of Directors ofMueller Group, LLC

In ouropinion, the accompanying consolidated balance sheets and the relatedconsolidated statements of operations, shareholders’ equity (deficit) andcomprehensive loss and of cash flows present fairly, in all material respects,the financial position of Mueller Group, LLC, at September 30, 2006 and2005, and the results of its operations and its cash flows for the year ended September 30,2006, the nine months ended September 30, 2005, and the year ended December 31,2004, in conformity with accounting principles generally accepted in the UnitedStates of America. These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits. We conducted our audits of thesestatements in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.
| /s/ PRICEWATERHOUSECOOPERS LLP |   |
|--------------------------------|--------|
| Atlanta, Georgia               |
| December 18, 2006         |

 

F-1

----

**MUELLER GROUP, LLCCONSOLIDATED BALANCE SHEETS**

| ** **                                                                                                                                    | ** ** | **September 30,  2006**        | ** ** | **September 30,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **(dollars in millions)** | ** ** |
| **Assets**                                                                                                                                    | ** ** |                                | ** ** | ** **                   |       |   | ** ** | ** ** |   |
| Cash and cash  equivalents                                                                                                                    |       |                                | $          | 79.1                         |       |   |   | $ | — |   |   |
| Receivables, net  of allowance for doubtful accounts of $4.8 million and $0.9 million at  September 30, 2006 and 2005, respectively |       |                                | 322.9      |                         |       |   | 118.5 |   |   |
| Inventories                                                                                                                                   |       |                                | 454.6      |                         |       |   | 147.2 |   |   |
| Deferred income  taxes                                                                                                                        |       |                                | 42.6       |                         |       |   | 11.1 |   |   |
| Prepaid expenses                                                                                                                              |       |                                | 33.7       |                         |       |   | 1.5 |   |   |
| Total current assets                                                                                                                          |       |                                | 932.9      |                         |       |   | 278.3 |   |   |
| Property, plant  and equipment, net                                                                                                           |       |                                | 337.0      |                         |       |   | 149.2 |   |   |
| Deferred  financing fees                                                                                                                      |       |                                | 14.6       |                         |       |   | — |   |   |
| Deferred income  taxes                                                                                                                        |       |                                | —     |                         |       |   | 9.5 |   |   |
| Identifiable  intangibles, net                                                                                                                |       |                                | 835.4      |                         |       |   | — |   |   |
| Goodwill                                                                                                                                      |       |                                | 724.1      |                         |       |   | 58.4 |   |   |
| Other long-term  assets                                                                                                                       |       |                                | 2.2        |                         |       |   | — |   |   |
| Total assets                                                                                                                                  |       |                                | $          | 2,846.2                      |       |   |   | $ | 495.4 |   |   |
| **Liabilities**                                                                                                                               | ** ** |                                | ** ** | ** **                   |       |   | ** ** | ** ** |   |
| Current portion  of long-term debt                                                                                                            |       |                                | $          | 9.0                          |       |   |   | $ | — |   |   |
| Accounts payable                                                                                                                              |       |                                | 124.8      |                         |       |   | 52.5 |   |   |
| Accrued expenses  and other liabilities                                                                                                       |       |                                | 122.1      |                         |       |   | 34.7 |   |   |
| Payable to  affiliate, Sloss Industries                                                                                                       |       |                                | 1.5        |                         |       |   | 2.5 |   |   |
| Total current liabilities                                                                                                                     |       |                                | 257.4      |                         |       |   | 89.7 |   |   |
| Long-term  debt                                                                                                                               |       |                                | 1,002.0    |                         |       |   | — |   |   |
| Payable to  parent, Walter Industries                                                                                                         |       |                                | 3.6        |                         |       |   | 443.6 |   |   |
| Accrued pension  liability, net                                                                                                               |       |                                | 43.7       |                         |       |   | 53.6 |   |   |
| Accumulated  postretirement benefits obligation                                                                                               |       |                                | 46.3       |                         |       |   | 51.1 |   |   |
| Deferred income  taxes                                                                                                                        |       |                                | 294.0      |                         |       |   | — |   |   |
| Other long-term  liabilities                                                                                                                  |       |                                | 20.9       |                         |       |   | 12.6 |   |   |
| Total liabilities                                                                                                                             |       |                                | 1,667.9    |                         |       |   | 650.6 |   |   |
| Commitments and contingencies (Note 15)                                                                                                  |       |                                |       |                         |       |   |   |   |   |
| **Shareholder’s equity (deficit)**                                                                                                       | ** ** |                                | ** ** | ** **                   |       |   | ** ** | ** ** |   |
| Membership unit:                                                                                                                              |       |                                |       |                         |       |   |   |   |   |
| 1 unit outstanding at September 30, 2006                                                                                                 |       |                                | —     |                         |       |   | — |   |   |
| Capital in excess  of par value                                                                                                               |       |                                | 1,358.4    |                         |       |   | 68.3 |   |   |
| Accumulated  deficit                                                                                                                          |       |                                | (161.5     | )                            |       |   | (178.1 | ) |   |
| Accumulated other  comprehensive loss                                                                                                         |       |                                | (18.6      | )                            |       |   | (45.4 | ) |   |
| Total shareholders’ equity (deficit)                                                                                                     |       |                                | 1,178.3    |                         |       |   | (155.2 | ) |   |
| Total liabilities  and shareholders’ equity (deficit)                                                                                    |       |                                | $          | 2,846.2                      |       |   |   | $ | 495.4 |   |   |

 

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

F-2

----

**MUELLER GROUP, LLCCONSOLIDATED STATEMENTS OF OPERATIONS**

| ** **                                                                | ** ** | **Twelve Months  Ended  September 30, 2006** | ** ** | **Nine Months  Ended  September 30, 2005** | ** ** | **Twelve Months  Ended**

**December 31, 2004** | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|-----------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                | ** ** | **(dollars in millions)**                         | ** ** |
| Net sales                                                                 |       |                                                        | $          | 1,933.4                                                   |       |                                                           |       | $ | 456.9 |   |   |   | $ | 578.4 |   |   |
| Cost of sales                                                             |       |                                                        | 1,525.7    |                                                      |       |                                                           | 402.2      |   |   |   | 531.4 |   |   |
| Gross profit                                                              |       |                                                        | 407.7      |                                                      |       |                                                           | 54.7       |   |   |   | 47.0 |   |   |
| Operating expenses:                                                       |       |                                                        |       |                                                      |       |                                                           |       |   |   |   |   |   |   |
| Selling, general and administrative                                       |       |                                                        | 242.1      |                                                      |       |                                                           | 25.9       |   |   |   | 38.2 |   |   |
| Related party corporate charges                                           |       |                                                        | 8.0        |                                                      |       |                                                           | 5.4        |   |   |   | 7.7 |   |   |
| Facility rationalization, restructuring and related  costs                |       |                                                        | 28.6       |                                                      |       |                                                           | —     |   |   |   | 0.1 |   |   |
| Total operating expenses                                                  |       |                                                        | 278.7      |                                                      |       |                                                           | 31.3       |   |   |   | 46.0 |   |   |
| Income from  operations                                                   |       |                                                        | 129.0      |                                                      |       |                                                           | 23.4       |   |   |   | 1.0 |   |   |
| Interest expense  arising from related party payable to Walter Industries |       |                                                        | —     |                                                      |       |                                                           | (15.2      | ) |   |   | (18.9 | ) |   |
| Interest expense,  net of interest income                                 |       |                                                        | (101.4     | )                                                         |       |                                                           | (0.3       | ) |   |   | (0.5 | ) |   |
| Income (loss) before income taxes                                         |       |                                                        | 27.6       |                                                      |       |                                                           | 7.9        |   |   |   | (18.4 | ) |   |
| Income tax  expense (benefit)                                             |       |                                                        | 11.0       |                                                      |       |                                                           | 2.8        |   |   |   | (2.9 | ) |   |
| Net income (loss)                                                         |       |                                                        | $          | 16.6                                                      |       |                                                           |       | $ | 5.1 |   |   |   | $ | (15.5 | ) |   |

 

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

F-3

----

**MUELLERGROUP, LLC**

**CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY(DEFICIT) AND COMPREHENSIVELOSS**

**FORTHE THREE FISCAL PERIODS ENDED SEPTEMBER 30, 2006, SEPTEMBER 30, 2005, ANDDECEMBER 31, 2004**

**(dollarsin millions)**

| ** **                                              | ** ** | **Capital in  Excess of  Par Value** | ** ** | **Accumulated  Deficit** | ** ** | **Comprehensive  Income  (Loss)** | ** ** | **Accumulated Other  Comprehensive  Loss** | ** ** | **Total** | ** ** |
|---------------------------------------------------------|------------|-----------------------------------------------------|------------|--------------------------|------------|-----------------------------------|------------|-------------------------------------------------|------------|-----------|------------|
| Balance at  December 31, 2003                      |       | $                                                   | 68.3       |                     |       | $                                 | (167.7     | )                                               |       |      |       |   |   |   | $ | (29.6 | ) |   | $ | (129.0 | ) |
| Comprehensive loss:                                     |       |                                                |       |                     |       |                              |       |                                            |       |      |       |   |   |   |   |   |   |
| Net loss                                                |       | —                                              |       |                     | (15.5      | )                                 |       |                                            | $          | (15.5     | )          |   |   | — |   |   | (15.5 | ) |
| Other comprehensive loss, net of tax:              |       |                                                |       |                     |       |                              |       |                                            |       |      |       |   |   |   |   |   |   |
| Increase in additional  minimum  pension liability |       | —                                              |       |                     | —     |                              |       |                                            | (0.6       | )         |       |   | (0.6 | ) |   | (0.6 | ) |
| Comprehensive loss                                      |       |                                                |       |                     |       |                              |       |                                            | $          | (16.1     | )          |   |   |   |   |   |   |   |
| Balance at  December 31, 2004                      |       | 68.3                                                |       |                     | (183.2     | )                                 |       |                                            |       |      |       |   | (30.2 | ) |   | (145.1 | ) |
| Comprehensive loss:                                     |       |                                                |       |                     |       |                              |       |                                            |       |      |       |   |   |   |   |   |   |
| Net income                                              |       | —                                              |       |                     | 5.1        |                              |       |                                            | 5.1        |      |       |   | — |   |   | 5.1 |   |
| Other comprehensive loss, net of tax:              |       |                                                |       |                     |       |                              |       |                                            |       |      |       |   |   |   |   |   |   |
| Increase in additional  minimum pension liability  |       | —                                              |       |                     | —     |                              |       |                                            | (15.2      | )         |       |   | (15.2 | ) |   | (15.2 | ) |
| Comprehensive loss                                      |       |                                                |       |                     |       |                              |       |                                            | $          | (10.1     | )          |   |   |   |   |   |   |   |
| Balance at  September 30, 2005                     |       | 68.3                                                |       |                     | (178.1     | )                                 |       |                                            |       |      |       |   | (45.4 | ) |   | (155.2 | ) |
| Walter’s investment in  subsidiary                 |       | 932.1                                               |       |                     | —     |                              |       |                                            |       |      |       |   | — |   |   | 932.1 |   |
| Dividend to Walter                                      |       | (444.5                                              | )          |                     | —     |                              |       |                                            |       |      |       |   | — |   |   | (444.5 | ) |
| Dividend to Walter for  acquisition costs               |       | (12.0                                               | )          |                     | —     |                              |       |                                            |       |      |       |   | — |   |   | (12.0 | ) |
| Forgiveness of U.S. Pipe  payable to Walter        |       | 443.6                                               |       |                     | —     |                              |       |                                            |       |      |       |   | — |   |   | 443.6 |   |
| Contribution from  Mueller Water                        |       | 368.7                                               |       |                     | —     |                              |       |                                            |       |      |       |   | — |   |   | 368.7 |   |
| Share-based compensation                                |       | 2.2                                                 |       |                     | —     |                              |       |                                            |       |      |       |   | — |   |   | 2.2 |   |
| Comprehensive income                                    |       |                                                |       |                     |       |                              |       |                                            |       |      |       |   |   |   |   |   |   |
| Net income                                              |       | —                                              |       |                     | 16.6       |                              |       |                                            | 16.6       |      |       |   | — |   |   | 16.6 |   |
| Other comprehensive income, net of tax:            |       |                                                |       |                     |       |                              |       |                                            |       |      |       |   |   |   |   |   |   |
| Unrealized gain on  interest rate swaps            |       | —                                              |       |                     | —     |                              |       |                                            | 1.0        |      |       |   | 1.0 |   |   | 1.0 |   |
| Foreign currency  translation adjustments               |       | —                                              |       |                     | —     |                              |       |                                            | 1.8        |      |       |   | 1.8 |   |   | 1.8 |   |
| Decrease in additional  minimum pension liability       |       | —                                              |       |                     | —     |                              |       |                                            | 24.0       |      |       |   | 24.0 |   |   | 24.0 |   |
| Comprehensive income                                    |       |                                                |       |                     |       |                              |       |                                            | $          | 43.4      |       |   |   |   |   |   |   |   |
| Balance at September 30, 2006                      |       | $                                                   | 1,358.4    |                     |       | $                                 | (161.5     | )                                               |       |      |       |   |   |   | $ | (18.6 | ) |   | $ | 1,178.3 |   |

 

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

F-4

----

**MUELLER GROUP, LLCCONSOLIDATED STATEMENTS OF CASH FLOWS**

| ** **                                                                                          | ** ** | **Twelve months  ended  September 30,  2006** | ** ** | **Nine months  ended  September 30,  2005** | ** ** | **Twelve months  ended  December 31,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                                          | ** ** | **(dollars in millions)**                     | ** ** |
| **Operating Activities**                                                                            | ** ** |                                                    | ** ** | ** **                                            |       |                                                   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Net income (loss)                                                                                   |       |                                                    | $          | 16.6                                                  |       |                                                   |       | $ | 5.1 |   |   |   | $ | (15.5 | ) |   |
| Adjustments to reconcile  net income (loss) to net cash provided by (used in) operating activities: |       |                                                    |       |                                                  |       |                                                   |       |   |   |   |   |   |   |
| Depreciation                                                                                        |       |                                                    | 68.8       |                                                  |       |                                                   | 19.4       |   |   |   | 26.5 |   |   |
| Amortization of  intangibles                                                                        |       |                                                    | 28.1       |                                                  |       |                                                   | —     |   |   |   | — |   |   |
| Amortization of  deferred financing fees                                                            |       |                                                    | 3.1        |                                                  |       |                                                   | —     |   |   |   | — |   |   |
| Accretion on debt                                                                                   |       |                                                    | (2.8       | )                                                     |       |                                                   | —     |   |   |   | — |   |   |
| Write off of  premium on debt                                                                       |       |                                                    | (5.8       | )                                                     |       |                                                   | —     |   |   |   | — |   |   |
| Loss on disposal  of property, plant and equipment                                                  |       |                                                    | 2.1        |                                                  |       |                                                   | 0.9        |   |   |   | 1.0 |   |   |
| Write off of  deferred financing fees                                                               |       |                                                    | 4.1        |                                                  |       |                                                   | —     |   |   |   | — |   |   |
| Share-based  compensation expense                                                                   |       |                                                    | 3.1        |                                                  |       |                                                   | —     |   |   |   | — |   |   |
| Impairments of  property, plant and equipment                                                       |       |                                                    | 21.5       |                                                  |       |                                                   | —     |   |   |   | — |   |   |
| Provision (credit)  for deferred income taxes                                                       |       |                                                    | (25.9      | )                                                     |       |                                                   | (3.5       | ) |   |   | 9.0 |   |   |
| Gain on interest  rate swaps                                                                        |       |                                                    | (0.4       | )                                                     |       |                                                   | —     |   |   |   | — |   |   |
| Other, net                                                                                          |       |                                                    | (2.2       | )                                                     |       |                                                   | 0.2        |   |   |   | 0.3 |   |   |
| Changes in assets and  liabilities, net of the effects of acquisitions:                             |       |                                                    |       |                                                  |       |                                                   |       |   |   |   |   |   |   |
| Receivables                                                                                         |       |                                                    | (25.2      | )                                                     |       |                                                   | (15.0      | ) |   |   | (22.6 | ) |   |
| Inventories                                                                                         |       |                                                    | 70.4       |                                                  |       |                                                   | (20.0      | ) |   |   | (3.7 | ) |   |
| Income taxes  payable                                                                               |       |                                                    | —     |                                                  |       |                                                   | 4.7        |   |   |   | (0.6 | ) |   |
| Prepaid expenses  and other current assets                                                          |       |                                                    | (0.9       | )                                                     |       |                                                   | (0.5       | ) |   |   | 0.1 |   |   |
| Other non-current  assets                                                                           |       |                                                    | (0.4       | )                                                     |       |                                                   | (0.9       | ) |   |   | (7.6 | ) |   |
| Pension and other  long-term liabilities                                                            |       |                                                    | (27.1      | )                                                     |       |                                                   | 0.5        |   |   |   | (1.2 | ) |   |
| Accounts payable,  accrued expenses and other current liabilities                                   |       |                                                    | (5.2       | )                                                     |       |                                                   | 4.1        |   |   |   | 20.1 |   |   |
| Net cash provided  by (used in) operating activities                                                |       |                                                    | 121.9      |                                                  |       |                                                   | (5.0       | ) |   |   | 5.8 |   |   |
| **Investing  Activities**                                                                           | ** ** |                                                    | ** ** | ** **                                            |       |                                                   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Additions to  property, plant and equipment                                                         |       |                                                    | (71.1      | )                                                     |       |                                                   | (16.5      | ) |   |   | (20.4 | ) |   |
| Acquisition of  businesses, net of cash acquired                                                    |       |                                                    | (15.6      | )                                                     |       |                                                   | —     |   |   |   | — |   |   |
| Proceeds from sale  of property, plant and equipment                                                |       |                                                    | 3.6        |                                                  |       |                                                   | —     |   |   |   | — |   |   |
| Increase in  amounts due to Walter                                                                  |       |                                                    | 1.7        |                                                  |       |                                                   | 20.8       |   |   |   | 15.7 |   |   |
| Net cash (used in)  provided by investing activities                                                |       |                                                    | (81.4      | )                                                     |       |                                                   | 4.3        |   |   |   | (4.7 | ) |   |
| **Financing  Activities**                                                                           | ** ** |                                                    | ** ** | ** **                                            |       |                                                   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Increase  (decrease) in dollar value of bank checks outstanding                                     |       |                                                    | 10.0       |                                                  |       |                                                   | 0.7        |   |   |   | (1.3 | ) |   |
| Proceeds from  short-term borrowings                                                                |       |                                                    | 55.9       |                                                  |       |                                                   | —     |   |   |   | — |   |   |
| Retirement of  short-term debt                                                                      |       |                                                    | (55.9      | )                                                     |       |                                                   | —     |   |   |   | — |   |   |
| Proceeds from long-term  debt                                                                       |       |                                                    | 1,050.0    |                                                  |       |                                                   | —     |   |   |   | — |   |   |
| Retirement of long-term  debt                                                                       |       |                                                    | (979.4     | )                                                     |       |                                                   | —     |   |   |   | — |   |   |
| Contribution from  Mueller Water                                                                    |       |                                                    | 368.7      |                                                  |       |                                                   | —     |   |   |   | — |   |   |
| Payment of  deferred financing fees                                                                 |       |                                                    | (21.6      | )                                                     |       |                                                   | —     |   |   |   | — |   |   |
| Dividend to Walter                                                                                  |       |                                                    | (444.5     | )                                                     |       |                                                   | —     |   |   |   | — |   |   |
| Dividend to Walter  for acquisition costs                                                           |       |                                                    | (12.0      | )                                                     |       |                                                   | —     |   |   |   | — |   |   |
| Walter  contribution of Predecessor Mueller’s cash                                             |       |                                                    | 67.4       |                                                  |       |                                                   | —     |   |   |   | — |   |   |
| Net cash provided  by (used in) financing activities                                                |       |                                                    | 38.6       |                                                  |       |                                                   | 0.7        |   |   |   | (1.3 | ) |   |
| Net increase  (decrease) in cash and cash equivalents                                               |       |                                                    | 79.1       |                                                  |       |                                                   | —     |   |   |   | (0.2 | ) |   |
| Cash and cash  equivalents at beginning of year                                                     |       |                                                    | —     |                                                  |       |                                                   | —     |   |   |   | 0.2 |   |   |
| Cash and cash  equivalents at end of year                                                           |       |                                                    | $          | 79.1                                                  |       |                                                   |       | $ | — |   |   |   | $ | — |   |   |
| **Supplemental Disclosures**                                                                        | ** ** |                                                    | ** ** | ** **                                            |       |                                                   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Interest paid                                                                                       |       |                                                    | $          | 109.0                                                 |       |                                                   |       | $ | 0.3 |   |   |   | $ | 0.5 |   |   |
| Income taxes paid                                                                                   |       |                                                    | $          | 49.2                                                  |       |                                                   |       | $ | — |   |   |   | $ | — |   |   |

 

F-5

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The Company recordedfacility rationalization, restructuring and related charges of $28.6 million,zero and $0.1 million for the twelve months ended September 30, 2006, thenine months ended September 30, 2005 and the twelve months ended December 31,2004, respectively. A portion of these charges, consisting of write-offs ofassets, were non-cash and are reconciled below:

| ** **                                                       | ** ** | **Twelve months  ended  September 30,  2006** | ** ** | **Nine months  ended  September 30,  2005** | ** ** | **Twelve months  ended  September 30,  2004** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                       | ** ** | **(dollars in millions)**                     | ** ** |
| Accrued expenses                                                 |       |                                                    | $          | 7.1                                                   |       |                                                    |       | $ | — |   |   |   | $ | 0.1 |   |   |
| Non-cash                                                         |       |                                                    | 21.5       |                                                  |       |                                                    | —     |   |   |   | — |   |   |
| Total facility  rationalization, restructuring and related costs |       |                                                    | $          | 28.6                                                  |       |                                                    |       | $ | — |   |   |   | $ | 0.1 |   |   |

 

Schedule of non-cash investing and financingactivities:

On October 3,2005, the Company’s former parent, Walter Industries, Inc. (“Walter”),purchased all of the outstanding common stock of Mueller Water Products, Inc.(“Predecessor Mueller Water”). See Note 1.

| ** **                                     | ** ** | **(dollars in millions)** | ** ** |
|------------------------------------------------|------------|-------------------------------------|------------|
| Contribution of  Predecessor Mueller by Walter |       |                                | $          | 932.9 |   |   |
| Less: Cash of  Predecessor Mueller received    |       |                                | (67.4      | ) |   |
| Total net assets  received excluding cash      |       |                                | $          | 865.5 |   |   |

 

Subsequent to the Acquisition, Walter forgave anintercompany receivable from U.S. Pipe of $443.6 million.

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

F-6

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**MUELLER GROUP, LLCNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**Note 1.**   Organization

Mueller Group, LLC is awholly-owned subsidiary of Mueller Water Products, Inc. (“Mueller Water”),a Delaware corporation. Mueller Water is the surviving corporation of the mergeron February 2, 2006 of Mueller Water Products, LLC (Commission FileNumber: 333-116590) and Mueller Water Products Co-Issuer, Inc. withand into Mueller Holding Company, Inc., a Delaware corporation. On June 1,2006, Mueller Water completed its initial public offering (IPO) of its Series Acommon stock (NYSE: MWA). On December 14, 2006, Walter Industries, Inc.(“Walter”), a diversified New York Stock Exchange traded company (NYSE: WLT),distributed all of Mueller Water’s outstanding Series B common stock(NYSE: MWA-B) to Walter’s shareholders. From October 3, 2005 through December 14,2006, Mueller Water was a wholly-owned subsidiary of Walter.

On October 3, 2005,through a series of transactions (the “Acquisition”), Walter, through awholly-owned subsidiary, acquired all outstanding shares of capital stock ofour parent company, Predecessor Mueller Water, which immediately was convertedinto Mueller Water Products, LLC, a Delaware limited liability company andcontributed United States Pipe and Foundry Company, LLC, (“U.S. Pipe”), ownedby Walter since 1969, to the acquired company’s wholly-owned subsidiary,Mueller Group, LLC (“Predecessor Mueller Group”). In accordance with accountingprinciples generally accepted in the United States, for accounting purposesU.S. Pipe is treated as the acquirer of Predecessor Mueller Group. Accordingly,effective October 3, 2005, U.S. Pipe’s basis of accounting is used for theCompany and all financial data for periods prior to October 3, 2005 of theCompany included in this report on Form 10-K is that of U.S. Pipe.The results of operations of Predecessor Mueller Group are included in theConsolidated Statements of Operations beginning October 3, 2005.

The Company was originallyorganized as United States Pipe and Foundry Company, Inc. (“Inc.”) and wasa wholly-owned subsidiary of Walter. On September 23, 2005, Inc. wasdissolved and United States Pipe and Foundry Company, LLC was organized in thestate of Alabama, and the operations of Inc. were conducted under the form of alimited liability company.

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

The consolidated financialstatements include the accounts of all wholly-owned subsidiaries. Preparationof financial statements in accordance with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the amounts reported in the consolidated financialstatements. Actual results could differ from those estimates. All significant intercompanybalances and transactions have been eliminated.

Certain amounts in theprior period’s consolidated financial statements have been reclassified toconform to the current-period presentation.

**Note 2.**   Summaryof Significant Accounting Policies

*Revenue Recognition—**The*Companyrecognizes revenue based on the recognition criteria set forth in theSecurities and Exchange Commission’s Staff Accounting Bulletin 104, *Revenue Recognition in Financial Statements*, which is whendelivery of product has occurred or services have been rendered and there ispersuasive evidence of a sales arrangement, selling prices are fixed ordeterminable, and collectibility from the customer is reasonably assured.Revenue from the sale of products via rail or truck is recognized when 

F-7

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title passes upondelivery to the customer. Revenue earned for shipments via ocean vessel isrecognized under international shipping standards as defined by Incoterms 2000when title and risk of loss transfer to the customer. Sales are recorded net ofestimated cash discounts and rebates.

