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 1934For the quarterly period ended June 30, 2008oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Commission File Number 001-13711

WALTER INDUSTRIES, INC.

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, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ý

Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company o


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

Number of shares of common stock outstanding as of July 31, 2008:55,741,087.



---





PART IFINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

WALTER INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

June 30,
2008

December 31,
2007ASSETSCash and cash equivalents

$
17,653

$
30,614Short-term investments, restricted


61,822


75,851Instalment notes receivable, net of allowance of $13,946 and $13,992, respectively


1,821,745


1,837,059Receivables, net


148,475


81,698Inventories


119,937


101,676Prepaid expenses


42,720


38,340Property, plant and equipment, net


460,984


435,035Other assets


153,566


156,113Goodwill


10,895


10,895$
2,837,797

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

$
81,113

$
72,072Accrued expenses


82,618


83,072Accrued interest


12,503


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


1,437,387


1,706,218Other debt


206,852


225,860Accumulated postretirement benefits obligation


342,769


335,034Other liabilities


223,361


216,372Total liabilities


2,386,603


2,652,568Commitments and contingencies (Note 14)Stockholders' equityCommon stock, $0.01 par value per share:Authorized200,000,000 sharesIssued55,736,301 and 51,991,134 shares


557


520Capital in excess of par value


789,172


497,032Accumulated deficit


(244,314
)

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


(85,128
)

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


(9,093
)

(4,782
)Total stockholders' equity


451,194


114,713$
2,837,797

$
2,767,281


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

1

---



WALTER INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

For the three months ended June 30,2008

2007Net sales and revenues:Net sales

$
315,686

$
239,146Interest income on instalment notes


48,022


50,662Miscellaneous


6,328


6,716370,036


296,524Costs and expenses:Cost of sales (exclusive of depreciation)


200,893


174,457Depreciation


13,633


11,591Selling, general and administrative


37,400


38,125Provision for losses on instalment notes


3,002


2,493Postretirement benefits


6,596


6,687Interest expensemortgage-backed/asset-backed notes


25,846


29,745Interest expenseother debt


11,184


7,218Amortization of intangibles


340


442298,894


270,758Income from continuing operations before income tax expense


71,142


25,766Income tax expense


20,366


7,996Income from continuing operations


50,776


17,770Income from discontinued operations





281Net income

$
50,776

$
18,051Basic income per share:Income from continuing operations

$
0.96

$
0.34Income from discontinued operations





0.01Net income

$
0.96

$
0.35Diluted income per share:Income from continuing operations

$
0.94

$
0.33Income from discontinued operations





0.01Net income

$
0.94

$
0.34Dividends declared per common share

$
0.05

$
0.05


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

2

---



WALTER INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

For the six months ended June 30,2008

2007Net sales and revenues:Net sales

$
558,686

$
498,533Interest income on instalment notes


96,732


100,227Miscellaneous


10,308


18,058665,726


616,818Costs and expenses:Cost of sales (exclusive of depreciation)


374,929


346,097Depreciation


27,600


22,221Selling, general and administrative


75,270


75,576Provision for losses on instalment notes


7,327


5,390Postretirement benefits


13,188


13,019Interest expensemortgage-backed/asset-backed notes


54,154


59,516Interest rate hedge ineffectiveness


16,981


Interest expenseother debt


16,899


14,565Amortization of intangibles


705


920Restructuring and impairment charges


6,770


593,823


537,304Income from continuing operations before income tax expense


71,903


79,514Income tax expense


20,628


29,609Income from continuing operations


51,275


49,905Loss from discontinued operations





(2,229
)Net income

$
51,275

$
47,676Basic income (loss) per share:Income from continuing operations

$
0.98

$
0.96Loss from discontinued operations





(0.04
)Net income

$
0.98

$
0.92Diluted income (loss) per share:Income from continuing operations

$
0.96

$
0.95Loss from discontinued operations





(0.04
)Net income

$
0.96

$
0.91Dividends declared per common share

$
0.10

$
0.10


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

3

---



WALTER INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES

IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)

FOR THE SIX MONTHS ENDED JUNE 30, 2008 (UNAUDITED)

(IN THOUSANDS)

Total

Common
Stock

Capital in
Excess of
Par Value

Comprehensive
Income

Accumulated
Deficit

Accumulated
Other
Comprehensive
Income (Loss)Balance at December 31, 2007

$
114,713

$
520

$
497,032




$
(290,986
)
$
(91,853
)Comprehensive income:Net income


51,275







$
51,275


51,275Other comprehensive income (loss), net of tax:Change in pension and postretirement benefit plans


1,273








1,273





1,273Net unrealized loss on hedges


(4,311
)







(4,311
)




(4,311
)Comprehensive income










$
48,237Effects of changing the pension plan measurement date pursuant to FASB 158:Service cost, interest cost, and expected return on plan assets for October 1December 31, 2007, net of taxes


(4,603
)










(4,603
)Amortization of actuarial gain and prior service cost for October 1December 31, 2007, net of taxes


670














670Purchases of stock under stock repurchase program


(363
)




(363
)Proceeds from public stock offering


280,432


32


280,400Stock issued upon the exercise of stock options


7,544


4


7,540Stock issued upon conversion of convertible notes


785


1


784Tax benefit from the exercise of stock
options


6,322





6,322Dividends paid, $0.10 per share


(5,225
)




(5,225
)Stock-based compensation


4,084





4,084Other


(1,402
)




(1,402
)Balance at June 30, 2008

$
451,194

$
557

$
789,172




$
(244,314
)
$
(94,221
)


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

4

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WALTER INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(IN THOUSANDS)

For the six months
ended June 30,2008

2007OPERATING ACTIVITIESNet income

$
51,275

$
47,676Loss from discontinued operations





2,229Income from continuing operations


51,275


49,905Adjustments to reconcile income from continuing operations to net cash provided by operating activities:Provision for losses on instalment notes receivable


7,327


5,390Depreciation


27,600


22,221Other


15,353


4,802Decrease (increase) in assets:Receivables


(51,054
)

8,874Inventories


(18,261
)

(5,175
)Prepaid expenses


5,352


(639
)Instalment notes receivable, net


(41
)

(41,099
)Increase (decrease) in liabilities:Accounts payable


10,473


(2,888
)Accrued expenses


(2,568
)

(23,852
)Accrued interest


(1,437
)

(2,198
)Cash flows provided by operating activities


44,019


15,341INVESTING ACTIVITIESPurchases of loans





(34,988
)Principal payments received on purchased loans


8,028


20,908Decrease in short-term investments, restricted


14,029


6,525Additions to property, plant and equipment


(58,069
)

