10-K

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K

ý	Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the year ended December 31, 2004
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.
(Exact name of registrant as specified in its charter)

Delaware	13-3429953
(State or other jurisdiction of	(IRS Employer
incorporation or organization)	Identification No.)
4211 W. Boy Scout Boulevard Tampa, Florida (Address of principal executive offices)	33607 (Zip Code)
Registrant's telephone number, including area code: (813) 871-4811
Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Name of exchange on which registered
Common Stock, par value $.01	New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE

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

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes    ý No    o

        The aggregate market value of voting stock held by non-affiliates of the registrant, based on the closing price of the Common Stock on June 30, 2004, the registrant's most recently completed second fiscal quarter, as reported by the New York Stock Exchange, was approximately $505.5 million.

        Number of shares of common stock outstanding as of February 28, 2005: 37,751,990

Documents Incorporated by Reference

        Applicable portions of the Proxy Statement for the Annual Meeting of Stockholders of the Company to be held April 28, 2005 are incorporated by reference in Part III of this Form 10-K.

PART I

Item 1.    Description of Business

(a)

Narrative Description of Business

General

        Walter Industries, Inc. ("the Company"), organized in 1987, is a diversified company which operates in five reportable segments: Homebuilding, Financing, Industrial Products, Natural Resources, and Other. Through these operating segments, the Company offers a diversified line of products and services including home construction, mortgage financing, ductile iron pressure pipe and related products, coal, natural gas, furnace and foundry coke, chemicals and slag fiber.

        On December 3, 2003, the Company completed the sale of Applied Industrial Materials Corporation ("AIMCOR"), previously a wholly-owned subsidiary of the Company, to Oxbow Carbon and Minerals LLC. AIMCOR, based in Stamford, Connecticut, marketed and distributed petroleum coke and performed refinery outsourcing services and, through its Metals division, supplied ferroalloys and other steel and foundry products. The Company also completed the sale of JW Aluminum Company ("JW Aluminum"), previously a wholly-owned subsidiary of the Company, to Wellspring Capital Management LLC on December 5, 2003. JW Aluminum, based in Mount Holly, South Carolina, manufactured specialty flat-rolled aluminum foil and sheet products, including "fin stock," used by the heating and cooling industry.

        As a result of the above sales, in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the operations of AIMCOR and JW Aluminum have been classified as discontinued operations in the statements of operations.

        The Company makes its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments thereto available on its website at www.walterind.com without charge as soon as reasonably practicable after filing or furnishing to the SEC. Additionally, the Company will also provide without charge, a copy of its Form 10-K to any shareholder by mail. Requests should be sent to Walter Industries Inc., Attention: Shareholder Relations, 4211 W. Boy Scout Boulevard, Tampa, Florida 33607. You may read and copy any document the Company files at the SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. The Company's SEC filings are also available to the public from the SEC's website at http://www.sec.gov.

(b)

Industry Segments

        The Company's industry segment information is included in Note 19 of "Notes to Consolidated Financial Statements" included herein.

(c)

Description of Business

Homebuilding

Jim Walter Homes, Inc.

        Jim Walter Homes, Inc. and its subsidiaries ("JWH"), headquartered in Tampa, Florida, markets and supervises the construction of detached, single-family residential homes, primarily in the southern United States where the weather generally permits year-round construction. JWH also provides mortgage financing on a significant portion of the homes sold. JWH historically has concentrated on the low- to moderately-priced segment of the housing market. Approximately 354,000 homes have been completed by JWH since its inception in 1946.

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        JWH's products consist of over 50 models of conventionally-built homes (ranging in size from approximately 800 to 2,500 square feet) and its modular subsidiary has 14 separate home models (ranging in size from 900 to 2,900 square feet).

        At December 31, 2004, JWH operated 85 branch offices located in 16 states and serving one additional adjoining state. During 2004, home sales in Texas represented 26% of JWH's net sales; North Carolina 19%; Mississippi 11%; Alabama, Florida and Louisiana 7% each. The remaining sales were spread throughout other southeastern states. Approximately 78% of the branch offices are owned, with the balance on leased land. Substantially all of these branch offices serve as "display parks" that are designed to allow customers to view various actual models.