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

*Customer Rebates—**Customer*rebates areapplied against net sales at the time the sales are recorded based on estimateswith respect to the deductions to be taken.

*Share-Based Compensation—**On**May 25, 2006, t*heCompany adopted the Mueller Water Products, Inc. 2006 Stock Incentive Plan(the “2006 Plan”), which is more fully described in Note 5. The Company recordscompensation costs for stock options and restricted stock units granted toemployees based on the fair value at the grant dates as prescribed by Statementof Financial Accounting Standards (SFAS) No. 123(R), *Share-BasedPayment*. The Company records share-based compensation costs asselling, general and administrative in the consolidated statements ofoperations.

*Cash and Cash Equivalents—**The*Company considersall highly liquid investments with original maturities of ninety days or lesswhen purchased to be cash equivalents. Outstanding checks are netted againstcash when there is a sufficient balance of cash available in the Company’saccounts at the bank to cover the outstanding amount and the right of offsetexists. Where there is no right of offset against cash balances, outstandingchecks are included in accounts payable. At September 30, 2006 and September 30,2005 checks issued but not yet presented to the banks for payment (i.e. thedollar value of bank checks outstanding) were $10.0 million and zero,respectively, and were recorded in accounts payable.

*Receivables—**Receivables r*elateprimarily to amounts due from customers located in North America. To reducecredit risk, credit investigations are performed prior to accepting an orderand, when necessary, letters of credit are required to ensure payment.

The estimated allowancefor doubtful accounts receivable is based, in large part, upon judgments andestimates of expected losses and specific identification of problem tradeaccounts. Significantly weaker than anticipated industry or economic conditionscould impact customers’ ability to pay such that actual losses may be greaterthan the amounts provided for in these allowances. The periodic evaluation ofthe adequacy of the allowance for doubtful accounts is based on an analysis ofprior collection experience, specific customer creditworthiness and currenteconomic trends within the industries served. In circumstances where a specificcustomer’s inability to meet its financial obligation is known to the Company(e.g., bankruptcy filings or substantial downgrading of credit ratings), theCompany records a specific allowance to reduce the receivable to the amount theCompany reasonably believes will be collected.

Thefollowing table summarizes information concerning the Company’s allowance fordoubtful accounts:

| ** **                                              | ** ** | **For the twelve  months ended  September 30,  2006** | ** ** | **For the nine  months ended  September 30,  2005** | ** ** | **For the twelve  months ended  December 31,  2004** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **(dollars in millions)**                                       | ** ** |
| Balance at  beginning of period                         |       |                                                                      | $          | 0.9                                                                     |       |                                                                     |       | $ | 0.7 |   |   |   | $ | 0.8 |   |   |
| Allowance for  doubtful accounts of Predecessor Mueller |       |                                                                      | 5.0        |                                                                    |       |                                                                     | —     |   |   |   | — |   |   |
| Provisions  charged to income                           |       |                                                                      | 1.8        |                                                                    |       |                                                                     | 0.3        |   |   |   | 0.2 |   |   |
| Charge-offs, net  of recoveries                         |       |                                                                      | (2.9       | )                                                                       |       |                                                                     | (0.1       | ) |   |   | (0.3 | ) |   |
| Balance at end of period                                |       |                                                                      | $          | 4.8                                                                     |       |                                                                     |       | $ | 0.9 |   |   |   | $ | 0.7 |   |   |

 

F-8

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

*Property,plant and equipment—**Property*, plant and equipment isrecorded at cost, less accumulated depreciation and amortization. Depreciationis recorded on the straight-line method over the estimated useful lives of theassets. Leasehold improvements are amortized on the straight-line method overthe lesser of the useful life of the improvement or the remaining lease term.Estimated useful lives used in computing depreciation expense are 2 to20 years for machinery and equipment and 3 to 50 years for landimprovements and buildings. Gains and losses upon disposition are reflected inthe Consolidated Statements of Operations in the period of disposition.

Direct internal and external costs to implementcomputer systems and software are capitalized as incurred. Capitalized costs areamortized over the estimated useful life of the system or software, beginningwhen site installations or module development is complete and ready for itsintended use, which generally is 3 to 5 years.

The Company accounts for its asset retirement obligationsrelated to plant and landfill closures in accordance with Statement ofFinancial Accounting Standards No. 143, *Accountingfor Asset Retirement Obligations* (SFAS 143). Under SFAS 143,liabilities are recognized at fair value for an asset retirement obligation inthe period in which it is incurred and the carrying amount of the relatedlong-lived asset is correspondingly increased. Over time, the liability isaccreted to its future value. The corresponding asset capitalized at inceptionis depreciated over the estimated useful life of the asset.

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

*EnvironmentalExpenditures—**The*Company capitalizesenvironmental expenditures that increase the life or efficiency of property orthat reduce or prevent environmental contamination. The Company accrues forenvironmental expenses resulting from existing conditions that relate to pastoperations when the costs are probable and reasonably estimable. The Company isindemnified by Tyco for all environmental liabilities associated withPredecessor Mueller as it existed as of August 16, 1999, whether known ornot.

*Accountingfor the Impairment of Long-Lived Assets—**Long-lived* assets arereviewed for impairment whenever events or changes in circumstances indicatethat the book value of the asset may not be recoverable. Goodwill and intangibleassets that have an indefinite life are not amortized, but instead are testedfor impairment annually (or more frequently if events or circumstances indicatepossible impairments) using both a discounted cash flow method and a marketcomparable method.

F-9

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*Workers’ Compensation—**The*Company is self-insured for workers’compensation benefits for work-related injuries, subject to stop-loss insurancecoverage in the amount of $1.0 million cost per incident. Liabilities,including those related to claims incurred but not reported, are recordedprincipally using annual valuations based on discounted future expectedpayments and using historical data or combined insurance industry data whenhistorical data is limited. Pursuant to the terms of the Tyco Purchase Agreement,Predecessor Mueller is indemnified by Tyco for all liabilities that occurredprior to August 16, 1999. Workers’ compensation liabilities were asfollows:

| ** **                                                          | ** ** | **September 30,  2006**        | ** ** | **September 30,  2005** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------------|------------|------------------------------|------------|
| ** **                                                          | ** ** | **(dollars in millions)** | ** ** |
| Undiscounted aggregated estimated claims to be paid                 |       |                                | $          | 25.0                         |       |   |   | $ | 14.4 |   |   |
| Workers’ compensation liability recorded on a discounted basis |       |                                | $          | 21.6                         |       |   |   | $ | 11.9 |   |   |

 

The Companyapplies a discount rate at a risk-free interest rate, generally a U.S. Treasurybill rate, for each policy year. The rate used is one with a duration thatcorresponds 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 ratefor that policy year until all claims are paid. The use of this methoddecreases the volatility of the liability related solely to changes in thediscount rate.

*WarrantyCosts—**The*Company accrues for U.S. Pipesegment warranty expenses that include customer costs of repair and/orreplacement, including labor, materials, equipment, freight and reasonableoverhead costs, determined on a case-by-case basis, whenever the Company’sproducts and/or services fail to comply with published industry standards ormutually agreed upon customer requirements.

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

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

| ** **                               | ** ** | **For the twelve  months ended  September 30,  2006** | ** ** | **For the nine  months ended  September 30,  2005** | ** ** | **For the twelve  months ended  December 31,  2004** | ** ** |
|------------------------------------------|------------|---------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| Accrued balance  at beginning of period  |       |                                                                      | $          | 4.7                                                                     |       |                                                                     |       | $ | 1.7 |   |   |   | $ | 0.5 |   |   |
| Accrued warranty  of Predecessor Mueller |       |                                                                      | 1.6        |                                                                    |       |                                                                     | —     |   |   |   | — |   |   |
| Warranty expense                         |       |                                                                      | 3.1        |                                                                    |       |                                                                     | 5.7        |   |   |   | 5.5 |   |   |
| Settlement of  warranty claims           |       |                                                                      | (6.7       | )                                                                       |       |                                                                     | (2.7       | ) |   |   | (4.3 | ) |   |
| Balance at end of period                 |       |                                                                      | $          | 2.7                                                                     |       |                                                                     |       | $ | 4.7 |   |   |   | $ | 1.7 |   |   |

 

*DeferredFinancing Fees—**Costs*of debt financing areamortized over the life of the related loan agreements, which range from fiveto ten years. Such costs are reassessed when amendments occur, in accordancewith Emerging Issues Task Force (EITF) 96-19, *DebtorsAccounting for a Modification or Exchange of Debt Instruments*.

*IncomeTaxes—**Deferred*tax liabilities and assetsare recognized for the expected future tax consequences of events that havebeen included in the financial statements or tax returns. Deferred taxliabilities and assets are determined based on the differences between thefinancial statements basis and the tax basis of assets and liabilities, usingtax rates in effect for the years in which the differences are expected toreverse. A valuation allowance is provided if, based upon the availableevidence, it is more likely than not that some or all of the deferred taxassets will not be realized.

F-10

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*Researchand Development**—Research*and developmentexpenditures are expensed when incurred.

*Advertising—**Advertising*costs areexpensed when incurred.

*Translationof Foreign Currency—**Assets*and liabilities of theCompany’s businesses operating outside of the United States of America that maintainaccounts in a functional currency other than U.S. dollars are translated intoU.S. dollars using year-end exchange rates. Revenues and expenses aretranslated at the average exchange rates effective during the year. Foreigncurrency translation gains and losses are included as a separate component ofstockholders’ equity. Gains and losses resulting from foreign currencytransactions are included in either cost of sales or selling, general andadministrative expense, as appropriate.

*DerivativeInstruments and Hedging Activities—**The*Company currentlyuses interest rate swaps as required in the 2005 Mueller Credit Agreement tomitigate the impact of interest rate volatility. The amount to be paid orreceived from interest rate swaps is charged or credited to interest expenseover the lives of the interest rate swap agreements. Changes in the fair valueof derivatives that are designated as effective are recorded to accumulatedother comprehensive income (loss). Changes in the fair value of derivatives thatare designated as ineffective are recorded to earnings each period (seeNote 8).

Additionally, the Company utilizes forward contractsto mitigate its exposure to changes in foreign currency exchange rates fromthird party and intercompany transactions. The primary currency to which theCompany is exposed and to which it hedges its exposure is the Canadian Dollar.The unrealized gains and losses associated with forward contracts are deferredas a component of accumulated other comprehensive income (loss) until theunderlying hedged transactions are reported in the Company’s ConsolidatedStatements of Operations.

*RelatedParty Transactions—**The*Company purchases foundry cokefrom Sloss Industries, Inc., which was an affiliate until December 14,2006, for an amount that approximates the market value of comparabletransactions. Costs included in cost of sales related to purchases from SlossIndustries, Inc. were $21.2 million, $17.9 million and $15.1million for the twelve months ended September 30, 2006, the nine monthsended September 30, 2005 and the twelve months ended December 31,2004, respectively.

Other services that Sloss Industries, Inc.provides to the Company include the delivery of electrical power to one of theCompany’s facilities, rail car switching and the leasing of a distributionfacility. The total of these other services included in the Company’s operatingexpenses were $1.9 million, $1.7 million and $1.8 million for thetwelve months ended September 30, 2006, the nine months ended September 30,2005 and the twelve months ended December 31, 2004, respectively.

*RelatedParty Allocations—**Certain***costsincurred by Walter such as insurance, executive salaries, professional servicefees, human resources, transportation, healthcare and other centralizedbusiness functions are allocated to its subsidiaries. Certain costs that wereconsidered directly related to the U.S. Pipe segment were charged to theCompany and included in selling, general and administrative expenses. Thesecosts were approximately $2.0 million, $1.3 million and $1.4 millionfor the twelve months ended September 30, 2006, the nine months ended September 30,2005 and the twelve months ended December 31, 2004, respectively. Costsincurred by Walter that cannot be directly attributed to its subsidiaries areallocated to them based on estimated annual revenues. Such costs were allocatedto the Company, and are recorded as related party corporate charges in theaccompanying Consolidated Statements of Operations, and were approximately $8.0 million,$5.4 million and $7.6 million for the twelve months ended September 30,2006, the nine months ended September 30, 2005 and the twelve months endedDecember 31, 2004, respectively.

While the Company considers the allocation of suchcosts to be reasonable, the cost of performing such services on our own behalfmay be higher or lower than historically allocated amounts.

F-11

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Certain of theCompany’s employees have been granted Walter restricted stock units and stockoptions under Walter’s share-based compensation plans. The Company has expensed$0.8 million related to the share-based compensation costs allocated fromWalter for the twelve months ended September 30, 2006.

During 2006, the Company recorded $1.9 million of interest incomeand $2.9 million of prepayment penalty income related to the $20.0 million notereceivable from Walter. These amounts are included in interest expense, net ofinterest income in the Consolidated Statements of Operations.

**Note 3.**   Acquisitions

**Hunt Industries, Inc.**

On January 4,2006, the Company acquired Hunt Industries, Inc. (“Hunt”) for$6.8 million in cash. Hunt, based in Murfreesboro, Tennessee, is amanufacturer of meter pits and meter yokes that are sold by the Company’s Muellersegment.

Theestimated fair values of the assets and liabilities acquired are as follows(dollars in millions):

| Current assets       |   | $    | 0.2    |   |
|----------------------|--------|------|--------|--------|
| Goodwill             |   | 6.8  |   |
| Current  liabilities |   | (0.2 | )      |
| Net assets  acquired |   | $    | 6.8    |   |

 

**CCNE, L.L.C.**

On January 27, 2006, the Company acquired theoperating assets of CCNE, L.L.C., a Connecticut-based manufacturer of checkvalves for sale to the water and wastewater treatment markets, for$8.8 million in cash.

Theestimated fair values of the assets and liabilities acquired are as follows(dollars in millions):

| Inventory            |   | $   | 2.1    |   |
|----------------------|--------|-----|--------|--------|
| Intangible assets    |   | 6.7 |   |
| Net assets  acquired |   | $   | 8.8    |   |

 

The intangible assetsacquired represent purchased technology and are being amortized over anestimated useful life of 55 months.

**Acquisition ofPredecessor Mueller Water by Walter**

On October 3, 2005, pursuant to the agreementdated June 17, 2005, Walter acquired all of the outstanding common stockof Predecessor Mueller Water for $944.0 million and assumed $1.05 billion ofindebtedness. Predecessor Mueller Water was converted into a limited liabilitycompany on October 3, 2005 and was merged with and into our parent,Mueller Water, on February 2, 2006. Transaction costs included in theacquisition price were $15.4 million. In conjunction with the acquisition, U.S.Pipe was contributed in a series of transactions to the Company, a wholly-ownedsubsidiary of Mueller Water, on October 3, 2005. On February 23,2006, Walter received $10.5 million based on the final closing cash and workingcapital, adjusting the purchase price to $933.5 million.

Walter’sacquisition of Predecessor Mueller Water has been accounted for as a businesscombination with U.S. Pipe considered the acquirer for accounting purposes.Assets acquired and liabilities assumed 

F-12

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were recorded at their fair values as of October 3,2005. The total purchase price of $933.5 million is comprised of (dollars inmillions):

| Acquisition of  the outstanding common stock of Predecessor Mueller |   | $    | 918.1  |   |
|---------------------------------------------------------------------|--------|------|--------|--------|
| Acquisition-related  transaction costs                              |   | 15.4 |   |
| Total purchase  price                                               |   | $    | 933.5  |   |

 

Acquisition-related transaction costs includeinvestment banking, legal and accounting fees and other external costs directlyrelated to the Acquisition.

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

| Receivables, net                 |   | $        | 177.4  |   |
|----------------------------------|--------|----------|--------|--------|
| Inventories                      |   | 373.2    |   |
| Property, plant  and equipment   |   | 214.2    |   |
| Identifiable  intangible assets  |   | 856.9    |   |
| Goodwill                         |   | 660.3    |   |
| Net other assets                 |   | 351.2    |   |
| Net deferred tax  liabilities    |   | (288.6   | )      |
| Debt                             |   | (1,411.1 | )      |
| Total purchase  price allocation |   | $        | 933.5  |   |

 

Receivables are short-term trade receivables and theirnet book value approximated current fair value.

Finished goods inventory was valued at estimatedselling price less cost of disposal and reasonable profit allowance for theselling effort. Work in process inventory was valued at estimated selling priceof finished goods less costs to complete, cost of disposal and a reasonableprofit allowance for the completing and selling effort. Raw materials werevalued at book value, which approximated current replacement cost. The carryingvalue of inventories included $70.2 million in excess of Predecessor MuellerGroup’s carrying value, which was charged to cost of sales during the yearended September 30, 2006.

Property,plant and equipment were valued at the current replacement cost as follows (inmillions):

| ** **                           | ** ** | ** ** | ** ** | **Depreciation  Period** | ** ** |
|--------------------------------------|------------|------------|------------|--------------------------|------------|
| Land                                 |       | $          | 17.1       |                     | Indefinite |   |
| Buildings                            |       | 51.1       |       | 5 to 14 years            |       |
| Machinery and  equipment             |       | 132.8      |       | 3 to 5 years             |       |
| Other                                |       | 13.2       |       | 3 years                  |       |
| Total property,  plant and equipment |       | $          | 214.2      |                     |       |   |

 

Identifiable intangible assets acquired consist oftrade names, trademarks, technology and customer relationships and were valuedat their current fair value. Trade name and trademark relate to Mueller®, Anvil®, HerseyTM, Henry PrattTM and James JonesTM.Technology represents processes related to the design and development ofproducts. Customer relationships represent the recurring nature of sales tocurrent distributors, municipalities, contractors and other end-use customersregardless of their contractual nature.

F-13

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Identifiableintangible assets were as follows (dollars in millions):

| ** **                            | ** ** | ** ** | ** ** | **Amortization  Period** | ** ** |
|---------------------------------------|------------|------------|------------|--------------------------|------------|
| Trade name and  trademark             |       | $          | 403.0      |                     | Indefinite |   |
| Technology                            |       | 56.3       |       | 10 years                 |       |
| Customer  relationships               |       | 397.6      |       | 16 and 19 years          |       |
| Total  identifiable intangible assets |       | $          | 856.9      |                     |       |   |

 

Goodwill represents the excess of the purchase priceover the fair value of tangible and identifiable intangible assets acquired.Goodwill is not amortized, but rather is tested for impairment at leastannually. In the event that the Company determines the book value of goodwillhas become impaired, the Company will incur an accounting charge for the amountof impairment during the fiscal quarter in which such determination is made.The Company’s goodwill is not tax deductible.

Net other assets include cash, prepaid expenses,accounts payable, accrued expenses and accrued pension liability and werevalued at their approximate current fair value. As part of the Acquisition, theCompany paid a $444.5 million dividend to Walter.

Net deferred tax liabilities include the tax effectsof fair value adjustments related to identifiable intangible assets and nettangible assets.

Debt was valued at fair market value as of October 3,2005, which resulted in an increase of $18.9 million to the carrying valueof the senior subordinated notes.

The following table of unaudited pro forma results ofoperations of Predecessor Mueller Group and U.S. Pipe for the nine months endedSeptember 30, 2005 is presented as if the Acquisition and borrowings underthe 2005 Mueller Credit Agreement had taken place on January 1, 2005 andwere carried forward through September 30, 2005.

Theunaudited pro forma amounts are not intended to represent or be indicative ofthe consolidated results of operations that would have been reported had theAcquisition and borrowings under the 2005 Mueller Credit Agreement beencompleted as of the date presented.

| ** ** | ** ** | **Nine months  ended**         | ** ** |
|------------|------------|-------------------------------------|------------|
| ** ** | ** ** | **September 30, 2005**    | ** ** |
| ** ** | ** ** | **(dollars in millions)** | ** ** |
| Net sales  |       |                                | $          | 1,349.7 |   |   |
| Net income |       |                                | $          | 40.5 |   |   |

 

The pro forma amounts arebased on the historical results of operations and are adjusted for amortizationof finite-lived intangibles of $17.7 million; depreciation of property, plantand equipment of ($0.6) million; and interest expense of $17.6 million.

**Note 4.**   FacilityRationalization, Restructuring and Related Costs

On October 24, 2006,the Company announced the closure of Mueller segment’s James Jonesmanufacturing facility in El Monte, California. James Jones will transfer theproduction of its brass products and hydrants to Mueller segment’s Decatur,Illinois and Albertville, Alabama plants by June 2007. Approximately 155employees will be affected by the closure. Total estimated costs related tothis closure are $2.5 million, of which $0.2 million, consisting of terminationbenefits, and $0.5 million, consisting of property impairments, were recordedas adjustments to goodwill in the twelve months ended September 30, 2006.These costs are recorded to goodwill as the overall plan to close the facilitywas 

F-14

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identifiedprior to the Acquisition. Other estimated costs of $1.8 million, associatedwith relocating the El Monte warehouse and equipment, will be expensed asincurred.

On April 20, 2006,the Company announced the closure of the Mueller Canada valve and hydrantmanufacturing facility in Milton, Ontario, Canada. The facility closed infiscal year 2006, resulting in the termination of approximately 130 employees.Total estimated costs related to this closure of $4.5 million, includingtermination benefits of $2.5 million, property impairments of $0.2 million, andlease run-out costs of $0.6 million, were recorded as adjustments to goodwillin the twelve months ended September 30, 2006. These restructuring costswere recorded to goodwill as the overall plan to close the facility wasidentified prior to the Acquisition. Other estimated costs include $1.2 millionto relocate the Milton warehouse and equipment and will be expensed asincurred.

On January 26, 2006,the Company announced the closure of the Henry Pratt valve manufacturingfacility in Dixon, Illinois, which is included in the Company’s Muellersegment. The eventual closure of the facility is expected to occur in fiscalyear 2007, resulting in the termination of approximately 100 employees.Total estimated costs related to this closure are $3.7 million, includingtermination benefits of $1.0 million and property impairment charges of $1.7million, which were recorded as adjustments to goodwill in the twelve monthsended September 30, 2006. These restructuring costs were recorded togoodwill as the overall plan to close the facility was identified prior to theAcquisition. The remaining estimated costs of $1.0 million are for the transferand installation of equipment and temporary outsourcing of manufacturing andwill be expensed when incurred.

On October 26, 2005,Walter announced plans to close U.S. Pipe’s Chattanooga, Tennessee plant andtransfer the valve and hydrant production of that plant to Mueller’sChattanooga, Tennessee and Albertville, Alabama plants. The U.S. PipeChattanooga plant closed in 2006, resulting in the termination of approximately340 employees. Exit costs totaled $49.9 million of which approximately $28.6million was related to severance and fixed asset write-offs and qualified as restructuringand impairment charges. The remaining exit costs of $21.3 million werecomprised of an inventory write-down totaling $11.4 million, a $9.0 millionwrite-off of unabsorbed overhead costs, and $0.9 million of other relatedcosts, which were recognized in cost of sales during the twelve months ended September 30,2006.

Totalestimated restructuring and impairment charges and the amounts recorded torestructuring expenses for the year ended September 30, 2006 are asfollows (dollars in millions):

| Termination benefits                         |   | $    | 3.8    |   |
|----------------------------------------------|--------|------|--------|--------|
| Other employee-related  costs                |   | 3.3  |   |
| Impairment of property,  plant and equipment |   | 21.5 |   |
| Total                                        |   | $    | 28.6   |   |

 

Termination benefits relating to the U.S. PipeChattanooga plant closure of $3.8 million consist primarily of severancerelated to staff reductions of hourly and salaried personnel. In addition, theCompany recognized other employee-related costs of approximately$3.3 million related to pension and other postretirement benefitobligations.

Activityin accrued restructuring for the year ended September 30, 2006 was asfollows (dollars in millions):

| Beginning balance                                                                      |   | $    | — |   |
|----------------------------------------------------------------------------------------|--------|------|--------|--------|
| Accrual of  expenses                                                                   |   | 4.1  |   |
| Accruals  allocated to goodwill for plant closures identified prior to the Acquisition |   | 9.0  |   |
| Payments                                                                               |   | (7.8 | )      |
| Ending balance                                                                         |   | $    | 5.3    |   |

 

F-15

----

 

**Note 5.**   Share-Based Compensation Plans

The stockholders ofMueller Water approved the 2006 Stock Incentive Plan (the “2006 Plan”), underwhich an aggregate of 8.0 million shares of Mueller Water’s Series Acommon stock have been reserved for grant and issuance of awards of incentivestock options, nonstatutory stock options, restricted stock bonuses, restrictedstock purchase rights, stock appreciation rights, phantom stock units,restricted stock units, performance share bonuses and performance share units.Generally, all of the Company’s employees (including executive officers),members of the Board of Directors, and employees of its designated subsidiariesand affiliates are eligible to participate in the 2006 Plan.

Under the 2006 Plan, an awardbecomes exercisable at such times and in such installments as set by theCompensation Committee of the Board of Directors (generally, vesting occursover three years in equal annual increments), but no award will be exercisableafter the tenth anniversary of the date on which it is granted.

The Company recordscompensation costs for stock options and restricted stock units granted toemployees based on the fair value at the grant dates as prescribed by SFAS No. 123(R) *Share-Based Payment*, which requires that compensation costsrelated to share-based payment transactions be recognized in the financialstatements over the period that an employee provides service in exchange forthe award. Compensation cost for new and modified awards is recorded over the relatedvesting period of such awards.

During the year ended September 30,2006, the Company recorded share-based compensation expense associated with the2006 Plan of approximately $2.1 million. Such expenses are likely to increasein future periods. These amounts are reflected in selling, general andadministrative expenses and have been allocated to the reportable segments.