(60,956
)Other


1,400


2,613Cash flows used in investing activities


(34,612
)

(65,898
)FINANCING ACTIVITIESIssuance of mortgage-backed/asset-backed notes


25,000


113,350Payments of mortgage-backed/asset-backed notes


(293,864
)

(118,598
)Proceeds from issuances of other debt


280,000


Retirement of other debt


(315,669
)

(29,071
)Proceeds from public stock offering


280,432


Other


1,733


(3,633
)Cash flows used in financing activities


(22,368
)

(37,952
)Cash flows used in continuing operations


(12,961
)

(88,509
)CASH FLOWS FROM DISCONTINUED OPERATIONSCash flows provided by operating activities





630Cash flows provided by discontinued operations





630Net decrease in cash and cash equivalents

$
(12,961
)
$
(87,879
)Cash and cash equivalents at beginning of period

$
30,614

$
127,369Add: Cash and cash equivalents of discontinued operations at beginning of period





1Net decrease in cash and cash equivalents


(12,961
)

(87,879
)Cash and cash equivalents at end of period

$
17,653

$
39,491


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

5

---



WALTER INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(IN THOUSANDS)

For the six months
ended June 30,2008

2007SUPPLEMENTAL DISCLOSURESFinancing Activities:Non-cash transaction:One-year property insurance policy financing agreement

$
17,355

$
12,516


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

6

---



WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 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 13. Through these operating segments, the Company offers a diversified line of products and services including coal and natural
gas, furnace and foundry coke, slag fiber, mortgage financing and home construction. In the fourth quarter of 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. Operating results
for the three and six months ended June 30, 2007 have been revised to reflect this change.

The
accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 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 income (loss) from discontinued operations (in thousands):

For the
three months
ended
June 30, 2007

For the
six months
ended
June 30, 2007Net sales and revenues

$
5,317

$
12,358Income (loss) from discontinued operations before income taxes

$
433

$
(3,428
)Income tax (expense) benefit


(152
)

1,199Income (loss) from discontinued operations

$
281

$
(2,229
)


7

---



WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2008 (Unaudited)

Note 2Discontinued Operations (Continued)

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

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 16 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 been closed as part of the restructuring. As a result, the Company recorded a restructuring charge of $6.8 million in the first quarter of
2008, in Homebuilding, of which $4.3 million related to impairments of property, plant and equipment, $1.7 million related to severance obligations due to a 25 percent reduction
in workforce at Homebuilding and $0.8 million related to lease obligations of closed sales centers. This charge appears as restructuring and impairment charges in the statements of income.

8

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WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2008 (Unaudited)

Note 4Restructuring and Impairment (Continued)

The
following table summarizes restructuring activity for the three months ended June 30, 2008 (in thousands):

Balance at
March 31,
2008

Restructuring
and
Impairment
Charges

Cash
Payments

Balance at
June 30,
2008Severance obligations

$
1,197

$


$
(746
)
$
451Lease obligations


779





(372
)

407Total

$
1,976

$


$
(1,118
)
$
858


The
following table summarizes restructuring activity for the six months ended June 30, 2008 (in thousands):

Balance at
January 1,
2008

Restructuring
and
Impairment
Charges

Cash
Payments

Other
Non-Cash
Charges

Balance at
June 30,
2008Impairments of property, plant and
equipment

$


$
4,322

$


$
(4,322
)
$
Severance obligations





1,669


(1,218
)




451Lease obligations





779


(372
)




407Total

$


$
6,770

$
(1,590
)
$
(4,322
)
$
858


Note 5Restricted Short-Term Investments

Restricted short-term investments at June 30, 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") ($54.5 million and
$68.8 million, respectively) which are available only to pay expenses of the Trusts and principal and interest on indebtedness of the Trusts, and (ii) miscellaneous other segregated
accounts restricted to specific uses ($7.3 million and $7.1 million, respectively).

Note 6Instalment Notes Receivable

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

June 30,
2008

December 31,
2007Instalment notes receivable

$
1,610,794

$
1,616,753Mortgage loans


224,897


234,298Less: Allowance for losses


(13,946
)

(13,992
)Net

$
1,821,745

$
1,837,059


9

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WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2008 (Unaudited)

Note 7Inventories

Inventories are summarized as follows (in thousands):

June 30,
2008

December 31,
2007Finished goods

$
37,788

$
29,650Goods in process


16,302


19,598Raw materials and supplies


23,272


16,021Repossessed houses held for resale


42,575


36,407Total inventories

$
119,937

$
101,676


Note 8Debt

2005 Walter Credit Agreement

In 2005, Walter 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, $139.7 million of which was outstanding as of June 30, 2008 with a weighted average
interest rate of 5.672%, 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 its wholly owned domestic subsidiaries. The term loan requires quarterly principal payments of $0.4 million through October 3, 2012, at which time
the remaining outstanding principal is due.

On
April 30, 2008, Walter amended the 2005 Walter Credit Agreement to allow an additional $250.0 million of borrowings under the revolving credit facility, thereby
increasing the revolving credit facility to $475.0 million. Available funds of $214.8 million were used to repay principal, interest and fees and terminate the Mid-State
Trust IX and Mid-State Trust XIV mortgage warehouse facilities, which were due to mature in 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 the amendment to the 2005 Walter Credit Agreement, the Company incurred $3.7 million of refinancing fees. These fees were deferred and are being amortized over
the remaining life of the revolving credit facility.

During
the six months ended June 30, 2008, the Company borrowed $280.0 million under the revolving credit facility. On June 16, 2008, the Company completed an
offering of shares of its common

10

---



WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2008 (Unaudited)

Note 8Debt (Continued)

stock
and received $280.4 million of net proceeds, as more fully discussed in Note 11. During June 2008, the net proceeds from the offering were used to repay $77.9 million on the
outstanding term loan and $202.5 million on the revolving credit facility. Additional repayments on the revolving credit facility during the three months ended June 30, 2008 totaled
$28.7 million. At June 30, 2008, the Company had $48.8 million outstanding under the revolving credit facility at a weighted average interest rate of 5.48%.

Under
the terms of the Company's amended 2005 Walter Credit Agreement, availability under the revolving credit facility was reduced from $475.0 million to $373.8 million in
connection with the completion of the stock offering. As of June 30, 2008, the Company had $47.5 million in outstanding stand-by letters of credit and $277.5 million
of availability for future borrowings under the revolving credit facility.

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

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

At the beginning of the second quarter of 2008, the Company had two variable funding loan facilities ("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.