        Substantially all building and instalment sale contracts originated by JWH, are subject to (i) executing a promissory note which is secured by a first lien on the land and the home to be built, except in the State of Texas where liens are not obtained, (ii) executing a mortgage, deed of trust, mechanic's lien contract or other security instrument, (iii) receiving a satisfactory title report, (iv) inspecting the land to determine that it is suitable for building and (v) obtaining required permits. Although the mortgage, deed of trust and similar security instruments constitute a first lien on the land and the home to be built, such security instruments are not insured by the Federal Housing Administration, guaranteed by the Department of Veterans Affairs or otherwise insured or guaranteed.

        Historically, JWH has not owned or acquired significant land for home construction purposes and was not a land developer. The actual construction of conventionally-built homes sold by JWH is generally performed on customer-owned land by local building sub-contractors with their own crews, pursuant to subcontracts executed in connection with each home. During 2001, JWH began a limited program of constructing speculatively-built homes and subdivisions on land already owned by or purchased by the Company, in addition to its historical method of selling homes. However, much of this activity was curtailed in 2004.

        JWH builds its conventionally-built homes "on site" after the customer has entered into a building contract. Each conventionally-built home is constructed of wood on concrete foundations or wood pilings or of concrete block and is completely finished on the outside. Non-concrete block conventionally-built homes are constructed to varying degrees of interior completion, depending on the buyer's election to purchase optional interior components, including the installation thereof. Optional interior components include plumbing and electrical materials, heating and air conditioning, wallboard, interior doors, interior trim, painting and floor finishing. JWH's product line includes "shell" homes, which are completely finished on the outside, with the inside containing only rough floors, ceiling joists, partition studding and closet framing. The majority of JWH's customers select all interior options, thereby purchasing a home considered to be "90% complete," which generally excludes only driveway, landscaping and utility connections. Remaining units are sold at varying stages of interior finishing. All concrete block homes are built to 100% completion.

        JWH, through its wholly-owned subsidiary Crestline Homes, Inc. ("CHI"), also manufactures and distributes modular homes. CHI, based in Laurinburg, North Carolina, manufactures modular (factory-built) homes which are sold by a network of independent dealers, primarily in North and South Carolina and Virginia.

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        The following chart shows the unit sales volume of JWH and the percent of homes sold by category (shell, various stages, 90% complete and modular) for the years ended December 31, 2004, 2003 and 2002.

		Percent of Unit Sales
Year Ending December 31,	Units Built	Shell		Various Stages		90%+ Complete		Modular
2004	3,251	6	%	7	%	71	%	16	%
2003	4,164	6	%	7	%	72	%	15	%
2002	4,267	6	%	11	%	67	%	16	%

        The following chart shows the inventory positions for both speculatively-built ("spec") homes and subdivisions, as well as the units sold during the year:

	Spec Homes		Subdivisions
	2004	2003	2004	2003
Lots owned as of December 31	44	110	7	41
Homes under construction as of December 31	2	10	12	21
Finished homes, not sold as of December 31	19	46	7	4
Finished homes sold during the year ended December 31	36	31	39	5

        During the years ended December 31, 2004, 2003 and 2002, the average net sales price of a home was $71,700, $66,200, and $63,000, respectively.

        The estimated backlog of homes to be constructed by JWH as of December 31, 2004 was $143.4 million, as compared to $136.4 million at December 31, 2003. After the land is cleared and appropriate building permits are obtained, the time to construct a home averages between eleven and seventeen weeks.

        Most homes sold by JWH are purchased with financing provided by JWH. Qualified customers are offered fixed rate mortgages generally requiring no down payment and are secured by the home and the land on which it is situated. JWH does not charge closing costs, points, credit service fees or similar add-on charges and does not require private mortgage insurance. JWH offers credit terms for up to a maximum of 30 years, usually for 100% of the purchase price of the home. As of December 31, 2004, stated annual percentage rates offered for new mortgage instalment notes ranged between 7.0% and 10.0%.