Theeffect of share-based compensation on the financial performance of the Companyfor the year ended September 30, 2006 was as follows (in millions, exceptper share data):

| Decrease in  income from operations before income taxes |   | $ | 2.1    |   |
|---------------------------------------------------------|--------|---|--------|--------|
| Decrease in net  income                                 |   | $ | 1.3    |   |
| Cash outflow from  operating activities                 |   | $ | — |   |
| Cash inflow from  financing activities                  |   | $ | — |   |

 

In addition to the share-based compensation expenseassociated with the 2006 Plan, certain of the Company’s employees have beengranted Walter restricted stock units and stock options under Walter’sshare-based compensation plans. The Company has expensed $0.8 millionrelated to the share-based compensation costs allocated from Walter for theyear ended September 30, 2006.

Asummary of activity related to stock options under the 2006 Plan as of September 30,2006 and changes during the year then ended is presented below:

| ** **                              | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|-----------------------------------------|------------|------------|------------|--------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------|------------|
| ** **                              | ** ** | ** ** | ** ** | ** **                                 | ** ** | **(in years)**                                 | ** ** | **($ millions)**               | ** ** |
| Outstanding at  October 1, 2005    |       | —     |       |                                       | $          | —                                              |       |                                |       |   |   |   |   |   |   |   |
| Granted                                 |       | 112,694    |       |                                       | 16.11      |                                                |       |                                |       |   |   |   |   |   |   |
| Exercised                               |       | —     |       |                                       | —     |                                                |       |                                |       |   |   |   |   |   |   |
| Cancelled                               |       | —     |       |                                       | —     |                                                |       |                                |       |   |   |   |   |   |   |
| Outstanding at  September 30, 2006 |       | 112,694    |       |                                       | 16.11      |                                                |       |                                | 9.7        |   |   |   | $ | — |   |   |
| Exercisable at  September 30, 2006 |       | —     |       |                                       | $          | —                                              |       |                                |       | — |   |   |   | $ | — |   |   |

 

F-16

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The aggregate intrinsic value of options outstandingat September 30, 2006 was zero, as the quoted market value of the stockwas less than the exercise price of the options outstanding at that date.

Weightedaverage assumptions used to determine the grant-date fair value of optionsgranted during the year ended September 30, 2006 under the Black-Scholesmethod were:

| Risk-free  interest rate         |   | 4.97  | %      |
|----------------------------------|--------|-------|--------|
| Dividend yield                   |   | 0.44  | %      |
| Expected life  (years)           |   | 6.38  |   |
| Expected  volatility             |   | 32.28 | %      |
| Expected annual  forfeiture rate |   | 5.00  | %      |

 

The risk-free interest rate is based on the U.S.Treasury zero-coupon yield in effect at the time of grant with a term equal tothe expected life. The expected dividend yield is based on the Company’sestimated annual dividend payout at grant date. The expected term of theoptions represents the period of time the options are expected to beoutstanding. Expected volatility was calculated using data from comparablecompanies because the Company has limited historical share price information ofits own going back to its IPO on June 1, 2006. Since the Company’s 2006Plan is at its inception, the Company does not have a sufficient history toestimate the expected pre-vesting forfeiture rate. Since the structure andterms of the plan are very similar to Walter’s plan, the Company has decided itwould be reasonable to use a pre-vesting forfeiture rate similar to Walter’scurrent historical rate of approximately 5% as an initial estimate for theCompany’s plan. This initial estimate will be re-evaluated as the Companyaccumulates actual experience with the passage of time.

Restricted stock unit grants fall into one of twovesting provisions; a 3-year cliff vesting provision or a provision with7-year vesting with early vesting possible if certain stock price targetsare met. As of September 30, 2006, the Company cannot conclude if or whenthese targets will be met, and as a result, compensation expense is amortizedover the full 7-year vesting period.

Asummary of activity related to restricted stock units under the 2006 Plan as ofSeptember 30, 2006 and changes during the year then ended is presentedbelow:

| ** **                              | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|-----------------------------------------|------------|------------|------------|--------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------|------------|
| ** **                              | ** ** | ** ** | ** ** | ** **                                 | ** ** | **(in years)**                                 | ** ** | **($ millions)**               | ** ** |
| Outstanding at  October 1, 2005    |       | —     |       |                                       | $          | —                                              |       |                                |       |   |   |   |   |   |   |   |
| Granted                                 |       | 1,165,116  |       |                                       | 16.02      |                                                |       |                                |       |   |   |   |   |   |   |
| Vested                                  |       | —     |       |                                       | —     |                                                |       |                                |       |   |   |   |   |   |   |
| Cancelled                               |       | —     |       |                                       | —     |                                                |       |                                |       |   |   |   |   |   |   |
| Outstanding at  September 30, 2006 |       | 1,165,116  |       |                                       | 16.02      |                                                |       |                                | 2.78       |   |   |   | $ | 17.0 |   |   |
|                                         |            |            |            |                                            |            |                                                     |            |                                     |            |  |  |  |  |  |  |  |  |

 

The weighted-average grant-date fair value of stockoptions and of restricted stock units granted during the year endedSeptember 30, 2006 was $6.54 for stock options and $16.02 forrestricted stock units. As of September 30, 2006, there was approximately$17.2 million of unrecognized compensation cost related to non-vestedshare-based compensation arrangements granted under the 2006 Plan; that costwill be recognized over the periods during which they vest.

F-17

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**Employee StockPurchase Plan**

The Mueller Water Products, Inc. 2006 EmployeeStock Purchase Plan (the ESPP Plan) authorizes the sale of 4.0 million sharesof Mueller Water’s Series A common stock to employees. Employees maydesignate up to the lesser of $25,000 or 20% of their annual compensation forthe purchase of stock. The price for shares purchased under the plan is thelower of 85% of market value on the first day or the last day of the quarterlypurchase period. Generally, all of the employees (including executive officers)and employees of its designated subsidiaries and its affiliates are eligible toparticipate in the ESPP Plan.

In connection with employee elections made during theyear ended September 30, 2006, the Company will issue 31,235 shares underthis plan, with 3,968,765 shares reserved for future issuance. The Companyrecords compensation expense equal to the sum of (1) 15% of the fair valueof Series A common stock on the first day of the quarterly purchase periodto recognize the 15% discount to the quoted market price and (2) the fairvalue of 85% of a Series A common stock call option and 15% of a Series Acommon stock put option to recognize the plan’s requirement to designate sharesbased on the lesser of the first day or the last day quoted market price of thequarterly purchase period. The Company recorded compensation expense ofapproximately $0.1 million for the year ended September 30, 2006.

Theweighted-average grant-date fair value of each designated share purchased underthis plan in fiscal 2006 under the Employee Stock Purchase Plan is $4.20. Thefair value of each designated share purchased under the Employee Stock PurchasePlan is estimated on the date of grant using the Black-Scholes option-pricingmodel using the following assumptions:

| Risk-free interest rate  |   | 5.20  | %      |
|--------------------------|--------|-------|--------|
| Dividend yield           |   | 0.43  | %      |
| Expected life (months)   |   | 3     |   |
| Expected volatility      |   | 60.33 | %      |
| Expected forfeiture rate |   | 0     | %      |

 

The risk-free interestrate is based on the U.S. Treasury zero-coupon yield in effect at the time ofgrant with a term equal to the expected life. The expected dividend yield isbased on the Company’s estimated annual dividend payout at grant date. Theexpected term of the options represents the period of time the options areexpected to be outstanding. The expected volatility is deemed to be equal tothe historical volatility over a 3-month period ending on the date ofgrant.

**Note 6.**   IncomeTaxes

Thecomponents of pre-tax income (loss) are as follows (in millions):

| ** ** | ** ** | **For the twelve  months ended  September 30,  2006** | ** ** | **For the nine  months ended  September 30,  2005** | ** ** | **For the twelve  months ended  December 31,  2004** | ** ** |
|------------|------------|---------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| U.S.       |       |                                                                      | $          | 21.3                                                                    |       |                                                                     |       | $ | 7.9 |   |   |   | $ | (18.4 | ) |   |
| Foreign    |       |                                                                      | 6.3        |                                                                    |       |                                                                     | —     |   |   |   | — |   |   |
| Total      |       |                                                                      | $          | 27.6                                                                    |       |                                                                     |       | $ | 7.9 |   |   |   | $ | (18.4 | ) |   |

 

F-18

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Incometax expense (benefit) applicable to the Company consists of the following (inmillions):

| ** **      | ** ** | **For the twelve months ended  September 30, 2006** | ** ** | **For the nine months ended  September 30, 2005** | ** ** | **For the twelve months ended  December 31, 2004** | ** ** |
|-----------------|------------|-----------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **      | ** ** | **Current**                                                                       | ** ** | **Deferred**                                                                    | ** ** | **Total**                                                                        | ** ** | **Current** | ** ** | **Deferred** | ** ** | **Total** | ** ** | **Current** | ** ** | **Deferred** | ** ** | **Total** | ** ** |
| Federal         |       |                                                                              | $          | 30.8                                                                            |       |                                                                             |       | $ | (22.8 | ) |   | $ | 8.0 |   |   | $ | 6.3 |   |   |   | $ | (3.5 | ) |   |   | $ | 2.8 |   |   |   | $ | (11.9 | ) |   |   | $ | 4.1 |   |   | $ | (7.8 | ) |
| State and local |       |                                                                              | 3.8        |                                                                            |       |                                                                             | (2.9       | ) |   | 0.9 |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 4.9 |   |   | 4.9 |   |
| Foreign         |       |                                                                              | 2.3        |                                                                            |       |                                                                             | (0.2       | ) |   | 2.1 |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | — |   |
| Total           |       |                                                                              | $          | 36.9                                                                            |       |                                                                             |       | $ | (25.9 | ) |   | $ | 11.0 |   |   | $ | 6.3 |   |   |   | $ | (3.5 | ) |   |   | $ | 2.8 |   |   |   | $ | (11.9 | ) |   |   | $ | 9.0 |   |   | $ | (2.9 | ) |

 

Theincome tax expense (benefit) at the Company’s effective tax rate differed fromthe federal statutory rate as follows:

| ** **                               | ** ** | **For the twelve  months ended  September 30,  2006** | ** ** | **For the nine  months ended  September 30,  2005** | ** ** | **For the twelve  months ended  December 31,  2004** | ** ** |
|------------------------------------------|------------|---------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| Statutory tax  rate                      |       |                                                                      | 35.0       | %                                                                       |       |                                                                     | 35.0       | % |   |   | (35.0 | )% |   |
| Effect of:                               |       |                                                                      |       |                                                                    |       |                                                                     |       |   |   |   |   |   |   |
| State income tax, net of federal benefit |       |                                                                      | 3.3        |                                                                    |       |                                                                     | 4.8        |   |   |   | — |   |   |
| Foreign income tax                       |       |                                                                      | 1.2        |                                                                    |       |                                                                     | —     |   |   |   | — |   |   |
| Change in valuation allowances           |       |                                                                      | —     |                                                                    |       |                                                                     | (4.8       | ) |   |   | 19.2 |   |   |
| U.S. manufacturing deduction             |       |                                                                      | (3.7       | )                                                                       |       |                                                                     | —     |   |   |   | — |   |   |
| Change in state tax rates                |       |                                                                      | 1.8        |                                                                    |       |                                                                     | —     |   |   |   | — |   |   |
| Other non-deductible expenses            |       |                                                                      | 1.9        |                                                                    |       |                                                                     | —     |   |   |   | — |   |   |
| Other, net                               |       |                                                                      | 0.4        |                                                                    |       |                                                                     | 1.2        |   |   |   | — |   |   |
| Effective tax  rate                      |       |                                                                      | 39.9       | %                                                                       |       |                                                                     | 36.2       | % |   |   | (15.8 | )% |   |

 

The change in valuation allowances consists of stateincome tax benefits for which the Company believes it is more likely than notthat the deferred tax asset will not be realized. The U.S. manufacturingdeduction resulted from the American Jobs Creation Act of 2004 which providesU.S. manufacturers a tax deduction for a certain percentage of the Company’sprofits. The state valuation allowance was reversed at the time of theAcquisition because it became likely that the deferred tax asset would berealized due to future taxable income of the Company’s businesses.

Activityin the valuation allowance for deferred tax assets is summarized as follows (inmillions):

| ** **                                                        | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Balance at  beginning of period                                   |       |                         | $          | 9.0                          |       |                        |       | $ | 10.5 |   |   |   | $ | 8.7 |   |   |
| Provision  (reversal) applicable to state net deferred tax assets |       |                         | —     |                         |       |                        | (2.6       | ) |   |   | (0.4 | ) |   |
| Provision  (reversal) applicable to other comprehensive loss      |       |                         | —     |                         |       |                        | 1.1        |   |   |   | 2.2 |   |   |
| Reversal of  valuation allowance                                  |       |                         | (9.0       | )                            |       |                        | —     |   |   |   | — |   |   |
| Balance at end of period                                          |       |                         | $          | —                       |       |                        |       | $ | 9.0 |   |   |   | $ | 10.5 |   |   |

 

F-19

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Deferredtax assets (liabilities) related to the following (in millions):

| ** **                                  | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| Deferred tax  assets:                       |       |                         |       |                         |       |   |   |   |   |
| Allowance for losses on receivables         |       |                         | $          | 2.1                          |       |   |   | $ | 0.3 |   |   |
| Inventories                                 |       |                         | 20.1       |                         |       |   | 0.1 |   |   |
| Accrued expenses                            |       |                         | 34.4       |                         |       |   | 12.1 |   |   |
| Net operating loss                          |       |                         | —     |                         |       |   | 6.2 |   |   |
| Postretirement benefits other than pensions |       |                         | 18.2       |                         |       |   | 20.3 |   |   |
| Pensions                                    |       |                         | 16.8       |                         |       |   | 21.3 |   |   |
|                                        |       |                         | 91.6       |                         |       |   | 60.3 |   |   |
| Valuation allowance                         |       |                         | —     |                         |       |   | (9.0 | ) |   |
| Deferred tax assets                         |       |                         | 91.6       |                         |       |   | 51.3 |   |   |
| Deferred tax  liabilities:                  |       |                         |       |                         |       |   |   |   |   |
| Intangibles                                 |       |                         | (294.3     | )                            |       |   | — |   |   |
| Depreciation and amortization               |       |                         | (48.7      | )                            |       |   | (30.7 | ) |   |
| Deferred tax liabilities                    |       |                         | (343.0     | )                            |       |   | (30.7 | ) |   |
| Net deferred tax  (liabilities) assets      |       |                         | $          | (251.4                       | )          |   |   | $ | 20.6 |   |   |

 

A valuation allowance has not been provided ondeferred tax assets as of September 30, 2006 as the Company’s managementbelieves it is more likely than not that the assets will be realized throughfuture taxable income.

Forfederal income tax purposes, the Company files a consolidated income tax returnwith Walter and its subsidiaries. The income tax provision has been presentedas if the Company filed on a stand alone basis, with the exception that the taxsharing agreement in place with Walter for years ending September 30, 2005and December 31, 2004 provided that subsidiaries of Walter incurringlosses received tax benefits for such losses during the year the loss wasincurred. Since the losses incurred at the Company provided an immediatebenefit through the tax sharing agreement, management determined that thebenefit should be fully recognized on a stand alone basis. Had Walter’sagreement with its subsidiaries not provided for immediate benefit as of September 30,2005, the Company would have been in a net operating loss carryforward positionfor federal income tax purposes. On a separate return basis, such lossestotaled $2.4 million as of September 30, 2005. Furthermore, withoutWalter providing immediate benefit and without consideration of the Company’sacquisition of Predecessor Mueller on October 3, 2005, it is more likelythan not that such federal operating losses would not be utilized. Theinformation below provides the pro forma effect as if the Company determined astand alone tax provision assuming the Company provided taxes withoutconsideration of its parent company benefit for the nine months ended September 30,2005 (in millions):

| ** **      | ** ** | **As Reported** | ** ** | **Pro Forma (unaudited)** | ** ** |
|-----------------|------------|----------------------|------------|-------------------------------------|------------|
| ** **      | ** ** | **Current**          | ** ** | **Deferred**                        | ** ** | **Total** | ** ** | **Current** | ** ** | **Deferred** | ** ** | **Total** | ** ** |
| Federal         |       |                 | $          | 6.4                                 |       |   |   | $ | (3.5 | ) |   |   | $ | 2.9 |   |   |   | $ | 1.6 |   |   |   | $ | — |   |   |   | $ | 1.6 |   |   |
| State and Local |       |                 | —     |                                |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
|            |       |                 | $          | 6.4                                 |       |   |   | $ | (3.5 | ) |   |   | $ | 2.9 |   |   |   | $ | 1.6 |   |   |   | $ | — |   |   |   | $ | 1.6 |   |   |

 

Additionally, on a pro forma basis, the above netdeferred tax asset of $20.6 million at September 30, 2005 would bereduced to zero.

F-20

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The Company has state net operating loss carryforwardsof approximately $98.8 million expiring beginning 2009. The losscarryforwards are subject to limitations in certain jurisdictions under IRC Section 382.

The cumulative amount ofundistributed earnings of foreign subsidiaries for which U.S. income taxes havenot been provided was approximately $90.0 million at September 30, 2006. Itis not currently practical to estimate the amount of unrecognized deferred U.S.income taxes that might be payable on the repatriation of these earnings.

**Note 7.**   Borrowing Arrangements

*Long-Term Debt—**At September 30, 2006, long-term*debtconsists of the following obligations (dollars in millions):

| 2005 Mueller  Credit Agreement    |   | $       | 793.8   |   |
|-----------------------------------|--------|---------|---------|--------|
| 10% senior  subordinated notes(1) |   | 215.1   |    |
| Capital lease  obligations        |   | 2.1     |    |
|                              |   | 1,011.0 |    |
| Less current  portion             |   | (9.0    | )       |
|                              |   | $       | 1,002.0 |   |

----

(1)          The 10% seniorsubordinated notes were recorded at fair value at October 3, 2005,resulting in an increase of $18.9 million over Predecessor Mueller’s carryingamount. The effective interest rate on such notes is 9.2%.

Aschedule of debt maturities as of September 30, 2006 is as follows:

| ** **                     | ** ** | **Less than  1 year**     | ** ** | **1-3  years** | ** ** | **4-5  years** | ** ** | **After  5 years** | ** ** | **Total** | ** ** |
|--------------------------------|------------|-------------------------------------|------------|----------------|------------|----------------|------------|-------------------------|------------|-----------|------------|
| ** **                     | ** ** | **(dollars in millions)** | ** ** |
| 2005 Mueller  Credit Agreement |       |                                | $          | 8.0            |       |           | $          | 16.0                    |       | $         | 16.0       |   | $ | 753.8 |   | $ | 793.8 |   |
| 10% senior  subordinated notes |       |                                | —     |           |       | —         |       | —                  |       | 215.1     |       | 215.1 |   |
| Capital lease  obligations     |       |                                | 1.0        |           |       | 1.1            |       | —                  |       | —    |       | 2.1 |   |
| Total debt maturities          |       |                                | $          | 9.0            |       |           | $          | 17.1                    |       | $         | 16.0       |   | $ | 968.9 |   | $ | 1,011.0 |   |

 

*2005Mueller Credit Agreement—*On October 3, 2005, theCompany entered into a credit agreement (the “2005 Mueller Credit Agreement”)consisting of a $145 million senior secured revolving credit facility maturingin October 2010 (the “2005 Mueller Revolving Credit Facility”) and a$1,050 million senior secured term loan maturing in October 2012 (the “2005Mueller Term Loan”). The 2005 Mueller Credit Agreement is a secured obligationof the Company and substantially all of its wholly-owned domestic subsidiaries.The 2005 Mueller Term Loan requires quarterly principal payments of $2.0million through October 3, 2012, at which point in time the remainingprincipal outstanding is due. The commitment fee on the unused portion of the2005 Mueller Revolving Credit Facility is 0.50% and the interest rate is afloating interest rate of 2.25% over LIBOR. As of September 30, 2006, theCompany had $31.9 million in letters of credit outstanding under the 2005Mueller Credit Agreement, reducing availability for borrowing under the 2005Mueller Revolving Credit Facility. The 2005 Mueller Term Loan carries afloating interest rate of 2.00% over LIBOR. As of September 30, 2006, theweighted average interest rate including interest rate swaps was 8.26% and theweighted average interest rate excluding interest rate swaps was 8.45%.

Proceeds from the 2005 Mueller Credit Agreement were$1,053.4 million, net of $21.6 million of underwriting fees and expenses whichwill be amortized over the life of the loans. The proceeds were used 

F-21

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to finance the acquisitionof our parent, Predecessor Mueller Water, by Walter and to refinance existingindebtedness.

The 2005 Mueller Credit Agreement contains customaryevents of default and covenants, including covenants that restrict the abilityof Group and certain of its subsidiaries to incur certain additional indebtedness,pay dividends, create or permit liens on assets, engage in mergers orconsolidations, and certain restrictive financial covenants.

On June 1, 2006, the Company used $245.6 millionof the $368.7 million contributed to it by Mueller Water from the proceeds fromMueller Water’s IPO for a partial redemption of the outstanding 2005 MuellerTerm Loan. A $4.1 million portion of the deferred financing fees related to the2005 Mueller Term Loan was written off to interest expense.

*10%Senior Subordinated Notes—*In 2004, Predecessor Mueller Group issued $315 millionprincipal face amount of 10% senior subordinated notes due 2012. The seniorsubordinated notes are guaranteed by each of the Company’s existingdomestic restricted subsidiaries. The subordinated notes contain customarycovenants and events of default, including covenants that limit the Company’sability to incur debt, pay dividends and make investments. The effectiveinterest rate on these notes is 9.2%.

On July 3, 2006, the Company used $123.1 millionof the $368.7 million contributed to it by Mueller Water form the proceeds fromMueller Water’s IPO for a partial redemption of $110.3 million of the seniorsubordinated notes, plus accrued interest of $1.8 million, resulting in a losson redemption of $5.2 million.

*Capital Lease Obligations—**The*Company leasesautomobiles under capital lease arrangements that expire over the next fouryears.

Futureminimum lease payments under capital leases that have initial or remaining non-cancelableterms in excess of one year are as follows:

| ** **                        | ** ** | **(dollars  in millions)** | ** ** |
|-----------------------------------|------------|---------------------------------|------------|
| Fiscal 2007                       |       |                            | $          | 1.1 |   |   |
| Fiscal 2008                       |       |                            | 0.8        |   |   |
| Fiscal 2009                       |       |                            | 0.5        |   |   |
| Fiscal 2010                       |       |                            | 0.1        |   |   |
| Total minimum lease payments      |       |                            | 2.5        |   |   |
| Amount  representing interest     |       |                            | (0.4       | ) |   |
| Obligations under  capital leases |       |                            | 2.1        |   |   |
| Obligations due  within one year  |       |                            | (1.0       | ) |   |
| Long term obligations             |       |                            | $          | 1.1 |   |   |

 

**InterestRate Swaps****—These** hedges are described inNote 8 and comply with covenants contained in the 2005 Mueller CreditAgreement.

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

F-22

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Mueller Water’sonly direct subsidiary. However, the terms of the Company’s borrowingarrangements significantly restrict its ability to pay dividends to MuellerWater.

**Note 8.**   Derivative Financial Instruments

*InterestRate Swaps—**On*October 27, 2005, theCompany entered into six interest rate hedge transactions with a cumulativenotional amount of $350 million. The swap terms are between one and seven yearswith five separate counter-parties. The objective of the hedges is to protectthe Company against rising LIBOR interest rates that would have a negativeeffect on the Company’s cash flows due to changes in interest payments on its2005 Mueller Term Loan. The structure of the hedges are a one-year 4.617% LIBORswap of $25 million, a three-year 4.740% LIBOR swap of $50 million, a four-year4.800% LIBOR swap of $50 million, a five-year 4.814% LIBOR swap of$100 million, a six-year 4.915% LIBOR swap of $50 million, and a sevenyear 4.960% LIBOR swap of $75 million. These swap agreements call for theCompany to make fixed rate payments over the term at each swap’s stated fixedrate and to receive payments based on three month LIBOR from thecounter-parties. These swaps will be settled quarterly over their lives andwill be accounted for as cash flow hedges. As such, changes in the fair valueof these swaps that take place through the date of maturity will be recorded inaccumulated other comprehensive income (loss). These hedges comply withcovenants contained in the 2005 Mueller Credit Agreement.

The Company also has two interest rate hedgeagreements that existed as of October 3, 2005: a two-year 3.928% LIBORswap that matures in May 2007 and a two-year 4.249% LIBOR swap thatmatures in April 2007. The changes in fair value of these two swaps wererecorded as interest expense in the Consolidated Statements of Operations untilachieving hedge effectiveness in October 2005 and November 2005,respectively, at which times such changes in fair value were recorded inaccumulated other comprehensive income (loss).

The Company recorded an unrealized gain from itsinterest rate swap contracts, net of tax, of $1.0 million at September 30,2006 in accumulated other comprehensive income (loss).

*ForwardForeign Currency Exchange Contracts—**The*Company enteredinto forward exchange contracts primarily to hedge currency fluctuations fromtransactions (primarily an intercompany loan and anticipated inventorypurchases) denominated in foreign currencies, thereby limiting the risk thatwould otherwise result from changes in foreign currency exchange rates. Themajority of the Company’s exposure to currency fluctuations is in Canada. Gainsand losses on the forward foreign currency exchange contracts are expected tobe offset by losses / gains on identified underlying foreign currency exchangetransactions. As of September 30, 2006, the Company had entered intoforward foreign currency exchange contracts at a notional amount of $4.9million to protect anticipated inventory purchases over the next four months byits Canadian operations. With these hedges, the Company purchases U.S. dollarsand sells Canadian dollars at an average exchange rate of $0.896.

The Company hasalso entered into hedges protecting the Company from currency fluctuations fromits Canadian-denominated intercompany loan. The hedges have a notional value of$33.0 million and mature over the next two years. With these hedges, theCompany sells Canadian dollars for U.S. dollars at an exchange rate of $0.8681.Gains or losses on these hedges will be recorded in earnings. The loss on thehedges for the twelve months ended September 30, 2006 was $1.3 million.