On
April 30, 2008, the Company repaid all outstanding borrowings and terminated these facilities using proceeds from the amended 2005 Walter Credit Agreement, as discussed above.
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, after May 1, 2008, WMC is no longer providing financing to new customers of Homebuilding. However, substantially all of the backlog of homes with signed contracts and
those which were under construction as of May 1, 2008, were or are expected to be completed over the next six months and financed by WMC. The Company will finance these WMC instalment notes
receivable
with operating cash flows or funds from borrowings under the 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.

11

---



WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2008 (Unaudited)

Note 9Pension and Other Postretirement Benefits

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

Pension Benefits

Other BenefitsFor the three months ended June 30,

For the three months ended June 30,2008

2007

2008

2007Components of net periodic benefit cost:Service cost

$
1,002

$
1,014

$
753

$
783Interest cost


3,003


2,725


5,378


4,968Expected return on plan assets


(3,632
)

(3,059
)




Amortization of prior service cost


76


104


(794
)

(887
)Amortization of net actuarial loss


615


1,142


1,259


1,823Net periodic benefit cost

$
1,064

$
1,926

$
6,596

$
6,687




Pension Benefits

Other BenefitsFor the six months ended June 30,

For the six months ended June 30,2008

2007

2008

2007Components of net periodic benefit cost:Service cost

$
2,004

$
2,028

$
1,506

$
1,533Interest cost


6,006


5,450


10,752


9,771Expected return on plan assets


(7,264
)

(6,118
)




Amortization of prior service cost


152


208


(1,588
)

(1,951
)Amortization of net actuarial loss


1,230


2,285


2,518


3,666Net periodic benefit cost

$
2,128

$
3,853

$
13,188

$
13,019


12

---



WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2008 (Unaudited)

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 June 30, 2008 and 2007 was $46.5 million and $14.2 million, respectively. Comprehensive income for the six months ended
June 30, 2008 and 2007, was $48.2 million and $43.5 million, respectively.

Note 11Stockholders' Equity

On June 16, 2008, the Company completed a public offering of 3,220,000 shares of its common stock at a price of $90.75 per share. The Company received $280.4 million of net
proceeds from this offering, after deducting underwriting discounts and offering expenses. The Company used the net proceeds from this offering to repay $280.4 million of the borrowings
outstanding under the Company's 2005 Walter Credit Agreement. See Note 8.

On
July 31, 2008, the Board of Directors approved an increase in the Company's regular quarterly dividend rate from $0.05 per common share to $0.10 per common share, payable on
September 12, 2008 to shareholders of record at the close of business on August 8, 2008.

Note 12Net Income Per Share

A reconciliation of the basic and diluted net income per share computations for the three and six months ended June 30, 2008 and 2007 are as follows (in thousands, except per
share data):

For the three months ended June 30,2008

2007Basic

Diluted

Basic

DilutedNumerator:Income from continuing operations

$
50,776

$
50,776

$
17,770

$
17,770Effect of dilutive securities:Interest related to 3.75% convertible senior subordinated notes, net of tax(a)











5$
50,776

$
50,776

$
17,770

$
17,775Income from discontinued operations

$


$


$
281

$
281Denominator:Average number of common shares outstanding


52,983


52,983


52,081


52,081Effect of dilutive securities:Stock options and restricted stock units ("units")(b)





788





4103.75% convertible senior subordinated notes(a)











8452,983


53,771


52,081


52,575Income from continuing operations per share

$
0.96

$
0.94

$
0.34

$
0.33Income from discontinued operations per share








0.01


0.01Net income per share

$
0.96

$
0.94

$
0.35

$
0.34


13

---



WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2008 (Unaudited)

Note 12Net Income Per Share (Continued)

For the six months ended June 30,2008

2007Basic

Diluted

Basic

DilutedNumerator:Income from continuing operations

$
51,275

$
51,275

$
49,905

$
49,905Effect of dilutive securities:Interest related to 3.75% convertible senior subordinated notes, net of tax(a)











10$
51,275

$
51,275

$
49,905

$
49,915Loss from discontinued operations

$


$


$
(2,229
)
$
(2,229
)Denominator:Average number of common shares outstanding


52,582


52,582


52,046


52,046Effect of dilutive securities:Stock options and restricted stock units ("units")(b)





751





3953.75% convertible senior subordinated notes(a)











8452,582


53,333


52,046


52,525Income from continuing operations per share

$
0.98

$
0.96

$
0.96

$
0.95Loss from discontinued operations per share








(0.04
)

(0.04
)Net income per share

$
0.98

$
0.96

$
0.92

$
0.91


---

14

---



WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2008 (Unaudited)

Note 13Segment Information

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

For the three months ended June 30,2008

2007Net sales and revenues:Natural Resources

$
237,428

$
139,019Sloss


53,265


33,122Natural Resources and Sloss


290,693


172,141Financing


51,722


55,046Homebuilding


39,227


68,175Financing and Homebuilding Group


90,949


123,221Other


706


3,268Consolidating eliminations


(12,312
)

(2,106
)Sales and revenues

$
370,036

$
296,524Segment operating income (loss):Natural Resources

$
64,573

$
22,399Sloss


15,091


2,948Natural Resources and Sloss


79,664


25,347Financing(a)


14,334


13,045Homebuilding


(3,243
)

(467
)Financing and Homebuilding Group


11,091


12,578Other


(8,184
)

(4,941
)Consolidating eliminations


(245
)

Operating income from continuing operations


82,326


32,984Less other debt interest expense


(11,184
)

(7,218
)Income from continuing operations before income tax expense


71,142


25,766Income tax expense


20,366


7,996Income from continuing operations

$
50,776

$
17,770Depreciation:Natural Resources

$
11,528

$
8,776Sloss


979


943Natural Resources and Sloss


12,507


9,719Financing


123


273Homebuilding


775


1,272Financing and Homebuilding Group


898


1,545Other


228


327Total

$
13,633

$
11,591


15

---



WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2008 (Unaudited)

Note 13Segment Information (Continued)



For the six months ended June 30,2008

2007Net sales and revenues:Natural Resources

$
390,459

$
310,465Sloss


104,136


65,923Natural Resources and Sloss


494,595


376,388Financing


103,826


108,793Homebuilding


79,299


130,308Financing and Homebuilding Group


183,125


239,101Other


1,124


4,538Consolidating eliminations


(13,118
)

(3,209
)Sales and revenues

$
665,726

$
616,818Segment operating income (loss):Natural Resources

$
82,383

$
79,940Sloss


33,791


4,254Natural Resources and Sloss


116,174


84,194Financing(a), (b)


