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 March 31, 2008
|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 (Do not check if a smaller reporting company) |  | Smaller reporting company o
|------------------------- |  | ------------------- |  | --------------------------------------------------------------------- |  | ---------------------------

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

Number of shares of common stock outstanding as of April 30, 2008: 52,382,740



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PART IFINANCIAL INFORMATION        ITEM 1. FINANCIAL STATEMENTS        WALTER INDUSTRIES, INC. AND SUBSIDIARIES        CONDENSED CONSOLIDATED BALANCE SHEETS    
(UNAUDITED)

|                                                                                   |                                       | March 31,
2008                                        |                            | December 31,
2007 |        
|---------------------------------------------------------------------------------- | ------------------------------------- | ----------------------------------------------------- | -------------------------- | ----------------- | -------
|
|ASSETS                                                                             |                                       |                                                       |                            |                   |        
|Cash and cash equivalents                                                          |                                       | $                                                     | 26,394                     |                   | $      
|Short-term investments, restricted                                                 |                                       |                                                       | 73,462                     |                   |        
|Instalment notes receivable, net of allowance of $14,009 and $13,992, respectively |                                       |                                                       | 1,829,840                  |                   |        
|Receivables, net                                                                   |                                       |                                                       | 89,738                     |                   |        
|Inventories                                                                        |                                       |                                                       | 116,800                    |                   |        
|Prepaid expenses                                                                   |                                       |                                                       | 52,677                     |                   |        
|Property, plant and equipment, net                                                 |                                       |                                                       | 441,366                    |                   |        
|Other assets                                                                       |                                       |                                                       | 143,131                    |                   |        
|Goodwill                                                                           |                                       |                                                       | 10,895                     |                   |        
|                                                                                   |                                       |                                                       |                            |                   |        
|                                                                                   |                                       | $                                                     | 2,784,303                  |                   | $      
|                                                                                   |                                       |                                                       |                            |                   |        
|LIABILITIES AND STOCKHOLDERS' EQUITY                                               |                                       |                                                       |                            |                   |        
|Accounts payable                                                                   |                                       | $                                                     | 71,780                     |                   | $      
|Accrued expenses                                                                   |                                       |                                                       | 70,644                     |                   |        
|Accrued interest                                                                   |                                       |                                                       | 13,462                     |                   |        
|Debt:                                                                              |                                       |                                                       |                            |                   |        
|                                                                                   | Mortgage-backed/asset-backed notes    |                                                       |                            | 1,689,944         |        
|                                                                                   | Other debt                            |                                                       |                            | 251,219           |        
|Accumulated postretirement benefits obligation                                     |                                       |                                                       | 341,541                    |                   |        
|Other liabilities                                                                  |                                       |                                                       | 226,636                    |                   |        
|                                                                                   |                                       |                                                       |                            |                   |        
|                                                                                   | Total liabilities                     |                                                       |                            | 2,665,226         |        
|                                                                                   |                                       |                                                       |                            |                   |        
|Commitments and contingencies (Note 13)                                            |                                       |                                                       |                            |                   |        
|Stockholders' equity
Common stock, $.01 par value per share:                       |                                       |                                                       |                            |                   |        
|                                                                                   |                                       | Authorized200,000,000 shares                         |                            |                   |        
|                                                                                   |                                       | Issued52,404,076 and 51,991,134 shares               |                            |                   | 524    
|                                                                                   | Capital in excess of par value        |                                                       |                            | 503,615           |        
|                                                                                   | Accumulated deficit                   |                                                       |                            | (295,090          | )      
|                                                                                   | Accumulated other comprehensive loss: |                                                       |                            |                   |        
|                                                                                   |                                       | Pension and post-retirement benefit plans, net of tax |                            |                   | (85,765
|                                                                                   |                                       | Unrealized gain (loss) on hedges, net of tax          |                            |                   | (4,207 
|                                                                                   |                                       |                                                       |                            |                   |        
|                                                                                   |                                       |                                                       | Total stockholders' equity |                   |        
|                                                                                   |                                       |                                                       |                            |                   |        
|                                                                                   |                                       | $                                                     | 2,784,303                  |                   | $      
|                                                                                   |                                       |                                                       |                            |                   |        

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
March 31, |        
|----------------------------------------------------------- | --------------------------------------------------- | ------------------------------------ | -------
|
|
|Net sales and revenues:                                     |                                                     |                                      |        
|                                                            | Net sales                                           |                                      | $      
|                                                            | Interest income on instalment notes                 |                                      |        
|                                                            | Miscellaneous                                       |                                      |        
|                                                            |                                                     |                                      |        
|                                                            |                                                     |                                      | 295,690
|                                                            |                                                     |                                      |        
|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 rate hedge ineffectiveness                 |                                      |        
|                                                            | Interest expenseother debt                         |                                      |        
|                                                            | Amortization of intangibles                         |                                      |        
|                                                            | Restructuring and impairment charges                |                                      |        
|                                                            |                                                     |                                      |        
|                                                            |                                                     |                                      | 294,929
|                                                            |                                                     |                                      |        
|Income from continuing operations before income tax expense |                                                     |                                      | 761    
|Income tax expense                                          |                                                     |                                      | 262    
|                                                            |                                                     |                                      |        
|Income from continuing operations                           |                                                     |                                      | 499    
|Loss from discontinued operations                           |                                                     |                                      |       
|                                                            |                                                     |                                      |        
|Net income                                                  |                                                     | $                                    | 499    
|                                                            |                                                     |                                      |        
|Basic income per share:                                     |                                                     |                                      |        
|                                                            | Income from continuing operations                   |                                      | $      
|                                                            | Loss from discontinued operations                   |                                      |        
|                                                            |                                                     |                                      |        
|                                                            | Net income                                          |                                      | $      
|                                                            |                                                     |                                      |        
|Diluted income per share:                                   |                                                     |                                      |        
|                                                            | Income from continuing operations                   |                                      | $      
|                                                            | Loss from discontinued operations                   |                                      |        
|                                                            |                                                     |                                      |        
|                                                            | Net income                                          |                                      | $      
|                                                            |                                                     |                                      |        
|Dividends declared per common share                         |                                                     | $                                    | 0.05   
|                                                            |                                                     |                                      |        