On November 15, 2006, the Company entered intoforward contracts in a notional amount of $30.9 million to protectanticipated inventory purchases over the next 11 months by its Canadianoperations. With these hedges, the Company purchases U.S. dollars and sellsCanadian dollars at an average exchange rate of $0.88.

*Natural Gas Swap—**On*October 2,2006, the Company entered into a swap contract to hedge anticipated purchasesof natural gas from November 2006 through September 2007 totaling 0.5million 

F-23

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mmbtu, orapproximately 34% of expected natural gas consumption, at a price range of$6.30 to $7.91 per mmbtu. This swap contract effectively converts a portion offorecasted purchases at market prices to a fixed price basis. Any change in thefair value of this swap contract will be recorded in accumulated othercomprehensive income (loss).

**Note 9.**   InterestExpense Arising from Related Party Payable to Walter

Interest expenseassociated with the outstanding debt payable to Walter was allocated to theCompany up to the date of the Acquisition based upon the outstanding balance ofthe intercompany note. On October 3, 2005, the intercompany note to Walterof $443.6 million was forgiven and contributed to capital. Intercompanyinterest expense was $15.2 million and $18.9 million for the nine months ended September 30,2004 and the twelve months ended December 31, 2004, respectively.

**Note 10.**   RetirementPlans

The Company has various pension and profit sharingplans covering substantially all employees (the “Plans”). Total pension expensefor the twelve months ended September 30, 2006, the nine months ended September 30,2005 and the twelve months ended December 31, 2004 was $17.3 million,$5.4 million and $8.4 million, respectively. The Company funds itsretirement and employee benefit plans in accordance with the requirements ofthe plans and, where applicable, in amounts sufficient to satisfy the “MinimumFunding Standards” of the Employee Retirement Income Security Act of 1974(ERISA). The plans provide benefits based on years of service and compensationor at stated amounts for each year of service.

The Company also provides certain postretirementbenefits other than pensions, primarily healthcare, to eligible retirees. TheCompany’s postretirement benefit plans are not funded. New salaried employeeshave been ineligible to participate in postretirement healthcare benefits sinceMay 2000. Effective January 1, 2003, the Company placed a monthly capon Company contributions for postretirement healthcare coverage of $350 persalaried participant (pre-Medicare eligibility) and $150 per participant(post-Medicare eligibility).

For the twelve months ended September 30, 2006,the Company used a June 30 measurement date for its U.S. Pipe PensionPlans and postretirement benefit plans and a September 30 measurement datefor its Predecessor Mueller Group Pension Plans. The Company’s policy prior to2006 has been to use a measurement date that is three months prior to itsfiscal year end. For the nine months ended September 30, 2005, the Companyused a June 30 measurement date for all of its pension and postretirementbenefit plans. For the twelve months ended December 31, 2004, the Companyused a September 30 measurement date. In 2006, the Company acquiredPredecessor Mueller Group and its affiliated defined benefit pension plans (the“Predecessor Mueller Pension Plans”). The Predecessor Mueller Pension Plansinclude plans in the United States and Canada. Historically, the policy ofPredecessor Mueller Group has been to use the fiscal year end date as themeasurement date. The Company has decided to maintain the measurement datepolicies for both its pre-existing U.S. Pipe Plans and the Predecessor MuellerPension Plans for the current fiscal year. Predecessor Mueller Group did nothave any other postemployment benefit plans.

F-24

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Theamounts recognized for such plans are as follows (in millions):

| ** **                                                  | ** ** | **Pension Benefits**    | ** ** | **Other Benefits**      | ** ** |
|-------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                  | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** |
| Accumulated  benefit obligation                             |       |                         | $          | 332.3                        |       |   |   | $ | 234.9 |   |   |   | $ | 22.3 |   |   |   | $ | 29.5 |   |   |
| Change in  projected benefit obligation:                    |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Acquired balance of Predecessor Mueller Pension  Plans      |       |                         | $          | 123.4                        |       |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Projected benefit obligation at beginning of period         |       |                         | 258.0      |                         |       |   | 216.3 |   |   |   | 29.5 |   |   |   | 23.8 |   |   |
| Service cost                                                |       |                         | 7.6        |                         |       |   | 3.8 |   |   |   | 0.7 |   |   |   | 0.4 |   |   |
| Interest cost                                               |       |                         | 20.3       |                         |       |   | 9.4 |   |   |   | 1.4 |   |   |   | 1.0 |   |   |
| Amendments                                                  |       |                         | —     |                         |       |   | 0.9 |   |   |   | — |   |   |   | — |   |   |
| Actuarial loss (gain)                                       |       |                         | (38.4      | )                            |       |   | 37.0 |   |   |   | (5.2 | ) |   |   | 5.1 |   |   |
| Benefits paid                                               |       |                         | (20.7      | )                            |       |   | (9.4 | ) |   |   | (2.0 | ) |   |   | (0.8 | ) |   |
| Employee contributions                                      |       |                         | 0.2        |                         |       |   | — |   |   |   | — |   |   |   | — |   |   |
| Currency translation adjustment                             |       |                         | 0.5        |                         |       |   | — |   |   |   | — |   |   |   | — |   |   |
| Special termination benefit                                 |       |                         | 4.8        |                         |       |   | — |   |   |   | — |   |   |   | — |   |   |
| Curtailment (gain) / loss                                   |       |                         | (6.2       | )                            |       |   | — |   |   |   | (2.1 | ) |   |   | — |   |   |
| Projected benefit obligation at end of period               |       |                         | $          | 349.5                        |       |   |   | $ | 258.0 |   |   |   | $ | 22.3 |   |   |   | $ | 29.5 |   |   |
| Change in plan  assets:                                     |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Acquired balance of Predecessor Mueller Pension  Plans      |       |                         | $          | 83.3                         |       |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Fair value of plan assets at beginning of  period           |       |                         | 173.7      |                         |       |   | 164.2 |   |   |   | — |   |   |   | — |   |   |
| Actual gain on plan assets                                  |       |                         | 26.2       |                         |       |   | 17.9 |   |   |   | — |   |   |   | — |   |   |
| Employer contribution                                       |       |                         | 26.5       |                         |       |   | 1.0 |   |   |   | 2.0 |   |   |   | 0.8 |   |   |
| Employee contributions                                      |       |                         | 0.2        |                         |       |   | — |   |   |   | — |   |   |   | — |   |   |
| Currency translation adjustment                             |       |                         | 0.6        |                         |       |   | — |   |   |   | — |   |   |   | — |   |   |
| Benefits paid                                               |       |                         | (20.7      | )                            |       |   | (9.4 | ) |   |   | (2.0 | ) |   |   | (0.8 | ) |   |
| Other                                                       |       |                         | (0.2       | )                            |       |   | — |   |   |   | — |   |   |   | — |   |   |
| Fair value of plan assets at end of period                  |       |                         | $          | 289.6                        |       |   |   | $ | 173.7 |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Funded (unfunded) status                                    |       |                         | $          | (59.9                        | )          |   |   | $ | (84.3 | ) |   |   | $ | (22.3 | ) |   |   | $ | (29.5 | ) |   |
| Unrecognized net actuarial loss (gain)                      |       |                         | 38.1       |                         |       |   | 92.9 |   |   |   | (13.1 | ) |   |   | (13.7 | ) |   |
| Unrecognized prior service cost                             |       |                         | 2.6        |                         |       |   | 3.1 |   |   |   | (11.4 | ) |   |   | (8.2 | ) |   |
| Contribution after measurement date                         |       |                         | 6.1        |                         |       |   | 4.5 |   |   |   | 0.5 |   |   |   | 0.3 |   |   |
| Prepaid (accrued) benefit cost                              |       |                         | $          | (13.1                        | )          |   |   | $ | 16.2 |   |   |   | $ | (46.3 | ) |   |   | $ | (51.1 | ) |   |
| Amounts  recognized in the balance sheet:                   |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Prepaid benefit cost                                        |       |                         | $          | 10.2                         |       |   |   | $ | 16.2 |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Accrued benefit cost                                        |       |                         | (56.5      | )                            |       |   | (72.9 | ) |   |   | (46.3 | ) |   |   | (51.1 | ) |   |
| Intangible asset                                            |       |                         | 2.6        |                         |       |   | 3.1 |   |   |   | — |   |   |   | — |   |   |
| Accumulated other comprehensive income, before tax  effects |       |                         | 30.6       |                         |       |   | 69.8 |   |   |   | — |   |   |   | — |   |   |
| Net amount  recognized                                      |       |                         | $          | (13.1                        | )          |   |   | $ | 16.2 |   |   |   | $ | (46.3 | ) |   |   | $ | (51.1 | ) |   |

 

F-25

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Informationfor pension plans with an accumulated benefit obligation in excess of planassets are as follows (in millions):

| ** **                      | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** |
|---------------------------------|------------|------------------------------|------------|------------------------------|------------|
| Projected benefit  obligation   |       |                         | $          | 339.7                        |       |   |   | $ | 258.0 |   |   |
| Accumulated benefit  obligation |       |                         | 323.7      |                         |       |   | 234.9 |   |   |
| Fair value of plan  assets      |       |                         | 277.6      |                         |       |   | 173.7 |   |   |

 

Theamounts in each period reflected in other comprehensive income are as follows(in millions):

| ** **                                                                                                                     | ** ** | **Pension Benefits**    | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                                     | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** |
| Increase  (decrease) in additional minimum pension liability (before tax effects)  included in other comprehensive income |       |                         | $          | (39.3 | ) |   |   | $ | 23.4 |   |   |
|                                                                                                                                |            |                              |            |  |  |  |  |  |  |  |  |

 

**A summary of key assumptions used is as follows:**

| ** **                                                           | ** ** | **September 30, 2006**                 | ** ** | ** **                             | ** ** | ** **                   | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------|------------|------------------------------|------------|
| ** **                                                           | ** ** | **Predecessor Mueller  Pension Plans** | ** ** | **U.S. Pipe  Pension Plans** | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
| Weighted average  assumptions used to determine benefit obligations: |       |                                             |       |                                   |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Discount rate                                                        |       |                                             | 5.69       | %                                      |       |                         | 6.25       | % |   |   | 5.00 | % |   |   | 6.00 | % |   |
| Rate of compensation increase                                        |       |                                             | 3.50       | %                                      |       |                         | 3.50       | % |   |   | 3.50 | % |   |   | 3.50 | % |   |
| Weighted average  assumptions used to determine net periodic cost:   |       |                                             |       |                                   |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Discount rate                                                        |       |                                             | 5.22       | %                                      |       |                         | 5.00       | % |   |   | 6.00 | % |   |   | 6.35 | % |   |
| Expected return on plan assets                                       |       |                                             | 7.66       | %                                      |       |                         | 8.90       | % |   |   | 8.90 | % |   |   | 8.90 | % |   |
| Rate of  compensation increase                                       |       |                                             | 3.50       | %                                      |       |                         | 3.50       | % |   |   | 3.50 | % |   |   | 3.50 | % |   |

 

| ** **                                                                                           | ** ** | **Other Benefits**      | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                           | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
| Weighted average  assumptions used to determine benefit obligations:                                 |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Discount rate                                                                                        |       |                         | 6.25       | % |   |   | 5.00 | % |   |   | 6.00 | % |   |
| Weighted average  assumptions used to determine net periodic cost:                                   |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Discount rate                                                                                        |       |                         | 5.00       | % |   |   | 6.00 | % |   |   | 6.35 | % |   |
| Assumed healthcare cost  trend rates:                                                                |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Health care cost trend rate assumed for the next  year—Pre 65                              |       |                         | 10.00      | % |   |   | 10.00 | % |   |   | 10.00 | % |   |
| Health care cost trend rate assumed for the next  year—Post 65                             |       |                         | 12.00      | % |   |   |   |   |   |   |   |   |   |
| Rate to which the cost trend rate is assumed to  decline (the ultimate trend rate)—Pre 65  |       |                         | 5.00       | % |   |   | 5.00 | % |   |   | 5.00 | % |   |
| Rate to which the cost trend rate is assumed to  decline (the ultimate trend rate)—Post 65 |       |                         | 7.00       | % |   |   |   |   |   |   |   |   |   |
| Year that the  rate reaches the ultimate trend rate                                                  |       |                         | 2014       |   |   |   | 2010 |   |   |   | 2009 |   |   |

 

F-26

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Thecomponents of net periodic benefit cost (income) are as follows (in millions):

| ** **                                | ** ** | **Pension Benefits**                                                         | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                                | ** ** | **For the twelve months  ended September 30, 2006** | ** ** | **For the nine months ended  September 30, 2005** | ** ** | **For the twelve months  ended December 31, 2004** | ** ** |
| Components of net  periodic benefit cost: |       |                                                                              |       |   |   |   |   |   |   |   |   |   |   |
| Service cost                              |       |                                                                              | $          | 8.1 |   |   |   | $ | 3.8 |   |   |   | $ | 4.6 |   |   |
| Interest cost                             |       |                                                                              | 20.3       |   |   |   | 9.4 |   |   |   | 12.7 |   |   |
| Expected return on plan  assets           |       |                                                                              | (20.5      | ) |   |   | (10.5 | ) |   |   | (12.5 | ) |   |
| Amortization of prior service cost        |       |                                                                              | 0.3        |   |   |   | 0.2 |   |   |   | 0.3 |   |   |
| Amortization of net loss                  |       |                                                                              | 3.9        |   |   |   | 2.5 |   |   |   | 3.3 |   |   |
| Other                                     |       |                                                                              | 0.2        |   |   |   | — |   |   |   | — |   |   |
| Net periodic  benefit cost                |       |                                                                              | $          | 12.3 |   |   |   | $ | 5.4 |   |   |   | $ | 8.4 |   |   |
| Curtailment settlement loss               |       |                                                                              | 0.2        |   |   |   | — |   |   |   | — |   |   |
| Special termination benefits              |       |                                                                              | 4.8        |   |   |   | — |   |   |   | — |   |   |
| Total net periodic  benefit cost          |       |                                                                              | $          | 17.3 |   |   |   | $ | 5.4 |   |   |   | $ | 8.4 |   |   |

 

| ** **                                                                  | ** ** | **Other Benefits**                                                           | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **For the twelve months  ended September 30, 2006** | ** ** | **For the nine months ended  September 30, 2005** | ** ** | **For the twelve months  ended December 31, 2004** | ** ** |
| Components of net periodic  benefit income (cost): |       |                                                                              |       |   |   |   |   |   |   |   |   |   |   |
| Service cost                                                                |       |                                                                              | $          | 0.7 |   |   |   | $ | 0.4 |   |   |   | $ | 0.5 |   |   |
| Interest cost                                                               |       |                                                                              | 1.4        |   |   |   | 1.0 |   |   |   | 1.5 |   |   |
| Amortization of prior service cost                                     |       |                                                                              | (2.5       | ) |   |   | (1.8 | ) |   |   | (2.8 | ) |   |
| Amortization of net gain                                                    |       |                                                                              | (0.9       | ) |   |   | (0.7 | ) |   |   | (0.8 | ) |   |
| Curtailment / special termination benefit                                   |       |                                                                              | (1.7       | ) |   |   | — |   |   |   | 0.3 |   |   |
| Net periodic benefit  income (cost)                                         |       |                                                                              | $          | (3.0 | ) |   |   | $ | (1.1 | ) |   |   | $ | (1.3 | ) |   |

 

As previously noted, theassets of U.S. Pipe Pension Plans and Predecessor Mueller Pension Plans aremaintained in separate master trusts and the assets and obligations areevaluated using different measurement dates. The discussion below addresses theassumptions used for each set of plans.

*U.S. Pipe PensionPlans and Other Benefit Plans*

The discount rate is based on a proprietary bonddefeasance model designed by the Plans’ investment consultant to create aportfolio of high quality corporate bonds which, if invested on the measurementdate, would provide the necessary future cash flows to pay accumulated benefitswhen due. The premise of the model is that annual benefit obligations arefunded from the cash flows generated from periodic bond coupon payments,principal maturities and the interest on excess cash flows, i.e. carry forwardbalances.

The model uses a statistical program to determine theoptimal mix of securities to offset benefit obligations. The model is populatedwith an array of Moody’s Aa-rated corporate fixed income securities thatactively traded in the bond market on the measurement date. None of thesecurities used in the model had embedded call, put or convertible features,and none were structured with par paydowns or deferred income streams. All ofthe securities in the model are considered appropriate for the analysis as theyare 

F-27

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diversified by maturitydate and issuer and offer predictable cash flow streams. For diversificationpurposes, the model was constrained to purchasing no more than 20 percentof any outstanding issuance. Carryforward interest is credited at a ratedetermined by adding the appropriate implied forward Treasury yield to the Aa-ratedcredit spread as of the measurement date.

The expected return on pension assets is based on thelong-term actual average rate of return on the U.S. Pipe Pension Plans’ pensionassets and projected returns using asset mix forecasts and historical returndata.

TheU.S. Pipe Pension Plans’ weighted-average asset allocations at themeasurement date, by asset category, are as follows:

| ** **        | ** ** | **June 30,  2006** | ** ** | **June 30,  2005** | ** ** |
|-------------------|------------|-------------------------|------------|-------------------------|------------|
| Asset Category:   |       |                    |       |                    |       |   |   |   |   |
| Equity securities |       |                    | 69.9       | %                       |       |   | 68 | % |   |
| Debt securities   |       |                    | 30.0       |                    |       |   | 30 |   |   |
| Other             |       |                    | 0.1        |                    |       |   | 2 |   |   |
| Total             |       |                    | 100.0      | %                       |       |   | 100 | % |   |

 

The plan assets of the pension plans are contributedto, held and invested by the Walter Industries, Inc. Subsidiaries MasterPension Trust (“Pension Trust”). The plan assets included in the Company’sdetermination of its pension benefit obligation is based on an allocation ofthe Pension Trust assets, whereby the projected benefit obligation of theCompany is compared with the projected benefit obligation of Walter and itsaffiliates (including the Company) to determine the Company’s “ProjectedBenefit Obligation Ratio.” This ratio is applied to the total assets in thePension Trust to determine the amount of assets allocated to the Company. ThePension Trust employs a total return investment approach whereby a mix ofequity and fixed income investments are used to meet the long-term fundingrequirements of the Pension Trust. The asset mix strives to generate rates ofreturn sufficient to fund plan liabilities and exceed the long-term rate ofinflation, while maintaining an appropriate level of portfolio risk. Risktolerance is established through careful consideration of plan liabilities,plan funded status, and corporate financial condition. The investment portfoliois diversified across domestic and foreign equity holdings, and by investmentstyles and market capitalizations. Fixed income holdings are diversified byissuer, security type, and principal and interest payment characteristics.Derivatives may be used to gain market exposure in an efficient and timelymanner; however, derivatives may not be used to leverage the portfolio beyondthe market value of the underlying investments. Investment risk is measured andmonitored on an ongoing basis through quarterly investment portfolio reviews,annual benefits liability measurements, and periodic asset/liability studies.

As of June 30,2006, the Pension Trust’s strategic asset allocation was as follows:

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

 

F-28

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

The Pension Trust employs a building block approach indetermining the long-term rate of return for plan assets. Historical marketreturns are studied and long-term risk/return relationships between equity andfixed income asset classes are analyzed. This analysis supports the fundamentalinvestment principle that assets with greater risk generate higher returns overlong periods of time. The historical impact of returns in one asset class onreturns of another asset class is reviewed to evaluate portfoliodiversification benefits. Current market factors including inflation rates andinterest rate levels are considered before assumptions are developed. Thelong-term portfolio return is established via the building block approach byadding interest rate risk and equity risk premiums to the anticipated long-termrate of inflation. Proper consideration is given to the importance of portfoliodiversification and periodic rebalancing. Peer data and historical returnassumptions are reviewed to check for reasonableness.

Assumed healthcare cost trend rates, discount rates,expected return on plan assets and salary increases have a significant effecton the amounts reported for the pension and healthcare plans. A one-percentage-pointchange in the trend rate for these assumptions would have the following effects(in millions):

| ** **                                                     | ** ** | **1-Percentage  Point Increase** | ** ** | **1-Percentage  Point Decrease** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| Health care cost trend:                                        |       |                                  |       |                                  |       |   |   |   |   |
| Effect on total of service and interest cost  components       |       |                                  | $          | 0.1                                   |       |   |   | $ | (0.1 | ) |   |
| Effect on postretirement benefit obligation                    |       |                                  | 0.4        |                                  |       |   | (0.3 | ) |   |
| Discount rate:                                                 |       |                                  |       |                                  |       |   |   |   |   |
| Effect on postretirement service and interest cost  components |       |                                  | —     |                                  |       |   | — |   |   |
| Effect on postretirement benefit obligation                    |       |                                  | (1.8       | )                                     |       |   | 2.1 |   |   |
| Effect on current year postretirement benefits  expense        |       |                                  | (0.2       | )                                     |       |   | 0.2 |   |   |
| Effect on pension service and interest cost  components        |       |                                  | (0.2       | )                                     |       |   | 0.1 |   |   |
| Effect on pension benefit obligation                           |       |                                  | (23.7      | )                                     |       |   | 28.8 |   |   |
| Effect on current year pension expense                         |       |                                  | (1.4       | )                                     |       |   | 1.7 |   |   |
| Expected return on plan  assets:                               |       |                                  |       |                                  |       |   |   |   |   |
| Effect on current year pension expense                         |       |                                  | (1.8       | )                                     |       |   | 1.8 |   |   |
| Rate of compensation  increase:                                |       |                                  |       |                                  |       |   |   |   |   |
| Effect on pension service and interest cost  components        |       |                                  | 0.6        |                                  |       |   | (0.6 | ) |   |
| Effect on pension benefit obligation                           |       |                                  | 4.6        |                                  |       |   | (4.1 | ) |   |
| Effect on current  year pension expense                        |       |                                  | 1.0        |                                  |       |   | (1.0 | ) |   |
|                                                                |            |                                       |            |                                       |            |  |  |  |  |  |  |

 

The discount rate is basedon published rates for high-quality fixed-income investments that produce cashflows that approximate the timing and amount of expected future benefitpayments. To develop the expected long-term rate of return on assetsassumption, the Company considered the historical returns and the futureexpectations for returns for each asset class, as well as the target allocationof the pension portfolio, over a 20-year time horizon based on the factsand circumstances that exist as of the measurement date. The Company alsoreflected historical and expected future returns associated with its activemanagement of certain asset classes in recognition of the potential tooutperform the broader market.

F-29

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*Predecessor MuellerPension Plans*

PredecessorMueller Pension Plans’ weighted-average asset allocations at September 30,2006, by asset category, are as follows:

| ** **             | ** ** | **September 30, 2006** | ** ** |
|------------------------|------------|----------------------------------|------------|
| Equity Securities      |       |                             | 55.7       | % |   |
| Debt Securities        |       |                             | 23.6       |   |   |
| Other, including  cash |       |                             | 20.7       |   |   |
| Total                  |       |                             | 100.0      | % |   |

 

Following the Acquisition the plan assets of thePredecessor Mueller Pension Plans were transferred to Walter’s Pension Trust,thus the investment strategy and target asset allocations for these plans isthe same as described for the U.S. Pipe Pension Plans above. It should be notedthat $16.3 million in contributions to the plans on September 14, 2006,representing approximately 16% of Predecessor Mueller Pension Plans’ total planassets, had not yet been allocated among equity and debt securities as of September 30,2006. Thus the actual assets allocated among these classes differed materiallyfrom the target asset allocation. This was a short-term deviation solelyattributable to the timing of the contributions made.

Assumeddiscount rates, expected return on plan assets and salary increases have asignificant effect on the amounts reported for the pension and healthcareplans. A one-percentage-point change in the trend rate for theseassumptions would have the following effects (in millions):

| ** **                                              | ** ** | **1-Percentage  Point Increase** | ** ** | **1-Percentage  Point Decrease** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| Discount rate:                                          |       |                                  |       |                                  |       |   |   |   |   |
| Effect on pension service and interest cost  components |       |                                  | $          | —                                |       |   |   | $ | — |   |   |
| Effect on pension benefit obligation                    |       |                                  | (12.7      | )                                     |       |   | 16.2 |   |   |
| Effect on current year pension expense                  |       |                                  | —     |                                  |       |   | — |   |   |
| Expected return on plan  assets:                        |       |                                  |       |                                  |       |   |   |   |   |
| Effect on current year pension expense                  |       |                                  | (0.8       | )                                     |       |   | 0.8 |   |   |
| Rate of compensation  increase:                         |       |                                  |       |                                  |       |   |   |   |   |
| Effect on pension service and interest cost  components |       |                                  | —     |                                  |       |   | — |   |   |
| Effect on pension benefit obligation                    |       |                                  | 0.4        |                                  |       |   | (0.4 | ) |   |
| Effect on current  year pension expense                 |       |                                  | —     |                                  |       |   | — |   |   |
|                                                         |            |                                       |            |                                       |            |  |  |  |  |  |  |

 

The discount rate is basedon published rates for high-quality fixed-income investments that produce cashflows that approximate the timing and amount of expected future benefitpayments. To develop the expected long-term rate of return on assetsassumption, the Company considered the historical returns and the futureexpectations for returns for each asset class, as well as the target allocationof the pension portfolio, over a 20-year time horizon based on the factsand circumstances that exist as of the measurement date. The Company alsoreflected historical and expected future returns associated with its activemanagement of certain asset classes in recognition of the potential tooutperform the broader market.