7,622


23,616Homebuilding(c)


(17,970
)

(3,145
)Financing and Homebuilding Group


(10,348
)

20,471Other


(16,380
)

(10,586
)Consolidating eliminations


(644
)

Operating income from continuing operations


88,802


94,079Less other debt interest expense


(16,899
)

(14,565
)Income from continuing operations before income tax expense


71,903


79,514Income tax expense


20,628


29,609Income from continuing operations

$
51,275

$
49,905Depreciation:Natural Resources

$
22,903

$
16,656Sloss


1,985


1,859Natural Resources and Sloss


24,888


18,515Financing


258


554Homebuilding


1,994


2,506Financing and Homebuilding Group


2,252


3,060Other


460


646Total

$
27,600

$
22,221


---

16

---



WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2008 (Unaudited)

Note 14Commitments and Contingencies



The Company is currently under audit by the Internal Revenue Service (the "IRS) for the years ended December 31, 2002 through
December 31, 2005 and the IRS has proposed adjustments relating to the audit. The Company is in the process of reviewing these proposed adjustments and management believes that the final
resolution of the proposed adjustments will not have a material adverse effect on the financial condition of the Company.

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, 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.

17

---



WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2008 (Unaudited)

Note 14Commitments and Contingencies (Continued)

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.



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

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

Sloss
and Walter Industries, Inc. have received a letter from attorneys purporting to represent a group of residents of the North Birmingham area of Jefferson County, Alabama
alleging personal injury, property damage, nuisance and trespass. The allegations against Sloss relate to air emissions from its
coking facility. Walter is named in this litigation because of its ownership interest in Sloss. The Company has reached an agreement in principle for the settlement of these allegations. As a result,
the Company recognized a charge of $2.2 million in the second quarter of 2008 as selling, general and administrative expenses in the statements of income.

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

18

---



WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2008 (Unaudited)

Note 14Commitments and Contingencies (Continued)

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.



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.



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

Note 15Income Taxes

The Company's effective tax rate for the three and six months ended June 30, 2008 was 28.6% and 28.7%, respectively, compared to 31.0% and 37.2% for the same periods in 2007. The
effective tax rate for the three and six months ended June 30, 2008 includes the favorable impact of a $3.7 million tax credit resulting from the resolution of certain Federal tax
matters associated with the IRS audit for the years ended May 31, 2000, December 31, 2000 and December 31, 2001. Excluding this discrete item, the effective tax rate for the six
months ended June 30, 2008 would have been 33.8%. The resolution of certain Federal tax matters also resulted in a net reduction to the accrual for unrecognized tax benefits of
$1.1 million. 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 discrete item, the effective tax rate for the six months ended June 30, 2007 would have been 31.7%. Both 2008 and 2007 effective tax rates differ from the Federal statutory rate
primarily due to the benefit from percentage depletion and domestic production deductions.

Note 16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 June 30, 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

$
521

$


$
521

$
Natural gas hedge agreements


15,624





15,624





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.

19

---





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 13 of "Notes to Condensed Consolidated Financial Statements," which describe the Company's net sales and revenues and operating
income by operating segment.

RESULTS OF OPERATIONS

Summary Operating Results of Continuing Operations for the Three Months Ended June 30, 2008 and 2007

For the three months ended June 30, 2008(in thousands)

Natural
Resources

Sloss

Financing

Homebuilding

Other

Cons Elims

TotalNet sales

$
233,274

$
52,862

$
3,183

$
38,599

$
80

$
(12,312
)
$
315,686Interest income on instalment notes








48,022











48,022Miscellaneous income


4,154


403


517


628


626





6,328Net sales and revenues


237,428


53,265


51,722


39,227


706


(12,312
)

370,036Cost of sales


148,390


32,038


1,461


31,054


17


(12,067
)

200,893Interest expense(1)








25,846











25,846Depreciation


11,528


979


123


775


228





13,633Selling, general & administrative


5,586


5,319


6,795


10,793


8,907





37,400Provision for possible losses on instalment notes








3,002











3,002Postretirement benefits


7,284


(162
)

(112
)

(152
)

(262
)




6,596Amortization of other intangibles


67





273











340Operating income (loss)

$
64,573

$
15,091

$
14,334

$
(3,243
)
$
(8,184
)
$
(245
)

82,326Other debt interest expense




















(11,184
)Income from continuing operations before income taxes



















$
71,142


---

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

Natural
Resources

Sloss

Financing

Homebuilding

Other

Cons Elims

TotalNet sales

$
135,174

$
32,975

$
3,360

$
68,150

$
1,593

$
(2,106
)
$
239,146Interest income on instalment notes








50,662











50,662Miscellaneous income


3,845


147


1,024


25


1,675





6,716Net sales and revenues


139,019


33,122


55,046


68,175


3,268


(2,106
)

296,524Cost of sales


95,269


27,050


2,208


51,444


592


(2,106
)

174,457Interest expense(1)








29,745











29,745Depreciation


8,776


943


273


1,272


327





11,591Selling, general & administrative


5,173


2,397


6,946


16,074


7,535





38,125Provision for possible losses on instalment notes








2,493











2,493Postretirement benefits


7,402


(216
)

(106
)

(148
)

(245
)




6,687Amortization of other intangibles








442











442Operating income (loss)

$
22,399

$
2,948

$
13,045

$
(467
)
$
(4,941
)
$



32,984Other debt interest expense




















(7,218
)Income from continuing operations before income taxes



















$
25,766


---

20

---



Overview

The Company's income from continuing operations for the three months ended June 30, 2008 was $50.8 million, or $0.94 per
diluted share, which compares to $17.8 million, or $0.33 per diluted share for the three months ended June 30, 2007.

In
the three months ended June 30, 2008, the Company's results included a 24.8% increase in net sales and revenues and a 149.6% increase in operating income from continuing
operations versus the same period in 2007. These results were led by the Company's core Natural Resources and Sloss businesses that generated combined revenues of $290.7 million, up 68.9%
versus the same period in 2007, and combined operating income of $79.7 million, up 214.3% versus the same period in 2007. Factors contributing to these increases included higher average
metallurgical coal and coke pricing as well as increased volumes. Partially offsetting these favorable increases were decreases in net sales and revenues and operating income from the combined
Homebuilding and Financing businesses. Revenues and operating income from these businesses declined due to fewer unit deliveries and an additional discount charge on instalment notes receivable
originated during the second quarter of 2008 at Homebuilding as well as lower prepayment-related interest income at Financing. The impact of these factors on the combined operating income for these
businesses was partially offset by lower selling, general and administrative expenses at Homebuilding resulting from restructuring actions taken in February 2008 and from lower interest expense at
Financing as a result of the April 2008 repayment of all outstanding borrowings under its variable funding loan facilities ("warehouse facilities") as discussed in Note 8 of the "Notes to
Condensed Consolidated Financial Statements."