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

2

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WALTER INDUSTRIES, INC. AND SUBSIDIARIES        CONDENSED CONSOLIDATED STATEMENT OF CHANGES        IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME        FOR THE THREE MONTHS ENDED
MARCH 31, 2008        (UNAUDITED)    (in thousands)

|                                                                                          |                                                                                                                               | Total                                                                          |         | Common
Stock |     | Capital in
Excess of
Par Value |  | Comprehensive
Income (Loss) |         | Accumulated
Deficit |   | Accumulated
Other
Comprehensive
Income (Loss) |    
|----------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | ------- | ------------ | --- | ------------------------------ |  | --------------------------- | ------- | ------------------- | - | --------------------------------------------- | ---
|Balance at December 31, 2007                                                              |                                                                                                                               | $                                                                              | 114,713 |              | $   | 520                            |  | $                           | 497,032 |                     |   |                                               |    
|Comprehensive income:                                                                     |                                                                                                                               |                                                                                |         |              |     |                                |  |                             |         |                     |   |                                               |    
|                                                                                          | Net income                                                                                                                    |                                                                                |         | 499          |     |                                |  |                             |         |                     |   | $                                             | 499
|                                                                                          | Other comprehensive income (loss), net of tax:                                                                                |                                                                                |         |              |     |                                |  |                             |         |                     |   |                                               |    
|                                                                                          |                                                                                                                               | Change in pension and postretirement benefit plans, net of tax of $0.5 million |         |              | 636 |                                |  |                             |         |                     |   |                                               |    
|                                                                                          |                                                                                                                               | Net unrealized gain on hedges, net of tax of $0.5 million                      |         |              | 575 |                                |  |                             |         |                     |   |                                               |    
|                                                                                          |                                                                                                                               |                                                                                |         |              |     |                                |  |                             |         |                     |   |                                               |    
|Comprehensive income                                                                      |                                                                                                                               |                                                                                |         |              |     |                                |  |                             |         |                     | $ | 1,710                                         |    
|                                                                                          |                                                                                                                               |                                                                                |         |              |     |                                |  |                             |         |                     |   |                                               |    
|Effects of changing the pension plan measurement date pursuant to FASB Statement No. 158: |                                                                                                                               |                                                                                |         |              |     |                                |  |                             |         |                     |   |                                               |    
|                                                                                          | Service cost, interest cost, and expected return on plan assets for October 1  December 31, 2007, net of tax of $3.1 million |                                                                                |         | (4,603       | )   |                                |  |                             |         |                     |   |                                               |    
|                                                                                          | Amortization of actuarial gain and prior service cost for October 1  December 31, 2007, net of tax of $0.5 million           |                                                                                |         | 670          |     |                                |  |                             |         |                     |   |                                               |    
|Purchase of stock under stock repurchase program                                          |                                                                                                                               |                                                                                | (363    | )            |     |                                |  |                             | (363    | )                   |   |                                               |    
|Stock issued upon the exercise of stock options                                           |                                                                                                                               |                                                                                | 4,269   |              |     | 3                              |  |                             | 4,266   |                     |   |                                               |    
|Stock issued upon conversion of convertible notes                                         |                                                                                                                               |                                                                                | 785     |              |     | 1                              |  |                             | 784     |                     |   |                                               |    
|Tax benefit from the exercise of stock options                                            |                                                                                                                               |                                                                                | 3,766   |              |     |                                |  |                             | 3,766   |                     |   |                                               |    
|Dividends paid, $0.05 per share                                                           |                                                                                                                               |                                                                                | (2,605  | )            |     |                                |  |                             | (2,605  | )                   |   |                                               |    
|Stock-based compensation                                                                  |                                                                                                                               |                                                                                | 2,139   |              |     |                                |  |                             | 2,139   |                     |   |                                               |    
|Other                                                                                     |                                                                                                                               |                                                                                | (1,404  | )            |     |                                |  |                             | (1,404  | )                   |   |                                               |    
|                                                                                          |                                                                                                                               |                                                                                |         |              |     |                                |  |                             |         |                     |   |                                               |    
|Balance at March 31, 2008                                                                 |                                                                                                                               | $                                                                              | 119,077 |              | $   | 524                            |  | $                           | 503,615 |                     |   |                                               |    
|                                                                                          |                                                                                                                               |                                                                                |         |              |     |                                |  |                             |         |                     |   |                                               |    

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

3

---





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

|                                                                                               |                                                     | For the three months
ended
March 31,                  |       
|---------------------------------------------------------------------------------------------- | --------------------------------------------------- | ----------------------------------------------------- | ------
|
|
|OPERATING ACTIVITIES                                                                           |                                                     |                                                       |       
|Net income                                                                                     |                                                     | $                                                     | 499   
|Loss from discontinued operations                                                              |                                                     |                                                       |      
|                                                                                               |                                                     |                                                       |       
|                                                                                               |                                                     | Income from continuing operations                     |       
|Adjustments to reconcile income from continuing operations to net cash provided by operations: |                                                     |                                                       |       
|                                                                                               | Provision for losses on instalment notes receivable |                                                       |       
|                                                                                               | Depreciation                                        |                                                       |       
|                                                                                               | Provision for deferred income taxes                 |                                                       |       
|                                                                                               | Non-cash loss from ineffective hedges               |                                                       |       
|                                                                                               | Other                                               |                                                       |       
|Decrease (increase) in assets:                                                                 |                                                     |                                                       |       
|                                                                                               | Receivables                                         |                                                       |       
|                                                                                               | Inventories                                         |                                                       |       
|                                                                                               | Prepaid expenses                                    |                                                       |       
|                                                                                               | Instalment notes receivable, net                    |                                                       |       
|Increase (decrease) in liabilities:                                                            |                                                     |                                                       |       
|                                                                                               | Accounts payable                                    |                                                       |       
|                                                                                               | Accrued expenses                                    |                                                       |       
|                                                                                               | Accrued interest                                    |                                                       |       
|                                                                                               |                                                     |                                                       |       
|                                                                                               |                                                     | Cash flows provided by operating activities           |       
|                                                                                               |                                                     |                                                       |       
|INVESTING ACTIVITIES                                                                           |                                                     |                                                       |       
|                                                                                               | Purchases of loans                                  |                                                       |       
|                                                                                               | Principal payments received on purchased loans      |                                                       |       
|                                                                                               | Decrease in short-term investments, restricted      |                                                       |       
|                                                                                               | Additions to property, plant and equipment          |                                                       |       
|                                                                                               | Other                                               |                                                       |       
|                                                                                               |                                                     |                                                       |       
|                                                                                               |                                                     | Cash flows used in investing activities               |       
|                                                                                               |                                                     |                                                       |       
|FINANCING ACTIVITIES                                                                           |                                                     |                                                       |       
|                                                                                               | Issuance of mortgage-backed/asset-backed notes      |                                                       |       
|                                                                                               | Payments of mortgage-backed/asset-backed notes      |                                                       |       
|                                                                                               | Retirement of other debt                            |                                                       |       
|                                                                                               | Proceeds from issuances of other debt               |                                                       |       
|                                                                                               | Other                                               |                                                       |       
|                                                                                               |                                                     |                                                       |       
|                                                                                               |                                                     | Cash flows provided by (used in) financing activities |       
|                                                                                               |                                                     |                                                       |       
|                                                                                               |                                                     | Cash flows used in continuing operations              |       
|                                                                                               |                                                     |                                                       |       
|CASH FLOWS FROM DISCONTINUED OPERATIONS                                                        |                                                     |                                                       |       
|                                                                                               | Cash flows used in operating activities             |                                                       |       
|                                                                                               | Cash flows used in investing activities             |                                                       |       
|                                                                                               | Cash flows provided by financing activities         |                                                       |       
|                                                                                               |                                                     |                                                       |       
|                                                                                               |                                                     | Cash flows used in discontinued operations            |       
|                                                                                               |                                                     |                                                       |       
|Net decrease in cash and cash equivalents                                                      |                                                     |                                                       | (4,220
|                                                                                               |                                                     |                                                       |       
|Cash and cash equivalents at beginning of period                                               |                                                     |                                                       | 30,614
|Add: Cash and cash equivalents of discontinued operations at beginning of period               |                                                     |                                                       |      
|Net decrease in cash and cash equivalents                                                      |                                                     |                                                       | (4,220
|Less: Cash and cash equivalents of discontinued operations at end of period                    |                                                     |                                                       |      
|                                                                                               |                                                     |                                                       |       
|Cash and cash equivalents at end of period                                                     |                                                     | $                                                     | 26,394
|                                                                                               |                                                     |                                                       |       

