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

FORM 10-Q

|ý                                                 | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  
|------------------------------------------------- | -----------------------------------------------------------------------------------------
|For the quarterly period ended September 30, 2007
|or                                               
|o                                                 | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-13711

WALTER INDUSTRIES, INC.

|Incorporated in Delaware                    |  | 13-3429953IRS Employer Identification No.
|------------------------------------------- |  | -----------------------------------------
|4211 W. Boy Scout Boulevard, Tampa, Florida |  | 33607                                    
|(813) 871-4811Telephone Number             

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

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

Large
accelerated filer ý                Accelerated
filer o                Non-accelerated filer o

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

There were 51,912,603 shares of common stock of the registrant outstanding at October 31, 2007.



---





PART IFINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

WALTER INDUSTRIES, INC. AND SUBSIDIARIES    CONDENSED CONSOLIDATED BALANCE SHEETS    (UNAUDITED)

|                                                                                       |                                                        | September 30,
2007                                                    |                            | December 31,
2006 |    
|-------------------------------------------------------------------------------------- | ------------------------------------------------------ | --------------------------------------------------------------------- | -------------------------- | ----------------- | ---
|
|ASSETS                                                                                 |                                                        |                                                                       |                            |                   |    
|Cash and cash equivalents                                                              |                                                        | $                                                                     | 23,159                     |                   | $  
|Short-term investments, restricted                                                     |                                                        |                                                                       | 86,607                     |                   |    
|Instalment notes receivable, net of allowance of $13,957 and $13,011,
    respectively |                                                        |                                                                       | 1,834,816                  |                   |    
|Receivables, net                                                                       |                                                        |                                                                       | 97,350                     |                   |    
|Inventories                                                                            |                                                        |                                                                       | 90,763                     |                   |    
|Prepaid expenses                                                                       |                                                        |                                                                       | 46,933                     |                   |    
|Property, plant and equipment, net                                                     |                                                        |                                                                       | 396,692                    |                   |    
|Other assets                                                                           |                                                        |                                                                       | 168,923                    |                   |    
|Goodwill                                                                               |                                                        |                                                                       | 10,895                     |                   |    
|Assets of discontinued operations                                                      |                                                        |                                                                       |                           |                   |    
|                                                                                       |                                                        |                                                                       |                            |                   |    
|                                                                                       |                                                        | $                                                                     | 2,756,138                  |                   | $  
|                                                                                       |                                                        |                                                                       |                            |                   |    
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                   |                                                        |                                                                       |                            |                   |    
|Accounts payable                                                                       |                                                        | $                                                                     | 67,062                     |                   | $  
|Accrued expenses                                                                       |                                                        |                                                                       | 76,331                     |                   |    
|Accrued interest on debt                                                               |                                                        |                                                                       | 14,149                     |                   |    
|Debt:                                                                                  |                                                        |                                                                       |                            |                   |    
|                                                                                       | Mortgage-backed/asset-backed notes                     |                                                                       |                            | 1,738,273         |    
|                                                                                       | Other debt                                             |                                                                       |                            | 229,708           |    
|Accumulated postretirement benefits obligation                                         |                                                        |                                                                       | 349,406                    |                   |    
|Other liabilities                                                                      |                                                        |                                                                       | 221,309                    |                   |    
|Liabilities of discontinued operations                                                 |                                                        |                                                                       |                           |                   |    
|                                                                                       |                                                        |                                                                       |                            |                   |    
|                                                                                       | Total liabilities                                      |                                                                       |                            | 2,696,238         |    
|                                                                                       |                                                        |                                                                       |                            |                   |    
|Commitments and contingencies (Note 14)                                                |                                                        |                                                                       |                            |                   |    
|Stockholders' equity                                                                   |                                                        |                                                                       |                            |                   |    
|                                                                                       | Common stock, $.01 par value per share:                |                                                                       |                            |                   |    
|                                                                                       |                                                        | Authorized200,000,000 shares
Issued51,926,331 and 72,730,770 shares |                            |                   | 519
|                                                                                       | Capital in excess of par value                         |                                                                       |                            | 496,356           |    
|                                                                                       | Accumulated deficit                                    |                                                                       |                            | (330,946          | )  
|                                                                                       | Treasury stock0 shares and 20,771,902 shares, at cost |                                                                       |                            |                  |    
|                                                                                       | Accumulated other comprehensive loss                   |                                                                       |                            | (106,029          | )  
|                                                                                       |                                                        |                                                                       |                            |                   |    
|                                                                                       |                                                        |                                                                       | Total stockholders' equity |                   |    
|                                                                                       |                                                        |                                                                       |                            |                   |    
|                                                                                       |                                                        | $                                                                     | 2,756,138                  |                   | $  
|                                                                                       |                                                        |                                                                       |                            |                   |    

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

1

---





WALTER INDUSTRIES, INC. AND SUBSIDIARIES        CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS        (UNAUDITED)

|                                                                                  |                                                     | For the
three months ended
September 30,
|--------------------------------------------------------------------------------- | --------------------------------------------------- | ----------------------------------------
|
|
|Net sales and revenues:                                                           |                                                     |                                         
|                                                                                  | Net sales                                           |                                         
|                                                                                  | Interest income on instalment notes                 |                                         
|                                                                                  | Miscellaneous                                       |                                         
|                                                                                  |                                                     |                                         
|                                                                                  |                                                     |                                         
|                                                                                  |                                                     |                                         
|Costs and expenses:                                                               |                                                     |                                         
|                                                                                  | Cost of sales (exclusive of depreciation)           |                                         
|                                                                                  | Depreciation                                        |                                         
|                                                                                  | Selling, general and administrative                 |                                         
|                                                                                  | Provision for losses on instalment notes            |                                         
|                                                                                  | Postretirement benefits                             |                                         
|                                                                                  | Interest expensemortgage-backed/asset-backed notes |                                         
|                                                                                  | Interest expenseother debt                         |                                         
|                                                                                  | Amortization of intangibles                         |                                         
|                                                                                  |                                                     |                                         
|                                                                                  |                                                     |                                         
|                                                                                  |                                                     |                                         
|Income from continuing operations before income tax expense and minority interest |                                                     |                                         
|Income tax expense                                                                |                                                     |                                         
|                                                                                  |                                                     |                                         
|Income from continuing operations before minority interest                        |                                                     |                                         
|Minority interest in net loss of affiliate                                        |                                                     |                                         
|                                                                                  |                                                     |                                         
|Income from continuing operations                                                 |                                                     |                                         
|Discontinued operations                                                           |                                                     |                                         
|                                                                                  |                                                     |                                         
|Net income                                                                        |                                                     | $                                       
|                                                                                  |                                                     |                                         
|Basic income per share:                                                           |                                                     |                                         
|                                                                                  | Income from continuing operations                   |                                         
|                                                                                  | Discontinued operations                             |                                         
|                                                                                  |                                                     |                                         
|                                                                                  | Net income                                          |                                         
|                                                                                  |                                                     |                                         
|Diluted income per share:                                                         |                                                     |                                         
|                                                                                  | Income from continuing operations                   |                                         
|                                                                                  | Discontinued operations                             |                                         
|                                                                                  |                                                     |                                         
|                                                                                  | Net income                                          |                                         
|                                                                                  |                                                     |                                         
|Dividends declared per common share                                               |                                                     | $                                       
|                                                                                  |                                                     |                                         