Outlook and Strategic Initiatives



21

---





22

---





Homebuilding and Financing



23

---





Other



Summary of Second Quarter Consolidated Results of Continuing Operations

Net sales and revenues for the three months ended June 30, 2008 were $370.0 million, an increase of $73.5 million,
or 24.8% from $296.5 million in the same period in 2007. This increase in revenues was primarily driven by higher metallurgical coal and coke pricing as well as higher coal and coke sales
volumes. These increases were partially offset by declines in unit deliveries at Homebuilding, a $4.2 million increase in the discount charge on instalment notes receivable originated during
the second quarter of 2008, and lower Financing prepayment income.

Cost
of sales, exclusive of depreciation, increased $26.4 million to $200.9 million and represented 63.6% of net sales for the three months ended June 30, 2008
versus $174.5 million or 72.9% of net sales for the same period in 2007. The increase in costs results from increased sales volume at both Natural Resources and Sloss, as well as increased
material costs at Sloss and higher material, labor and freight costs at Natural Resources. These increases were partially offset by lower costs at Homebuilding resulting from fewer unit deliveries.
The decrease in cost of sales as a percentage of net sales in 2008 as compared to 2007 results primarily from increased sales pricing, which outpaced cost increases at Natural Resources and Sloss.

Depreciation
for the three months ended June 30, 2008 was $13.6 million, an increase of $2.0 million compared to the same period in 2007. The increase was primarily
due to the Company's continued investment in the expansion of Natural Resources' mining operations and replacement of equipment.

Interest
expensemortgage-backed notes was $25.8 million for the three months ended June 30, 2008, down $3.9 million compared to the same period in 2007.
This decrease was due to a reduction in the weighted average borrowings outstanding for the three months ended June 30, 2008 as compared to the same period in 2007 resulting from the
pay-off and termination of the warehouse facilities in April 2008 totaling $214.0 million, as well as normal repayments on the other securitized notes. The weighted average interest
rate for the three months ended June 30, 2008 was also slightly lower as compared to the same period in 2007.

24

---



Interest
expenseother debt increased $4.0 million to $11.2 million for the three months ended June 30. 2008, primarily as a result of increased weighted
average borrowings outstanding and the expensing of previously deferred financing fees, partially offset by a reduction in the weighted average interest rate. For further discussion, see Note 8
of the "Notes to Condensed Consolidated Financial Statements."

The
Company's effective tax rate for the three months ended June 30, 2008 and 2007 was 28.6% and 31.0%, respectively. The effective tax rate for the three months ended
June 30, 2008 includes the favorable impact of a $3.7 million tax credit resulting from the resolution of certain Federal tax matters associated with the IRS audit for the years ended
May 31, 2000, December 31, 2000 and December 31, 2001. Excluding this discrete item, the effective tax rate for the quarter would have been 33.8%. Both 2008 and 2007 effective tax
rates differ from the Federal statutory rate primarily due to the benefits from percentage depletion and domestic production deductions.

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

Segment Analysis



Natural Resources, which include the operations of Jim Walter Resources, Kodiak Mining, TRI and United Land, reported revenues of
$237.4 million in the second quarter of 2008, an increase of $98.4 million from the same period last year. The increase in revenues was primarily due to a 17.5% increase in selling
prices for metallurgical coal, as compared to the same period in 2007. Additionally, there was an increase in 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
June 30,2008

2007Average Coal Selling Price (per short ton)

$
110.79

$
94.29Tons of Coal Sold (in thousands)


1,747


1,301Average Natural Gas Selling Price (per MCF)

$
8.99

$
7.96Billion Cubic Feet of Natural Gas Sold


1.6


1.8Number of Natural Gas Wells


412


427


Natural
Resources reported operating income of $64.6 million in the second quarter of 2008, compared to $22.4 million in the same period in 2007. The $42.2 million
increase in operating income was primarily the result of the increase in net sales and revenues discussed above, partially offset by an increase in cost of sales of $53.1 million, due to
increased sales volume and increased production costs per ton caused by inflationary increases in material, labor and freight costs as well as a higher mix of continuous miner tons to longwall tons
associated with the development of the Mine No. 7 Southwest "A" panel and the Mine No. 7 East expansion at Jim Walter Resources. Additionally, depreciation increased $2.8 million.



Sloss generated net sales and revenues of $53.3 million for the three months ended June 30, 2008, an increase of 60.8%
compared to the same period in 2007, and generated operating income of $15.1 million, an increase of $12.1 million compared to the same period in 2007. These increases were driven by
higher coke pricing and increased sales volumes, partially offset by higher raw material coal costs and a $2.2 million charge related to the resolution of a legal matter.

25

---





Net sales and revenues were $51.7 million for the three months ended June 30, 2008, a decrease of $3.3 million
from the same period in 2007 primarily due to lower prepayment income. Financing generated operating income of $14.3 million in the three months ended June 30, 2008, an increase of
$1.3 million over the same period in 2007. The increase in operating results was primarily due to a reduction in interest expense partially offset by decreased revenues as discussed above. The
decrease in interest expense was caused by a reduction in the weighted average borrowings outstanding for the three months ended June 30, 2008 as compared to the same period in 2007 that
resulted from the pay-off and termination of the warehouse facilities totaling $214.0 million in April 2008, as well as normal repayments on the other securitized notes. The
weighted average interest rate for the three months ended June 30, 2008 was also slightly lower as compared to the same period in 2007.

Delinquencies
(the percentage of amounts outstanding over 30 days past due) were 4.1% at June 30, 2008, compared to 3.8% at June 30, 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.



Net sales and revenues were $39.2 million for the three months ended June 30, 2008, a decrease of $28.9 million
from the same period in 2007 primarily as a result of a 38.7% decrease in units completed 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
June 30,2008

2007Unit completions


421


687Average revenue per home sold(1)

$
90,200

$
98,900






Homebuilding's
operating loss was $3.2 million for the three months ended June 30, 2008 compared to an operating loss of $0.5 million for the three months ended
June 30, 2007. The increase in operating loss was primarily due to the effect of lower sales volume and the increase in the discount discussed above, offset in part by lower personnel related
cost as a result of the restructuring in the first quarter 2008 as further discussed in Note 4 of the "Notes to Condensed Consolidated Financial Statements."