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

4

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WALTER INDUSTRIES, INC. AND SUBSIDIARIES        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS        AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2008        (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 12. 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 2007, the Company began reporting United Land, the parent of Kodiak and
Tuscaloosa Resources, Inc. ("TRI"), as part of Natural Resources due to its natural resource holdings. Prior to the fourth quarter of 2007, United Land was included in the Other segment. The
first quarter of 2007 has 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 three month period ended March 31, 2008 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2008.

The
balance sheet at December 31, 2007 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Discontinued Operations

Modular Homes Division

During the first quarter of 2007, the Company decided to exit the manufacture and distribution of modular homes, which operated as Crestline Homes, Inc.
("Crestline"). As such, the Company has reported the results of operations, assets, liabilities and cash flows of Crestline, previously included in the Homebuilding segment, as discontinued
operations. This business was sold on May 30, 2007.

The
table below presents the significant components of operating results included in the loss from discontinued operations for the quarter ended March 31, 2007 (in thousands):

Net sales and revenues

$
7,041Loss from discontinued operations before income tax benefit

$
(3,861
)Income tax benefit


1,351Loss from discontinued operations

$
(2,510
)


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

5

---



WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2008

(Unaudited)

Note 2Discontinued Operations (Continued)

operating
segments as selling, general and administrative expenses. The Company did not elect to allocate additional interest expense to discontinued operations.

Note 3Adoption of New Accounting Pronouncements

In 2006 the FASB issued SFAS No. 157, "Fair Value Measurements," which provides a definition of fair value, establishes a framework for measuring fair
value and expands fair value financial statement disclosure requirements. SFAS No. 157 is intended to eliminate the diversity in practice associated with measuring fair value under existing
accounting pronouncements and does not require any new fair value measurements. The adoption of SFAS No. 157 for financial assets and financial liabilities on January 1, 2008 did not
have a material effect on the Company's consolidated financial statements. See Note 15 for fair value disclosures.

In
2006 the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans," which, among other changes, requires companies to measure
plan assets and liabilities as of the fiscal year-end reporting date. On January 1, 2008, the Company adopted the measurement provisions of SFAS No. 158 and elected the
alternative transition method. Based on the actuarial valuation performed as of September 30, 2007, the Company's actuary provided a 15-month projection of net periodic pension cost
to December 31, 2008. In recognizing the effects of changing the Company's measurement date from September 30 to December 31, the Company recorded a charge to accumulated deficit
of $4.6 million, net of taxes of $3.1 million, increases in accumulated postretirement benefits obligation and pension liability of $6.1 million and $0.4 million,
respectively, and a credit to accumulated other comprehensive loss of $0.7 million, net of taxes of $0.5 million.

Note 4Restructuring and Impairment

On February 19, 2008, the Company announced a restructuring of JWH Holding Company, LLC, the Company's Financing and Homebuilding business.
Thirty-six underperforming Jim Walter Homes sales centers have closed or will close as part of the restructuring. As a result, the Company recorded a restructuring charge of
$6.8 million in the 2008 first quarter, in Homebuilding, of which $4.3 million relates to impairments of property, plant and equipment, $1.7 million relates to severance
obligations due to a 25 percent reduction in workforce at Homebuilding and $0.8 million relates to lease obligations of closed sales centers. This charge appears as restructuring and
impairment charges in the statement of operations.

6

---



WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2008

(Unaudited)

Note 4Restructuring and Impairment (Continued)

The
following table summarizes restructuring activity for the three months ended March 31, 2008 (in thousands):

|                                             |  | Balance at
January 1,
2008 |   | Restructuring
and
Impairment
Charges |   | Cash
Payments |  | Other
Non-
Cash
Charges |      | Balance at
March 31,
2008
|-------------------------------------------- |  | -------------------------- | - | ------------------------------------ | - | ------------- |  | ----------------------- | ---- | -------------------------
|Impairments of property, plant and equipment |  | $                          |  |                                      | $ | 4,322         |  | $                       |     |                          
|Severance obligations                        |  |                            |  |                                      |   | 1,669         |  |                         | (472 | )                        
|Lease obligations                            |  |                            |  |                                      |   | 779           |  |                         |     |                          
|                                             |  |                            |   |                                      |   |               |  |                         |      |                          
|Total                                        |  | $                          |  |                                      | $ | 6,770         |  | $                       | (472 | )                        
|                                             |  |                            |   |                                      |   |               |  |                         |      |                          

Note 5Restricted Short-Term Investments

Restricted short-term investments at March 31, 2008 and December 31, 2007 include (i) temporary investments primarily in
commercial paper or money market accounts with maturities less than 90 days from collections on instalment notes receivable owned by various Mid-State Trusts (the "Trusts")
($66.1 million and $68.8 million, respectively) which are available only to pay expenses of the Trusts and principal and interest on indebtedness of the Trusts, and
(ii) miscellaneous other segregated accounts restricted to specific uses ($7.4 million and $7.1 million, respectively).