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

2

---



WALTER INDUSTRIES, INC. AND SUBSIDIARIES        CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS        (UNAUDITED)

|                                                                                  |                                                     | For the
nine months ended
September 30,
|--------------------------------------------------------------------------------- | --------------------------------------------------- | ---------------------------------------
|
|
|Net sales and revenues:                                                           |                                                     |                                        
|                                                                                  | Net sales                                           |                                        
|                                                                                  | Interest income on instalment notes                 |                                        
|                                                                                  | Miscellaneous                                       |                                        
|                                                                                  |                                                     |                                        
|                                                                                  |                                                     |                                        
|                                                                                  |                                                     |                                        
|Costs and expenses:                                                               |                                                     |                                        
|                                                                                  | Cost of sales (exclusive of depreciation)           |                                        
|                                                                                  | Depreciation                                        |                                        
|                                                                                  | Selling, general and administrative                 |                                        
|                                                                                  | Provision for losses on instalment notes            |                                        
|                                                                                  | Postretirement benefits                             |                                        
|                                                                                  | Interest expensemortgage-backed/asset-backed notes |                                        
|                                                                                  | Interest expenseother debt                         |                                        
|                                                                                  | Amortization of intangibles                         |                                        
|                                                                                  |                                                     |                                        
|                                                                                  |                                                     |                                        
|                                                                                  |                                                     |                                        
|Income from continuing operations before income tax expense and minority interest |                                                     |                                        
|Income tax expense                                                                |                                                     |                                        
|                                                                                  |                                                     |                                        
|Income from continuing operations before minority interest                        |                                                     |                                        
|Minority interest in net loss of affiliate                                        |                                                     |                                        
|                                                                                  |                                                     |                                        
|Income from continuing operations                                                 |                                                     |                                        
|Discontinued operations                                                           |                                                     |                                        
|                                                                                  |                                                     |                                        
|Net income                                                                        |                                                     | $                                      
|                                                                                  |                                                     |                                        
|Basic income (loss) per share:                                                    |                                                     |                                        
|                                                                                  | Income from continuing operations                   |                                        
|                                                                                  | Discontinued operations                             |                                        
|                                                                                  |                                                     |                                        
|                                                                                  | Net income                                          |                                        
|                                                                                  |                                                     |                                        
|Diluted income (loss) per share:                                                  |                                                     |                                        
|                                                                                  | Income from continuing operations                   |                                        
|                                                                                  | Discontinued operations                             |                                        
|                                                                                  |                                                     |                                        
|                                                                                  | Net income                                          |                                        
|                                                                                  |                                                     |                                        
|Dividends declared per common share                                               |                                                     | $                                      
|                                                                                  |                                                     |                                        

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

3

---





WALTER INDUSTRIES, INC. AND SUBSIDIARIES        CONDENSED CONSOLIDATED STATEMENT OF CHANGES  IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME        FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2007        (UNAUDITED)        (in thousands)

|                                                      |                                                                                                                 | Total |        | Common
Stock |   | Capital in
Excess of
Par Value |   | Comprehensive
Income (Loss) |          | Accumulated
Deficit |   | Treasury
Stock |        | Accumulated
Other
Comprehensive
Income (Loss) |         
|----------------------------------------------------- | --------------------------------------------------------------------------------------------------------------- | ----- | ------ | ------------ | - | ------------------------------ | - | --------------------------- | -------- | ------------------- | - | -------------- | ------ | --------------------------------------------- | --------
|Balance at December 31,
  2006                        |                                                                                                                 | $     | 1,908  |              | $ | 728                            |   | $                           | 757,699  |                     |   |                |        | $                                             | (398,564
|Adjustment to initially
  apply FIN 48                |                                                                                                                 |       | (4,421 | )            |   |                                |   |                             |          |                     |   |                |        |                                               | (4,421  
|                                                      |                                                                                                                 |       |        |              |   |                                |   |                             |          |                     |   |                |        |                                               |         
|Adjusted balance at
  January 1, 2007                 |                                                                                                                 | $     | (2,513 | )            | $ | 728                            |   | $                           | 757,699  |                     |   |                |        | $                                             | (402,985
|Comprehensive income:                                 |                                                                                                                 |       |        |              |   |                                |   |                             |          |                     |   |                |        |                                               |         
|                                                      | Net income                                                                                                      |       |        | 72,039       |   |                                |   |                             |          |                     |   | $              | 72,039 |                                               |         
|                                                      | Other comprehensive
  income (loss), net of
  tax:                                                              |       |        |              |   |                                |   |                             |          |                     |   |                |        |                                               |         
|                                                      | Amortization of
  prior service cost
  and net actuarial
  loss on postretirement
  benefits obligation         |       |        | 6,078        |   |                                |   |                             |          |                     |   |                | 6,078  |                                               |         
|                                                      | Increase in
  accumulated
  postretirement
  benefit obligation
  for plan
  amendment after
  measurement date |       |        | (9,347       | ) |                                |   |                             |          |                     |   |                | (9,347 | )                                             |         
|                                                      | Net unrealized loss
  on hedges                                                                                 |       |        | (4,122       | ) |                                |   |                             |          |                     |   |                | (4,122 | )                                             |         
|                                                      |                                                                                                                 |       |        |              |   |                                |   |                             |          |                     |   |                |        |                                               |         
|Comprehensive income                                  |                                                                                                                 |       |        |              |   |                                |   |                             |          |                     | $ | 64,648         |        |                                               |         
|                                                      |                                                                                                                 |       |        |              |   |                                |   |                             |          |                     |   |                |        |                                               |         
|Retirement of treasury
  stock                        |                                                                                                                 |       |       |              |   | (207                           | ) |                             | (259,902 | )                   |   |                |        |                                               |         
|Purchases of stock
  under stock
  repurchase program |                                                                                                                 |       | (5,241 | )            |   | (2                             | ) |                             | (5,239   | )                   |   |                |        |                                               |         
|Stock issued upon the
  exercise of
  stock options   |                                                                                                                 |       | 725    |              |   |                                |   |                             | 725      |                     |   |                |        |                                               |         
|Tax benefit from the
  exercise of  stock options     |                                                                                                                 |       | 1,380  |              |   |                                |   |                             | 1,380    |                     |   |                |        |                                               |         
|Dividends paid, $0.15
  per share                     |                                                                                                                 |       | (7,815 | )            |   |                                |   |                             | (7,815   | )                   |   |                |        |                                               |         
|Stock-based
  compensation                            |                                                                                                                 |       | 9,508  |              |   |                                |   |                             | 9,508    |                     |   |                |        |                                               |         
|Other                                                 |                                                                                                                 |       | (792   | )            |   |                                |   |                             |          |                     |   |                |        |                                               |         
|                                                      |                                                                                                                 |       |        |              |   |                                |   |                             |          |                     |   |                |        |                                               |         
|Balance at September
  30, 2007                       |                                                                                                                 | $     | 59,900 |              | $ | 519                            |   | $                           | 496,356  |                     |   |                |        | $                                             | (330,946
|                                                      |                                                                                                                 |       |        |              |   |                                |   |                             |          |                     |   |                |        |                                               |         

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

4

---





WALTER INDUSTRIES, INC. AND SUBSIDIARIES        CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS        (UNAUDITED)

|                                                                                                          |                                                       | For the nine months
ended
September 30,                              |         
|--------------------------------------------------------------------------------------------------------- | ----------------------------------------------------- | -------------------------------------------------------------------- | --------
|
|
|OPERATING ACTIVITIES                                                                                      |                                                       |                                                                      |         
|Net income                                                                                                |                                                       | $                                                                    | 72,039  
|Loss (income) from discontinued operations                                                                |                                                       |                                                                      | 2,229   
|                                                                                                          |                                                       |                                                                      |         
|Income from continuing operations                                                                         |                                                       |                                                                      | 74,268  
|Adjustments to reconcile income from continuing operations to net cash provided by continuing operations: |                                                       |                                                                      |         
|                                                                                                          | Provision for losses on instalment notes receivable   |                                                                      |         
|                                                                                                          | Depreciation                                          |                                                                      |         
|                                                                                                          | Provision for (benefit from) deferred income taxes    |                                                                      |         
|                                                                                                          | Other                                                 |                                                                      |         
|Decrease (increase) in assets, net of effect of acquisition:                                              |                                                       |                                                                      |         
|                                                                                                          | Receivables                                           |                                                                      |         
|                                                                                                          | Inventories                                           |                                                                      |         
|                                                                                                          | Prepaid expenses                                      |                                                                      |         
|                                                                                                          | Instalment notes receivable, net                      |                                                                      |         
|Increase (decrease) in liabilities, net of effect of acquisition:                                         |                                                       |                                                                      |         
|                                                                                                          | Accounts payable                                      |                                                                      |         
|                                                                                                          | Accrued expenses                                      |                                                                      |         
|                                                                                                          | Accrued interest                                      |                                                                      |         
|                                                                                                          |                                                       |                                                                      |         
|                                                                                                          |                                                       | Cash flows provided by operating activities of continuing operations |         
|                                                                                                          |                                                       |                                                                      |         
|INVESTING ACTIVITIES                                                                                      |                                                       |                                                                      |         
|                                                                                                          | Acquisition                                           |                                                                      |         
|                                                                                                          | Purchases of loans                                    |                                                                      |         
|                                                                                                          | Principal payments received on purchased loans        |                                                                      |         
|                                                                                                          | Decrease in short-term investments, restricted        |                                                                      |         
|                                                                                                          | Additions to property, plant and equipment            |                                                                      |         
|                                                                                                          | Escrow release from prior acquisition                 |                                                                      |         
|                                                                                                          | Other                                                 |                                                                      |         
|                                                                                                          |                                                       |                                                                      |         
|                                                                                                          |                                                       | Cash flows used in investing activities of continuing operations     |         
|                                                                                                          |                                                       |                                                                      |         
|FINANCING ACTIVITIES                                                                                      |                                                       |                                                                      |         
|                                                                                                          | Issuance of mortgage-backed/asset-backed notes        |                                                                      |         
|                                                                                                          | Payments of mortgage-backed/asset-backed notes        |                                                                      |         
|                                                                                                          | Retirements of other debt                             |                                                                      |         
|                                                                                                          | Dividends paid                                        |                                                                      |         
|                                                                                                          | Tax benefit on the exercise of employee stock options |                                                                      |         
|                                                                                                          | Issuance of common stock                              |                                                                      |         
|                                                                                                          | Purchases of stock under stock repurchase program     |                                                                      |         
|                                                                                                          | Other                                                 |                                                                      |         
|                                                                                                          |                                                       |                                                                      |         
|                                                                                                          |                                                       | Cash flows used in financing activities of continuing operations     |         
|                                                                                                          |                                                       |                                                                      |         
|                                                                                                          |                                                       | Cash flows provided by (used in) continuing operations               |         
|                                                                                                          |                                                       |                                                                      |         
|CASH FLOWS FROM DISCONTINUED OPERATIONS                                                                   |                                                       |                                                                      |         
|                                                                                                          | Cash flows provided by operating activities           |                                                                      | $       
|                                                                                                          | Cash flows used in investing activities               |                                                                      |         
|                                                                                                          | Cash flows provided by financing activities           |                                                                      |         
|                                                                                                          |                                                       |                                                                      |         
|                                                                                                          |                                                       | Cash flows provided by (used in) discontinued operations             |         
|                                                                                                          |                                                       |                                                                      |         
|Net increase (decrease) in cash and cash equivalents                                                      |                                                       | $                                                                    | (104,211
|                                                                                                          |                                                       |                                                                      |         
|Cash and cash equivalents at beginning of period                                                          |                                                       | $                                                                    | 127,369 
|Add: Cash and cash equivalents of discontinued operations at beginning of period                          |                                                       |                                                                      | 1       
|Net increase (decrease) in cash and cash equivalents                                                      |                                                       |                                                                      | (104,211
|Less: Cash and cash equivalents of discontinued operations at end of period                               |                                                       |                                                                      |        
|                                                                                                          |                                                       |                                                                      |         
|Cash and cash equivalents at end of period                                                                |                                                       | $                                                                    | 23,159  
|                                                                                                          |                                                       |                                                                      |         