        Some customers who purchase and finance homes through JWH may not qualify for traditional mortgage financing. To qualify for JWH financing, a potential customer generally must provide information concerning personal income and employment history. If the customer owns the land on which the home is to be built, a legal description of the land, evidence that there are no liens or encumbrances and evidence of ownership is required. If the land is not owned outright, the financing of the land and home may be obtained through Walter Mortgage Company ("WMC") (see Financing business description). A customer's income and employment are usually verified by examining pay stubs, W-2 forms and occasionally through telephone conversations with the customer's employer or, if the customer is self-employed, income tax returns. An applicant generally must have a minimum of one year's continuous employment. Only a small percentage of secondary income (second jobs or part-time employment) is utilized in qualifying applicants. Ownership of land is verified by examining the title record. In addition, a tri-bureau credit report is obtained that includes, among other information, a credit score. Particular attention is paid to the credit information for the most recent two to three years. Attention is also given to the customer's total indebtedness and other payment and debt obligations. If a favorable credit report is obtained, the required monthly payment does not exceed 25% to 27% of the customer's monthly gross income, and the customers total debt payments don't exceed 50% of monthly gross income, there is a high likelihood that the applicant will be approved

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subject to verification of land values. A title report is ordered and, frequently, a survey of the property is made. Independent registered surveyors perform surveys when, in the opinion of JWH, additional information beyond examination of the title record is needed. Such additional information is primarily concerned with verification of legal description, ownership of land, necessary right-of-way easements and existence of any encroachments.

        When a home is financed by JWH, the Company does not generally obtain third party appraisals or title insurance. Although significant consideration is given to the ratio of the amount financed to the estimated value of the home and land securing such amount, there is no rigid appraisal-based loan-to-value test. There is a minimum requirement that a lot evaluation be performed to determine the value of the lot on which the home is to be built, as estimated primarily on the basis of Walter Mortgage Company's servicing employees' experience and knowledge. Generally, the lot or land value must be at least 10% of the selling price of the home, resulting in an initial loan-to-value ratio of approximately 90%. Under certain favorable credit conditions, the loan-to-value ratio may be 95%. Prior to occupancy of the new home, the buyer must complete utility hook-ups and any other components not purchased from JWH, arrange for the final building inspection and, in most circumstances, obtain a certificate of occupancy. The cost incurred by customers to complete a new home depends on the stage of completion of the home purchased and whether public water and sewer systems are available or wells and septic tanks must be installed. Such costs to complete the home could range from 5 to 20% of the sales price (based upon a 90% complete home), thereby further reducing the initial loan-to-value ratio.

        If JWH finances the new home purchase, upon completion of construction to the agreed-upon percentage, in the ordinary course of business, JWH sells the building and instalment sale contract, the note and the related mortgage, deed of trust or other security instrument to Mid-State Homes, Inc., a wholly-owned subsidiary of the Company ("MSH"), pursuant to an agreement between JWH and MSH.

        The single-family residential housing industry is highly competitive. JWH competes in each of its market areas with numerous homebuilders, ranging from regional and national firms to small local companies, on the basis of price, quality, design, finishing options and accessibility to financing. JWH also competes with manufactured and modular housing builders. JWH's strategy is to compete in a specific segment of the housing market by offering customers quality traditionally-built homes, at affordable prices, with favorable financing, no down payment and no closing costs. Based on the most recent data available from Builder Magazine (May 2004), JWH was the twenty-fourth largest builder of detached single-family homes in the United States.

Financing

        Within the Financing Segment, MSH purchases and services instalment notes and mortgages originated by JWH. Walter Mortgage Company, a wholly-owned subsidiary of the Company ("WMC"), offers financing to JWH homebuyers that is secured by first mortgages and liens, and also originates mortgage loans by purchasing them from other homebuilders and third parties. WMC's mortgage loans are also sold to MSH, but are serviced by WMC. The interest income generated by both MSH and WMC is recognized using the interest method, however, the legal instruments used by each company allow for different amounts to be charged to the customer for late fees and ultimately recognized as revenue. Both the MSH instalment notes and the WMC mortgage loans have fixed monthly payments, similar repayment terms and the ability to levy costs to protect collateral positions upon default, such as attorney fees and late charges as allowed by state law. References to instalment notes or mortgage instalment notes include mortgage loans offered by WMC. Mortgage loans in the WMC portfolio, before allowances, were approximately $109.3 million and $75.5 million at December 31, 2004 and 2003, respectively.

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Mid-State Homes, Inc.