Note 6Instalment Notes Receivable

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

March 31,
2008

December 31,
2007Instalment notes receivable

$
1,615,003

$
1,616,753Mortgage loans


228,846


234,298Less: Allowance for losses


(14,009
)

(13,992
)Net

$
1,829,840

$
1,837,059


Note 7Inventories

Inventories are summarized as follows (in thousands):

March 31,
2008

December 31,
2007Finished goods

$
37,215

$
29,650Goods in process


18,569


19,598Raw materials and supplies


20,691


16,021Repossessed houses held for resale


40,325


36,407Total inventories

$
116,800

$
101,676


7

---



WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2008

(Unaudited)

Note 8Debt

2005 Walter Credit Agreement

In 2005, Walter Industries entered into a $675.0 million credit agreement ("2005 Walter Credit Agreement") which includes (1) an amortizing term
loan facility with an initial aggregate principal amount of $450.0 million, $218.0 million of which was outstanding as of March 31, 2008 with a weighted average interest rate of
4.73%, and (2) a $225.0 million revolving credit facility which provides for loans and letters of credit. The 2005 Walter Credit Agreement is a secured obligation of the Company and
substantially all of the wholly owned domestic subsidiaries of the Company. The 2005 Walter Term Loan requires quarterly principal payments of $0.6 million through October 3, 2012, at
which time the remaining outstanding principal is due.

During
the quarter ended March 31, 2008, the Company borrowed $30.0 million under the revolving credit facility at a weighted average interest rate of 4.19%. Additionally,
the Company had $47.5 million in outstanding stand-by letters of credit, reducing availability for borrowings under the revolving credit facility to $147.5 million.

On
April 30, 2008, the Company amended the 2005 Walter Credit Agreement to allow an additional $250.0 million of borrowings under the revolving credit facility, thereby
increasing the revolving credit facility to $475.0 million. Approximately $220.0 million of available funds were used to repay and terminate the Mid-State Trust IX and Trust
XIV mortgage warehouse facilities, which were due to mature in July 2008 and October 2008, respectively. The amendment also increases the interest rate on the revolving credit facility and the term
loan to LIBOR plus 300 basis points. The commitment fee on the unused portion of the revolving facility also increases from 0.375% per year to 0.5% per year. In addition, the amended 2005 Walter
Credit Agreement contains a reducing revolver commitment feature, where the total available revolver commitment may not exceed $400.0 million at March 31, 2009, $350.0 million at
June 30, 2009, $300.0 million at September 30, 2009, and $250.0 million at December 31, 2009.

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

In
connection with this amendment, the Company incurred $3.7 million of refinancing fees. These fees will be deferred and amortized over the remaining life of the revolving credit
facility.

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

As of March 31, 2008, the Company had two variable funding loan ("warehouse") facilities totaling $350.0 million that provided temporary warehouse
financing to Walter Mortgage Company ("WMC") for its current purchases of instalment notes and mortgages originated by Homebuilding. At March 31, 2008, there were $214.0 million of
borrowings outstanding under these facilities.

On
April 30, 2008, the Company repaid and terminated these facilities using proceeds from the amended 2005 Walter Credit Facility, as discussed above. With the termination of the
warehouse

8

---



WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2008

(Unaudited)

Note 8Debt (Continued)

facilities,
the Company is no longer reliant on the availability of mortgage warehouse facilities or the mortgage-backed securitization market.

In
addition, after May 1, 2008, WMC will no longer finance customers of Homebuilding. However, the backlog of homes with signed contracts and those which are under construction
will be completed over the next six to nine months and financed by WMC. The Company will finance these WMC instalment notes receivable with operating cash flows or availability under the increased
revolving credit facility. Homebuilding is transitioning to a third-party financing model including the use of government-sponsored loan programs.

Convertible Notes

In January 2008, the holders of the remaining $0.8 million 3.75% Convertible Senior Subordinated Notes agreed to convert the principal amount in exchange
for 84,013 shares of the Company's common stock and $0.1 million of conversion inducement payments.

Note 9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                             |                           | $                | 1,002  |                | $
|Interest cost                            |                           |                  | 3,003  |                |  
|Expected return on plan assets           |                           |                  | (3,632 | )              |  
|Amortization of prior service cost       |                           |                  | 76     |                |  
|Amortization of net actuarial loss       |                           |                  | 615    |                |  
|                                         |                           |                  |        |                |  
|                                         | Net periodic benefit cost |                  | $      | 1,064          |  
|                                         |                           |                  |        |                |  

Note 10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 March 31, 2008 and 2007 was $1.7 million and $29.3 million, respectively. During the three months ended
March 31, 2008 and 2007, the net change in unrealized losses on cash flow hedges totaled $10.3 million, net of taxes of $5.7 million, and $0.7 million, net of taxes of
$0.4 million, respectively. Reclassification adjustments to net income for realized losses on cash flow hedges totaled $10.9 million, net of taxes of $6.2 million for the three
months ended March 31, 2008, and reclassification adjustments to net income for realized gains totaled $1.6 million, net of taxes of $0.9 million, for the three months ended
March 31, 2007.

9

---



WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2008

(Unaudited)

Note 11Net Income (Loss) Per Share

A reconciliation of the basic and diluted net income (loss) per share computations for the three months ended March 31, 2008 and 2007 are as follows (in
thousands, except per share data):

|                                            |                                                                                | For the three months ended March 31, |       
|------------------------------------------- | ------------------------------------------------------------------------------ | ------------------------------------ | ------
|
|
|Numerator:                                  |                                                                                |                                      |       
|Income from continuing operations           |                                                                                | $                                    | 499   
|Effect of dilutive securities:              |                                                                                |                                      |       
|                                            | Interest related to 3.75% convertible senior subordinated notes, net of tax(a) |                                      |       
|                                            |                                                                                |                                      |       
|                                            |                                                                                | $                                    | 499   
|                                            |                                                                                |                                      |       
|Net loss from discontinued operations       |                                                                                | $                                    |      
|                                            |                                                                                |                                      |       
|Denominator:                                |                                                                                |                                      |       
|Average number of common shares outstanding |                                                                                |                                      | 52,203
|Effect of dilutive securities:              |                                                                                |                                      |       
|                                            | Stock options and restricted stock units ("units")(b)                          |                                      |       
|                                            | 3.75% convertible senior subordinated notes(a)                                 |                                      |       
|                                            |                                                                                |                                      |       
|                                            |                                                                                |                                      | 52,203
|                                            |                                                                                |                                      |       
|Income from continuing operations per share |                                                                                | $                                    | 0.01  
|                                            |                                                                                |                                      |       
|Loss from discontinued operations per share |                                                                                |                                      |      
|                                            |                                                                                |                                      |       
|Net income per share                        |                                                                                | $                                    | 0.01  
|                                            |                                                                                |                                      |       