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

5

---



WALTER INDUSTRIES, INC. AND SUBSIDIARIES        CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS        (UNAUDITED)

|                                           |                                                        | For the nine months
ended September 30, 2007 |       
|------------------------------------------ | ------------------------------------------------------ | -------------------------------------------- | ------
|SUPPLEMENTAL DISCLOSURES                   |                                                        |                                              |       
|Investing Activities:                      |                                                        |                                              |       
|Acquisition of Tuscaloosa Resources, Inc.: |                                                        |                                              |       
|                                           | Fair value of assets acquired                          |                                              | $     
|                                           | Fair value of liabilities assumed                      |                                              |       
|                                           |                                                        |                                              |       
|Net cash paid                              |                                                        | $                                            | 11,650
|                                           |                                                        |                                              |       
|Financing Activities:                      |                                                        |                                              |       
|                                           | One-year property insurance policy financing agreement |                                              | $     
|                                           |                                                        |                                              |       

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

6

---





WALTER INDUSTRIES, INC. AND SUBSIDIARIES        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS        AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007        (Unaudited)

Note 1Basis of Presentation

Walter Industries, Inc. ("Walter"), together with its consolidated subsidiaries ("the Company"), is a diversified company which operates in five reportable
segments: Natural Resources, Sloss, Financing, Homebuilding and Other, see Note 13. Through these operating segments, the Company offers a diversified line of products and services including
coal and natural gas, furnace and foundry coke, slag fiber, mortgage financing and home construction. In the fourth quarter of 2006, the Company began reporting Sloss as a separate segment due to its
significance in relation to all continuing operating segments. Prior to the fourth quarter of 2006, Sloss was included in the Other segment. Results for 2006 have been revised to reflect this change.

The
accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine month period ended September 30, 2007 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2007.

The
balance sheet at December 31, 2006 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by
accounting principles generally accepted in the United States for complete financial statements.

Note 2Acquisition of Tuscaloosa Resources, Inc.

On August 31, 2007, Walter, through its wholly owned subsidiary, United Land Corporation, acquired 100% of the outstanding common shares of Tuscaloosa
Resources, Inc. (TRI) for $12.5 million, of which $11.7 million was paid prior to September 30, 2007. TRI debt at the date of acquisition totaled $8.5 million of
which $7.0 million was retired prior to September 30, 2007. TRI mines primarily low-sulfur coal for the industrial and electric utility markets and is located in Brookwood,
Alabama. The acquisition of TRI, included in the Natural Resources segment, diversifies the Company's coal production base and provides an immediate and profitable platform to grow the Company's
domestic Natural Resources business.

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

7

---



Note 3Discontinued Operations

Spin-off of Mueller Water Products, Inc.

On December 14, 2006, the Company distributed all of its 85.8 million shares of Mueller Water Products, Inc. ("Mueller Water")
Series B common stock to its shareholders and no longer holds any interest in Mueller Water. As a result of the spin-off, Mueller Water's previously reported 2006 results are
presented as discontinued operations.

Modular Homes Division

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

Net
sales and revenues and income from the discontinued operations of Mueller Water and Crestline were as follows (in thousands):

For the three months ended September 30,2007

2006Net sales and revenues

$


$
523,740Income from discontinued operations before
    income tax expense and minority interest





44,909Income tax expense





(18,223
)Minority interest in net income of affiliate





(6,948
)Net income (loss) from discontinued
    operations

$


$
19,738


For the three months ended September 30,2007

2006Net sales and revenues

$
12,358

$
1,470,678Income (loss) from discontinued operations
    before income tax benefit (expense) and
    minority interest


(3,428
)

78,606Income tax benefit (expense)


1,199


(32,381
)Minority interest in net income of affiliate





(8,176
)Net income (loss) from discontinued
    operations

$
(2,229
)
$
38,049


8

---



The
Company allocated certain corporate expenses, limited to specifically identified costs and other corporate shared services which supported segment operations, to discontinued
operations. These costs represent expenses that have historically been allocated to and recorded by the Company's operating segments as selling, general and administrative expenses. The Company did
not elect to allocate additional interest expense to discontinued operations.

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

December 31,
2006Cash and cash equivalents

$
1Receivables, net


3,549Inventories


3,344Prepaid expenses


419Property, plant and equipment, net


1,026Other assets


1,988Total assets

$
10,327Accounts payable

$
383Accrued expenses


1,622Total liabilities

$
2,005


Note 4Adoption of New Accounting Pronouncements

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

On
January 1, 2007, as required, the Company adopted FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"). FIN 48 clarifies the accounting
for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition. As a result of adoption, the Company recognized an increase of $4.4 million in the liability
for unrecognized tax benefits with a corresponding increase to the accumulated deficit as of January 1, 2007. As of the date of adoption and after the impact of recognizing the increase in
liability noted above, the Company's liability for unrecognized tax benefits totaled $53.3 million, of which $36.9 million, if recognized, would impact the effective rate. The Company
does not anticipate any significant increase or decrease to the liability for unrecognized tax benefits during the next twelve months.

9

---



Also,
as of the adoption date, the Company had accrued interest and penalties related to the unrecognized tax benefits of $67.3 million. The Company recognizes interest related to
unrecognized tax benefits in interest expense and penalties in selling, general and administrative expenses. For the three months ended September 30, 2007 and 2006, interest expense includes
$2.2 million and $1.2 million, respectively, for interest accrued on the liability for unrecognized tax benefits. For the nine months ended September 30, 2007 and 2006, interest
expense includes $6.5 million and $3.5 million, respectively, for this accrual.

Note 5Subsidiary Equity Award

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

Note 6Restricted Short-Term Investments

Restricted short-term investments at September 30, 2007 and December 31, 2006 include (i) temporary investments primarily in
commercial paper or money market accounts with maturities less than 90 days from collections on instalment notes receivable owned by various Mid-State Trusts (the "Trusts")
($75.6 million and $84.0 million, respectively) which are available only to pay expenses of the Trusts and principal and interest on indebtedness of the Trusts, and
(ii) miscellaneous other segregated accounts restricted to specific uses ($11.0 million and $6.0 million, respectively).