F-30

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*All Plans*

TheCompany’s minimum pension plan funding requirement for fiscal 2007 is $7.7million, which the Company expects to fully fund. The Company also expects tocontribute $2.0 million to its other post-employment benefit plan infiscal 2007. The following estimated benefit payments, which reflect expectedfuture service, as appropriate, are expected to be paid (in millions):

| ** **      | ** ** | **Pension  Benefits** | ** ** | **Other  Postretirement  Benefits  Before  Medicare  Subsidy** | ** ** |
|-----------------|------------|-----------------------|------------|----------------------------------------------------------------|------------|
| 2007            |       |                  | $          | 21.9                                                           |       |   |   | $ | 2.0 |   |   |
| 2008            |       |                  | 22.3       |                                                           |       |   | 1.8 |   |   |
| 2009            |       |                  | 22.7       |                                                           |       |   | 1.8 |   |   |
| 2010            |       |                  | 23.0       |                                                           |       |   | 1.9 |   |   |
| 2011            |       |                  | 23.3       |                                                           |       |   | 1.9 |   |   |
| Years 2012-2016 |       |                  | 123.5      |                                                           |       |   | 9.8 |   |   |

 

Of the total pension planobligations at September 30, 2006, 96% relate to United States plans, and4% relate to non-United States plans of Predecessor Mueller.

*Defined ContributionRetirement Plan—**Certain*United States employees ofthe Company and its subsidiaries participate in a defined contribution 401(k) matchingplan. Pension expense for the defined contribution plan is computed as apercentage of participants’ compensation and was $5.8 million for the twelvemonths ended September 30, 2006. There was no pension expense for thedefined contribution plan for the nine months ended September 30, 2005 andthe twelve months ended December 31, 2004 as U.S. Pipe salariedemployees are covered by a defined benefit pension plan and not a definedcontribution plan.

**Note 11.**   Goodwilland Identifiable Intangibles

Goodwill and intangibleassets that have an indefinite life are not amortized, but instead are testedfor impairment annually (or more frequently if events or circumstances indicatepossible impairments) using both a discounted cash flow method and a marketcomparable method. Finite-lived intangible assets are amortized overtheir respective estimated useful lives and reviewed for impairment if eventsor circumstances indicate possible impairment. The Company uses an estimate offuture undiscounted net cash flows of the related asset or asset grouping overthe remaining life in measuring whether the assets are recoverable.

Identifiableintangible assets consist of the following:

| ** **                             | ** ** | **September 30, 2006**    | ** ** |
|----------------------------------------|------------|-------------------------------------|------------|
| ** **                             | ** ** | **Cost**                            | ** ** | **Accumulated  Amortization** | ** ** |
| ** **                             | ** ** | **(dollars in millions)** | ** ** |
| **Finite-lived intangible assets**     | ** ** | ** **                          | ** ** |   | ** ** | ** ** |   |
| Technology                             |       | $                                   | 62.9       |   |   | $ | (6.7 | ) |   |
| Customer relationships                 |       | 397.6                               |       |   | (21.4 | ) |   |
|                                   |       | 460.5                               |       |   | (28.1 | ) |   |
| **Indefinite-lived intangible assets** | ** ** | ** **                          | ** ** |   | ** ** | ** ** |   |
| Trade name and  trademarks             |       | 403.0                               |       |   | — |   |   |
|                                   |       | $                                   | 863.5      |   |   | $ | (28.1 | ) |   |

 

Identifiable intangibleassets, net, were $835.4 million at September 30, 2006, and resultprimarily from the Acquisition of Predecessor Mueller. In January 2006,there was an addition of $6.7 million of 

F-31

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technologyintangibles related to the acquisition of CCNE, L.L.C. The weighted-averageamortization period for the finite-lived intangible assets acquired is 17.6years.

Amortization expense onfinite-lived intangible assets was $28.1 million for the twelve months ended September 30,2006. Estimated amortization expense for the year ending September 30,2007, 2008, 2009, 2010 and 2011 is $28.5 million, $28.4 million, $28.5 million,$28.2 million and $27.1 million, respectively.

Goodwillwas $724.1 million at September 30, 2006, compared to $58.4 million at September 30,2005. The following adjustments have been recorded during the twelve monthsended September 30, 2006:

| ** **                                                            | ** ** | **(dollars in millions)** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------|------------|
| Balance at  September 30, 2005                                   |       |                                | $          | 58.4 |   |   |
| Allocation of the  purchase price of Predecessor Mueller, as adjusted |       |                                | 660.3      |   |   |
| Acquisition of Hunt  Industries                                       |       |                                | 6.8        |   |   |
| Other                                                                 |       |                                | (1.4       | ) |   |
| Balance at September 30, 2006                                    |       |                                | $          | 724.1 |   |   |

 

For a discussion of theacquisition of Hunt Industries, Inc., see Note 3. Other goodwilladjustments of $(1.4) million represents a tax benefit on acquisition costscontributed from Walter to the Company.

**Note 12.   SupplementaryBalance Sheet Information**

Selected supplementarybalance sheet information is presented below:

| ** **                                          | ** ** | **September 30,**              | ** ** |
|-----------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                          | ** ** | **2006**                            | ** ** | **2005** | ** ** |
| ** **                                          | ** ** | **(dollars in millions)** | ** ** |
| **Inventories**                                     |       |                                |       |   |   |
| Purchased materials and manufactured parts          |       | $                                   | 66.7       |   | $ | 30.6 |   |
| Work in process                                     |       | 127.7                               |       | 15.5 |   |
| Finished goods                                      |       | 260.2                               |       | 101.1 |   |
|                                                |       | $                                   | 454.6      |   | $ | 147.2 |   |
| **Property, plant and equipment**                   |       |                                |       |   |   |
| Land                                                |       | $                                   | 28.4       |   | $ | 11.3 |   |
| Buildings                                           |       | 83.4                                |       | 33.8 |   |
| Machinery and equipment                             |       | 489.9                               |       | 401.7 |   |
| Other                                               |       | 46.4                                |       | 16.2 |   |
|                                                |       | 648.1                               |       | 463.0 |   |
| Accumulated depreciation                            |       | (311.1                              | )          | (313.8 | ) |
|                                                |       | $                                   | 337.0      |   | $ | 149.2 |   |
| **Accrued  expenses and other current liabilities** |       |                                |       |   |   |
| Vacations and holidays                              |       | $                                   | 13.6       |   | $ | 4.5 |   |
| Workers compensation                                |       | 6.0                                 |       | 2.9 |   |
| Accrued payroll and bonus                           |       | 23.5                                |       | 3.9 |   |
| Accrued sales commissions                           |       | 5.0                                 |       | 1.0 |   |
| Accrued other taxes                                 |       | 7.7                                 |       | 2.1 |   |
| Accrued warranty claims                             |       | 2.7                                 |       | 4.7 |   |
| Accrued environmental claims                        |       | 2.5                                 |       | 4.0 |   |
| Accrued income taxes payable (receivable)           |       | 5.4                                 |       | 5.5 |   |
| Accrued cash discounts and rebates                  |       | 22.1                                |       | 4.8 |   |
| Accrued interest                                    |       | 13.6                                |       | — |   |
| Accrued restructuring                               |       | 5.3                                 |       | — |   |
| Other                                               |       | 14.7                                |       | 1.3 |   |
|                                                |       | $                                   | 122.1      |   | $ | 34.7 |   |

 

F-32

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**Note 13.**   SupplementaryIncome Statement Information

Selectedsupplementary income statement information is presented below.

| ** **                                        | ** ** | **Twelve months  ended  September 30,  2006** | ** ** | **Nine months  ended  September 30,  2005** | ** ** | **Twelve months  ended  December 31,  2004** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                        | ** ** | **(dollars in millions)**                     | ** ** |
| Included in selling,  general and administrative: |       |                                                    |       |                                                  |       |                                                   |       |   |   |   |   |   |   |
| Research and  development                         |       |                                                    | $          | 5.7                                                   |       |                                                   |       | $ | 0.4 |   |   |   | $ | 1.5 |   |   |
| Advertising                                       |       |                                                    | $          | 4.4                                                   |       |                                                   |       | $ | 0.3 |   |   |   | $ | 0.5 |   |   |
| Interest expense,  net of interest income:        |       |                                                    |       |                                                  |       |                                                   |       |   |   |   |   |   |   |
| Contractual  interest expense                     |       |                                                    | $          | 94.4                                                  |       |                                                   |       | $ | 0.3 |   |   |   | $ | 0.5 |   |   |
| Deferred  financing fee amortization              |       |                                                    | 3.1        |                                                  |       |                                                   | —     |   |   |   | — |   |   |
| Early debt  redemption penalty                    |       |                                                    | 13.4       |                                                  |       |                                                   | —     |   |   |   | — |   |   |
| Write off of  deferred financing fees             |       |                                                    | (4.1       | )                                                     |       |                                                   | —     |   |   |   | — |   |   |
| Bridge loan fee                                   |       |                                                    | 2.5        |                                                  |       |                                                   | —     |   |   |   | — |   |   |
| Interest rate  swap gains                         |       |                                                    | (0.4       | )                                                     |       |                                                   | —     |   |   |   | — |   |   |
| Interest expense                                  |       |                                                    | 108.9      |                                                  |       |                                                   | 0.3        |   |   |   | 0.5 |   |   |
| Interest income                                   |       |                                                    | (7.5       | )                                                     |       |                                                   | —     |   |   |   | — |   |   |
| Total interest expense,  net of interest income   |       |                                                    | $          | 101.4                                                 |       |                                                   |       | $ | 0.3 |   |   |   | $ | 0.5 |   |   |

 

**Note 14.**   SegmentInformation

Prior to the Acquisition on October 3, 2005, theCompany had one segment: U.S. Pipe. As of September 30, 2006, the Company’soperations consisted of three operating segments: Mueller, U.S. Pipe and Anvil.These segments are organized based on products and are consistent with how theoperating segments are managed, how resources are allocated, and howinformation is used by the chief operating decision maker. The Mueller segmentis a manufacturer of valves, fire hydrants and other related products utilizedin the distribution of water and gas and in water and wastewater treatmentfacilities. The U.S. Pipe segment is a manufacturer of ductile iron pressurepipe, fittings and other cast iron products used primarily for major water andwastewater transmission and collection systems. The Anvil segment is amanufacturer of cast iron and malleable iron pipe fittings, ductile ironcouplings and fittings, pipe hangers and other related products for the fireprotection, plumbing, heating, mechanical, construction, retail hardware andother related industries. The accounting policies of the segments are the sameas those described in the summary of significant accounting policies.

Intersegment sales and transfers are made atestablished intersegment selling prices generally intended to cover costs. Thedetermination of segment earnings does not reflect allocations of certaincorporate expenses not directly attributable to segment operations andintersegment eliminations, which is designated as Corporate in the segmentpresentation, and is before interest expense, net of interest income, andincome taxes. Corporate expenses include those costs incurred by Mueller’scorporate function and do not include any allocated costs from Walter. Costsallocated by Walter to the Company are included in the determination of U.S.Pipe’s operating income. Corporate costs include those costs related tofinancial and administrative matters, treasury, risk management, humanresources, legal counsel, and tax functions. Corporate assets include cash,deferred tax assets and deferred financing fees. These assets have not beenpushed down to the Company’s segments and are maintained as Corporate items.Therefore, segment earnings are not reflective of results on a stand-alonebasis. See also Note 2 regarding Related Party Allocations from Walter whichare recorded by U.S. Pipe and Corporate and are reflected in the Company’sconsolidated selling, general and administrative expenses.

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

| ** **                                                      | ** ** | **For the twelve  months ended  September 30,  2006** | ** ** | **For the nine  months ended  September 30,  2005** | ** ** | **For the twelve  months ended  December 31,  2004** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **(dollars in millions)**                                       | ** ** |
| **Net  sales, excluding intersegment sales:**                   | ** ** |                                                                      | ** ** | ** **                                                              |       |                                                                     | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Mueller                                                         |       |                                                                      | $          | 804.1                                                                   |       |                                                                     |       | $ | — | ** ** |   |   | $ | — | ** ** |   |
| U.S. Pipe                                                       |       |                                                                      | 594.7      |                                                                    |       |                                                                     | 456.9      | ** ** |   |   | 578.4 | ** ** |   |
| Anvil                                                           |       |                                                                      | 534.6      |                                                                    |       |                                                                     | —     | ** ** |   |   | — | ** ** |   |
| Consolidated                                                    |       |                                                                      | $          | 1,933.4                                                                 |       |                                                                     |       | $ | 456.9 | ** ** |   |   | $ | 578.4 | ** ** |   |
| **Intersegment sales:**                                         | ** ** |                                                                      | ** ** | ** **                                                              |       |                                                                     | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Mueller                                                         |       |                                                                      | $          | 17.1                                                                    |       |                                                                     |       | $ | — | ** ** |   |   | $ | — | ** ** |   |
| U.S. Pipe                                                       |       |                                                                      | 3.8        |                                                                    |       |                                                                     | —     | ** ** |   |   | — | ** ** |   |
| Anvil                                                           |       |                                                                      | 0.6        |                                                                    |       |                                                                     | —     | ** ** |   |   | — | ** ** |   |
| Eliminated from consolidated net sales                          |       |                                                                      | $          | 21.5                                                                    |       |                                                                     |       | $ | — | ** ** |   |   | $ | — | ** ** |   |
| **Income (loss) from operations:**                              | ** ** |                                                                      | ** ** | ** **                                                              |       |                                                                     | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Mueller                                                         |       |                                                                      | $          | 144.7                                                                   |       |                                                                     |       | $ | — | ** ** |   |   | $ | — | ** ** |   |
| U.S. Pipe                                                       |       |                                                                      | (17.0      | )                                                                       |       |                                                                     | 23.4       | ** ** |   |   | 1.0 | ** ** |   |
| Anvil                                                           |       |                                                                      | 31.8       |                                                                    |       |                                                                     | —     | ** ** |   |   | — | ** ** |   |
| Corporate expense                                               |       |                                                                      | (30.1      | )                                                                       |       |                                                                     | —     | ** ** |   |   | — | ** ** |   |
| Consolidating eliminations                                      |       |                                                                      | (0.4       | )                                                                       |       |                                                                     | —     | ** ** |   |   | — | ** ** |   |
| Consolidated                                                    |       |                                                                      | $          | 129.0                                                                   |       |                                                                     |       | $ | 23.4 | ** ** |   |   | $ | 1.0 | ** ** |   |
| **Depreciation and amortization:**                              | ** ** |                                                                      | ** ** | ** **                                                              |       |                                                                     | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Mueller                                                         |       |                                                                      | $          | 50.5                                                                    |       |                                                                     |       | $ | — | ** ** |   |   | $ | — | ** ** |   |
| U.S. Pipe                                                       |       |                                                                      | 22.7       |                                                                    |       |                                                                     | 19.4       | ** ** |   |   | 26.5 | ** ** |   |
| Anvil                                                           |       |                                                                      | 23.4       |                                                                    |       |                                                                     | —     | ** ** |   |   | — | ** ** |   |
| Corporate                                                       |       |                                                                      | 0.3        |                                                                    |       |                                                                     | —     | ** ** |   |   | — | ** ** |   |
| Consolidated                                                    |       |                                                                      | $          | 96.9                                                                    |       |                                                                     |       | $ | 19.4 | ** ** |   |   | $ | 26.5 | ** ** |   |
| **Facility rationalization, restructuring and  related costs:** | ** ** |                                                                      | ** ** | ** **                                                              |       |                                                                     | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Mueller                                                         |       |                                                                      | $          | —                                                                  |       |                                                                     |       | $ | — | ** ** |   |   | $ | — | ** ** |   |
| U.S. Pipe                                                       |       |                                                                      | 28.6       |                                                                    |       |                                                                     | —     | ** ** |   |   | 0.1 | ** ** |   |
| Anvil                                                           |       |                                                                      | —     |                                                                    |       |                                                                     | —     | ** ** |   |   | — | ** ** |   |
| Consolidated                                                    |       |                                                                      | $          | 28.6                                                                    |       |                                                                     |       | $ | — | ** ** |   |   | $ | 0.1 | ** ** |   |
| **Capital expenditures:**                                       | ** ** |                                                                      | ** ** | ** **                                                              |       |                                                                     | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Mueller                                                         |       |                                                                      | $          | 32.2                                                                    |       |                                                                     |       | $ | — | ** ** |   |   | $ | — | ** ** |   |
| U.S. Pipe                                                       |       |                                                                      | 22.8       |                                                                    |       |                                                                     | 16.5       | ** ** |   |   | 20.4 | ** ** |   |
| Anvil                                                           |       |                                                                      | 16.1       |                                                                    |       |                                                                     | —     | ** ** |   |   | — | ** ** |   |
| Corporate                                                       |       |                                                                      | —     |                                                                    |       |                                                                     | —     | ** ** |   |   | — | ** ** |   |
| Consolidated                                                    |       |                                                                      | $          | 71.1                                                                    |       |                                                                     |       | $ | 16.5 | ** ** |   |   | $ | 20.4 | ** ** |   |

 

F-34

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| ** **                | ** ** | **September 30,  2006**        | ** ** | **September 30,  2005** | ** ** |
|---------------------------|------------|-------------------------------------|------------|------------------------------|------------|
| ** **                | ** ** | **(dollars in millions)** | ** ** |
| Total assets:             |       |                                |       |                         |       |   |   |   |   |
| Mueller                   |       |                                | $          | 1,794.0                      |       |   |   | $ | — |   |   |
| U.S. Pipe                 |       |                                | 406.8      |                         |       |   | 495.4 |   |   |
| Anvil                     |       |                                | 492.5      |                         |       |   | — |   |   |
| Corporate                 |       |                                | 152.9      |                         |       |   | — |   |   |
| Consolidated              |       |                                | $          | 2,846.2                      |       |   |   | $ | 495.4 |   |   |
| Goodwill:                 |       |                                |       |                         |       |   |   |   |   |
| Mueller                   |       |                                | $          | 591.4                        |       |   |   | $ | — |   |   |
| U.S. Pipe                 |       |                                | 58.4       |                         |       |   | 58.4 |   |   |
| Anvil                     |       |                                | 74.3       |                         |       |   | — |   |   |
| Consolidated              |       |                                | $          | 724.1                        |       |   |   | $ | 58.4 |   |   |
| Identifiable intangibles: |       |                                |       |                         |       |   |   |   |   |
| Mueller                   |       |                                | $          | 747.4                        |       |   |   | $ | — |   |   |
| U.S. Pipe                 |       |                                | —     |                         |       |   | — |   |   |
| Anvil                     |       |                                | 88.0       |                         |       |   | — |   |   |
| Consolidated              |       |                                | $          | 835.4                        |       |   |   | $ | — |   |   |

 

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

| ** **      | ** ** | **Twelve months  ended  September 30,  2006** | ** ** | **Nine months  ended  September 30,  2005** | ** ** | **Twelve months  ended  December 31,  2004** | ** ** |
|-----------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **      | ** ** | **(dollars in millions)**                     | ** ** |
| Net sales:      |       |                                                    |       |                                                  |       |                                                   |       |   |   |   |   |   |   |
| United States   |       |                                                    | $          | 1,693.8                                               |       |                                                   |       | $ | 448.2 |   |   |   | $ | 557.9 |   |   |
| Canada          |       |                                                    | 231.4      |                                                  |       |                                                   | —     |   |   |   | 0.1 |   |   |
| Other Countries |       |                                                    | 8.2        |                                                  |       |                                                   | 8.7        |   |   |   | 20.4 |   |   |
|            |       |                                                    | $          | 1,933.4                                               |       |                                                   |       | $ | 456.9 |   |   |   | $ | 578.4 |   |   |

 

| ** **                           | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** |
|--------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| Property, plant and  equipment, net: |       |                         |       |                         |       |   |   |   |   |
| United States                        |       |                         | $          | 318.6                        |       |   |   | $ | 149.2 |   |   |
| Canada                               |       |                         | 16.4       |                         |       |   | — |   |   |
| Other Countries                      |       |                         | 2.0        |                         |       |   | — |   |   |
|                                 |       |                         | $          | 337.0                        |       |   |   | $ | 149.2 |   |   |

 

For the year ended September 30,2006, sales to two distributors comprised approximately 30% of the Company’stotal net sales. Accounts receivable includes $95.5 million from these two distributorsas of September 30, 2006.

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**Note 15.**   Commitments and Contingencies

**Income TaxLitigation**

A dispute exists withregard to federal income taxes for fiscal years 1980 through 1994 allegedlyowed by the Walter consolidated group, which included the U.S. Pipe segmentduring these periods. It is estimated that the amount of tax presently claimedby the IRS is approximately $34.0 million for issues currently in disputein bankruptcy court for matters unrelated to the Company. This amount issubject to interest and penalties. In addition, the Internal Revenue Servicehas issued a Notice of Proposed Deficiency assessing additional tax of$80.4 million for the fiscal years ended May 31, 2000, December 31,2000, and December 31, 2001. Under tax law, the Company is jointly andseverally liable for any final tax determination. However, Walter and itsaffiliates believe that their tax filing positions have substantial merit andintend to defend vigorously any claims asserted. Walter has an accrual that itbelieves to be sufficient to cover the estimated probable loss, includinginterest and penalties. There are no charges or accruals in the Company’saccounts related to these issues since these matters do not relate to theoperations of the Company.

**Environmental Matters**

The Company is subject to a wide variety of laws andregulations concerning the protection of the environment, both with respect tothe construction and operation of many of its plants and with respect toremediating environmental conditions that may exist at its own and otherproperties. The Company believes that it is in substantial compliance withfederal, state and local environmental laws and regulations. The Companyaccrues for environmental expenses resulting from existing conditions that relateto past operations when the costs are probable and reasonably estimable. Expenses charged to the statementof operations for compliance of ongoing operations and for remediation ofenvironmental conditions arising from past operations were approximately $2.3million, $4.4 million and $9.5 million in the year ended September 30,2006, the nine months ended September 30, 2005 and the year ended December 31,2004, respectively. Because environmental laws and regulations continueto evolve and because conditions giving rise to obligations and liabilitiesunder environmental laws are in some circumstances not readily identifiable, itis difficult to forecast the amount of such future environmental expendituresor the effects of changing standards on future business operations or results.Consequently, the Company can give no assurance that such expenditures will notbe material in the future. The Company capitalizes environmental expendituresthat increase the life or efficiency of property or that reduce or preventenvironmental contamination. Capital expenditures for environmentalrequirements are anticipated to average approximately $7.0 million peryear in the next five years. Capitalexpenditures for environmental requirements were approximately $4.7 million,$1.7 million and $2.7 million in the year ended September 30, 2006, thenine months ended September 30, 2005 and the year ended December 31,2004, respectively.

The Company has implemented an Administrative ConsentOrder (ACO) for its Burlington, New Jersey plant that was required underthe New Jersey Environmental Cleanup Responsibility Act (now known as theIndustrial Site Recovery Act). The ACO required soil and ground water cleanup,and the Company has completed, and has received final approval on, the soilcleanup required by the ACO. U. S. Pipe is continuing to addressground water issues at this site. Further remediation could be required. Theseremediation costs are expected to be minimal. Long-term ground water monitoringwill be required to verify natural attenuation. It is not known how long groundwater monitoring will be required. Management does not believe monitoring orfurther cleanup costs, if any, will have a material adverse effect on thefinancial condition or results of operations of the Company.

The Federal Comprehensive Environmental Response,Compensation and Liability Act (CERCLA) generally imposes liability, which maybe joint and several and is without regard to fault or the legality of 

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waste generation ordisposal, on certain classes of persons, including owners and operators ofsites at which hazardous substances are released into the environment (or posea threat of such release), persons that disposed or arranged for the disposalof hazardous substances at such sites, and persons who owned or operated suchsites at the time of such disposal. CERCLA authorizes the EnvironmentalProtection Agency (EPA), the States and, in some circumstances, privateentities to take actions in response to public health or environmental threatsand to seek to recover the costs they incur from the same classes of persons.Certain governmental authorities can also seek recovery for damages to naturalresources. Currently, U.S. Pipe has been identified as a potentiallyresponsible party (PRP) by the EPA under CERCLA with respect to cleanup ofhazardous substances at a superfund site located in Anniston, Alabama, and U.S.Pipe is among many PRP’s at the site, a significant number of which aresubstantial companies.

The PRP’s have negotiated an ACO with the EPA. Basedon these negotiations, management estimated the Company’s share of liabilityfor cleanup, after allocation among several PRP’s, would be approximately$4.0 million, which was accrued in 2004. In the fourth quarter of 2006,U.S. Pipe and Phelps Dodge (a co-signer of the ACO) agreed that Phelps Dodgewould assume U.S. Pipe’s obligations and liabilities relating to the ACO. As aresult, the Company recognized a pre-tax benefit related to the settlement ofthis obligation, which was not material to the Company’s financial statements.Phelps Dodge had previously entered into similar agreements with all othersignatories to the ACO.

Solutia, Inc andPharmacia Corporation filed suit against U.S. Pipe and Walter Industries on January 5,2003 for contribution and cost recovery by Solutia with respect to costsincurred and to be incurred by Solutia in performing remediation ofpolychlorinated biphenyls (PCBs) and heavy metals mandated by EPA in Anniston,Alabama with respect to the ACO described above. The ACO provides protectionagainst contribution claims by third parties, such as Solutia. Managementbelieves that the likelihood of liability in the contribution litigation isremote. The Magistrate has entered an Order staying discovery in this matterbut has allowed Solutia to proceed with “on-site” sampling discovery.

The Company’s U.S. Pipe subsidiary has been named in apurported civil class action case originally filed on April 8, 2005 in theCircuit Court of Calhoun County, Alabama, and removed to the U.S. DistrictCourt for the Northern District of Alabama under the Class Action Fairness Act.The putative plaintiffs in the case filed an amended complaint with the U.S.District Court on December 15, 2006. The case was filed against U.S. Pipeand other foundries in the Anniston, Alabama area alleging state law tortclaims (negligence, failure to warn, wantonness, nuisance, trespass andoutrage) arising from creation and disposal of “foundry sand” alleged tocontain harmful levels of PCBs and other toxins, including arsenic, cadmium,chromium, lead and zinc. The plaintiffs are seeking damages for real andpersonal property damage and for other unspecified personal injury. Managementbelieves this matter is still in early stages of litigation and no substantialdiscovery has taken place. In addition, management believes that bothprocedural and substantive defenses would likely be available should this classaction be allowed to proceed. At present, management has no reasonable basis toform a view with respect to the probability of liability in this matter.