        MSH, headquartered in Tampa, Florida, was established in 1958 to purchase and service mortgage instalment notes originated by JWH. Currently, MSH funds its purchase of these mortgage instalment notes using various warehouse lines of credit. Historically, once a critical mass of assets have been accumulated, MSH would securitize the assets using a grantor trust structure, structured as a financing, which requires that the assets and liabilities be recorded on the balance sheet and there is no gain for tax purposes. These business trusts acquire the mortgage instalment notes using the proceeds from borrowings secured by the notes. MSH owns, directly or indirectly, all of the beneficial interests in these trusts. Only the notes and MSH's beneficial interests in the trusts secure the borrowings of these trusts. These borrowings are non-recourse to the Company. (For additional information on the notes, the trusts and their related borrowings, see Notes 6 and 12 of "Notes to Consolidated Financial Statements.")

        At December 31, 2004, MSH's portfolio was geographically distributed as follows: Texas (31%), Mississippi (15%), Alabama (9%) and Florida (7%). The remaining portfolio was spread primarily in other southeastern states.

Walter Mortgage Company

        WMC was established in 2001 to provide home financing to customers of JWH. Through WMC, homebuyers have the option of financing land along with their home purchase, including a traditional cash down payment in lieu of land equity. Existing MSH customers also have the option of refinancing their mortgage with WMC. The Company believes WMC will be a key component in achieving the growth plans of the Homebuilding and Financing Segments. Since inception through December 31, 2004, 1,809 mortgages totaling approximately $139.4 million have been originated, purchased, or funded through WMC. WMC initiated a program to acquire mortgage loans in 2003 that meet the Company's strict underwriting criteria. Loans are purchased from other mortgage companies, banks, thrifts, builders and other various sellers of first lien mortgages. During 2004, approximately $40.2 million of mortgage loans were purchased.

Other

        Best Insurors, Inc. ("Best"), located in Tampa, Florida, is an agency that primarily places fire and extended insurance coverage for homeowners who finance through MSH or WMC. Cardem Insurance Company Ltd. ("Cardem"), located in Bermuda, primarily provides reinsurance of such insurance placed through Best and provides captive coverage for various other company risks, including primary and excess workers' compensation for all significant subsidiaries except U.S. Pipe.

Industrial Products

United States Pipe and Foundry Company, Inc.

        United States Pipe and Foundry Company, Inc. ("U.S. Pipe") manufactures and sells a broad line of ductile iron pressure pipe, fittings, valves, hydrants and other cast iron products. Founded in 1899 and headquartered in Birmingham, Alabama, it is one of the nation's largest producers of ductile iron pressure pipe based on industry shipping information provided by the Ductile Iron Pipe Research Association. In the years ended December 31, 2004, 2003 and 2002, net sales and revenues amounted to $545.9 million, $452.9 million and $479.2 million, respectively.

        U.S. Pipe manufactures and markets a complete line of ductile iron pipe ranging from 4" to 64" in diameter as well as various metric sizes, in lengths up to 20 feet. In addition, U.S. Pipe produces and sells a full line of fittings, valves and hydrants of various configurations to meet municipal specifications.

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        Ductile iron pressure pipe is used primarily for drinking (potable) water distribution systems, small water system grids, reinforcing distribution systems (including looping grids and supply lines) and is used for major water and waste water transmission and collection systems.

        The ductile iron pressure pipe industry is highly competitive, with a small number of manufacturers of ductile iron pressure pipe, fittings, valves and hydrants. Major competitors of U.S. Pipe include McWane, Inc., Griffin Ductile Iron Pipe Company and American Cast Iron Pipe Company.

        Additional competition for ductile iron pressure pipe comes from pipe composed of other materials, such as polyvinylchloride (PVC), high density polyethylene (HDPE), concrete, fiberglass, reinforced plastic and steel. Although ductile iron pressure pipe is typically more expensive than competing forms of pipe, customers choose ductile iron for its quality, longevity, strength, ease of installation and lack of maintenance problems.

        U.S. Pipe has a sales force that sells pipe products throughout the United States. The organization is divided into four geographic territories each managed by a regional sales manager. International orders are sold directly by U.S. Pipe sales personnel as well as an extensive number of representatives principally in Central and South America and the Middle East.