Note 7Instalment Notes Receivable

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

September 30,
2007

December 31,
2006Instalment notes receivable

$
1,607,684

$
1,578,760Mortgage loans


241,089


213,948Less: Allowance for losses


(13,957
)

(13,011
)Net

$
1,834,816

$
1,779,697


10

---



Note 8Inventories

Inventories are summarized as follows (in thousands):

September 30,
2007

December 31,
2006Finished goods

$
24,937

$
35,138Goods in process


22,314


25,830Raw materials and supplies


16,160


15,145Repossessed houses held for resale


27,352


29,414Total inventories

$
90,763

$
105,527


Note 9Debt and Interest Rate Hedge Agreements

The Company has two variable funding loan facilities totaling $350.0 million that provide temporary financing to the Company's wholly owned subsidiary,
Walter Mortgage Company, the successor by merger to Mid-State Homes, Inc., for its current purchases of instalment notes from Homebuilding and for its mortgage loan originations.
The $150.0 million Trust IX facility was renewed on July 30, 2007, under substantially similar terms as the previous facility, and matures July 28, 2008. The $200.0 million
Trust XIV facility was renewed on October 25, 2007, under substantially similar terms as the previous facility, and matures October 23, 2008. At September 30, 2007, there were
$172.2 million of borrowings outstanding under these facilities.

During
July 2007, the Company entered into two interest rate hedge agreements with notional values totaling $40.0 million such that as of September 30, 2007 the
Company has interest rate hedge agreements with combined notional values totaling $215.0 million designed to protect against changes in the benchmark interest rate on the forecasted issuance of
mortgage-backed bonds anticipated to be issued in April 2008. The hedges will be settled on or before maturity and are being accounted for as cash flow hedges. As such, changes in the fair
value of the hedges that take place through the date of maturity are recorded in accumulated other comprehensive income (loss).

11

---





Note 10Pension and Other Postretirement Benefits

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

|                                         |                           | Pension Benefits |        | Other Benefits |  
|---------------------------------------- | ------------------------- | ---------------- | ------ | -------------- | -
|
|
|Components of net periodic benefit cost: |                           |                  |        |                |  
|Service cost                             |                           | $                | 1,014  |                | $
|Interest cost                            |                           |                  | 2,725  |                |  
|Expected return on plan assets           |                           |                  | (3,059 | )              |  
|Amortization of prior service cost       |                           |                  | 104    |                |  
|Amortization of net actuarial loss       |                           |                  | 1,142  |                |  
|                                         |                           |                  |        |                |  
|                                         | Net periodic benefit cost |                  | $      | 1,926          |  
|                                         |                           |                  |        |                |  

|                                         |                           | Pension Benefits |        | Other Benefits |  
|---------------------------------------- | ------------------------- | ---------------- | ------ | -------------- | -
|
|
|Components of net periodic benefit cost: |                           |                  |        |                |  
|Service cost                             |                           | $                | 3,042  |                | $
|Interest cost                            |                           |                  | 8,175  |                |  
|Expected return on plan assets           |                           |                  | (9,177 | )              |  
|Amortization of prior service cost       |                           |                  | 312    |                |  
|Amortization of net actuarial loss       |                           |                  | 3,428  |                |  
|                                         |                           |                  |        |                |  
|                                         | Net periodic benefit cost |                  | $      | 5,780          |  
|                                         |                           |                  |        |                |  

In
January 2007, Jim Walter Resources signed a new contract with the United Mine Workers of America (UMWA) which eliminated certain retiree deductible requirements for employees
who are members of the UMWA. This enhanced employee benefit will increase postretirement benefit costs by $1.3 million in 2007, the effect of which the Company began recognizing in the second
quarter of 2007. In addition, the reported accumulated postretirement benefits obligation increased $15.4 million in 2007 as a result of this amendment.

Note 11Comprehensive Income

Comprehensive income is comprised primarily of net income, gains or losses from the effect of cash flow hedges and changes in accumulated postretirement benefits
obligations. Comprehensive income for the three months ended September 30, 2007 and 2006 was $21.1 million and $57.7 million, respectively. For the nine months ended
September 30, 2007 and 2006, comprehensive income was $64.6 million and $171.6 million, respectively.

12

---



Note 12Net Income (Loss) Per Share

A reconciliation of the basic and diluted net income (loss) per share computations for the three and nine months ended September 30, 2007 and 2006 are as
follows (in thousands, except per share data):

|                                              |                                                                                    | For the three months ended September 30,
|--------------------------------------------- | ---------------------------------------------------------------------------------- | ----------------------------------------
|
|
|Numerator:                                    |                                                                                    |                                         
|Income from continuing operations             |                                                                                    | $                                       
|Effect of dilutive securities:                |                                                                                    |                                         
|                                              | Interest related to 3.75% convertible senior
    subordinated notes, net of tax(a) |                                         
|                                              |                                                                                    |                                         
|                                              |                                                                                    | $                                       
|                                              |                                                                                    |                                         
|Income from discontinued operations           |                                                                                    | $                                       
|                                              |                                                                                    |                                         
|Denominator:                                  |                                                                                    |                                         
|Average number of common shares outstanding   |                                                                                    |                                         
|Effect of dilutive securities:                |                                                                                    |                                         
|                                              | Stock options and restricted stock units(b)                                        |                                         
|                                              | 3.75% convertible senior subordinated notes(a)                                     |                                         
|                                              |                                                                                    |                                         
|                                              |                                                                                    |                                         
|                                              |                                                                                    |                                         
|Income from continuing operations per share   |                                                                                    | $                                       
|Income from discontinued operations per share |                                                                                    |                                         
|                                              |                                                                                    |                                         
|Net income per share                          |                                                                                    | $                                       
|                                              |                                                                                    |                                         

13

---



|                                                     |                                                                                    | For the nine months ended September 30,
|---------------------------------------------------- | ---------------------------------------------------------------------------------- | ---------------------------------------
|
|
|Numerator:                                           |                                                                                    |                                        
|Income from continuing operations                    |                                                                                    | $                                      
|Effect of dilutive securities:                       |                                                                                    |                                        
|                                                     | Interest related to 3.75% convertible senior
    subordinated notes, net of tax(a) |                                        
|                                                     |                                                                                    |                                        
|                                                     |                                                                                    | $                                      
|                                                     |                                                                                    |                                        
|Income (loss) from discontinued operations           |                                                                                    | $                                      
|                                                     |                                                                                    |                                        
|Denominator:                                         |                                                                                    |                                        
|Average number of common shares outstanding          |                                                                                    |                                        
|Effect of dilutive securities:                       |                                                                                    |                                        
|                                                     | Stock options and restricted stock units(b)                                        |                                        
|                                                     | 3.75% convertible senior subordinated notes(a)                                     |                                        
|                                                     |                                                                                    |                                        
|                                                     |                                                                                    |                                        
|                                                     |                                                                                    |                                        
|Income from continuing operations per share          |                                                                                    | $                                      
|Income (loss) from discontinued operations per share |                                                                                    |                                        
|                                                     |                                                                                    |                                        
|Net income per share                                 |                                                                                    | $                                      
|                                                     |                                                                                    |                                        

---

14

---





Note 13Segment Information

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

|                                                            |                                                                                       | For the three months ended September 30, |  
|----------------------------------------------------------- | ------------------------------------------------------------------------------------- | ---------------------------------------- | -
|
|Net sales and revenues:                                     |                                                                                       |                                          |  
|                                                            | Natural Resources                                                                     |                                          | $
|                                                            | Sloss                                                                                 |                                          |  
|                                                            |                                                                                       |                                          |  
|                                                            | Natural Resources and Sloss                                                           |                                          |  
|                                                            | Financing                                                                             |                                          |  
|                                                            | Homebuilding                                                                          |                                          |  
|                                                            |                                                                                       |                                          |  
|                                                            | Financing and Homebuilding Group                                                      |                                          |  
|                                                            | Other                                                                                 |                                          |  
|                                                            | Consolidating eliminations                                                            |                                          |  
|                                                            |                                                                                       |                                          |  
|                                                            |                                                                                       | Net sales and revenues                   |  
|                                                            |                                                                                       |                                          |  
|Segment operating income (loss) from continuing operations: |                                                                                       |                                          |  
|                                                            | Natural Resources                                                                     |                                          | $
|                                                            | Sloss                                                                                 |                                          |  
|                                                            |                                                                                       |                                          |  
|                                                            | Natural Resources and Sloss                                                           |                                          |  
|                                                            | Financing(a)                                                                          |                                          |  
|                                                            | Homebuilding                                                                          |                                          |  
|                                                            |                                                                                       |                                          |  
|                                                            | Financing and Homebuilding Group                                                      |                                          |  
|                                                            | Other                                                                                 |                                          |  
|                                                            | Consolidating eliminations                                                            |                                          |  
|                                                            |                                                                                       |                                          |  
|                                                            | Operating income from continuing operations                                           |                                          |  
|                                                            | Less other debt interest expense                                                      |                                          |  
|                                                            |                                                                                       |                                          |  
|                                                            | Income from continuing operations before income tax expense and
    minority interest |                                          |  
|                                                            | Income tax expense                                                                    |                                          |  
|                                                            |                                                                                       |                                          |  
|                                                            | Income from continuing operations before minority interest                            |                                          |  
|                                                            | Minority interest                                                                     |                                          |  
|                                                            |                                                                                       |                                          |  
|                                                            |                                                                                       | Income from continuing operations        |  
|                                                            |                                                                                       |                                          |  
|Depreciation:                                               |                                                                                       |                                          |  
|                                                            | Natural Resources                                                                     |                                          | $
|                                                            | Sloss                                                                                 |                                          |  
|                                                            |                                                                                       |                                          |  
|                                                            | Natural Resources and Sloss                                                           |                                          |  
|                                                            | Financing                                                                             |                                          |  
|                                                            | Homebuilding                                                                          |                                          |  
|                                                            |                                                                                       |                                          |  
|                                                            | Financing and Homebuilding Group                                                      |                                          |  
|                                                            | Other                                                                                 |                                          |  
|                                                            |                                                                                       |                                          |  
|                                                            |                                                                                       | Total                                    |  
|                                                            |                                                                                       |                                          |  