The Company and U.S. Pipe recently received a letterfrom attorneys representing a purported group of residents of the NorthBirmingham area of Jefferson County, Alabama alleging personal injury, propertydamage, nuisance, and trespass involving the release of toxic emissions intothe North Birmingham environment causing injury. The Company is named in thispotential litigation because of its ownership interests in U.S. Pipe. Theallegations against U. S. Pipe result from the use of coal tar products andtheir emissions into the North Birmingham environment.

Although the Company now produces a small amount ofno-lead brass products, most of the Company’s brass valve products containapproximately 5.0% lead. Environmental advocacy groups, relying on standardsestablished by California’s Proposition 65, are seeking to eliminate or reducethe content of 

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lead in waterinfrastructure products offered for sale in California. Some of the Company’ssubsidiaries have entered into settlement agreements with these environmentaladvocacy groups to modify products or offer substitutes for sale in California.Legislation to substantially restrict lead content in water infrastructureproducts has been introduced in the United States Congress. Congress or statejurisdictions other than California may enact legislation similar toProposition 65 to restrict the content of lead in water products, which couldrequire the Company to incur additional capital expenses to modify production. Weundertook a capital project to implement a no-lead brass production line thatrequired the Company to incur approximately $8.0 million in incremental capitalspending, of which $7.9 million was spent during the year ended September 30,2006. Also, we began implementation of a project to consolidate our twoexisting brass foundries into one facility that required the Company to incurapproximately $11.2 million in incremental spending, of which $5.8 million wasspent during the year ended September 30, 2006. The foundry consolidationproject is expected to be completed during 2007.

The Company’s Anvil segment entered into a ConsentOrder with the Georgia Department of Natural Resources regarding allegedhazardous waste violations at Anvil’s former foundry facility in Statesboro,Georgia. Pursuant to the Consent Order, Anvil agreed to pay a monetary fine of$50,000 and pay an additional $50,000 to fund a supplemental environmentalproject. Anvil has also agreed to perform various investigatory and remedialactions at the foundry and its landfill. The total costs are estimated to bebetween $1.2 million and $1.4 million. The Company maintains anadequate reserve to cover these estimated costs.

Over the next two years, the Company could potentiallyincur between $20.0 million and $24.0 million of capital costs at itsiron foundries to comply with the United States Environmental Protection Agency’sNational Emissions Standards for Hazardous Air Pollutants which were issued April 22,2004.

Although no assurances can be given that the Companywill not be required in the future to make material expenditures relating toenvironmental laws or legally mandated site clean-up, management does notbelieve at this time that the compliance and cleanup costs, if any, associatedwith the current laws and sites for which the Company has cleanup liability orany other future sites will have a material adverse effect on the financialcondition or results of operations of the Company, but such cleanup costs couldbe material to results of operations in a reporting period.

In 2004, the Company entered into a settlement andrelease agreement with a former insurer whereby the former insurer paid$1.9 million, net of legal fees, to the Company for historical insuranceclaims, previously expensed as incurred by the Company. Such claims had notpreviously been submitted to the insurance company for reimbursement. TheCompany released the insurer of both past and future claims, and recorded a$1.9 million reduction to selling, general and administrative expenses in2004.

In 2005, the Company entered into a settlement andrelease agreement with a former insurer whereby the former insurer agreed topay $5.1 million, net of legal fees, to the Company for historicalinsurance claims previously expensed as incurred by the Company. Such claimshad not previously been submitted to the insurance company for reimbursement.The Company released the insurer of both past and future claims. During 2005,the Company received $2.8 million in cash and the remainder was receivedduring the quarter ended March 31, 2006. The Company recorded a$5.1 million reduction to selling, general and administrative expenses in2005.

Under the terms of theagreement whereby Tyco International Ltd. (“Tyco”) sold the Mueller and Anvilbusinesses in August 1999 to prior owners (the “August 1999 TycoTransaction”), Tyco agreed to indemnify the Company’s predecessor-in-interest (“PredecessorMueller”), and, by legal succession, the Company and its affiliates, for all “ExcludedLiabilities”. Excluded Liabilities include, among other things, substantiallyall environmental liabilities relating to the time prior to the August 1999Tyco Transaction. The indemnity survives indefinitely, is not subject to anydeductibles or caps, and continues with respect to the Company’s currentoperations, other than those operations acquired since the August 1999Tyco 

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Transaction,including the operations of the U.S. Pipe segment. If Tyco ever becomesfinancially unable to, or otherwise fails to comply with the terms of theindemnity, the Company may be responsible for the Tyco-indemnified obligations.In addition, Tyco’s indemnity does not cover environmental liabilities to theextent caused by the Company or Predecessor Mueller or the operation of theCompany’s business after the August 1999 Tyco Transaction, nor does itcover environmental liabilities arising with respect to businesses or sitesacquired after the August 1999 Tyco Transaction

**MiscellaneousLitigation**

In 2003, the Company increased its accruals foroutstanding litigation by approximately $6.5 million, principally relatedto the settlement of a class action employment matter. The settlement wasfinalized in May 2004 for an amount approximating the accrual.

The Los Angeles Department of Water and Power, ex rel.Nora Armenta (“Armenta”) filed suit against our subsidiaries, James JonesCompany and Mueller Co. (Superior Court, Los Angeles County, California; Case No. BC173487) on June 27, 1997. In a related case, on September 15, 2004,the City of Banning and other California municipalities (collectively, “City ofBanning”) filed suit against the Company’s subsidiaries, James Jones Companyand Mueller Co. (Superior Court, Los Angeles County; Case No. BC 321513).The Armenta matter is a false claims lawsuit brought on behalf of cities, waterdistricts and municipalities against Mueller Co., James Jones Company andothers alleging that the defendants sold allegedly non-conforming public watersystem parts to various government entities. The lawsuit seeks consequentialdamages, penalties and punitive damages relating to the repair and replacementof the water systems to remove the allegedly non-conforming parts. While JamesJones Company has always been a defendant in the Armenta action, in January 2004,Mueller Co. was dismissed as a defendant; however the dismissal was reversed bythe California Court of Appeals in August 2006. On September 15,2004, the Armenta trial court ruled against the intervention of approximately30 municipalities that had failed to intervene within the time deadlinespreviously specified by the court. The trial court also ruled that the majorityof municipalities that had purchased James Jones products from contractors ordistributors were not in privity with the James Jones Company and were notentitled to punitive damages. Following the Armenta court’s ruling, on September 15,2004, the water districts and municipalities filed the City of Banning actionagainst the James Jones Company and Watts (former parent company of James JonesCompany), alleging fraud and intentional misrepresentation. This lawsuit isbased on the same underlying facts as the Armenta lawsuit. Any liabilityassociated with these lawsuits is covered by the Tyco indemnity, and thedefense is being paid for and conducted by Tyco, all in accordance with theindemnity obligation of Tyco described above in *EnvironmentalMatters*.

Some of the Company’s subsidiaries have been named asdefendants in a small number of asbestos-related lawsuits. The Company does notbelieve these lawsuits, either individually or in the aggregate, are materialto its financial position or results of operations.

The Company is a party to anumber of other lawsuits arising in the ordinary course of business. TheCompany provides for costs relating to these matters when a loss is probableand the amount is reasonably estimable. The effect of the outcome of thesematters on the Company’s future results of operations cannot be predicted withcertainty as any such effect depends on future results of operations and theamount and timing of the resolution of such matters. While the results oflitigation cannot be predicted with certainty, the Company believes that thefinal outcome of such other litigation will not have a materially adverseeffect on the Company’s financial statements.

*Commitments andContingencies—Other*

As part of the acquisition on January 15, 2004 ofthe business of Star Pipe, Inc. (“Star”), Anvil has agreed to a futurepayment to be made to the seller Star to the extent that the gross profit ofthe acquired 

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business exceeds atargeted gross profit. The maximum potential payment amount is $23 million.Management currently estimates the payment could total approximately $3 millionto $6 million for the payment period that began February 1, 2004 and ends January 31,2007. The payment amount indicated above is based on management’s bestestimate, but the actual payment could be materially different. The liabilityfor such payment will be recorded at the end of the payment period, inaccordance with the purchase agreement, with a corresponding increase togoodwill.

In the opinion ofmanagement, accruals associated with contingencies incurred in the normalcourse of business are sufficient. Resolution of existing known contingenciesis not expected to significantly affect the Company’s financial position andresult of operations.

**Operating Leases**

The Company accounts for operating leases inaccordance with SFAS 13, *Accounting for Leases*,which includes guidance for evaluating free rent periods, determiningamortization periods of leasehold improvements and incentives related toleasehold improvements. The Company’s operating leases are primarily forequipment and office space.

Rentexpense was $10.0 million, $0.2 million and $0.3 million for thetwelve months ended September 30, 2006, the nine months ended September 30,2005 and the twelve months ended December 31, 2004, respectively. Futureminimum payments under non-cancelable operating leases as of September 30,2006 are (in millions):

| 2007       |   | $   | 8.1    |   |
|------------|--------|-----|--------|--------|
| 2008       |   | 6.4 |   |
| 2009       |   | 3.1 |   |
| 2010       |   | 2.8 |   |
| 2011       |   | 2.4 |   |
| Thereafter |   | 5.4 |   |

 

**Note 16.**   NewAccounting Pronouncements

In July 2006, the FASB issued finalInterpretation (FIN) No. 48, *Accounting for Uncertaintyin Income Taxes*, which defines the minimum recognition threshold atax provision must meet before being recognized in the financial statements.This interpretation also provides guidance on derecognition of income taxassets and liabilities, classification of current and deferred income taxassets and liabilities, accounting for interest and penalties associated withtax positions, accounting for income taxes in interim periods, and income taxdisclosures. FIN No. 48 applies to all tax positions related to incometaxes subject to SFAS No. 109 *Accounting for IncomeTaxes*. The Company has not yet determined what effect, if any, theadoption of this interpretation, which becomes effective October 1, 2007,will have on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158,*Employers’ Accounting for Defined Benefit Pensionand Other Postretirement Plans—An Amendment of FASB Statements No. 87, 88,106, and 132(R),* which requires companies to (a) recognize anet liability or asset to report the funded status of the Company’s definedbenefit pension and other postretirement benefit plans on the balance sheet and(b) to measure plan assets and benefit obligations as of the date of theCompany’s fiscal year-end statement of financial position. The Company has notyet determined what impact the adoption of this statement, which becomeseffective September 30, 2007 for requirement (a) and September 30,2009 for requirement (b), respectively, will have on its consolidated financialstatements.

In September 2006,the FASB issued FASB Staff Position (FSP) No. AUG-AIR-1 *Accounting for Planned Major Maintenance Activities*. ThisFSP prohibits the use of the accrue-in-advance method of 

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accountingfor planned major maintenance activities in annual and interim financialreporting periods and should be applied retrospectively for all financialstatements presented. This FSP becomes effective for the Company October 1,2007. The Company does not expect the adoption of this FSP to have a materialeffect on its consolidated financial statements.

**Note 17.**   SubsequentEvents

On October 24, 2006, the Company announced theclosure of the Mueller segment’s James Jones manufacturing facility in ElMonte, California. James Jones will transfer the production of its brassproducts and hydrants to the Mueller segment’s Decatur, Illinois andAlbertville, Alabama plants by June 2007. Approximately 155 employees willbe affected by the closure.

On December 14, 2006, after the close of trading,Walter distributed its approximately 85.8 million shares of Series Bcommon stock of the Company’s parent, Mueller Water, to holders of Walter’scommon stock on the record date of December 6, 2006. The Series BCommon Shares represent approximately 75% of the outstanding shares of MuellerWater, and approximately 96% of the combined voting power of all of MuellerWater’s common stock.

On December 15, 2006,in conjunction with the spin-off of Mueller Water by Walter, Mueller Waterapproved the grant of stock options and restricted stock units for MuellerWater’s Series A common stock pursuant to Mueller Water’s 2006 StockIncentive Plan to replace the legacy share-based compensation instruments heldby Walter employees that became Company employees upon the Walter spin-off ofMueller Water. As a result, grants of approximately 464,000 non-qualified stockoptions with exercise prices ranging from approximately $2.00 to $21.00, andgrants of approximately 414,000 restricted stock units, were approved by MuellerWater.

**Note 18.   Quarterly Consolidated FinancialInformation (Unaudited)**

| ** **                                                          | ** ** | **Quarter ended** | ** ** |
|---------------------------------------------------------------------|------------|------------------------|------------|
| **Twelve months ended September 30, 2006** | ** ** | ** **             | ** ** | **December 31** | ** ** | **March 31** | ** ** | **June 30** | ** ** | **September 30** | ** ** |
| ** **                                                          | ** ** | **(in millions)**      | ** ** |
| Net sales                                                           |       |                   | $          | 480.4 |   |   |   | $ | 434.9 |   |   | $ | 500.0 |   |   | $ | 518.1 |   |   |
| Gross profit                                                        |       |                   | $          | 43.5 |   |   |   | $ | 94.6 |   |   | $ | 134.5 |   |   | $ | 135.1 |   |   |
| Operating income  (loss)                                            |       |                   | $          | (39.5 | ) |   |   | $ | 27.5 |   |   | $ | 69.4 |   |   | $ | 71.6 |   |   |
| Net income (loss)                                                   |       |                   | $          | (40.9 | ) |   |   | $ | 1.0 |   |   | $ | 23.6 |   |   | $ | 32.9 |   |   |
|                                                                     |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                                                        | ** ** | **Quarter ended** | ** ** |
|-------------------------------------------------------------------|------------|------------------------|------------|
| **Nine months ended September 30, 2005** | ** ** | ** **             | ** ** | **March 31** | ** ** | **June 30** | ** ** | **September 30** | ** ** |
| Net sales and  revenues                                           |       |                   | $          | 124.7 |   |   | $ | 162.0 |   |   | $ | 170.2 |   |   |
| Gross profit                                                      |       |                   | $          | 10.6 |   |   | $ | 22.8 |   |   | $ | 21.3 |   |   |
| Operating income  (loss)                                          |       |                   | $          | 3.7 |   |   | $ | 10.3 |   |   | $ | 9.4 |   |   |
| Net income (loss)                                                 |       |                   | $          | (1.2 | ) |   | $ | 3.6 |   |   | $ | 2.7 |   |   |
|                                                                   |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Note 19.   ConsolidatingGuarantor and Non-Guarantor Financial Information**

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

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Prior to the Acquisitionon October 3, 2005, U.S. Pipe was not a Guarantor Company of the seniorsubordinated notes issued by Predecessor Mueller Group. See Note 20 for furtherdiscussion of Predecessor Mueller Group. The Consolidating Statements ofOperations and the Consolidating Statement of Cash Flows for the twelve monthsended September 30, 2006 and the Consolidating Balance Sheet as of September 30,2006 reflect the results of the Company.

**Consolidating Statement of OperationsFor Mueller Group, LLCFor the Twelve Months Ended September 30, 2006**

| ** **                                                      | ** ** | **Issuer**                          | ** ** | **Guarantor  Companies(1)** | ** ** | **Non-Guarantor  Companies** | ** ** | **Consolidating  Eliminating** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------|------------|------------------------------|------------|--------------------------------|------------|------------------|------------|
| ** **                                                      | ** ** | **(dollars in millions)** | ** ** |
| Net sales                                                       |       | $                                   | —     |                        |       | $                            | 1,738.1    |                           |       |             | $          | 195.3 |   |   |   | $ | — |   |   |   | $ | 1,933.4 |   |   |
| Cost of sales                                                   |       | —                              |       |                        | 1,368.7    |                         |       |                           | 157.0      |             |       |   | — |   |   |   | 1,525.7 |   |   |
| Gross profit                                                    |       | —                              |       |                        | 369.4      |                         |       |                           | 38.3       |             |       |   | — |   |   |   | 407.7 |   |   |
| Selling, general  and administrative                            |       | —                              |       |                        | 215.4      |                         |       |                           | 26.7       |             |       |   | — |   |   |   | 242.1 |   |   |
| Related party  corporate charges                                |       | —                              |       |                        | 8.0        |                         |       |                           | —     |             |       |   | — |   |   |   | 8.0 |   |   |
| Facility  rationalization, restructuring and related costs |       | —                              |       |                        | 28.6       |                         |       |                           | —     |             |       |   | — |   |   |   | 28.6 |   |   |
| Income (loss)  from operations                                  |       | —                              |       |                        | 117.4      |                         |       |                           | 11.6       |             |       |   | — |   |   |   | 129.0 |   |   |
| Interest expense,  net of interest  income                      |       | (101.5                              | )          |                        | (0.3       | )                            |       |                           | 0.4        |             |       |   | — |   |   |   | (101.4 | ) |   |
| Income (loss)  before income tax expense (benefit)              |       | (101.5                              | )          |                        | 117.1      |                         |       |                           | 12.0       |             |       |   | — |   |   |   | 27.6 |   |   |
| Income tax  expense (benefit)                                   |       | (40.6                               | )          |                        | 46.8       |                         |       |                           | 4.8        |             |       |   | — |   |   |   | 11.0 |   |   |
| Equity income  (loss) from  subsidiaries                        |       | 77.5                                |       |                        | 7.2        |                         |       |                           | —     |             |       |   | (84.7 | ) |   |   | — |   |   |
| Net income (loss)                                               |       | $                                   | 16.6       |                        |       | $                            | 77.5       |                           |       |             | $          | 7.2 |   |   |   | $ | (84.7 | ) |   |   | $ | 16.6 |   |   |

 

F-42

----

**Consolidating Balance SheetFor Mueller Group, LLCSeptember 30, 2006**

| ** **                                                      | ** ** | **Issuer**                          | ** ** | **Guarantor  Companies(1)** | ** ** | **Non-Guarantor  Companies** | ** ** | **Consolidating  Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------|------------|------------------------------|------------|---------------------------------|------------|------------------|------------|
| ** **                                                      | ** ** | **(dollars in millions)** | ** ** |
| **Assets**                                                      | ** ** | ** **                          | ** ** |                        | ** ** | ** **                   |       |                            | ** ** | ** **       |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Cash and cash  equivalents                                      |       | $                                   | 80.1       |                        |       | $                            | (11.1      | )                               |       |             | $          | 10.1 |   |   |   | $ | — |   |   |   | $ | 79.1 | ** ** |   |
| Receivables, net                                                |       | —                              |       |                        | 285.2      |                         |       |                            | 37.7       |             |       |   | — |   |   |   | 322.9 | ** ** |   |
| Inventories                                                     |       | —                              |       |                        | 396.3      |                         |       |                            | 58.3       |             |       |   | — |   |   |   | 454.6 | ** ** |   |
| Deferred income  taxes                                          |       | —                              |       |                        | 42.6       |                         |       |                            | —     |             |       |   | — |   |   |   | 42.6 | ** ** |   |
| Prepaid expenses                                                |       | —                              |       |                        | 32.1       |                         |       |                            | 1.6        |             |       |   | — |   |   |   | 33.7 | ** ** |   |
| Total current  assets                                           |       | 80.1                                |       |                        | 745.1      |                         |       |                            | 107.7      |             |       |   | — |   |   |   | 932.9 | ** ** |   |
| Property, plant  and equipment, net                             |       | 2.2                                 |       |                        | 316.9      |                         |       |                            | 17.9       |             |       |   | — |   |   |   | 337.0 | ** ** |   |
| Deferred  financing fees                                        |       | 14.6                                |       |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | 14.6 | ** ** |   |
| Identifiable  intangibles, net                                  |       | —                              |       |                        | 835.4      |                         |       |                            | —     |             |       |   | — |   |   |   | 835.4 | ** ** |   |
| Goodwill                                                        |       | —                              |       |                        | 724.1      |                         |       |                            | —     |             |       |   | — |   |   |   | 724.1 | ** ** |   |
| Other long-term  assets                                         |       | —                              |       |                        | 2.2        |                         |       |                            | —     |             |       |   | — |   |   |   | 2.2 | ** ** |   |
| Investment in  subsidiaries                                     |       | 2,808.9                             |       |                        | 52.9       |                         |       |                            | —     |             |       |   | (2,861.8 | ) |   |   | — | ** ** |   |
| Total assets                                                    |       | $                                   | 2,905.8    |                        |       | $                            | 2,676.6    |                            |       |             | $          | 125.6 |   |   |   | $ | (2,861.8 | ) |   |   | $ | 2,846.2 | ** ** |   |
| **Liabilities**                                                 | ** ** | ** **                          | ** ** |                        | ** ** | ** **                   |       |                            | ** ** | ** **       |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Current portion  of long-term debt                              |       | $                                   | 8.0        |                        |       | $                            | 1.0        |                            |       |             | $          | — |   |   |   | $ | — |   |   |   | $ | 9.0 | ** ** |   |
| Accounts payable                                                |       | 10.7                                |       |                        | 102.5      |                         |       |                            | 11.6       |             |       |   | — |   |   |   | 124.8 | ** ** |   |
| Accrued expenses  and other liabilities                         |       | 13.6                                |       |                        | 105.4      |                         |       |                            | 3.1        |             |       |   | — |   |   |   | 122.1 | ** ** |   |
| Payable to  affiliate, Sloss Industries                         |       | —                              |       |                        | 1.5        |                         |       |                            | —     |             |       |   | — |   |   |   | 1.5 | ** ** |   |
| Total current  liabilities                                      |       | 32.3                                |       |                        | 210.4      |                         |       |                            | 14.7       |             |       |   | — |   |   |   | 257.4 | ** ** |   |
| Intercompany  accounts                                          |       | 694.3                               |       |                        | (748.7     | )                            |       |                            | 54.4       |             |       |   | — |   |   |   | — | ** ** |   |
| Long-term  debt                                                 |       | 1,000.9                             |       |                        | 1.1        |                         |       |                            | —     |             |       |   | — |   |   |   | 1,002.0 | ** ** |   |
| Payable to  parent, Walter Industries                           |       | —                              |       |                        | 3.6        |                         |       |                            | —     |             |       |   | — |   |   |   | 3.6 | ** ** |   |
| Accrued pension  liability, net                                 |       | —                              |       |                        | 44.6       |                         |       |                            | (0.9       | )                |       |   | — |   |   |   | 43.7 | ** ** |   |
| Accumulated  postretirement benefits obligation                 |       | —                              |       |                        | 46.3       |                         |       |                            | —     |             |       |   | — |   |   |   | 46.3 | ** ** |   |
| Deferred income  taxes                                          |       | —                              |       |                        | 289.5      |                         |       |                            | 4.5        |             |       |   | — |   |   |   | 294.0 | ** ** |   |
| Other long-term  liabilities                                    |       | —                              |       |                        | 20.9       |                         |       |                            | —     |             |       |   | — |   |   |   | 20.9 | ** ** |   |
| Total liabilities                                               |       | 1,727.5                             |       |                        | (132.3     | )                            |       |                            | 72.7       |             |       |   | — |   |   |   | 1,667.9 | ** ** |   |
| **Shareholder’s  equity (deficit)**                        | ** ** | ** **                          | ** ** |                        | ** ** | ** **                   |       |                            | ** ** | ** **       |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Total  shareholder’s equity (deficit)                      |       | 1,178.3                             |       |                        | 2,808.9    |                         |       |                            | 52.9       |             |       |   | (2,861.8 | ) |   |   | 1,178.3 | ** ** |   |
| Total liabilities and  shareholder’s equity (deficit) |       | $                                   | 2,905.8    |                        |       | $                            | 2,676.6    |                            |       |             | $          | 125.6 |   |   |   | $ | (2,861.8 | ) |   |   | $ | 2,846.2 | ** ** |   |

 

F-43

----

**ConsolidatingStatement of Cash FlowsFor Mueller Group, LLCFor the Twelve Months Ended September 30, 2006**

| ** **                                                         | ** ** | **Issuer**                          | ** ** | **Guarantor  Companies(1)** | ** ** | **Non-Guarantor  Companies** | ** ** | **Consolidating  Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------|------------|------------------------------|------------|---------------------------------|------------|------------------|------------|
| ** **                                                         | ** ** | **(dollars in millions)** | ** ** |
| Net cash provided  by (used in) operating activities          |       | $                                   | (48.4      | )                           |       | $                            | 237.7      |                            |       |             | $          | (67.4 | ) |   |   | — |   |   |   | $ | 121.9 |   |   |
| **Cash flows from investing  activities**                          | ** ** | ** **                          | ** ** |                        |       |                         |       |                            |       |             |       |   |   |   |   |   |   |   |   |
| Additions to  property, plant and equipment                        |       | —                              |       |                        | (68.4      | )                            |       |                            | (2.7       | )                |       |   | — |   |   |   | (71.1 | ) |   |
| Acquisition of  businesses, net of cash acquired                   |       | —                              |       |                        | (15.5      | )                            |       |                            | —     |             |       |   | — |   |   |   | (15.5 | ) |   |
| Proceeds from  sale of property, plant and equipment               |       | —                              |       |                        | 3.6        |                         |       |                            | —     |             |       |   | — |   |   |   | 3.6 |   |   |
| Increase in  amounts due to Walter                                 |       | —                              |       |                        | 1.6        |                         |       |                            | —     |             |       |   | — |   |   |   | 1.6 |   |   |
| Net cash used in  investing activities                             |       | —                              |       |                        | (78.7      | )                            |       |                            | (2.7       | )                |       |   | — |   |   |   | (81.4 | ) |   |
| **Cash flows from financing  activities**                          | ** ** | ** **                          | ** ** |                        |       |                         |       |                            |       |             |       |   |   |   |   |   |   |   |   |
| Increase in  dollar value of bank checks outstanding               |       | 10.0                                |       |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | 10.0 |   |   |
| Intercompany  change                                               |       | 77.9                                |       |                        | (158.9     | )                            |       |                            | 81.0       |             |       |   | — |   |   |   | — |   |   |
| Proceeds from  short-term borrowings                               |       | 55.9                                |       |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | 55.9 |   |   |
| Retirement of  short-term debt                                     |       | (55.9                               | )          |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | (55.9 | ) |   |
| Proceeds from  long-term debt                                      |       | 1,050.0                             |       |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | 1,050.0 |   |   |
| Retirement of  long-term debt                                      |       | (979.4                              | )          |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | (979.4 | ) |   |
| Contribution from  Mueller Water                                   |       | 368.7                               |       |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | 368.7 |   |   |
| Payment of  deferred financing fees                                |       | (21.6                               | )          |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | (21.6 | ) |   |
| Dividend to  Walter                                                |       | (444.5                              | )          |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | (444.5 | ) |   |
| Dividend to  Walter for  acquisition costs                         |       | —                              |       |                        | (12.0      | )                            |       |                            | —     |             |       |   | — |   |   |   | (12.0 | ) |   |
| Walter contribution  of Predecessor Mueller Group’s cash |       | 67.4                                |       |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | 67.4 |   |   |
| Net cash provided  by (used in) financing activities          |       | 128.5                               |       |                        | (170.9     | )                            |       |                            | 81.0       |             |       |   | — |   |   |   | 38.6 |   |   |
| Net increase  (decrease) in cash and cash equivalents         |       | 80.1                                |       |                        | (11.9      | )                            |       |                            | 10.9       |             |       |   | — |   |   |   | 79.1 |   |   |
| Cash and cash  equivalents at beginning of year                    |       | —                              |       |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | — |   |   |
| Cash and cash  equivalents at end  of year                         |       | $                                   | 80.1       |                        |       | $                            | (11.9      | )                               |       |             | $          | 10.9 |   |   |   | — |   |   |   | $ | 79.1 |   |   |

----

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

F-44

----

 

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

----

*                    Applicableonly for periods beginning October 3, 2005.