26

---







Results in the "Other" segment, comprised of the Company's corporate expenses and land subsidiaries other than United Land, decreased
by $3.2 million in the first quarter of 2008 when compared to the same period in 2007 caused primarily by reduced interest income and reduced land sales.

RESULTS OF OPERATIONS

Summary Operating Results of Continuing Operations for the Six Months Ended June 30, 2008 and 2007

For the six months ended June 30, 2008Natural
Resources

Sloss

Financing

Homebuilding

Other

Cons
Elims

Total(in thousands)Net sales

$
383,788

$
103,524

$
5,753

$
78,659

$
80

$
(13,118
)
$
558,686Interest income on instalment notes








96,732











96,732Miscellaneous income


6,671


612


1,341


640


1,044





10,308Net sales and revenues


390,459


104,136


103,826


79,299


1,124


(13,118
)

665,726Cost of sales


259,977


60,367


3,231


63,811


17


(12,474
)

374,929Interest expense(1)








54,154











54,154Interest rate hedge ineffectiveness








16,981











16,981Depreciation


22,903


1,985


258


1,994


460





27,600Selling, general & administrative


10,492


8,316


13,912


24,998


17,552





75,270Provision for possible losses on instalment notes








7,327











7,327Postretirement benefits


14,565


(323
)

(225
)

(304
)

(525
)




13,188Amortization of other intangibles


139





566











705Restructuring & impairment charges











6,770








6,770Operating income (loss)

$
82,383

$
33,791

$
7,622

$
(17,970
)
$
(16,380
)
$
(644
)

88,802Other debt interest expense




















(16,899
)Income from continuing operations before income taxes



















$
71,903


---

27

---



For the six months ended June 30, 2007Natural
Resources

Sloss

Financing

Homebuilding

Other

Cons
Elims

Total(in thousands)Net sales

$
297,818

$
65,539

$
6,433

$
130,259

$
1,693

$
(3,209
)
$
498,533Interest income on instalment notes








100,227











100,227Miscellaneous income


12,647


384


2,133


49


2,845





18,058Net sales and revenues


310,465


65,923


108,793


130,308


4,538


(3,209
)

616,818Cost of sales


189,869


55,361


4,005


99,418


653


(3,209
)

346,097Interest expense(1)








59,516











59,516Depreciation


16,656


1,859


554


2,506


646





22,221Selling, general & administrative


9,555


4,881


15,004


31,825


14,311





75,576Provision for possible losses on instalment notes








5,390











5,390Postretirement benefits


14,445


(432
)

(212
)

(296
)

(486
)




13,019Amortization of other intangibles








920











920Operating income (loss)

$
79,940

$
4,254

$
23,616

$
(3,145
)
$
(10,586
)
$



94,079Other debt interest expense




















(14,565
)Income from continuing operations before income taxes



















$
79,514


---

Summary of Year to Date Consolidated Results of Continuing Operations

Net sales and revenues for the six months ended June 30, 2008 were $665.7 million. Revenues increased by
$48.9 million, or 7.9% from $616.8 million in the same period in 2007. The increase in revenues was primarily driven by higher metallurgical coal and coke pricing as well as increased
coal sales volumes partially offset by declines in unit deliveries at Homebuilding, an additional discount on instalment notes originated during the first half of 2008, and a decline in Financing's
prepayment income.

Cost
of sales, exclusive of depreciation, increased $28.8 million to $374.9 million for the six months ended June 30, 2008 and represented 67.1% of net sales in 2008
versus $346.1 million and 69.4% of net sales in the same period of 2007. Natural Resources and Sloss generated increased costs related to increased sales volume, as well as increased material,
labor and freight costs. These increases were partially offset by decreases from Homebuilding as a result of fewer unit deliveries. The decrease in cost of sales as a percentage of net sales in 2008
resulted primarily from the increased sales pricing, which outpaced increased costs at Natural Resources and Sloss.

Depreciation
for the six months ended June 30, 2008 was $27.6 million, an increase of $5.4 million compared to the same period in 2007. The increase was primarily
due to the Company's continued investment in the expansion of Natural Resources' mine operations and replacement of mining equipment.

Provision
for losses on instalment notes increased $1.9 million to $7.3 million for the six months ended June 30, 2008 compared to $5.4 million for the same
period in 2007. This increase primarily relates to increased losses on the ARM portion of the mortgage loans in the instalment notes receivable portfolio.

Interest
expensemortgage-backed/asset-backed notes decreased $5.4 million for the six months ended June 30, 2008 compared to the same period in 2007. This
decrease was due to a reduction in the weighted average borrowings outstanding for the six months ended June 30, 2008 as compared to the same period in 2007 primarily due to the
pay-off and retirement of the warehouse facilities in April

28

---



2008
totaling $214.0 million as well as normal repayments on the other securitized notes. The weighted average interest rate for the six months ended June 30, 2008 was also slightly
lower as compared to the same period in 2007.

The
interest rate hedge ineffectiveness charge of $17.0 million in the six months ended June 30, 2008 was recorded to recognize a loss on Financing's maturing interest rate
swaps that no longer qualified for hedge accounting treatment. The interest rate swaps, originally intended to hedge the Company's next securitization, no longer qualified 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.

Interest
expenseother debt increased $2.3 million to $16.9 million for the six months ended June 30, 2008 primarily as a result of increased weighted
average borrowings outstanding and expensing previously deferred financing fees, partially offset by a reduction in weighted average interest rate. For further discussion see Note 8 of the
"Notes to Condensed Consolidated Financial Statements."

Restructuring
charges of $6.8 million in the six months ended June 30, 2008 represent charges for the restructuring of Homebuilding in the first quarter of 2008 as further
discussed in Note 4 of the "Notes to Condensed Consolidated Financial Statements."

The
Company's effective tax rate for the six months ended June 30, 2008 and 2007 was 28.7% and 37.2%, respectively. The effective tax rate for the six months ended June 30,
2008 includes the favorable impact of a $3.7 million tax credit resulting from the resolution of certain Federal tax matters associated with the IRS audit for the years ended May 31,
2000, December 31, 2000 and December 31, 2001. Excluding this discrete item, the effective tax rate for 2008 would have been 33.8%. 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 discrete item, the effective tax rate for the six
months ended June 30, 2007 would have been 31.7%. Both 2008 and 2007 effective tax rates differ from the Federal statutory rate primarily due to the benefits from percentage depletion and
domestic production deductions.

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

Segment Analysis



Natural Resources reported revenues of $390.5 million for the six months ended June 30, 2008, up $80.0 million
from the same period in 2007. The increase in revenues was driven primarily by increased metallurgical coal volumes and coal pricing versus the prior-year period. Statistics presented in
the following table relate to Jim Walter Resources only.