---

10

---



WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2008

(Unaudited)

Note 12Segment Information

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

|                                  |                                                             | For the three months ended March 31, |    
|--------------------------------- | ----------------------------------------------------------- | ------------------------------------ | ---
|
|Net sales and revenues:           |                                                             |                                      |    
|                                  | Natural Resources                                           |                                      | $  
|                                  | Sloss                                                       |                                      |    
|                                  |                                                             |                                      |    
|                                  | Natural Resources and Sloss                                 |                                      |    
|                                  | Financing                                                   |                                      |    
|                                  | Homebuilding                                                |                                      |    
|                                  |                                                             |                                      |    
|                                  | Financing and Homebuilding Group                            |                                      |    
|                                  | Other                                                       |                                      |    
|                                  | Consolidating eliminations                                  |                                      |    
|                                  |                                                             |                                      |    
|                                  |                                                             | Sales and revenues                   |    
|                                  |                                                             |                                      |    
|Segment operating income (loss):  |                                                             |                                      |    
|                                  | Natural Resources                                           |                                      | $  
|                                  | Sloss                                                       |                                      |    
|                                  |                                                             |                                      |    
|                                  | Natural Resources and Sloss                                 |                                      |    
|                                  | Financing(a), (b)                                           |                                      |    
|                                  | Homebuilding(c)                                             |                                      |    
|                                  |                                                             |                                      |    
|                                  | 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 |                                      |    
|                                  | Income tax expense                                          |                                      |    
|                                  |                                                             |                                      |    
|Income from continuing operations |                                                             | $                                    | 499
|                                  |                                                             |                                      |    

11

---



WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2008

(Unaudited)

Note 12Segment Information (Continued)

|Depreciation: |                                  |       |   |        |        |   |      
|------------- | -------------------------------- | ----- | - | ------ | ------ | - | -----
|              | Natural Resources                |       | $ | 11,375 |        | $ | 7,880
|              | Sloss                            |       |   | 1,006  |        |   | 916  
|              |                                  |       |   |        |       
|              | Natural Resources and Sloss      |       |   | 12,381 |        |   | 8,796
|              | Financing                        |       |   | 135    |        |   | 281  
|              | Homebuilding                     |       |   | 1,219  |        |   | 1,234
|              |                                  |       |   |        |       
|              | Financing and Homebuilding Group |       |   | 1,354  |        |   | 1,515
|              | Other                            |       |   | 232    |        |   | 319  
|              |                                  |       |   |        |       
|              |                                  | Total |   | $      | 13,967 |   | $    
|              |                                  |       |   |        |       

---

Note 13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.

On
February 20, 2006, the IRS completed its audit of the Company's Federal income tax returns and issued a 30-day letter proposing tax deficiencies in the amount of
$82.2 million for the years ended May 31, 2000, December 31, 2000 and December 31, 2001. The issues in the 30-day letter relate primarily to the Company's
method of recognizing revenue on the sale of homes and related interest on the 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,

12

---



WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2008

(Unaudited)

Note 13Commitments and Contingencies (Continued)

among
other things, the resolution of disputed prepetition claims against the Company and other matters that may arise in connection with or related to the Consensual Plan, including claims related to
Federal income taxes.

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

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

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

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

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.

13

---



WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2008

(Unaudited)

Note 13Commitments and Contingencies (Continued)

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

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

Miscellaneous Litigation

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.

14

---



WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2008

(Unaudited)

Note 13Commitments and Contingencies (Continued)

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 14Income Taxes

The Company's effective tax rate for the three months ended March 31, 2008 and 2007 was 34.4% and 40.2%, respectively. The effective tax rate in 2007
includes the unfavorable impact of a $4.4 million write-off of certain deferred tax assets no longer considered realizable. Excluding this unusual adjustment, the effective tax rate
for 2007 would have been 32.0%. Both 2008 and 2007 differ from the Federal statutory rate primarily due to the benefit from percentage depletion deductions.

Note 15Fair Value of Financial Instruments

The Company measures certain financial instruments at fair value on a recurring basis, including interest rate and natural gas hedging agreements. The following
table summarizes the fair value of these financial instruments at March 31, 2008 by type of inputs used (in thousands):

|Liabilities                    |  | Total |        | Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) |   | Significant
Other
Observable
Inputs
(Level 2) |  | Significant
Unobservable
Inputs
(Level 3)
|------------------------------ |  | ----- | ------ | -------------------------------------------------------------- | - | --------------------------------------------- |  | -----------------------------------------
|Interest rate hedge agreements |  | $     | 17,905 |                                                                | $ |                                              |  | $                                        
|Natural gas hedge agreements   |  |       | 7,256  |                                                                |   |                                              |  |                                          

The
interest rate and natural gas hedge agreements are classified within Level 2 of the fair value hierarchy because they are valued using quoted dealer prices for similar
contracts.

As
of March 31, 2008, the Company held multiple interest rate hedge agreements with various counterparties with an aggregate notional value of $215.0 million, the objective
of which was to protect against changes in the benchmark interest rate on the forecasted issuance of mortgage-backed notes in a securitization (the "Securitization Hedges"). At March 31, 2008,
these Securitization Hedges no longer qualified for hedge accounting treatment because the Company does not plan to access the distressed securitization market. As a result, the Company recognized a
loss on interest rate hedge ineffectiveness of $17.0 million in the three months ended March 31, 2008. On April 1, 2008 the Company settled the Securitization Hedges for a payment
of $17.0 million.

The
fair value of the Company's LIBOR interest rate hedge contract designed to hedge interest payments under the 2005 Walter Credit Agreement was a liability of $0.9 million and
$0.2 million as of March 31, 2008 and December 31, 2007, respectively. The change in fair value of this contract was due to unfavorable movements in the underlying interest rate.

The
fair value of natural gas hedge contracts was a liability of $7.3 million as of March 31, 2008 and an asset of $0.9 million as of December 31, 2007. The
change in the fair value of these contracts was due to unfavorable movements in natural gas prices.