**Note 20.**   Supplemental Data—Predecessor MuellerGroup Financial Statements

Prior to the October 3,2005 Acquisition, Predecessor Mueller Group was a registrant filing reportswith the U.S. Securities and Exchange Commission (“SEC”). The followingfinancial statements were derived from the Annual Report on Form 10-Kof Mueller Group, LLC (formerly known as Mueller Group, Inc.) for thefiscal year ended September 30, 2005, as filed with the SEC on December 19,2005 (Commission File Number 333-117473). This information is presentedas supplemental data in this Form 10-K to support the prior periodPredecessor Mueller Group Guarantor Financial Statements. In this footnote, each of the terms “Group,” the “Company,”“we,” “us” or “our” refers to Predecessor Mueller Group, LLC and itssubsidiaries, except where the context makes clear that the reference is onlyto Predecessor Mueller Group itself, and is not inclusive of its subsidiaries.

**PREDECESSORMUELLER GROUP**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

| ** **                                                 | ** ** | **Fiscal years ended Sept. 30,**                 | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **     2005     ** | ** ** | **     2004     ** | ** ** |
| ** **                                                 | ** ** | **(dollars in millions)**                                  | ** ** |
| Net sales                                                  |       |                                                                 | $          | 1,148.9 |   |   |   | $ | 1,049.2 |   |   |
| Cost of sales                                              |       |                                                                 | 802.3      |   |   |   | 750.5 |   |   |
| Gross profit                                               |       |                                                                 | 346.6      |   |   |   | 298.7 |   |   |
| Operating  expenses:                                       |       |                                                                 |       |   |   |   |   |   |   |
| Selling, general and administrative                        |       |                                                                 | 172.1      |   |   |   | 184.9 |   |   |
| Facility rationalization, restructuring and related  costs |       |                                                                 | 1.7        |   |   |   | 0.9 |   |   |
| Total operating expenses                                   |       |                                                                 | 173.8      |   |   |   | 185.8 |   |   |
| Income from  operations                                    |       |                                                                 | 172.8      |   |   |   | 112.9 |   |   |
| Interest expense,  net of interest income                  |       |                                                                 | (70.2      | ) |   |   | (56.3 | ) |   |
| Income before income taxes                                 |       |                                                                 | 102.6      |   |   |   | 56.6 |   |   |
| Provision for  income taxes                                |       |                                                                 | 38.6       |   |   |   | 17.9 |   |   |
| Net income                                                 |       |                                                                 | $          | 64.0 |   |   |   | $ | 38.7 |   |   |

 

F-45

----

**PREDECESSOR MUELLER GROUPCONSOLIDATED BALANCE SHEET**

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

 

F-46

----

**PREDECESSOR MUELLERGROUPCONSOLIDATED STATEMENTS OF CASH FLOWS**

| ** **                                                                                   | ** ** | **Fiscal years ended Sept. 30,**                                         | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **       2005       ** | ** ** | **       2004       ** | ** ** |
| ** **                                                                                   | ** ** | **(dollars in millions)**                                                          | ** ** |
| **Operating Activities**                                                                     | ** ** |                                                                                         | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Net income                                                                                   |       |                                                                                         | $          | 64.0 |   |   |   | $ | 38.7 |   |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities: |       |                                                                                         |       |   |   |   |   |   |   |
| Depreciation                                                                                 |       |                                                                                         | 43.5       |   |   |   | 46.0 |   |   |
| Amortization of  intangibles                                                                 |       |                                                                                         | 2.8        |   |   |   | 16.0 |   |   |
| Amortization of  deferred financing fees                                                     |       |                                                                                         | 4.8        |   |   |   | 3.4 |   |   |
| Amortization of  tooling                                                                     |       |                                                                                         | 2.1        |   |   |   | 2.3 |   |   |
| Write off of  deferred financing fees                                                        |       |                                                                                         | —     |   |   |   | 7.0 |   |   |
| Non-cash stock  compensation                                                                 |       |                                                                                         | —     |   |   |   | 8.6 |   |   |
| Realized gain on  interest rate swaps                                                        |       |                                                                                         | (5.2       | ) |   |   | (12.5 | ) |   |
| Deferred income  taxes                                                                       |       |                                                                                         | (9.3       | ) |   |   | (3.0 | ) |   |
| Asset impairments                                                                            |       |                                                                                         | 0.5        |   |   |   | 0.1 |   |   |
| (Gain) Loss on  disposals of property, plant and equipment                                   |       |                                                                                         | (0.3       | ) |   |   | 1.6 |   |   |
| Changes in assets and liabilities, net of the effects  of acquisitions:                      |       |                                                                                         |       |   |   |   |   |   |   |
| Receivables                                                                                  |       |                                                                                         | (12.6      | ) |   |   | (21.7 | ) |   |
| Inventories                                                                                  |       |                                                                                         | (38.8      | ) |   |   | (9.6 | ) |   |
| Income tax  receivable                                                                       |       |                                                                                         | 4.1        |   |   |   | (4.1 | ) |   |
| Prepaid expenses                                                                             |       |                                                                                         | (4.6       | ) |   |   | (1.1 | ) |   |
| Pension, net                                                                                 |       |                                                                                         | 6.6        |   |   |   | (2.7 | ) |   |
| Accounts payable,  accrued expenses and other current liabilities                            |       |                                                                                         | 16.6       |   |   |   | 18.5 |   |   |
| Accrued royalty  expense                                                                     |       |                                                                                         | —     |   |   |   | — |   |   |
| Other, net                                                                                   |       |                                                                                         | (0.4       | ) |   |   | 2.0 |   |   |
| Cash flows  provided by operating activities                                                 |       |                                                                                         | 73.8       |   |   |   | 89.5 |   |   |
| **Investing Activities**                                                                     | ** ** |                                                                                         | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Additions to  property, plant and equipment                                                  |       |                                                                                         | (27.2      | ) |   |   | (22.5 | ) |   |
| Proceeds from sale  of property, plant and equipment                                         |       |                                                                                         | 2.2        |   |   |   | — |   |   |
| Acquisition of  businesses, net of cash acquired                                             |       |                                                                                         | —     |   |   |   | (19.8 | ) |   |
| Decrease in restricted  cash                                                                 |       |                                                                                         | —     |   |   |   | — |   |   |
| Cash flows used in  investing activities                                                     |       |                                                                                         | (25.0      | ) |   |   | (42.3 | ) |   |
| **Financing Activities**                                                                     | ** ** |                                                                                         | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Book overdrafts                                                                              |       |                                                                                         | 4.8        |   |   |   | 3.3 |   |   |
| Proceeds from  short-term borrowings                                                         |       |                                                                                         | —     |   |   |   | 9.2 |   |   |
| Retirement of  short-term debt                                                               |       |                                                                                         | —     |   |   |   | (9.2 | ) |   |
| Proceeds from long-term  debt                                                                |       |                                                                                         | —     |   |   |   | 960.0 |   |   |
| Retirement of long-term  debt                                                                |       |                                                                                         | (3.3       | ) |   |   | (604.6 | ) |   |
| Payment of  deferred financing fees                                                          |       |                                                                                         | —     |   |   |   | (32.2 | ) |   |
| Dividends paid  (excluding amounts paid to optionholders)                                    |       |                                                                                         | —     |   |   |   | (387.3 | ) |   |
| Contributed  capital                                                                         |       |                                                                                         | —     |   |   |   | — |   |   |
| Cash flows  provided by (used in) financing activities                                       |       |                                                                                         | 1.5        |   |   |   | (60.8 | ) |   |
| Effect of exchange  rate changes on cash                                                     |       |                                                                                         | 2.0        |   |   |   | 1.1 |   |   |
| Increase  (decrease) in cash and cash equivalents                                            |       |                                                                                         | 52.3       |   |   |   | (12.5 | ) |   |
| **Cash and cash equivalents**                                                                | ** ** |                                                                                         | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Beginning of period                                                                          |       |                                                                                         | 60.5       |   |   |   | 73.0 |   |   |
| End of period                                                                                |       |                                                                                         | $          | 112.8 |   |   |   | $ | 60.5 |   |   |
| **Supplemental Disclosures**                                                                 | ** ** |                                                                                         | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Interest paid                                                                                |       |                                                                                         | $          | 73.5 |   |   |   | $ | 50.4 |   |   |
| Income taxes paid                                                                            |       |                                                                                         | $          | 40.6 |   |   |   | $ | 27.4 |   |   |

 

F-47

----

TheCompany recorded facility rationalization, restructuring and related charges of$1.7 million and $0.9 million for the years ended September 30, 2005and 2004, respectively. A portion of these charges, consisting of write-offs ofassets, were non-cash and are reconciled below:

| ** **                                                       | ** ** | **Fiscal years ended Sept. 30,**                                         | ** ** |
|------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                                       | ** ** | **       2005       ** | ** ** | **       2004       ** | ** ** |
| ** **                                                       | ** ** | **(dollars in millions)**                                                          | ** ** |
| Accrued expenses                                                 |       |                                                                                         | $          | 1.2 |   |   |   | $ | 0.4 |   |   |
| Non-cash                                                         |       |                                                                                         | 0.5        |   |   |   | 0.5 |   |   |
| Total facility  rationalization, restructuring and related costs |       |                                                                                         | $          | 1.7 |   |   |   | $ | 0.9 |   |   |

 

**PREDECESSORMUELLER GROUP**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**Organization**

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

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

**Segment Information**

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

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

F-48

----

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

| ** **                                 | ** ** | **Fiscal years ended Sept. 30,**                             | ** ** |
|--------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **      2005      ** | ** ** | **      2004      ** | ** ** |
| ** **                                 | ** ** | **(dollars in millions)**                                              | ** ** |
| **Net  Sales:**                            |       |                                                                             |       |   |   |   |   |   |   |
| Mueller segment                            |       |                                                                             | $          | 663.9 |   |   |   | $ | 618.2 |   |   |
| Anvil segment                              |       |                                                                             | 485.0      |   |   |   | 431.0 |   |   |
| Consolidated                               |       |                                                                             | $          | 1,148.9 |   |   |   | $ | 1,049.2 |   |   |
| **Intersegment sales:**                    | ** ** |                                                                             |       |   |   |   |   |   |   |
| Mueller segment                            |       |                                                                             | $          | 13.9 |   |   |   | $ | 14.1 |   |   |
| Anvil segment                              |       |                                                                             | 0.8        |   |   |   | 0.7 |   |   |
| Consolidated                               |       |                                                                             | $          | 14.7 |   |   |   | $ | 14.8 |   |   |
| **Operating income (expense):**            | ** ** |                                                                             |       |   |   |   |   |   |   |
| Mueller segment                            |       |                                                                             | $          | 168.0 |   |   |   | $ | 142.4 |   |   |
| Anvil segment                              |       |                                                                             | 45.0       |   |   |   | 26.9 |   |   |
| Corporate  expense(1)                      |       |                                                                             | (40.2      | ) |   |   | (56.4 | ) |   |
| Consolidated                               |       |                                                                             | $          | 172.8 |   |   |   | $ | 112.9 |   |   |
| **Depreciation and amortization expense:** | ** ** |                                                                             |       |   |   |   |   |   |   |
| Mueller segment                            |       |                                                                             | $          | 21.8 |   |   |   | $ | 24.0 |   |   |
| Anvil segment                              |       |                                                                             | 17.3       |   |   |   | 17.3 |   |   |
| Corporate                                  |       |                                                                             | 9.3        |   |   |   | 23.0 |   |   |
| Consolidated                               |       |                                                                             | $          | 48.4 |   |   |   | $ | 64.3 |   |   |
| **Capital expenditures:**                  | ** ** |                                                                             |       |   |   |   |   |   |   |
| Mueller segment                            |       |                                                                             | $          | 17.2 |   |   |   | $ | 11.3 |   |   |
| Anvil segment                              |       |                                                                             | 9.7        |   |   |   | 11.2 |   |   |
| Corporate                                  |       |                                                                             | 0.3        |   |   |   | — |   |   |
| Consolidated                               |       |                                                                             | $          | 27.2 |   |   |   | $ | 22.5 |   |   |

----

(1)          Includescertain expenses not allocated to segments.

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

 

F-49

----

Geographicalarea information with respect to net sales, as determined by the location ofthe customer invoiced, and property, plant and equipment—net, as determined bythe physical location of the assets, were as follows for the fiscal years endedSeptember 30, 2005 and 2004:

| ** **      | ** ** | **Fiscal years ended Sept. 30,**                                         | ** ** |
|-----------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **      | ** ** | **       2005       ** | ** ** | **       2004       ** | ** ** |
| ** **      | ** ** | **(dollars in millions)**                                                          | ** ** |
| Net sales:      |       |                                                                                         |       |   |   |   |   |   |   |
| United States   |       |                                                                                         | $          | 935.1 |   |   |   | $ | 873.2 |   |   |
| Canada          |       |                                                                                         | 201.9      |   |   |   | 166.5 |   |   |
| Other Countries |       |                                                                                         | 11.9       |   |   |   | 9.5 |   |   |
|            |       |                                                                                         | $          | 1,148.9 |   |   |   | $ | 1,049.2 |   |   |

 

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

 

**Summary ofSignificant Accounting Policies**

Fiscal Year—The Company’s fiscal year ends on September 30.

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

WarrantyCosts—The Company accrues for the estimated cost of product warranties at thetime of product sale based on historical experience. Adjustments to obligationsfor warranties are made as changes in the obligations become reasonablyestimable. The following table summarizes information concerning the Company’sproduct warranty obligations:

| ** **                      | ** ** | **Fiscal years ended Sept. 30,**                                         | ** ** |
|---------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                      | ** ** | **       2005       ** | ** ** | **       2004       ** | ** ** |
| ** **                      | ** ** | **(dollars in millions)**                                                          | ** ** |
| Balance at  beginning of period |       |                                                                                         | $          | 1.6 |   |   |   | $ | 0.9 |   |   |
| Accruals for  warranties        |       |                                                                                         | 1.6        |   |   |   | 5.2 |   |   |
| Settlement of  warranty claims  |       |                                                                                         | (1.6       | ) |   |   | (4.5 | ) |   |
| Balance at end of period        |       |                                                                                         | $          | 1.6 |   |   |   | $ | 1.6 |   |   |

 

Comprehensive Income—The Company’s comprehensiveincome for the fiscal year ended September 30, 2005 includes foreigncurrency translation gains of $8.1 million and an increase in additionalminimum pension liability of $(1.7) million.

Related Party Transactions—Substantiallyall of the outstanding shares of the common stock of our parent company,Mueller Water Products, Inc., are held by the Donaldson, Lufkin &Jenrette (“DLJ”) Merchant Banking funds. We pay DLJ an annual advisory fee inconnection with a financial advisory agreement. Credit Suisse First Boston LLC,an affiliate of DLJ, has received and will receive customary fees andreimbursement of expenses in connection with the arrangement and syndication ofour senior 

F-50

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creditfacility and as a lender and agent thereunder. The aggregate amount of all feesincurred by the Company with these related parties in connection with advisoryservices and financing arrangements was approximately $0.5 million and $27.2million for the fiscal years ended September 30, 2005 and 2004,respectively.

**BorrowingArrangements**

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

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

 

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

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

 

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

Borrowings 2004 Mueller Credit Facility bore interestbased on a margin over, at the Company’s option, the base rate or LIBOR. Theapplicable margin was 2.75% over LIBOR and 1.50% over the base rate for termloans. The applicable margin under the revolving senior credit facility was arange of 2.25% to 3.25% over LIBOR and a range of 1.00% to 2.00% over thebase rate, depending on our ratio of consolidated debt to EBITDA as defined inthe senior credit facility. At September 30, 2005 the applicable margin onthe revolving senior credit facility was 2.75% over LIBOR and 1.50% over thebase rate. The Company’s obligations under the senior credit facility areguaranteed by Mueller Water and all of the Company’s existing or futuredomestic restricted subsidiaries and is secured by substantially all of theassets of the Company and its subsidiary guarantors, including a pledge of thecapital stock of all of the Company’s existing and future domesticsubsidiaries, a pledge of no more than 65.0% of the voting stock of 

F-51

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any of the Company’sforeign subsidiaries, a pledge of all intercompany indebtedness in favor of theCompany and its domestic restricted subsidiaries, and a pledge of its capitalstock by Mueller Water. The 2004 Mueller Credit Facility contained customarycovenants, including covenants that limit the Company’s ability to incur debtand liens, pay dividends and make investments and capital expenditures, andevents of default. Mueller Group was permitted to make payments of up to$2.0 million in any fiscal year to Mueller Water Products to pay overheadexpenses of Mueller Water Products. These restrictions expired October 3,2005 in connection with the acquisition by Walter.

*SecondPriority Senior Secured Floating Rate Notes:*   The Companyissued $100 million of such notes. Interest on the secured notes ispayable at a rate equal to the three-month reserve-adjusted London-interbankoffered rate, or LIBOR, which is reset quarterly, plus 4.75% on February 1,May 1, August 1 and November 1 of each year, beginning on August 1,2004. The interest rate for the interest period beginning August 1, 2005is 8.44% per annum. The secured notes mature in 2011 and are guaranteed by eachof the existing domestic restricted subsidiaries and secured by second-priorityliens on the assets securing the senior credit facility (other than certainsubsidiary stock and assets of Water). The secured notes contain customarycovenants and events of default, including covenants that limit the Company’sability to incur debt, pay dividends and make investments and also include amaintenance covenant limiting the Company’s senior total leverage as a multipleof EBITDA, as defined in the indenture.

*10%Senior Subordinated Notes:*   The Company issued $315 million of suchnotes. Interest on the subordinated notes is payable at an annual rate of 10%on May 1 and November 1 of each year, beginning on November 1,2004. The subordinated notes mature in 2012 and are guaranteed by each of theCompany’s existing domestic restricted subsidiaries. The subordinated notescontain customary covenants and events of default, including covenants thatlimit the Company’s ability to incur debt, pay dividends and make investments.Generally, the notes only permit us to pay dividends if there is no default orevent of default and our fixed charge ratio (as defined) is at least2.5 to 1, and the maximum amount we may pay cannot exceed 50% of ourcumulative net income (as defined) since January 1, 2004, subject tospecified exceptions. The Company is permitted to make dividends or loans toMueller Water of up to $2 million in any fiscal year for costs and expensesincurred by Mueller Water in its capacity as a holding company for servicesrendered on behalf of the Company.

*CapitalLeases**—The*Company leases automobilesunder capital lease arrangements that expire over the next four years.

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

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

 

F-52

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**InterestRate Swap****—The**Company has entered intointerest rate swap agreements in order to reduce interest rate risks and manageinterest expense. As of September 30, 2005, a notional principal amount of$100 million in swap agreements is still outstanding and scheduled tomature in April 2007 and May 2007. At September 30, 2005, thefair value of interest rate swaps was an asset of $0.5 million. The swapagreements effectively convert floating-rate debt into fixed-rate debt andcarry an average fixed interest rate of 4.09% at September 30, 2005.Interest differentials to be paid or received because of swap agreements arereflected as an adjustment to interest expense over the related debt period.For the fiscal years ended September 30, 2005 and 2004, Group recordedgains on interest rate swaps of $5.2 million and $12.5 million, respectively.While Group is exposed to credit loss on its interest rate swaps in the eventof non-performance by the counterparties to such swaps, management believessuch nonperformance is unlikely to occur given the financial resources of thecounterparties.

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

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

**Retirement Plans**

*DefinedBenefit Pension Plans—**The*Company has a number of non-contributoryand contributory defined benefit retirement plans covering certain UnitedStates and non-United States employees of the Company and its subsidiaries.Contributions are based on the projected unit credit method of calculation andare charged to the statements of operations on a systematic basis over theexpected average remaining service lives of current employees. The Company’sfunding policy is to make annual contributions to the extent such contributionsare tax deductible as actuarially determined. The benefits under the definedbenefit plans are based on years of service and compensation.

Thefollowing table presents the changes in the projected benefit obligations:

| ** **                                       | ** ** | **Fiscal year ended  September 30, 2005** | ** ** |
|--------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                       | ** ** | **(dollars in millions)**                           | ** ** |
| Benefit obligation  at beginning of the period   |       |                                                          | $          | 110.1 |   |   |
| Service cost                                     |       |                                                          | 3.3        |   |   |
| Interest cost                                    |       |                                                          | 6.1        |   |   |
| Actuarial losses                                 |       |                                                          | 9.0        |   |   |
| Benefits paid                                    |       |                                                          | (6.6       | ) |   |
| Plan amendments                                  |       |                                                          | 0.3        |   |   |
| Employee  contributions                          |       |                                                          | 0.2        |   |   |
| Currency  translation adjustment                 |       |                                                          | 1.0        |   |   |
| Net increase for  the period                     |       |                                                          | 13.3       |   |   |
| Projected benefit  obligation, end of the period |       |                                                          | $          | 123.4 |   |   |

 

F-53

----

 

Thefollowing table presents the changes in fair value of plan assets:

| ** **                                          | ** ** | **Fiscal year ended  September 30, 2005** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                          | ** ** | **(dollars in millions)**                           | ** ** |
| Fair value of  plan assets at beginning of period   |       |                                                          | $          | 79.2 |   |   |
| Actual return on  plan assets                       |       |                                                          | 8.9        |   |   |
| Employer  contributions                             |       |                                                          | 0.5        |   |   |
| Benefits paid                                       |       |                                                          | (6.6       | ) |   |
| Employee  contributions                             |       |                                                          | 0.2        |   |   |
| Currency  translation adjustment                    |       |                                                          | 1.1        |   |   |
| Net increase for  the period                        |       |                                                          | 4.1        |   |   |
| Fair value of plan  assets at the end of the period |       |                                                          | $          | 83.3 |   |   |

 

Informationfor the pension plans with an accumulated benefit obligation in excess of planassets:

| ** **                      | ** ** | **September 30, 2005**    | ** ** |
|---------------------------------|------------|-------------------------------------|------------|
| ** **                      | ** ** | **(dollars in millions)** | ** ** |
| Projected benefit  obligation   |       |                                | $          | 114.0 |   |   |
| Accumulated  benefit obligation |       |                                | $          | 114.0 |   |   |
| Fair value of plan  assets      |       |                                | $          | 72.0 |   |   |

 

Thefollowing is a reconciliation of the funded status of the plans:

| ** **                       | ** ** | **September 30, 2005**    | ** ** |
|----------------------------------|------------|-------------------------------------|------------|
| ** **                       | ** ** | **(dollars in millions)** | ** ** |
| Funded status                    |       |                                | $          | (40.1 | ) |   |
| Unrecognized prior  service cost |       |                                | 1.4        |   |   |
| Unrecognized net  actuarial loss |       |                                | 47.9       |   |   |
| Net amount recognized            |       |                                | $          | 9.2 |   |   |

 

Amountsrecognized in the Consolidated Balance Sheets consist of:

| ** **                                                                     | ** ** | **September 30, 2005** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------|------------|
| Accrued pension  liability (net of prepaid pension asset of $4.2 million) |       |                             | $          | (37.7 | ) |   |
| Pension intangible                                                             |       |                             | $          | 0.9 |   |   |
| Additional minimum  pension liability (pretax)                                 |       |                             | $          | 46.0 |   |   |
| Net amount recognized                                                          |       |                             | $          | 9.2 |   |   |

 

The following tablepresents the components of net periodic benefit cost:

| ** **                                                                                    | ** ** | **Fiscal years  ended Sept. 30,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                    | ** ** | **2005**                                         | ** ** | **2004** | ** ** |
| ** **                                                                                    | ** ** | **(dollars in  millions)**                  | ** ** |
| Service cost                                                                                  |       | $                                                | 3.3        |   | $ | 2.1 |   |
| Interest cost                                                                                 |       | 6.1                                              |       | 6.1 |   |
| Expected return on plan assets                                                                |       | (5.9                                             | )          | (5.3 | ) |
| Amortization of prior service cost                                                            |       | 0.1                                              |       | 0.1 |   |
| Contribution to Defined Contribution Retirement Plan  from Defined Benefit Pension Plans |       | 0.1                                              |       | 0.1 |   |
| Amortization of net actuarial loss                                                            |       | 2.7                                              |       | 2.7 |   |
| Net periodic benefit cost                                                                     |       | $                                                | 6.4        |   | $ | 5.8 |   |

 

F-54

----

 

| ** **                                                                                                              | ** ** | **At September 30,  2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                              | ** ** | **(dollars in  millions)**      | ** ** |
| Other comprehensive  income attributable to the change in additional minimum liability  recognition (pre-tax) |       |                                 | $          | 2.8 |   |   |
|                                                                                                                         |            |                                      |            |  |  |  |

                                                                                                

| ** **                                                                                   | ** ** | **At September 30,  2005** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| Weighted-Average  Assumptions used to determine benefit obligations as of end of fiscal year |       |                                 |       |   |   |
| Discount rate:                                                                               |       |                                 | 5.2        | % |   |
| Rate of compensation  increase:                                                              |       |                                 | 3.5        | % |   |

 

| ** **                                                                | ** ** | **Fiscal year ended  September 30,** | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                | ** ** | **2005**                                            | ** ** | **2004** | ** ** |
| Weighted-Average  Assumptions used to determine net periodic benefit cost |       |                                                |       |   |   |   |   |   |   |
| Discount rate:                                                            |       |                                                | 5.8        | % |   |   | 6.0 | % |   |
| Rate of compensation  increase:                                           |       |                                                | 3.5        | % |   |   | 3.5 | % |   |
| Expected long-term  return on plan assets:                                |       |                                                | 7.9        | % |   |   | 7.9 | % |   |

 

The discount rate is based on published rates forhigh-quality fixed-income investments that produce cash flows that approximatethe timing and amount of expected future benefit payments. To develop theexpected long-term rate of return on assets assumption, the Company consideredthe historical returns and the future expectations for returns for each assetclass, as well as the target allocation of the pension portfolio, over a 20-yeartime horizon based on the facts and circumstances that exist as of themeasurement date. The Company also reflected historical and expected futurereturns associated with its active management of certain asset classes inrecognition of the potential to outperform the broader market.