Six months ended
June 30,2008

2007Average Metallurgical Coal Selling Price (per short ton)

$
98.61

$
97.55Tons of Coal Sold (in thousands)


3,241


2,823Average Natural Gas Selling Price (per MCF)

$
8.48

$
7.94Billion Cubic Feet of Natural Gas Sold


3.2


3.6Number of Natural Gas Wells


412


427


Natural
Resources reported operating income of $82.4 million for the six month period in 2008, compared to $79.9 million in the same period in 2007. Results in the
current-year period benefitted

29

---



from
increased coal sales volumes and pricing, but were almost entirely offset by higher production costs on a per-ton basis. Production costs per ton for the first half of 2008 were
higher than the first half of 2007 due to inflationary increases in labor and materials as well as a higher mix of continuous miner tons to longwall tons associated with the development of the Mine
No. 7 Southwest "A" panel and the Mine No. 7 East expansion at Jim Walter Resources. In addition, 2007 benefitted from certain tax credits that were discontinued in 2008.



Net sales and revenues were $104.1 million for the six months ended June 30, 2007, an increase of $38.2 million
compared to the same period in 2007. This increase in revenues is mostly related to an increase in furnace and foundry coke average sales price per ton, which more than offset a slight decrease in
tons sold. Sloss reported operating income of $33.8 million
for the six months ended June 30, 2008 compared to $4.3 million in the same period in 2007, an increase of $29.5 million. Most of the increase results from the increase in furnace
and foundry coke average sales price per ton as described above, partially offset by higher raw material coal cost and a $2.2 million charge related to the resolution of a legal matter.



Net sales and revenues were $103.8 million for the six months ended June 30, 2008, a decrease of $5.0 million from
the prior-year period. This decrease is primarily attributable to lower prepayment-related interest income. Operating income was $7.6 million for the six months ended
June 30, 2008, a decrease of $16.0 million from the prior-year period. The decrease in operating income is primarily a result of recognizing a $17.0 million loss on
interest rate hedge ineffectiveness during the six months ended June 30, 2008.



Net sales and revenues were $79.3 million for the six months ended June 30, 2008, a decrease of $51.0 from the six months
ended June 30, 2007 primarily as a result of a 34% decrease in units sold and a $8.4 million increase in the discount required to transfer instalment notes receivable to Financing at
estimated market value.

Six months ended
June 30,2008

2007Unit completions


863


1,315Average revenue per home sold(1)

$
90,333

$
98,500






Homebuilding's
operating loss of $18.0 million for the six months ended June 30, 2008 increased $14.9 million when compared to an operating loss of
$3.1 million for the six months ended June 30, 2007. The increase in operating loss was primarily due to the effect of lower sales volumes, the increase in the discount discussed above,
and restructuring charges of $6.8 million as further discussed in Note 4 of the "Notes to Condensed Consolidated Financial Statements."



Results in the "Other" segment, comprised of the Company's corporate expenses and land subsidiaries other than United Land, decreased
by $5.8 million in the six month period ended June 30, 2008 when compared to the same period in 2007. The decrease was driven by reduced land sales and increased employee-related
expenses and professional fees.

30

---





FINANCIAL CONDITION

Cash and cash equivalents of continuing operations decreased by $12.9 million from $30.6 million at December 31,
2007 to $17.7 million at June 30, 2008 reflecting $44.0 million in cash flows provided by continuing operating activities, completely offset by $34.6 million of cash flows
used in investing activities and $22.4 million of cash flows used in financing activities. See additional discussion in the Statement of Cash Flows section that follows.

Short-term
investments were $61.8 million at June 30, 2008, down $14.0 million from December 31, 2007 since collections on mortgages previously
pledged as collateral against the warehouse facilities are no longer restricted as a result of the payoff and termination of the warehouse facilities in April 2008.

Net
instalment notes receivable were $1,821.7 million at June 30, 2008, down $15.3 million from December 31, 2007 as a result of payments on outstanding notes
exceeding new loan originations. The reduction in new loan originations is the result of WMC not providing financing to new customers of Homebuilding after May 1, 2008.

Net
receivables were $148.5 million at June 30, 2008, an increase of $66.8 million from December 31, 2007 primarily attributable to increased net sales and
revenues from the Natural Resources and Sloss businesses.

Inventories
were $119.9 million at June 30, 2008, an increase of $18.3 million from December 31, 2007 primarily due to increased raw materials at Sloss and
Natural Resources in preparation for completing customer orders, as well as an increase in repossessed property at Financing.

Net
property, plant and equipment was $461.0 million at June 30, 2008, up $25.9 million from December 31, 2007 primarily due to the Company's continued
investment in the expansion of Natural Resources' mine operations and replacement of mining equipment.

Mortgage-backed/asset-backed
notes were $1,437.4 million at June 30, 2008, down $268.8 million from December 31, 2007 as a result of principal payments, which
included the $214.0 million payoff and termination of the warehouse facilities in April 2008.

Other
debt decreased by $19.0 million from December 31, 2007 primarily due to $310.1 million of payments on the amended 2005 Walter Credit Agreement, offset in part
by $280.0 million in borrowings under the revolving credit facility. See Note 8 of the "Notes to Condensed Consolidated Financial Statements" for further discussion.

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 June 30, 2008, total debt decreased $287.8 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 flows and available sources of liquidity will be sufficient
to meet substantially all operating needs, to make planned capital expenditures and to make all required interest and principal payments on indebtedness for the next twelve to eighteen months.
However, the Company's operating cash flows and liquidity are significantly influenced by numerous factors, including
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.

31

---





In 2005, Walter 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, $139.7 million of which was outstanding as of June 30, 2008 with a weighted average
interest rate of 5.672%, 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 its wholly owned domestic subsidiaries. The term loan requires quarterly principal payments of $0.4 million through October 3, 2012, at which time
the remaining outstanding principal is due.

On
April 30, 2008, Walter amended the 2005 Walter Credit Agreement to allow an additional $250.0 million of borrowings under the revolving credit facility, thereby
increasing the revolving credit facility to $475.0 million. Funds available of $214.8 million were used to repay principal, interest and fees and terminate the Mid-State
Trust IX and Mid-State Trust XIV mortgage warehouse facilities, which were due to mature in 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 the amendment to the 2005 Walter Credit Agreement, the Company incurred $3.7 million of refinancing fees. These fees were deferred and are being amortized over
the remaining life of the revolving credit facility.