15

---





Item 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS, FINANCIAL CONDITION, AND LIQUIDITY AND CAPITAL RESOURCES

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 12 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 March 31, 2008 and 2007

For the three months ended March 31, 2008(in thousands)

Natural Resources

Sloss

Financing

Homebuilding

Other

Cons
Elims

TotalNet sales

$
150,514

$
50,662

$
2,570

$
40,060

$


$
(806
)
$
243,000Interest income on instalment notes








48,710











48,710Miscellaneous income


2,517


209


824


12


418





3,980Net sales and revenues


153,031


50,871


52,104


40,072


418


(806
)

295,690Cost of sales


111,587


28,329


1,770


32,757





(407
)

174,036Interest expense(1)








28,308











28,308Interest rate hedge ineffectiveness








16,981











16,981Depreciation


11,375


1,006


135


1,219


232





13,967Selling, general, & administrative


4,906


2,997


7,117


14,205


8,645





37,870Provision for losses on instalment notes








4,325











4,325Postretirement benefits


7,281


(161
)

(113
)

(152
)

(263
)




6,592Amortization of intangibles


72





293











365Restructuring & impairment charges











6,770








6,770Operating income (loss)

$
17,810

$
18,700

$
(6,712
)
$
(14,727
)
$
(8,196
)
$
(399
)

6,476Other debt interest expense


(5,715
)Income from continuing operations before income taxes

$
761


---

16

---



|                                         |                                                       | For the three months ended March 31, 2007 |        
|---------------------------------------- | ----------------------------------------------------- | ----------------------------------------- | -------
|
|Net sales                                |                                                       | $                                         | 162,644
|Interest income on instalment notes      |                                                       |                                           |       
|Miscellaneous income                     |                                                       |                                           | 8,802  
|                                         |                                                       |                                           |        
|                                         | Net sales and revenues                                |                                           |        
|Cost of sales                            |                                                       |                                           | 94,600 
|Interest expense(1)                      |                                                       |                                           |       
|Depreciation                             |                                                       |                                           | 7,880  
|Selling, general, & administrative       |                                                       |                                           | 4,382  
|Provision for losses on instalment notes |                                                       |                                           |       
|Postretirement benefits                  |                                                       |                                           | 7,043  
|Amortization of intangibles              |                                                       |                                           |       
|                                         |                                                       |                                           |        
|                                         | Operating income (loss)                               |                                           | $      
|                                         |                                                       |                                           |        
|                                         | Other debt interest expense                           |                                           |        
|                                         |                                                       |                                           |        
|                                         | Income from continuing operations before income taxes |                                           | $      
|                                         |                                                       |                                           |        

---

Overview

The Company's income from continuing operations for the three months ended March 31, 2008 was $0.5 million, or $0.01 per diluted share, which
compares to $32.1 million, or $0.61 per diluted share for the three months ended March 31, 2007.

In
the three months ended March 31, 2008, the Company's results included a 7.7% decrease in net sales and revenues and an 89.4% reduction in operating income from continuing
operations versus the same period in 2007. Factors contributing to these reductions were lower average metallurgical coal selling prices, which includes the effect of higher demurrage charges, at
Natural Resources and fewer unit deliveries at Homebuilding, partially offset by higher selling prices at Sloss and the addition of coal sales volumes at TRI. In addition, the Company's results for
the three months ended March 31, 2008 include pre-tax charges of $28.0 million from the Homebuilding and Financing segments related to losses on maturing interest rate
hedges, charges for the restructuring of Homebuilding and an additional discount on Homebuilding's transfer of instalment notes receivable to Financing. The discount will be recognized as income over
the life of the instalment note receivable in Financing.

Outlook and Strategic Initiatives

Natural Resources and Sloss



17

---





18

---





Homebuilding and Financing



19

---









Consolidated Results of Continuing Operations

Net sales and revenues for the three months ended March 31, 2008 were $295.7 million. Revenues decreased by $24.6 million, or 7.7% from
$320.3 million in the same period in 2007. Lower revenues are primarily the result of lower average metallurgical coal sales prices, which includes the effect of higher demurrage charges, at
Natural Resources and fewer unit deliveries at Homebuilding, partially offset by higher selling prices at Sloss and the addition of coal sales volumes at TRI.

Cost
of sales, exclusive of depreciation, increased $2.4 million to $174.0 million and represented 71.6% of net sales for the three months ended March 31, 2008
versus $171.6 million or 66.2% for the three months ended March 31, 2007. The increase in the percentage in 2008 is primarily the result of reduced revenues on a relatively fixed cost
structure at Natural Resources and reduced revenues at Homebuilding due to an additional $4.2 million discount required to recognize sales of instalment notes to Financing at estimated market
value, partially offset by a reduction in the percentage at Sloss resulting from increased coke pricing.

The
interest rate hedge ineffectiveness charge of $17.0 million in the three months ended March 31, 2008 was recorded to recognize a loss on Financing's maturing interest
rate swaps that no longer qualify for hedge accounting treatment. The interest rate swaps, originally intended to hedge the Company's next securitization, no longer qualify for hedge accounting
treatment because the Company does not plan to access the distressed securitization market. This loss would normally have been amortized over the life of the securitization and the cash outflow would
have been offset by increased
securitization cash proceeds. All of Financing's hedges were settled on April 1, 2008 and Financing has no more hedges outstanding.

Depreciation
for the three months ended March 31, 2008 was $14.0 million, an increase of $3.3 million compared to the same period in 2007. The increase is primarily
due to the Company's continued investment in the expansion of Natural Resources' mining operations and replacement of equipment.

Provision
for losses on instalment notes of $4.3 million for the three months ended March 31, 2008 increased $1.4 million from $2.9 million in the same period
in 2007 primarily due to anticipated higher repossessions and lower recovery rates in 2008 as compared to 2007.

Restructuring
charges of $6.8 million in the three months ended March 31, 2008 represent charges for the previously announced restructuring of Homebuilding. See "Outlook
and Strategic InitiativesHomebuilding and Financing" and Note 4 of "Notes to Condensed Consolidated Financial Statements."

The
Company's effective tax rate for the three months ended March 31, 2008 and 2007 was 34.4% and 40.2%, respectively. The effective tax rate in 2007 includes the unfavorable
impact of a $4.4 million write-off of certain deferred tax assets no longer considered realizable. Excluding this unusual adjustment, the effective tax rate for 2007 would have been
32.0%.

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

20

---



Segment Analysis

Natural Resources

Natural Resources, which includes the operations of Jim Walter Resources, Kodiak Mining, TRI and United Land, reported revenues of $153.0 million in the
first quarter, a decrease of $18.4 million from the same period last year. The decrease in revenues is primarily due to a 15.4% decline in selling prices for metallurgical coal, as compared to
the same period in 2007. The decrease in metallurgical coal selling prices includes the unfavorable effect of a $6.9 million increase in demurrage charges. This decrease was partially offset by
increased sales from Kodiak Mining and the addition of TRI sales in 2008. Statistics presented in the following table relate to Jim Walter Resources, only.