15

---



|                                                            |                                                                                       | For the nine months ended September 30, |  
|----------------------------------------------------------- | ------------------------------------------------------------------------------------- | --------------------------------------- | -
|
|Net sales and revenues:                                     |                                                                                       |                                         |  
|                                                            | Natural Resources                                                                     |                                         | $
|                                                            | Sloss                                                                                 |                                         |  
|                                                            |                                                                                       |                                         |  
|                                                            | Natural Resources and Sloss                                                           |                                         |  
|                                                            | Financing                                                                             |                                         |  
|                                                            | Homebuilding                                                                          |                                         |  
|                                                            |                                                                                       |                                         |  
|                                                            | Financing and Homebuilding Group                                                      |                                         |  
|                                                            | Other                                                                                 |                                         |  
|                                                            | Consolidating eliminations                                                            |                                         |  
|                                                            |                                                                                       |                                         |  
|                                                            |                                                                                       | Net sales and revenues                  |  
|                                                            |                                                                                       |                                         |  
|Segment operating income (loss) from continuing operations: |                                                                                       |                                         |  
|                                                            | Natural Resources                                                                     |                                         | $
|                                                            | Sloss                                                                                 |                                         |  
|                                                            |                                                                                       |                                         |  
|                                                            | Natural Resources and Sloss                                                           |                                         |  
|                                                            | Financing(a)                                                                          |                                         |  
|                                                            | Homebuilding                                                                          |                                         |  
|                                                            |                                                                                       |                                         |  
|                                                            | Financing and Homebuilding Group                                                      |                                         |  
|                                                            | Other                                                                                 |                                         |  
|                                                            | Consolidating eliminations                                                            |                                         |  
|                                                            |                                                                                       |                                         |  
|                                                            | Operating income from continuing operations                                           |                                         |  
|                                                            | Less other debt interest expense                                                      |                                         |  
|                                                            |                                                                                       |                                         |  
|                                                            | Income from continuing operations before income tax expense and
    minority interest |                                         |  
|                                                            | Income tax expense                                                                    |                                         |  
|                                                            |                                                                                       |                                         |  
|                                                            | Income from continuing operations before minority interest                            |                                         |  
|                                                            | Minority interest                                                                     |                                         |  
|                                                            |                                                                                       |                                         |  
|                                                            |                                                                                       | Income from continuing operations       |  
|                                                            |                                                                                       |                                         |  
|Depreciation:                                               |                                                                                       |                                         |  
|                                                            | Natural Resources                                                                     |                                         | $
|                                                            | Sloss                                                                                 |                                         |  
|                                                            |                                                                                       |                                         |  
|                                                            | Natural Resources and Sloss                                                           |                                         |  
|                                                            | Financing                                                                             |                                         |  
|                                                            | Homebuilding                                                                          |                                         |  
|                                                            |                                                                                       |                                         |  
|                                                            | Financing and Homebuilding Group                                                      |                                         |  
|                                                            | Other                                                                                 |                                         |  
|                                                            |                                                                                       |                                         |  
|                                                            |                                                                                       | Total                                   |  
|                                                            |                                                                                       |                                         |  

---

16

---



Note 14Commitments and Contingencies

Income Tax Litigation

The Company is currently under audit by the Internal Revenue Service (the "IRS") for the years ended December 31, 2002 through December 31, 2005. No
material adjustments have been proposed as a result of these audits.

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

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

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

The
amounts initially asserted by the Proof of Claim do not reflect the subsequent resolution of various issues through settlements or concessions by the parties. After adjustment for
these items, the Company estimates that the amount of tax presently claimed by the IRS is approximately $34 million for issues currently in dispute in the Adversary Proceeding. This amount is
subject to interest and penalties. Of the $34 million in claimed tax, $21 million represents issues in which the IRS is not challenging the deductibility of the particular expense but
only whether such expense is deductible in a particular year.

Consequently,
the Company believes that, should the IRS prevail on any such issues, the Company's financial exposure is limited to interest and possible penalties and the amount of tax
claimed will be offset by deductions in other years. Substantially all of the issues in the Proof of Claim, which have not been settled or conceded, have been litigated before the Bankruptcy Court and
are subject to appeal but only at the conclusion of the entire Adversary Proceeding.

17

---



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

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

Environmental Matters

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

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

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

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

18

---



this
time that the cleanup costs, if any, associated with these sites will have a material adverse effect on the financial condition of the Company, but such cleanup costs could be material to results
of operations in a future reporting period.

Miscellaneous Litigation

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

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

Commitments and ContingenciesOther

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

Note 15Income Taxes

The Company's effective tax rate related to continuing operations for the three and nine months ended September 30, 2007 was 27.2% and 34.3%, respectively
compared to 19.4% and 27.3% for the same periods in 2006. The increase in the effective tax rate for the third quarter of 2007 as compared to the same period in 2006 is due to favorable adjustments
recognized in the third quarter of 2006 primarily due to additional benefits from percentage depletion deductions. The increase in the effective tax rate for the nine months ended September 30,
2007 as compared to the same period in 2006 is primarily due to the unfavorable impact of a $4.4 million write-off in the first quarter of 2007 of certain deferred tax assets no
longer considered realizable. Excluding this unusual adjustment, the effective tax rate for the nine months ended September 30, 2007 is 30.4%. Both 2007 and 2006 effective tax rates differ from
the Federal statutory rate primarily due to the benefit from percentage depletion deductions.

19

---





MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS,    FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES    AND QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

This discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto of Walter Industries, Inc. and its
subsidiaries, particularly Note 13 of "Notes to Condensed Consolidated Financial Statements," which describe the Company's net sales and revenues and operating income by operating segment.

RESULTS OF OPERATIONS

Summary Operating Results of Continuing Operations for the Three Months Ended September 30, 2007 and 2006

For the three months ended September 30, 2007(in thousands)

Natural
Resources

Sloss

Financing

Homebuilding

Other

Cons
Elims

TotalNet sales

$
154,411

$
34,337

$
3,347

$
57,521

$
729

$
(1,182
)
$
249,163Interest income on instalment
    notes








49,712











49,712Miscellaneous income


7,653


134


1,045


539


3,960





13,331Net sales and revenues


162,064


34,471


54,104


58,060


4,689


(1,182
)

312,206Cost of sales


112,051


28,375


2,172


42,389


730


(1,182
)

184,535Interest expense(1)








29,996











29,996Depreciation


9,087


965


312


1,290


435





12,089Selling, general &
    administrative


4,133


2,116


6,755


14,611


6,473





34,088Provision for losses on
    instalment notes








3,366











3,366Postretirement benefits


7,576


(216
)

(106
)

(148
)

(243
)




6,863Amortization of intangibles


93





362











455Operating income (loss)

$
29,124

$
3,231

$
11,247

$
(82
)
$
(2,706
)
$



40,814Other debt interest expense


(7,358
)Income from continuing operations before income taxes

$
33,456


---

20

---



For the three months ended September 30, 2006(in thousands)

Natural
Resources

Sloss

Financing

Homebuilding

Other

Cons
Elims

TotalNet sales

$
178,157

$
34,372

$
3,701

$
60,631

$
1,771

$
(5,165
)
$
273,467Interest income on instalment
    notes








49,434











49,434Miscellaneous income


6,235


42


1,452


223


2,432





10,384Net sales and revenues


184,392


34,414


54,587


60,854


4,203


(5,165
)

333,285Cost of sales


112,695


29,625


983


47,923


649


(5,165
)

186,710Interest expense(1)








29,465











29,465Depreciation


7,004


879


349


1,127


604





9,963Selling, general &
    administrative


4,109


2,809


7,106


14,393


7,926





36,343Provision for losses on
    instalment notes








1,946











1,946Postretirement benefits


4,943


(170
)

(48
)

(122
)

(197
)




4,406Amortization of intangibles








560











560Operating income (loss)

$
55,641

$
1,271

$
14,226

$
(2,467
)
$
(4,779
)
$



63,892Other debt interest expense


(9,966
)Income from continuing operations before income taxes and minority interest

$
53,926


---

Overview

The Company's income from continuing operations for the quarter ended September 30, 2007 was $24.4 million, or $0.46 per diluted share, compared to
$43.5 million, or $0.85 per diluted share in the prior-year period.