The company’s pensionplans’ weighted-average asset allocations at September 30, 2005, byasset category, are as follows:

| ** **        | ** ** | **At September 30, 2005** | ** ** |
|-------------------|------------|------------------------------------------|------------|
| Equity Securities |       |                                     | 65.0       | % |   |
| Debt Securities   |       |                                     | 33.3       | % |   |
| Other             |       |                                     | 1.7        | % |   |
| Total             |       |                                     | 100.0      | % |   |

 

The target asset allocations for the plans are 45% forlarge cap domestic equities (range of 35%-50%), 5% for small cap domesticequities (range of 0% to 10%), 10% for international equities (range of 5% to15%), and 40% for domestic fixed income (range of 35% to 45%). The assets ofthe company’s plans are well diversified and managed with the goal ofmaximizing the plans’ real return within an acceptable level of risk. The assetallocation is designed to minimize the plans’ volatility of returns through theuse of a 40% allocation to fixed income securities. To offset the lower overallexpected returns from fixed income securities; the target equity component isweighted at 60% and includes both small cap and international equities. Thesmall cap equity allocation has a higher overall expected return than large capequities. International equities are considered a diversifier for the plans, asthe current expected return of international equities is not significantlydifferent than for domestic equities.

F-55

----

The Company reviews asset allocation each quarter todetermine if the asset class allocations for each asset class fall within theapproximate target ranges. If assets fall outside the ranges, rebalancing isaccomplished through cash flows and/or transfer of assets between assetclasses.

The Company is required to contribute$0.5 million to its pension plans in 2006 and it may make furtherdiscretionary payments.

The following benefitpayments, which reflect expected future service, are expected to be paid:

| **Fiscal Year** | ** ** | ** ** | ** ** | **(dollars in millions)** | ** ** |
|----------------------|------------|------------|------------|-------------------------------------|------------|
| 2006                 |       |       | $          | 6.5                                 |       |   |
| 2007                 |       |       | $          | 6.6                                 |       |   |
| 2008                 |       |       | $          | 6.7                                 |       |   |
| 2009                 |       |       | $          | 6.8                                 |       |   |
| 2010                 |       |       | $          | 6.9                                 |       |   |
| 2011 to 2015         |       |       | $          | 35.9                                |       |   |

 

Of the total plan obligations at September 30,2005, 91% relate to United States plans and 9% relate to non-United Statesplans.

*Defined ContributionRetirement Plan—**Certain*United States employees ofthe Company and its subsidiaries participate in a defined contribution 401(k) matchingplan. Pension expense for the defined contribution plan is computed as apercentage of participants’ compensation and was $5.6 million and$5.4 million for the fiscal years ended September 30, 2005 and 2004,respectively.

**Income Taxes**

The Company’s income tax provision (benefit) wascomputed in accordance with SFAS No. 109 and is based on current taxrates. The Company’s foreign income tax provision relates to Canadian federaland provincial income taxes.

The provision (benefit)for income taxes and the reconciliation between the United States federalincome taxes at the statutory rate on consolidated income (loss) before taxesand the Company’s income tax provision (benefit) are as follows.

| ** **                                                                                            | ** ** | **Fiscal year ended  September 30,**      | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                                            | ** ** | **    2005    ** | ** ** | **    2004    ** | ** ** |
| ** **                                                                                            | ** ** | **(dollars in millions)**                      | ** ** |
| U.S. federal income  taxes at the statutory rate                                                      |       |                                                     | $          | 35.9 |   |   |   | $ | 19.8 |   |   |
| Adjustments to reconcile to the Company’s income tax provisions:                                 |       |                                                     |       |   |   |   |   |   |   |
| U.S. state income tax  provision, net                                                                 |       |                                                     | 3.3        |   |   |   | 1.7 |   |   |
| Foreign rate  differential                                                                            |       |                                                     | (0.2       | ) |   |   | (0.1 | ) |   |
| Nondeductible charges                                                                                 |       |                                                     | 0.3        |   |   |   | 0.4 |   |   |
| U.S. export and  manufacturing incentives                                                             |       |                                                     | (0.8       | ) |   |   | — |   |   |
| Research and development  credit                                                                      |       |                                                     | (0.2       | ) |   |   | (0.2 | ) |   |
| Tax accrual adjustments  for conclusion of examinations and expiration of certain state statutes |       |                                                     | (0.3       | ) |   |   | (6.4 | ) |   |
| Reduction of Foreign Tax  Credits                                                                     |       |                                                     | —     |   |   |   | 1.8 |   |   |
| Other (net)                                                                                           |       |                                                     | 0.6        |   |   |   | 0.9 |   |   |
| Provision for income  taxes                                                                           |       |                                                     | 38.6       |   |   |   | 17.9 |   |   |
| Deferred provision  (benefit) for income taxes                                                        |       |                                                     | (9.3       | ) |   |   | (3.0 | ) |   |
| Current provision for  income taxes                                                                   |       |                                                     | $          | 47.9 |   |   |   | $ | 20.9 |   |   |

 

F-56

----

The provisions for the fiscal years ended September 30,2005 and 2004 included $6.8 million and $4.4 million, respectively,for foreign income taxes. The foreign component of income before income taxeswas $19.9 million and $14.0 million, respectively, for each of the periodsabove.

The deferred income taxbalance sheet accounts result from temporary differences between the amount ofassets and liabilities recognized for financial reporting and tax purposes. Thecomponents of the net deferred income tax asset are as follows:

| ** **                                                 | ** ** | **September 30,  2005**    | ** ** |
|------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                 | ** ** | **(dollars in  millions)** | ** ** |
| **Deferred tax assets**                                    | ** ** |                            | ** ** | ** ** |   |
| Inventories                                                |       |                            | $          | 15.1 |   |   |
| Identifiable intangibles                                   |       |                            | 12.5       |   |   |
| Accrued liabilities and  reserves                          |       |                            | 12.7       |   |   |
| Unrealized loss on  derivatives                            |       |                            | —     |   |   |
| State net operating loss  carryforwards                    |       |                            | 0.8        |   |   |
| Accumulated other  comprehensive loss:                     |       |                            |       |   |   |
| Additional  minimum pension liability                      |       |                            | 17.9       |   |   |
|                                                       |       |                            | 59.0       |   |   |
| State net operating loss  carryforward valuation allowance |       |                            | (0.8       | ) |   |
|                                                       |       |                            | 58.2       |   |   |
| **Deferred tax liabilities**                               | ** ** |                            | ** ** | ** ** |   |
| Property, plant and  equipment                             |       |                            | (13.0      | ) |   |
| Unrealized gain on  derivatives                            |       |                            | (0.2       | ) |   |
| Pensions                                                   |       |                            | (3.4       | ) |   |
| Other                                                      |       |                            | (3.0       | ) |   |
|                                                       |       |                            | (19.6      | ) |   |
| Net deferred income tax  assets                            |       |                            | $          | 38.6 |   |   |

 

As of September 30, 2005, the Company had $0.8million of state net operating loss carryforwards, due to expire in 2016 and2021 through 2023, for which there is currently a full valuation allowance. Thedecrease in valuation allowance from the prior year is due to the utilizationof state net operating loss carryforwards related to Anvil International, Inc.

Undistributed earnings ofthe Company’s foreign subsidiary amounted to approximately $80.2 millionat September 30, 2005. The American Jobs Creation Act (“AJCA”) which wasenacted on October 22, 2004 created a temporary incentive for USmultinationals to repatriate accumulated earnings outside the United States byproviding an 85 percent dividends received deduction for certain dividendsfrom controlled foreign corporations. The Company may elect to apply thisprovision to qualifying earnings repatriations in either fiscal 2005 or infiscal 2006. As of September 30, 2005, and prior to the acquisition on October 3,2005, the Company has not provided deferred taxes on foreign earnings becauseany taxes on dividends would be substantially offset by foreign tax credits orbecause the Company intends to reinvest those earnings indefinitely. Due to thecomplexity of the repatriation provision, the Company is still evaluating theeffects of this provision on its plan for repatriation of foreign earnings.

F-57

----

**SupplementaryBalance Sheet Information**

Selected supplementarybalance sheet information is presented below:

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

 

**Supplementary IncomeStatement Information**

Selected supplementary income statement information ispresented below.

| ** **                                                                | ** ** | **Fiscal year ended  September 30,** | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                | ** ** | **2005**                                            | ** ** | **2004** | ** ** |
| ** **                                                                | ** ** | **(dollars in  millions)**                     | ** ** |
| Included in selling, general and administrative: |       |                                                |       |   |   |
| Research and development                                                  |       | $                                                   | 4.8        |   | $ | 4.4 |   |
| Advertising                                                               |       | $                                                   | 2.1        |   | $ | 2.3 |   |
| Interest expense, net of interest income:                                 |       |                                                |       |   |   |
| Contractual interest expense                                              |       | $                                                   | 72.3       |   | $ | 51.8 |   |
| Deferred financing fee amortization                                       |       | 4.8                                                 |       | 3.4 |   |
| Senior subordinated debt early redemption penalty                         |       | —                                              |       | 7.0 |   |
| Write off of deferred financing fees                                      |       | —                                              |       | 7.0 |   |
| Interest rate swap gains                                                  |       | (5.2                                                | )          | (12.5 | ) |
| Interest expense                                                          |       | 71.9                                                |       | 56.7 |   |
| Interest income                                                           |       | (1.7                                                | )          | (0.4 | ) |
| Total interest expense, net of interest income                            |       | $                                                   | 70.2       |   | $ | 56.3 |   |

 

 

F-58

----

**FacilityRationalization, Restructuring and Related Costs**

*2005**—During* fiscal 2005,the Company recorded $1.7 million, related primarily to severance paymentsand to the termination of operating leases for the building and machinery at aMueller segment plant in Colorado that ceased manufacturing operations. As of September 30,2005, all employees have been severed and $0.3 million of lease terminationaccrual is remaining to be settled.

*2004**—During*fiscal 2004,the Company recorded $0.9 million, related to asset impairments,environmental issues at a closed facility in Statesboro, Georgia and leaseexpense at a closed and vacated facility.

**ConsolidatingGuarantor and Non-Guarantor Financial Information**

The following tables setforth the Consolidating Statements of Operations and the ConsolidatingStatement of Cash Flows for the fiscal years ended September 30, 2005 and2004 and the Consolidating Balance Sheet as of September 30, 2005. Thefollowing information is included as a result of the guarantee by certain ofthe Company’s wholly owned U.S. subsidiaries (“Guarantor Companies”) of thesecond priority senior secured notes and senior subordinated notes issued bythe Company. None of the Company’s other subsidiaries guarantee the debt. Eachof the guarantees is joint and several and full and unconditional. “MuellerGroup, Inc.” (“Issuer”) includes the consolidated financial results ofMueller Group, Inc. with all of its wholly-owned subsidiariesaccounted for under the equity method.

**Predecessor MuellerGroup**

**ConsolidatingStatement of OperationsFor the Year Ended September 30, 2004**

| ** **                                                      | ** ** | **Issuer** | ** ** | **Guarantor  Companies(1)** | ** ** | **Non-Guarantor  Companies** | ** ** | **Consolidating  Eliminating** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|------------------------------|------------|--------------------------------|------------|------------------|------------|
| Net sales                                                       |       | $          | —     |                        |       | $                            | 859.6      |                           |       |             | $          | 189.6 |   |   |   | $ | — |   |   |   | $ | 1,049.2 |   |   |
| Cost of sales                                                   |       | —     |       |                        | 600.5      |                         |       |                           | 150.0      |             |       |   | — |   |   |   | 750.5 |   |   |
| Royalty expense                                                 |       | —     |       |                        | (2.0       | )                            |       |                           | 2.0        |             |       |   | — |   |   |   | — |   |   |
| Gross profit                                                    |       | —     |       |                        | 261.1      |                         |       |                           | 37.6       |             |       |   | — |   |   |   | 298.7 |   |   |
| Selling, general  and administrative                            |       | 3.3        |       |                        | 161.6      |                         |       |                           | 20.0       |             |       |   | — |   |   |   | 184.9 |   |   |
| Facility  rationalization, restructuring and related costs |       | —     |       |                        | 0.9        |                         |       |                           | —     |             |       |   | — |   |   |   | 0.9 |   |   |
| Operating income  (loss)                                        |       | (3.3       | )          |                        | 98.6       |                         |       |                           | 17.6       |             |       |   | — |   |   |   | 112.9 |   |   |
| Interest expense,  net of interest income                       |       | (56.2      | )          |                        | 3.0        |                         |       |                           | (3.1       | )                |       |   | — |   |   |   | (56.3 | ) |   |
| Income (loss)  before income taxes                              |       | (59.5      | )          |                        | 101.6      |                         |       |                           | 14.5       |             |       |   | — |   |   |   | 56.6 |   |   |
| Income tax  expense (benefit)                                   |       | (20.5      | )          |                        | 34.0       |                         |       |                           | 4.4        |             |       |   | — |   |   |   | 17.9 |   |   |
| Equity income  from subsidiaries                                |       | 77.7       |       |                        | 10.1       |                         |       |                           | —     |             |       |   | (87.8 | ) |   |   | — |   |   |
| Net income                                                      |       | $          | 38.7       |                        |       | $                            | 77.7       |                           |       |             | $          | 10.1 |   |   |   | $ | (87.8 | ) |   |   | $ | 38.7 |   |   |

 

F-59

----

**Predecessor MuellerGroup**

**ConsolidatingStatement of OperationsFor the Year Ended September 30, 2005**

| ** **                                                      | ** ** | **Issuer** | ** ** | **Guarantor  Companies(1)** | ** ** | **Non-Guarantor  Companies** | ** ** | **Consolidating  Eliminating** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|------------------------------|------------|--------------------------------|------------|------------------|------------|
| Net sales                                                       |       | $          | —     |                        |       | $                            | 911.5      |                           |       |             | $          | 237.4 |   |   |   | $ | — |   |   |   | $ | 1,148.9 |   |   |
| Cost of sales                                                   |       | —     |       |                        | 613.4      |                         |       |                           | 188.9      |             |       |   | — |   |   |   | 802.3 |   |   |
| Gross profit                                                    |       | —     |       |                        | 298.1      |                         |       |                           | 48.5       |             |       |   | — |   |   |   | 346.6 |   |   |
| Selling, general  and administrative                            |       | 8.3        |       |                        | 134.9      |                         |       |                           | 28.9       |             |       |   | — |   |   |   | 172.1 |   |   |
| Facility  rationalization, restructuring and related costs |       | —     |       |                        | 1.7        |                         |       |                           | —     |             |       |   | — |   |   |   | 1.7 |   |   |
| Operating income  (loss)                                        |       | (8.3       | )          |                        | 161.5      |                         |       |                           | 19.6       |             |       |   | — |   |   |   | 172.8 |   |   |
| Interest expense,  net of interest income                       |       | (70.4      | )          |                        | (0.2       | )                            |       |                           | 0.4        |             |       |   | — |   |   |   | (70.2 | ) |   |
| Income (loss)  before income taxes                              |       | (78.7      | )          |                        | 161.3      |                         |       |                           | 20.0       |             |       |   | — |   |   |   | 102.6 |   |   |
| Income tax  expense (benefit)                                   |       | (30.7      | )          |                        | 62.5       |                         |       |                           | 6.8        |             |       |   | — |   |   |   | 38.6 |   |   |
| Equity income  from subsidiaries                                |       | 112.0      |       |                        | 13.2       |                         |       |                           | —     |             |       |   | (125.2 | ) |   |   | — |   |   |
| Net income                                                      |       | $          | 64.0       |                        |       | $                            | 112.0      |                           |       |             | $          | 13.2 |   |   |   | $ | (125.2 | ) |   |   | $ | 64.0 |   |   |

 

F-60

----

**Predecessor MuellerGroup**

**ConsolidatingBalance SheetSeptember 30, 2005**

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

 

F-61

----

**Predecessor MuellerGroup**

**ConsolidatingStatement of Cash FlowsFor the Fiscal Year Ended September 30, 2004**

| ** **                                           | ** ** | **Issuer** | ** ** | **Guarantor  Companies(1)** | ** ** | **Non-  Guarantor  Companies** | ** ** | **Consolidating  Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------|------------|------------|------------|-----------------------------|------------|--------------------------------|------------|---------------------------------|------------|------------------|------------|
| Net cash provided  by (used in) operating activities |       | $          | (18.4      | )                           |       | $                              | 103.2      |                            |       |             | $          | 4.7 |   |   |   | — |   |   |   | $ | 89.5 |   |   |
| **Cash flows from investing activities**             | ** ** | ** ** | ** ** |                        |       |                           |       |                            |       |             |       |   |   |   |   |   |   |   |   |
| Capital  expenditures                                |       | —     |       |                        | (21.5      | )                              |       |                            | (1.0       | )                |       |   | — |   |   |   | (22.5 | ) |   |
| Acquisition of  businesses                           |       | —     |       |                        | (19.8      | )                              |       |                            | —     |             |       |   | — |   |   |   | (19.8 | ) |   |
| Net cash used in  investing activities               |       | —     |       |                        | (41.3      | )                              |       |                            | (1.0       | )                |       |   | — |   |   |   | (42.3 | ) |   |
| **Cash flows from financing activities**             | ** ** | ** ** | ** ** |                        |       |                           |       |                            |       |             |       |   |   |   |   |   |   |   |   |
| Book overdrafts                                      |       | 3.3        |       |                        | —     |                           |       |                            | —     |             |       |   | — |   |   |   | 3.3 |   |   |
| Intercompany  change                                 |       | 72.9       |       |                        | (70.2      | )                              |       |                            | (2.7       | )                |       |   | — |   |   |   | — |   |   |
| Proceeds from  short-term borrowings                 |       | 9.2        |       |                        | —     |                           |       |                            | —     |             |       |   | — |   |   |   | 9.2 |   |   |
| Payment of  short-term borrowings                    |       | (9.2       | )          |                        | —     |                           |       |                            | —     |             |       |   | — |   |   |   | (9.2 | ) |   |
| Proceeds from  long-term debt                        |       | 960.0      |       |                        | —     |                           |       |                            | —     |             |       |   | — |   |   |   | 960.0 |   |   |
| Retirement of  long-term debt                        |       | (603.4     | )          |                        | (1.2       | )                              |       |                            | —     |             |       |   | — |   |   |   | (604.6 | ) |   |
| Payment of  deferred financing fees                  |       | (32.2      | )          |                        | —     |                           |       |                            | —     |             |       |   | — |   |   |   | (32.2 | ) |   |
| Dividends paid                                       |       | (387.3     | )          |                        | —     |                           |       |                            | —     |             |       |   | — |   |   |   | (387.3 | ) |   |
| Net cash provided  by (used in) financing activities |       | 13.3       |       |                        | (71.4      | )                              |       |                            | (2.7       | )                |       |   | — |   |   |   | (60.8 | ) |   |
| Effect of  exchange rate changes on cash             |       | —     |       |                        | —     |                           |       |                            | 1.1        |             |       |   | — |   |   |   | 1.1 |   |   |
| Increase  (decrease) in cash                         |       | (5.1       | )          |                        | (9.5       | )                              |       |                            | 2.1        |             |       |   | — |   |   |   | (12.5 | ) |   |
| **Cash and cash equivalents**                        | ** ** | ** ** | ** ** |                        |       |                           |       |                            |       |             |       |   |   |   |   |   |   |   |   |
| Beginning of  period                                 |       | 54.9       |       |                        | 1.6        |                           |       |                            | 16.5       |             |       |   | — |   |   |   | 73.0 |   |   |
| End of period                                        |       | $          | 49.8       |                        |       | $                              | (7.9       | )                               |       |             | $          | 18.6 |   |   |   | — |   |   |   | $ | 60.5 |   |   |

 

F-62

----

**Predecessor MuellerGroup**

**ConsolidatingStatement of Cash FlowsFor the Fiscal Year Ended September 30, 2005**

| ** **                                           | ** ** | **Issuer** | ** ** | **Guarantor  Companies(1)** | ** ** | **Non-  Guarantor  Companies** | ** ** | **Consolidating  Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------|------------|------------|------------|-----------------------------|------------|--------------------------------|------------|---------------------------------|------------|------------------|------------|
| Net cash provided  by (used in) operating activities |       | $          | (42.6      | )                           |       | $                              | 103.8      |                            |       |             | $          | 12.6 |   |   |   | — |   |   |   | $ | 73.8 |   |   |
| **Cash flows from investing activities**             | ** ** | ** ** |       |                        |       |                           |       |                            |       |             |       |   |   |   |   |   |   |   |   |
| Capital  expenditures                                |       | —     |       |                        | (24.0      | )                              |       |                            | (3.2       | )                |       |   | — |   |   |   | (27.2 | ) |   |
| Proceeds from  sale of property, plant and equipment |       | —     |       |                        | 2.2        |                           |       |                            | —     |             |       |   | — |   |   |   | 2.2 |   |   |
| Net cash used in  investing activities               |       | —     |       |                        | (21.8      | )                              |       |                            | (3.2       | )                |       |   | — |   |   |   | (25.0 | ) |   |
| **Cash flows from financing activities**             | ** ** | ** ** |       |                        |       |                           |       |                            |       |             |       |   |   |   |   |   |   |   |   |
| Book overdrafts                                      |       | 4.8        |       |                        | —     |                           |       |                            | —     |             |       |   | — |   |   |   | 4.8 |   |   |
| Intercompany  change                                 |       | 84.7       |       |                        | (84.4      | )                              |       |                            | (0.3       | )                |       |   | — |   |   |   | — |   |   |
| Retirement of  long-term debt,                       |       | (2.2       | )          |                        | (1.1       | )                              |       |                            | —     |             |       |   | — |   |   |   | (3.3 | ) |   |
| Net cash provided  by (used in) financing activities |       | 87.3       |       |                        | (85.5      | )                              |       |                            | (0.3       | )                |       |   | — |   |   |   | 1.5 |   |   |
| Effect of  exchange rate changes on cash             |       | —     |       |                        | —     |                           |       |                            | 8.1        |             |       |   | — |   |   |   | 2.0 |   |   |
| Increase  (decrease) in cash                         |       | 44.7       |       |                        | (3.5       | )                              |       |                            | 11.1       |             |       |   | — |   |   |   | 52.3 |   |   |
| **Cash and cash equivalents**                        | ** ** | ** ** |       |                        |       |                           |       |                            |       |             |       |   |   |   |   |   |   |   |   |
| Beginning of  period                                 |       | 49.8       |       |                        | (7.9       | )                              |       |                            | 18.6       |             |       |   | — |   |   |   | 60.5 |   |   |
| End of period                                        |       | $          | 94.5       |                        |       | $                              | (11.4      | )                               |       |             | $          | 29.7 |   |   |   | — |   |   |   | $ | 112.8 |   |   |

----

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

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

 

 

F-63

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

Date: December 21,2006

|        | MUELLER GROUP, LLC |
|--------|--------------------|
|   | By:                | /s/ JEFFERY W. SPRICK |   |
|   |               | Name: Jeffery W. Sprick |
|   | * *           | Title: *Interim Chief Financial  Officer* |

 

Pursuantto the requirements of the Securities Act of 1934, this report has been signedby the following persons on behalf of the registrant and in the capacities andon the dates indicated.
|                       | **Signature** | ** **                                                                          | ** ** | ** **              | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|-----------------------|---------------|-------------------------------------------------------------------------------------|------------|-------------------------|-----------|------------|------------|------------|----------|------------|
| /s/ DALE  B. SMITH    |          | President, Chief  Executive Officer and Manager                                     |       | December 21, 2006  |
| Dale  B. Smith        |          | (principal executive  officer)                                                      |       |                    |
| /s/ JEFFERY W. SPRICK |          | Interim Chief  Financial Officer, Chief Accounting                                  |       | December 21,  2006 |
| Jeffery  W. Sprick    |          | Officer and Manager  (principal financial officer and principal accounting officer) |       |                    |
| /s/ GREGORY E. HYLAND |          | Manager                                                                             |       | December 21,  2006 |
| Gregory  E. Hyland    |          |                                                                                |       |                    |

 

 

----