Three months ended
March 31,2008

2007Average Coal Selling Price (per short ton)

$
84.86

$
100.34Tons of Coal Sold (in thousands)


1,477


1,522Average Natural Gas Selling Price (per MCF)

$
7.96

$
7.92Billion Cubic Feet of Natural Gas Sold


1.6


1.9Number of Natural Gas Wells


397


424


Natural
Resources reported operating income of $17.8 million in the first quarter, compared to $57.5 million in the prior year period. The $39.7 million decrease in
operating income was primarily due to a reduction of $22.9 million from lower metallurgical coal selling prices and a $13.9 million increase in coal production costs at Jim Walter
Resources, as well as increased operating losses at Kodiak, partially offset by the addition of coal sales volumes at TRI. Increased production costs at Jim Walter Resources were primarily due to the
cost of additional continuous miner units developing the expansion at Mine No. 7, higher equipment and labor costs and the effect of lower production volumes.

Sloss

Sloss generated net sales and revenues of $50.9 million for the three months ended March 31, 2008, an increase of 55.1% compared to the same period
in 2007, and generated operating income of $18.7 million, an increase of $17.4 million compared to the same period in 2007, driven by record-high coke pricing.

Financing

Net sales and revenues were $52.1 million for the three months ended March 31, 2008, a decrease of $1.6 million from the same period in 2007.
This decrease is primarily attributable to lower prepayment-related interest income. This segment incurred an operating loss of $6.7 million in the three months ended March 31, 2008,
compared to operating income of $10.6 million in the same period in 2007. The decrease in operating results is primarily a result of recognizing a $17.0 million loss on interest rate
swaps, as previously discussed.

Portfolio
performance continues to be strong, with delinquencies (the percentage of amounts outstanding over 30 days past due) of 3.6% at March 31, 2008, compared to 3.4%
at March 31, 2007. The calculation of delinquencies excludes from delinquent amounts those accounts that are in bankruptcy proceedings that are paying their mortgage payments in contractual
compliance with bankruptcy court approved mortgage payment obligations.

Homebuilding

Net sales and revenues were $40.1 million for the three months ended March 31, 2008, a decrease of $22.1 million from the same period in 2007
primarily as a result of a 29.7% decrease in units sold

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and
a $4.2 million increase in the discount required to transfer instalment notes receivable to Financing at estimated market value. As a result of the current volatility and lack of liquidity
in the residential mortgage market, the discount required to fairly value the instalment notes receivable increased significantly and resulted in an additional discount within Homebuilding. The
discount will be recognized as interest income over the life of the instalment notes receivable in the Financing segment.

Three months ended
March 31,2008

2007Unit completions


446


634Average revenue per home sold(1)

$
89,800

$
98,000




Homebuilding's
operating loss was $14.7 million for the three months ended March 31, 2008 compared to an operating loss of $2.7 million for the three months ended
March 31, 2007. The increase in operating loss was primarily due to the effect of lower sales volume, the increase in the discount discussed above, and restructuring charges in the period
totaling $6.8 million. See "Outlook and Strategic InitiativeHomebuilding and Financing" and Note 4, "Restructuring and Impairment."

Other

Results in the "Other" segment, comprised of the Company's corporate expenses and land subsidiaries other than United Land, decreased by $2.6 million in
the first quarter of 2008 when compared to the same period in 2007 driven by reduced interest income, increased employee-related expenses and professional fees, partially offset by a decrease in
stock-based compensation expense.

FINANCIAL CONDITION

Cash and cash equivalents of continuing operations decreased by $4.2 million from $30.6 million at December 31, 2007 to $26.4 million
at March 31, 2008 reflecting $2.0 million in cash flows provided by continuing operating activities, $17.4 million of cash flows used in investing activities and
$11.2 million of cash flows provided by financing activities. See additional discussion in the Statement of Cash Flows section that follows.

Net
receivables were $89.7 million at March 31, 2008, an increase of $8.0 million from December 31, 2007 primarily attributable to increased receivables at
Sloss resulting from increased coke pricing to customers.

Inventories
were $116.8 million at March 31, 2008, an increase of $15.1 million from December 31, 2007 primarily due to increased raw materials at Sloss and
an increase in repossessed property at Financing.

Prepaid
expenses were $52.7 million at March 31, 2008 an increase of $14.3 million from December 31, 2007 primarily due to the first quarter 2008 payment of
income taxes.

Other
debt increased by $25.4 million from December 31, 2007 primarily due to borrowings of $30.0 million under the revolving credit agreement, partially offset by
the repayments of debt totaling $3.8 million and the conversion of $0.8 million in principal outstanding on the 3.75% convertible Senior Subordinated Notes into common stock.

Accrued
expenses were $70.6 million at March 31, 2008, a decrease of $12.4 million from December 31, 2007 primarily due to the payment of employee bonuses and
income taxes in the first quarter of 2008 that were accrued as of December 31, 2007.

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LIQUIDITY AND CAPITAL RESOURCES

Overview

The Company's principal sources of short-term funding are its existing cash balances, operating cash flows and borrowings under its revolving credit
facility. The Company's principal source of long-term funding is its bank term loan. As of March 31, 2008, total debt increased $9.1 million as compared to
December 31, 2007. See discussion below and Note 8 of "Notes to Condensed Consolidated Financial Statements."

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 and interest rates.

2005 Walter Credit Agreement

In 2005, Walter Industries entered into a $675.0 million credit agreement ("2005 Walter Credit Agreement") which includes (1) an amortizing term
loan facility with an initial aggregate principal amount of $450.0 million, $218.0 million of which was outstanding as of March 31, 2008 with a weighted average interest rate of
4.73%, and (2) a $225.0 million revolving credit facility which provides for loans and letters of credit. The 2005 Walter Credit Agreement is a secured obligation of the Company and
substantially all of the wholly owned domestic subsidiaries of the Company. The 2005 Walter Term Loan requires quarterly principal payments of $0.6 million through October 3, 2012, at
which time the remaining outstanding principal is due.

During
the quarter ended March 31, 2008, the Company borrowed $30.0 million under the revolving credit facility. Additionally, the Company had $47.5 million in
outstanding stand-by letters of credit, reducing availability for borrowings under the revolving credit facility to $147.5 million.

On
April 30, 2008, the Company amended the 2005 Walter Credit Agreement to allow an additional $250.0 million of borrowings under the revolving credit facility, thereby
increasing the revolving credit facility to $475.0 million. Approximately $220.0 million of available funds were used to repay and terminate the Mid-State Trust IX and Trust
XIV mortgage warehouse facilities, which were due to mature in July 2008 and October 2008, respectively. The amendment also requires the interest rate on the term loan to increase from LIBOR plus 175
to LIBOR plus 300 and requires the interest rate on the revolving credit facility to increase from LIBOR plus 150 to LIBOR plus 300 basis points. The commitment fee on the unused portion of the
revolving facility also increases from 0.375%
per year to 0.5% per year. In addition, the amended 2005 Walter Credit Agreement contains a reducing revolver commitment feature, where the total available revolver commitment may not exceed
$400.0 million at March 31, 2009, $350.0 million at June 30, 2009, $300.0 million at September 30, 2009, and $250.0 million at December 31,
2009.