Net
sales and revenues for the 2007 third quarter totaled $312.2 million, down from $333.3 million in the prior-year period. The decline was primarily due to
lower metallurgical coal prices along with lower natural gas volumes and prices at Natural Resources and fewer unit completions at Homebuilding, partially offset by higher Homebuilding selling prices.

Operating
income for the 2007 third quarter totaled $40.8 million compared to $63.9 million in the third quarter of 2006. The decline in operating income in the
current-year period is primarily due to the lower revenues, higher depreciation expense, increased provision of losses on instalment notes and increased postretirement benefits expense,
partially offset by lower selling, general and administrative expenses.

21

---



Outlook and Strategic Initiatives

Natural Resources and Sloss



22

---





Homebuilding and Financing



23

---





Summary of Third Quarter Consolidated Results of Continuing Operations

Net sales and revenues for the three months ended September 30, 2007 were $312.2 million. Revenues decreased by $21.1 million, or 6.3%, from
$333.3 million in the prior-year period. The decline was primarily due to lower metallurgical coal prices along with lower natural gas volumes and prices at Natural Resources and
fewer unit completions at Homebuilding, partially offset by higher Homebuilding selling prices.

Cost
of sales, exclusive of depreciation, decreased $2.2 million to $184.5 million and represented 74.0% of net sales in 2007 versus $186.7 million, or 68.3% of net
sales in the prior year. The increase in the percentage in 2007 was primarily the result of the effect from lower revenues on a relatively fixed cost structure at Natural Resources, partially offset
by an improvement at Homebuilding due to reduced material costs, improvements in cost control and slightly lower overhead.

Depreciation
for the three months ended September 30, 2007 was $12.1 million, an increase of $2.1 million compared to the prior-year period. The increase
is primarily due to the Company's continued investment in the expansion of Natural Resources' mining operations and the replacement of mining equipment.

Selling,
general and administrative expenses of $34.1 million were $2.2 million lower as compared to $36.3 million for the same period in 2006 primarily resulting
from reduced spending at Sloss and reduced corporate expenses.

Provision
for losses on installment notes increased $1.4 million to $3.4 million in the 2007 period compared to $2.0 million in the 2006 period. The increase
primarily results from a $1.0 million additional loss reserve due to expected continued weakness in Financing's ARM portfolio, which was $53.0 million at September 30, 2007.

Postretirement
benefits expense increased to $6.9 million in the 2007 period, compared to $4.4 million in the 2006 period, primarily due to an unfavorable change in
actuarial assumptions year over year and a plan amendment resulting from the 2007 contract with the United Mine Workers of America.

Interest
expense for the mortgage-backed/asset-backed notes increased to $30.0 million compared to $29.5 million for the same period in 2006 as a result of an increase in
the average debt balance for the three months ended September 30, 2007, partially offset by a reduction in the effective interest rate.

Interest
expense on other debt decreased $2.6 million to $7.4 million primarily as a result of a reduction in term debt outstanding compared to the same period in 2006 and
the conversion of nearly all of the Company's convertible senior subordinated debt into equity in the fourth quarter of 2006.

The
Company's effective tax rate related to continuing operations for the three months ended September 30, 2007 and 2006 was 27.2% and 19.4%, respectively. The increase in the
effective tax rate for the third quarter of 2007 as compared to the same period in 2006 is due to favorable adjustments recognized in the third quarter of 2006 primarily due to additional benefits
from percentage depletion deductions. Both the 2007 and 2006 effective tax rates differ from the Federal statutory rate primarily due to the benefit from percentage depletion deductions.

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

24

---



Segment Analysis

Natural Resources

Natural Resources, which includes the operations of Jim Walter Resources, Kodiak Mining and Tuscaloosa Resources, reported revenues of $162.1 million in
the third quarter, down $22.3 million versus the same period last year. The decline in revenues was principally driven by a 15.4% reduction in metallurgical coal prices along with lower natural
gas volumes and pricing, partially offset by $2.2 million of income from natural gas derivative contracts originally expected to be recognized primarily in the 2007 fourth quarter. Lower coal
prices include the impact of reduced contract pricing and increased demurrage charges. Statistics in the following table relate to Jim Walter Resources only.

Three months ended September 30,2007

2006Average Metallurgical Coal Selling Price (per short ton)

$
89.22

$
105.48Tons of Coal Sold (in thousands)


1,570


1,567Average Natural Gas Selling Price (per MCF)

$
7.59

$
8.49Billion Cubic Feet of Natural Gas Sold


1.8


2.0Number of Natural Gas Wells


418


423


The
Natural Resources segment reported operating income of $29.1 million in the 2007 third quarter, compared to $55.6 million in the prior-year period. The
$26.5 million decrease is driven almost entirely by the decline in metallurgical coal contract pricing and increased operating losses at Kodiak Mining. This decline was partially offset by
lower overall mining cost of sales, which improved 6.7% versus the same period in 2006.

Sloss

Sloss generated 2007 third quarter net sales and revenues of $34.5 million and operating income of $3.2 million compared to $34.4 million of
net sales and revenues and operating income of $1.3 million in the third quarter of 2006. The increases in 2007 as compared to 2006 are primarily due to the strength of the furnace coke market
as well as better plant performance.

Financing

Net sales and revenues were $54.1 million in the 2007 third quarter, a decrease of $0.5 million from the prior-year period. This
decrease is primarily attributable to lower prepayment-related interest income. Prepayments have declined due to rising mortgage interest rates and the departure of numerous sub-prime
lenders from the market which significantly slowed refinancing activity. Operating income was $11.2 million in the current-year period, compared to $14.2 million in the
prior-year period. The decrease in operating income primarily results from an increase in the provision for losses, lower prepayment income and higher interest expense. In addition, prior
year operating income included a $1.1 million favorable adjustment resulting from better than expected claims experience in the insurance business.

Delinquencies
(the percentage of amounts outstanding over 30 days past due) on the mortgage portfolio were 4.9% at September 30, 2007, up from 4.2% at September 30,
2006, as the Company's third party purchased loans, which include the ARM portion of the Company's portfolio, exhibited higher levels of delinquencies and losses. However, the fixed-rate
portfolio also experienced an increase in delinquencies during the third quarter of 2007. This weakness led the Company to increase its allowance for loan losses by $1.0 million in the 2007
third quarter. In response to the delinquency increase, the servicing organization implemented numerous actions to improve overall results, and as such, the delinquencies on the total portfolio
decreased to 4.3% at October 31, 2007. The calculation of

25

---



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

Homebuilding

Net sales and revenues were $58.1 million for the third quarter, a decrease of $2.8 million from the prior-year period primarily as a
result 11.6% decrease in unit completions, partially offset by a 7.4% increase in the average net selling price. For the current period, new sales orders, net of cancellations, were down 16.0%
compared to the third quarter of 2006 primarily resulting from unfavorable market conditions facing the entire homebuilding industry.

Three months ended September 30,2007

2006Unit completions


585


662Average net selling price

$
98,327

$
91,587


Homebuilding's
operating loss was $0.1 million for the three months ended September 30, 2007 compared to an operating loss of $2.5 million for the same period in
2006. The improvement resulted from higher selling prices and lower material costs.

Other

Results in the "Other" segment, comprised of the Company's corporate expenses and land subsidiaries, improved by $2.1 million in the third quarter of 2007
over the prior-year period, driven by increased land sales and lower corporate selling, general and administrative expenses.