During
the six months ended June 30, 2008, the Company borrowed $280.0 million under the revolving credit facility. On June 16, 2008, the Company completed an
offering of shares of its common stock and received $280.4 million of net proceeds, as more fully discussed in Note 11. During June 2008, the net proceeds from the offering were used to
repay $77.9 million on the term loan and $202.5 million on the revolving credit facility. Additional repayments on the revolving credit facility during the three months ended
June 30, 2008 totaled $28.7 million. At June 30, 2008, the Company had $48.8 million outstanding under the revolving credit facility at a weighted average interest rate of
5.48%.

Under
the terms of the Company's amended 2005 Walter Credit Agreement, availability under the revolving credit facility was reduced from $475.0 million to $373.8 million in
connection with the completion of the stock offering. As of June 30, 2008, the Company had $47.5 million in outstanding stand-by letters of credit and $277.5 million
of availability for future borrowings under the revolving credit facility.

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

32

---





At the beginning of the second quarter of 2008, the Company had two warehouse facilities totaling $350.0 million that provided
temporary warehouse financing to WMC for its current purchases of instalment notes and mortgages originated by Homebuilding.

On
April 30, 2008, the Company repaid all outstanding borrowings and terminated these facilities using proceeds from the amended 2005 Walter Credit Agreement, as discussed above.
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, after May 1, 2008, WMC is no longer providing financing to new customers of Homebuilding. However, the backlog of homes with signed contracts and those which were
under
construction as of May 1, 2008, were or are expected to be completed over the next six months and financed by WMC. As of June 30, 2008, an estimated 370 homes remain in the backlog,
representing a total of approximately $35.0 million in value to be funded by WMC. The Company will finance these WMC instalment notes receivable with operating cash flows or funds from
borrowings under the increased revolving credit facility. Homebuilding is transitioning to a third-party financing model including the use of government-sponsored loan programs.



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

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

Six months ended June 30,2008

2007Cash flows provided by operating activities

$
44,019

$
15,341Cash flows used in investing activities


(34,612
)

(65,898
)Cash flows used in financing activities


(22,368
)

(37,952
)Cash flows used in continuing operations


(12,961
)

(88,509
)Cash flows provided by discontinued operations





630Net decrease in cash and cash equivalents

$
(12,961
)
$
(87,879
)


Cash
balances were $17.7 million and $30.6 million at June 30, 2008 and December 31, 2007, respectively. The decrease in cash was primarily due to capital
expenditures of $58.1 million, net payments of mortgage-backed/asset-backed notes of $268.9 million, and net payments of other debt of $35.7 million. These cash flow uses were
partially offset by cash provided by operating activities of $44.0 million, $280.4 million in proceeds from the June 2008 stock offering, a $14.0 million decrease in restricted
short-term investments and $8.0 million from receipt of payments on purchased loans.

Net
cash provided by operating activities was $44.0 million for the six months ended June 30, 2008 as compared to $15.3 million for the same period in 2007. The
increase was primarily related to net income adjusted for non-cash items (major items include depreciation and amortization, restructuring and impairments, deferred income tax expense,
stock-based compensation and tax benefits on the exercise of employee stock options) of $101.6 million for the six months ended June 30, 2008 versus

33

---



$82.3 million
for the same period in 2007 and changes in operating assets and liabilities of $57.5 million for the six months ended June 30, 2008 compared to $67.0 million
for the same period in 2007.

Cash
flows used in investing activities of continuing operations for the six months ended June 30, 2008 were $34.6 million compared to $65.9 million for the same
period in 2007. Cash flows used in investing activities in the 2008 period included additions to property, plant and equipment totaling $58.1 million as the Company continued to invest in the
expansion of Natural Resources' mine operations and replacement of equipment, partially offset by $8.0 million in principal payments received on loans previously purchased by WMC and a
reduction of $14.1 million in restricted short term investments. Cash flows used in investing activities in the 2007 period included $61.0 million of additions to property plant and
equipment and a net outflow of $14.0 million associated with WMC's program to purchase loans from third parties. These outflows were partially offset by a reduction in restricted short term
investments of $6.5 million.

Cash
flows used by financing activities of continuing operations for the six months ended June 30, 2008 were $22.4 million compared to $38.0 million in the same
period in 2007. Cash flows used by financing activities in 2008 included net payments of mortgage-backed/asset-backed notes of $268.9 million and net retirements on other debt of
$35.7 million, partially offset by proceeds from the June 2008 stock offering of $280.4 million. See Note 11 to the "Notes To Condensed Consolidated Financial Statements" for
additional discussion. Cash flows used in financing activities for the six months ended June 30, 2007, were primarily attributable to $29.1 million of retirements on the Company's term
loan facility and net payments of mortgage-backed/asset-backed notes of $5.2 million.

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.

In
April 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



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 June 30, 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 six months
ended June 30, 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

34

---



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.

35

---





PART IIOTHER INFORMATION

Item 1.    Legal Proceedings

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

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

Item 1A.    Risk Factors

The Company's business, financial condition, operating results and cash flows can be impacted by a number of factors, any one of which
could cause our actual results to vary materially from recent results or from our anticipated future results. For a discussion identifying additional risk factors and important factors that could
cause actual results to differ materially from those anticipated, see the discussion in "Risk Factors" in the Company's Prospectus filed with the Securities And Exchange Commission on June 9,
2008. There has been no material changes in our risk factors from those disclosed in our Prospectus as noted above.

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 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.

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. Upon acquisition, these shares
were retired. At June 30, 2008, $19.0 million remains available under this authorization.

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

The Company's Annual Meeting of Shareholders was held on April 23, 2008. The stockholders voted on the following matter:

Proposal
I. The election of 9 directors (Howard L. Clark, Jr., Jerry W. Kolb, Patrick A. Kriegshauser, Mark J. O'Brien, Victor P.
Patrick, Bernard G. Rethore, George R. Richmond, Michael T. Tokarz, A. J. Wagner).

36

---



The
results of the voting for the directors were as follows:

Director

Affirmative Votes

Withheld VotesHoward L. Clark, Jr.


43,453,233


3,141,083Jerry W. Kolb


44,289,235


2,305,081Patrick A. Kriegshauser


46,003,563


590,754Mark J. O'Brien


46,303,468


290,848Victor P. Patrick


44,860,356


1,733,961Bernard G. Rethore


46,421,694


172,622George R. Richmond


46,303,707


290,610Michael T. Tokarz


43,453,920


3,140,397A. J. Wagner


46,053,901


540,416


Item 5.    Other Information



Item 6.    Exhibits



Exhibit
Number31.1

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

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


37

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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:
August 8, 2008

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