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

In
connection with this amendment, the Company incurred $3.7 million of refinancing fees. These fees will be deferred and amortized over the remaining life of the revolving credit
facility.

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

As of March 31, 2008, the Company had two variable funding loan ("warehouse") facilities totaling $350.0 million that provided temporary warehouse
financing to Walter Mortgage Company ("WMC") for its current purchases of instalment notes and mortgages originated by Homebuilding. At March 31, 2008, there were $214.0 million of
borrowings outstanding under these facilities.

On
April 30, 2008, the Company repaid and terminated these facilities using proceeds from the amended 2005 Walter Credit Facility, as discussed above. With the termination of the
warehouse facilities, the Company is no longer reliant on the availability of mortgage warehouse facilities or the mortgage-backed securitization market.

In
addition, WMC will no longer finance customers of Homebuilding after May 1, 2008. However, the backlog of homes with signed contracts and those which are under construction
will be completed over the next six to nine months and financed by WMC. The Company will finance these WMC instalment notes receivable with operating cash flows or availability under the increased
revolving credit facility. Homebuilding is transitioning to a third-party financing model including government-sponsored loan programs.

Convertible Notes

In January 2008, the holders of the remaining $0.8 million 3.75% Convertible Senior Subordinated Notes agreed to convert the principal amount in exchange
for 84,013 shares of the Company's common stock and $0.1 million of conversion inducement payments.

Statement of Cash Flows

Cash balances were $26.4 million and $30.6 million at March 31, 2008 and December 31, 2007, respectively. The decrease in cash was
primarily due to capital expenditures of $23.5 million and net payments of mortgage-backed/asset-backed notes of $16.3 million, partially offset by $30.0 million in borrowings.

Cash
flows provided by operating activities of continuing operations were $2.0 million for the three months ended March 31, 2008 compared to $31.5 million for the
same prior year period. The decrease of $29.5 million is primarily the result of a $21.0 million decrease in net income after adjusting for non-cash items.

Cash
flows used in investing activities of continuing operations for the three months ended March 31, 2008 were $17.4 million compared to $26.2 million for the same
period in 2007. The improvement of $8.8 million is primarily due to WMC discontinuing its program to purchase loans from third parties in August 2007, as a result of the volatile market
conditions for securitization of subprime mortgages. This program required a net cash outflow of $6.4 million in the three months ended March 31, 2007.

Cash
flows provided by financing activities of continuing operations for the three months ended March 31, 2008 were $11.2 million compared to cash flows used by financing
activities of continuing operations of $29.3 million in the same period in 2007. Cash flows provided by financing activities in 2008 included borrowings under the Company's revolving credit
facility of $30.0 million, partially offset by net payments of mortgage-backed/asset-backed notes of $16.3 million and retirements on other debt of $3.9 million. Cash flows used
in financing activities for the three months ended March 31, 2007, were primarily attributable to $28.5 million of retirements on the Company's term loan facility.

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Item 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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.

Subsequent
to March 31, 2008, the Company settled interest rate hedge agreements with an aggregate notional value of $215.0 million that were originally designed to hedge
the Company's next securitization. No similar hedges remain outstanding.

Item 4.    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 and financial
officer), of the effectiveness of our disclosure controls and procedures as of March 31, 2008. Based on that evaluation, our management, including our principal executive and financial officer,
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 three months ended March 31,
2008 that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.

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, including expressions such as "believe," "anticipate," "expect,"
"estimate," "intend," "may," "will," and similar expressions involve known and unknown risks, and uncertainties, and other factors that may cause the Company's actual results in future periods to
differ materially from the expectations expressed or implied by such forward-looking statements. These factors include, among others, the following: the market demand for the Company's products as
well as changes in costs and the availability of raw material, labor, equipment and transportation; changes in weather and geologic conditions; changes in extraction costs and pricing and our
assumptions and projections concerning our reserves in the Company's mining operations; changes in customer orders; pricing actions by the Company's competitors, customers, suppliers and contractors;
changes in governmental policies and laws; changes in general economic conditions; and the successful implementation and anticipated timing of any strategic actions and objectives that my be pursued,
including our announced separation of the Financing and Homebuilding business from the Company. Forward-looking statements made by the Company in this release, or elsewhere, speak only as of the date
on which the statements were made. Any forward-looking statements should be considered in context with the various disclosures made by us about our business, including the Risk Factors described in
our 2007 Annual Report on Form 10-K and our other filings with the Securities and Exchange Commission. The Company disclaims any duty to update its forward-looking statements as of
any future date.

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PART IIOTHER INFORMATION

Item 1.    Legal Proceedings

See Note 13 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 10K for
the fiscal year ended December 31, 2007.

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

Recent Sales of Unregistered Securities

In January 2008, the holders of the remaining $0.8 million of the Company's Convertible Senior Notes agreed to convert the principal amount in exchange for
84,013 shares of the Company's common stock and $0.1 million of conversion inducement payments.

Purchase of Equity Securities by the Company and Affiliated Purchasers

On August 13, 2007, the Company's Board of Directors authorized a $25.0 million Common Stock Open Market share buyback program to replace the
July 21, 2003 authorized program. During January 2008, the Company acquired 11,400 shares at an average price of $31.83 per share and, at March 31, 2008, $19.0 million remains
available under this authorization. Upon acquisition, these shares were retired.

On
February 25, 2008, the Company acquired 26,800 shares from employees at an average price of $52.41 per share. These shares were acquired to satisfy the employees' tax
obligations associated with the lapse of restrictions on certain stock awards granted under the 1995 Long-Term Incentive Stock Plan and the 2002 Long-Term Incentive Award Plan. Upon acquisition, these
shares were retired.

Item 6.    Exhibits



|Exhibit
Number |  |                                                                                                                                          
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------
|10.16          |  | Agreement dated as of May 9, 2008 between the Company, JWH Holding Company, LLC and Joseph J. Troy                                       
|31.1           |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002Principal Executive and Financial Officer                        
|32.1           |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350Principal Executive and Financial Officer

26

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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/VICTOR P. PATRICKVice Chairman, Chief Financial Officer and General Counsel (Principal Executive and Financial
Officer) |  | 
|-------------------------------------------------------------------------------------------------------------------------- |  | 

Date:
May 9, 2008

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