26

---



RESULTS OF OPERATIONS

Summary Operating Results of Continuing Operations for the Nine Months Ended September 30, 2007 and 2006

For the nine months ended September 30, 2007(in thousands)

Natural
Resources

Sloss

Financing

Homebuilding

Other

Cons
Elims

TotalNet sales

$
452,229

$
99,876

$
9,780

$
187,780

$
3,567

$
(5,536
)
$
747,696Interest income on
    instalment notes








149,939











149,939Miscellaneous income


17,500


518


3,178


588


9,605





31,389Net sales and revenues


469,729


100,394


162,897


188,368


13,172


(5,536
)

929,024Cost of sales


302,074


83,736


6,177


141,807


2,374


(5,536
)

530,632Interest expense(1)








89,512











89,512Depreciation


25,583


2,824


866


3,796


1,241





34,310Selling, general &
    administrative


12,627


6,997


21,759


46,436


21,845





109,664Provision for losses on
    instalment notes








8,756











8,756Postretirement benefits


22,023


(648
)

(318
)

(444
)

(731
)




19,882Amortization of intangibles


93





1,282











1,375Operating income (loss)

$
107,329

$
7,485

$
34,863

$
(3,227
)
$
(11,557
)
$



134,893Other debt interest expense


(21,923
)Income from continuing operations before income taxes

$
112,970


---

For the nine months ended September 30, 2006(in thousands)

Natural
Resources

Sloss

Financing

Homebuilding

Other

Cons
Elims

TotalNet sales

$
510,746

$
102,341

$
10,725

$
170,588

$
2,166

$
(10,271
)
$
786,295Interest income on
    instalment notes








150,901











150,901Miscellaneous income


15,838


270


4,799


479


8,057


(1,290
)

28,153Net sales and revenues


526,584


102,611


166,425


171,067


10,223


(11,561
)

965,349Cost of sales


296,659


87,073


6,036


136,570


2,393


(10,916
)

517,815Interest expense(1)








88,399











88,399Depreciation


19,549


2,727


1,031


3,307


1,197





27,811Selling, general &
    administrative


12,877


7,791


21,867


43,268


22,544





108,347Provision for losses on
    instalment notes








6,761











6,761Postretirement benefits


14,829


(510
)

(144
)

(366
)

(589
)




13,220Amortization of intangibles








1,899











1,899Operating income (loss)

$
182,670

$
5,530

$
40,576

$
(11,712
)
$
(15,322
)
$
(645
)

201,097Other debt interest expense


(31,355
)Income from continuing operations before income taxes and minority interest

$
169,742


---

27

---



Summary of Year to Date Consolidated Results of Continuing Operations

Net sales and revenues for the nine months ended September 30, 2007 were $929.0 million. Revenues decreased by $36.3 million, or 3.8% from
$965.3 million in the prior-year period. Decreased revenues are primarily attributable to lower coal sales volumes and pricing at Natural Resources, partially offset by increased
revenues from Homebuilding primarily due to higher average net selling prices.

Cost
of sales, exclusive of depreciation, increased $12.8 million to $530.6 million and represented 71.0% of net sales in 2007 versus $517.8 million and 65.9% of net
sales in the prior year. The increase in the percentage in 2007 primarily results from the effect of lower revenues on a relatively fixed cost structure at Natural Resources, partially offset by
improvements at Homebuilding where cost of sales, exclusive of depreciation, as a percentage of net sales decreased from 80.1% in 2006 to 75.5% in 2007.

Depreciation
for the nine months ended September 30, 2007 was $34.3 million, an increase of $6.5 million compared to the prior-year period. The increase
is primarily due to the Company's continued investment in the expansion of Natural Resources' mining operations and the replacement of mining equipment.

Selling,
general and administrative expenses of $109.7 million were 11.8% of net sales and revenues in 2007, compared to $108.3 million and 11.2% in 2006. The increase was
primarily attributable to increased expenses at Homebuilding for stock awards, professional services and advertising.

Provision
for losses on installment notes increased $2.0 million to $8.8 million in the 2007 period compared to $6.8 million in the 2006 period. The increase
reflects lower recovery rates in 2007 and a $1.0 million additional loss reserve due to expected continued weakness in Financing's ARM portfolio.

Postretirement
benefits expense increased to $19.9 million in the 2007 period, compared to $13.2 million in the 2006 period, primarily due to an unfavorable change in
actuarial assumptions year over year and a plan amendment resulting from the 2007 contract with the United Mine Workers of America.

Interest
expense for the mortgage-backed/asset-backed notes increased $1.1 million to $89.5 million compared to $88.4 million for the same period in 2006 resulting
from an increase in the average year-to-date debt balance, partially offset by a reduction in the effective interest rate.

Interest
expense on other debt decreased $9.4 million to $21.9 million primarily as a result of reduced term debt outstanding compared to the same period in 2006 and the
conversion of nearly all of the Company's convertible senior subordinated debt into equity in the fourth quarter of 2006.

The
Company's effective tax rate related to continuing operations for the nine months ended September 30, 2007 and 2006 was 34.3% and 27.3%, respectively. The increase in the
effective tax rate for the nine months ended September 30, 2007 as compared to the same period in 2006 is primarily due to the unfavorable impact of a $4.4 million write-off
in the first quarter of 2007 of certain deferred tax assets no longer considered realizable. Excluding this unusual adjustment, the effective tax rate for the nine months ended September 30,
2007 is 30.4%. Both 2007 and 2006 differ from the Federal statutory rate primarily due to the benefit from percentage depletion deductions.

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

28

---



Segment Analysis

Natural Resources

Natural Resources, which includes the operations of Jim Walter Resources, Kodiak Mining and Tuscaloosa Resources, reported revenues of $469.7 million in
the nine months ended September 30, 2007, down $56.9 million versus the same period last year. The decline in revenues was driven in part by a $14.39 per ton reduction in metallurgical
coal prices versus the prior-year period, partially offset by an increase of 172,000-tons in metallurgical coal sales volumes. Steam coal sales volumes totaled 300,000-tons in the prior
year period. These lower-priced steam coal sales ceased in the first quarter of 2006. Lower revenues also include a decline in natural gas volumes and pricing. Statistics in the following table
include results from Jim Walter Resources only.

Nine months ended September 30,2007

2006Average Metallurgical Coal Selling Price (per short ton)

$
94.57

$
108.96Tons of Coal Sold (in thousands)


4,393


4,521Average Natural Gas Selling Price (per MCF)

$
7.82

$
8.74Billion Cubic Feet of Natural Gas Sold


5.4


5.8Number of Natural Gas Wells


418


423


Natural
Resources reported operating income of $107.3 million for the nine month period in 2007, compared to $182.7 million in the prior-year period. Results in
the current-year period include lower coal and natural gas sales pricing and volumes, higher production and labor costs at Jim Walter Resources and $13.8 million of
pre-tax losses at Kodiak Mining. Kodiak's losses reflect difficult geological conditions and slow advance rates.

Sloss

Net sales and revenues were $100.4 million for the nine months ended September 30, 2007, a decrease of $2.2 million compared to the
prior-year period. The prior-year period included $7.3 million of revenues from the chemical business, which was sold in November 2006. This unfavorable variance
was partially offset by increased furnace coke and fiber volumes for the nine months ended September 30, 2007. Operating income of $7.5 million for the nine months ended
September 30, 2007 increased $2.0 million as compared to the same period in the prior year mainly due to a stronger furnace coke market, lower raw material costs and improved coke plant
performance.

Financing

Net sales and revenues were $162.9 million for the nine months ended September 30, 2007, a decrease of $3.5 million from the
prior-year period. This decrease is primarily attributable to lower prepayment-related interest income resulting from industry-wide tightened underwriting standards which
significantly slowed refinancing activity. Operating income was $34.9 million in 2007, compared to $40.6 million in 2006. The decrease in operating income reflects this lower prepayment
income, an increase in interest expense due to higher average monthly warehouse debt, an increase in the provision for loan losses due to expected continued weakness in Financing's ARM portfolio, and
an increase in stock award expenses.

29

---



Homebuilding

Net sales and revenues were $188.4 million for the nine months ended September 30, 2007, an increase of $17.3 million from the nine months
ended September 30, 2006 primarily due to higher average net selling prices, which increased 12.4% over the prior-year period.

Nine months ended September 30,2007

2006Unit completions


1,908


1,948Average net selling price

$
98,418

$
87,571New sales contracts


1,988


1,995Cancellations


320


415


Homebuilding's
operating loss of $3.2 million for the nine months ended September 30, 2007 improved $8.5 million when compared to an operating loss
of $11.7 million for the nine months ended September 30, 2006. The improved performance in 2007 was due to increased pricing, reduced cost of sales resulting from decreased cycle times
and reductions in materials costs, partially offset by an increase in selling, general and administrative expenses resulting from increased stock awards expense, professional service fess and
advertising expenses.

Other

Results in the "Other" segment, comprised of the Company's corporate expenses and land subsidiaries, improved by $3.8 million in the nine month period
ended September 30, 2007, driven by higher land sales.

FINANCIAL CONDITION

Cash and cash equivalents of continuing operations decreased from $127.4 million at December 31, 2006 to $23.2 million at
September 30, 2007 resulting from $69.1 million in cash flows provided by continuing operating activities offset by $121.4 million of cash flows used in investing activities of
continuing
operations and $52.5 million of cash flows used in financing activities of continuing operations. See additional discussion in the Statement of Cash Flows section that follows.

Inventories
decreased $14.8 million from $105.5 million at December 31, 2006 to $90.8 million at September 30, 2007. Inventories decreased
$7.1 million at Natural Resources driven by strong customer demand and $3.9 million at Homebuilding resulting from a lower number of units under construction.

Prepaid
expenses were $46.9 million at September 30, 2007, an increase of $17.2 million from December 31, 2006 primarily as a result of the annual renewal of
property insurance in June 2007 and increased prepaid expenses associated with longwall moves.

Property,
plant and equipment increased $86.5 million to $396.7 million at September 30, 2007 primarily as a result of continued investment in Natural Resources'
mining operations, the replacement of mining equipment and the acquisition of TRI's assets.

Other
assets were $168.9 million at September 30, 2007, up $33.6 million from December 31, 2006 primarily due to an increase in the Company's deferred tax
assets as a result of initially applying FIN 48 on January 1, 2007, an increase in deferred tax assets established for postretirement benefits accruals and additional identifiable
intangible assets resulting from the TRI acquisition.

Accrued
expenses of $76.3 million at September 30, 2007 decreased from $94.9 million at December 31, 2006 due to a decrease in current taxes payable and
accrued bonuses resulting from payments in the beginning of 2007 for accruals established for calendar year 2006.

30

---



Other
liabilities increased $31.9 million from $189.5 million at December 31, 2006 primarily as a result of adjustments made to initially apply FIN 48 on
January 1, 2007, which required an increase of $30.9 million to the liability for unrecognized tax benefits.

LIQUIDITY AND CAPITAL RESOURCES

Overview

The Company's principal sources of short-term funding are its existing cash balances, operating cash flows and borrowings under its revolving credit
facility and mortgage warehouse facilities. The Company's principal sources of long-term funding are its bank term loan and its financings under mortgage-backed/asset-backed notes. As of
September 30, 2007, total debt has decreased by $18.2 million compared to December 31, 2006. See discussion below.

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

Mortgage-backed/Asset-backed Notes

The Company has two variable funding loan facilities totaling $350.0 million that provide temporary financing to the Company's wholly owned subsidiary,
Walter Mortgage Company, the successor by merger to Mid-State Homes, Inc., for its current purchases of instalment notes from Homebuilding and for its mortgage loan originations.
The $150.0 million Trust IX facility was renewed on July 30, 2007, under substantially similar terms as the previous facility, and matures July 28, 2008. The $200.0 million
Trust XIV facility was renewed on October 25, 2007, under substantially similar terms as the previous facility, and matures October 23, 2008. At September 30, 2007, there were
$172.2 million of borrowings outstanding under these facilities.

2005 Walter Credit Agreement

The 2005 Walter Credit Agreement is a secured obligation of the Company and substantially all of its wholly owned domestic subsidiaries. The 2005 Walter Term Loan
currently requires quarterly principal payments of $0.6 million through October 3, 2012, at which time the remaining principal outstanding is due. The 2005 Walter Term Loan carries a
floating interest rate of 175 basis points over LIBOR. At September 30, 2007, the balance outstanding on the term loan was $219.1 million and the weighted-average interest rate was 7.3%.
The commitment fee on the unused portion of the $225.0 million 2005 Walter Revolving Credit Facility is 0.375% and the interest rate is a floating rate of 150 basis points over LIBOR. At
September 30, 2007, there were no borrowings outstanding under the revolving credit
facility, but the Company had $50.0 million in letters of credit outstanding, reducing availability for revolver borrowings to $175.0 million.

During
the nine months ended September 30, 2007, repayments of the term loan facility totaling $29.6 million were made using cash and available cash flow. The repayments
included $28.0 million of voluntary prepayments.

31

---



Statement of Cash Flows

Cash of continuing operations was $23.2 million and $127.4 million at September 30, 2007 and December 31, 2006, respectively. The
decrease in cash was primarily due to $110.3 million of capital expenditures, $40.8 million repayments of debt, $11.7 million for the TRI acquisition, $7.8 million of
dividends paid and $5.2 million of stock purchases under the stock repurchase program. These cash outflows were partially offset by $69.1 million of cash provided by operating activities
of continuing operations.

Cash
flows provided by operating activities of continuing operations for the nine months ended September 30, 2007 were $69.1 million compared to $150.3 million for
the nine months ended September 30, 2006. The $81.2 million decrease is primarily a result of a $50.2 million decrease in income from continuing operations and a
$27.5 million increase in taxes paid.

Cash
flows used in investing activities of continuing operations for the nine months ended September 30, 2007 were $121.4 million compared to $86.9 million for the
prior-year period. Results from investing activities include capital expenditures of $110.3 million for the nine months ended September 30, 2007 compared to
$75.7 million for the same period in 2006. Capital expenditures for the remainder of 2007 are expected to be $25.0 million to $35.0 million and relate primarily to Jim Walter
Resources' Mine No. 7 East expansion project. Investing activities for 2007 also includes cash outflow of $11.7 million to acquire TRI.

Cash
flows used in financing activities of continuing operations for the nine months ended September 30, 2007 were $52.5 million compared to cash flows used in financing
activities of continuing operations of $31.7 million in the prior-year period. The current-year period includes $40.8 million of corporate debt payments,
$5.2 million of stock purchases under the stock repurchase program, and $7.8 million of dividends paid. Financing activities in 2006 included $174.5 million of term loan payments,
$39.5 million of net principal payments on the Company's mortgage-backed/asset-backed notes and $5.1 million of dividends paid. Additionally, the
prior-year period benefited from the sale of common stock, a net cash inflow of $168.7 million. Debt repayments in 2007 include $7.0 million to repay debt assumed in the TRI
acquisition.

MARKET RISK

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

There
have been no material changes to market risk exposures in the third quarter 2007 compared to those described in the Annual Report on Form 10-K for the fiscal
year ended December 31, 2006.

CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

An evaluation was performed under the supervision and with the participation of our management, including our Vice Chairman (Principal Executive Officer) and
Chief Financial Officer (CFO), of the effectiveness of our disclosure controls and procedures as of September 30, 2007. Based on that evaluation, our management, including our Principal
Executive Officer and CFO, concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported as specified in the SEC's rules and forms. There has been no change in our internal control over financial reporting during the nine months
ended September 30, 2007 that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.

32

---



PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT

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

33

---





PART IIOTHER INFORMATION

Item 1.    Legal Proceedings

See Note 14 of the "Notes to Condensed Consolidated Financial Statements" in this Form 10-Q for a description of current legal
proceedings.

The
Company and its subsidiaries are parties to a number of other lawsuits arising in the ordinary course of their businesses. Most of these cases are in a preliminary stage and the
Company is unable to predict a range of possible loss, if any. The Company provides for costs relating to these matters when a loss is probable and the amount is reasonably estimable. The effect of
the outcome of these matters on the Company's future results of operations cannot be predicted because any such effect depends on future results of operations and the amount and timing of the
resolution of such matters. While the results of litigation cannot be predicted with certainty, the Company believes that the final outcome of such other litigation will not have a material adverse
effect on the Company's consolidated financial position.

Item 1A.    Risk Factors

For discussion of the Company's risk factors, please refer to Part 1, "Item 1A. Risk Factors" in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2006.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

Purchase of Equity Securities by the Company and Affiliated Purchasers.

During the quarter ended September 30, 2007, there were 218,753 shares of common stock repurchased that reduced the availability under the Company's Common
Stock Share Repurchase program. At September 30, 2007, $19.8 million remains available under this program.

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

None

Item 6.    Exhibits



Exhibit
Number31.1

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002Principal Executive Officer31.2

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

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350Principal Executive Officer32.2

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350Chief Financial Officer


33

---





SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.

|WALTER INDUSTRIES, INC.                                
|-------------------------------------------------------
|/s/JOSEPH J. TROYJoseph J. Troy Chief Financial Officer

Date:
November 8, 2007

34

---



QuickLinks