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

        The estimated order backlog consists of pressure pipe, valves and hydrants, fittings and castings and at December 31, 2004 was $115 million, compared to $86 million at December 31, 2003. The ductile iron pipe business is generally sensitive to economic recession because of its partial dependence on the level of new construction activity and state, municipal and federal tax revenues to fund water projects. However, certain aspects of U.S. Pipe's operations have in the past helped to reduce the impact of downturns in new construction. First, U.S. Pipe's products have experienced a strong level of demand in the replacement market, in part driven by mandates from the Safe Drinking Water Act. U.S. Pipe believes that growth of the replacement market will accelerate as a result of anticipated major expenditures by government entities, such as the New York, Boston, Washington, D.C., Atlanta and Philadelphia municipalities, to rehabilitate aging or inadequate water transmission systems. U.S. Pipe believes that this represents a significant growth opportunity and that it is well positioned to take advantage of this opportunity. Second, U.S. Pipe's Burlington, New Jersey plant is adjacent to the northeastern market with its significant replacement potential and its operations in the south are located in areas of steady economic growth. The west coast, served by the Union City, California plant, has a critical shortage of water for many of the large metropolitan areas that will require major transmission pipelines in the future. Because freight costs for pipe are high, locations close to important markets lower transportation costs, thereby making U.S. Pipe's products more competitive. During 2004, approximately 26% of U.S. Pipe's sales were to one customer. The Company believes the loss of this single customer would not have a material adverse effect on the results of operations of the Company on a consolidated basis as a result of its size, impact on operating income, and because the Company believes that, based on an overall balance of supply and demand within the pipe industry, the loss of this customer would be replaced with sales to other existing or new customers. Foreign sales accounted for approximately 4% of U.S. Pipe's sales during the year.

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Natural Resources

Jim Walter Resources, Inc.

        The operations of Jim Walter Resources, Inc. ("JWR") are conducted through its Mining Division, which mines and sells coal from three underground mines in Alabama, and its De-Gas Division, which extracts and sells natural gas from the coal seams owned or leased by JWR. On December 1, 2003, the Company announced that it expected to close Mine No. 5 during the fourth quarter of 2004 due to adverse geologic conditions. The mine was originally scheduled to close in 2006. However, given the poor operating conditions, management concluded that it was not economically feasible to access Mine No. 5's remaining coal reserves beyond 2004. On April 6, 2004, the Company announced that it would extend its coal production schedule for Mine No. 5 to mid-2005 due to favorable increases in metallurgical coal prices around the world. In the fourth quarter of 2004, the Company decided to extend its coal production schedule for Mine No. 5 to fourth quarter 2006, due to favorable metallurgical coal prices around the world. Approximately 1.5 million tons of coal were produced by Mine No. 5 during 2004. Mine No. 5 is expected to produce approximately 1 million tons of coal per year in 2005 and 2006.

        On December 16, 2004, the Company announced a capital investment program up to $135.0 million to increase coal production capacity at Mine No. 7. The investment will occur over a four-year period and increase annual production capacity by approximately 2.7 million tons per year starting in the second half of 2008.

Mining Division

        In the years ended December 31, 2004, 2003 and 2002 Mining Division's net sales and revenues totaled $303.6 million, $218.4 million and $221.0 million, respectively.

        The Mining Division, headquartered in Brookwood, Alabama, has approximately 7.5 million tons of rated annual coal production capacity from its three mines located in west central Alabama between the cities of Birmingham and Tuscaloosa. The Mining Division extracts coal primarily from Alabama's Blue Creek and Mary Lee seams, which contain high-quality bituminous coal. Blue Creek coal offers high coking strength with low coking pressure, low sulfur and low-to-medium ash content with high BTU values and can be sold either as metallurgical coal, used to produce coke, or as compliance steam coal, used by electric utilities because it meets current environmental compliance specifications.

        The majority of coal is mined using longwall extraction technology with development support from continuous miners. Underground mining with longwall technology drives greater production efficiency, improved safety, higher coal recovery and lower production costs. The Mining Division currently operates one longwall mining system in each mine for primary production and up to four continuous miner sections in each mine for the development of mains and longwall panel entries. The Mining Division's normal operating plan is a longwall/continuous miner production ratio of approximately 80% / 20%. This ratio is expected to remain consistent after the closure of Mine No. 5.

        Environmental expenditures imposed by laws relating to mining have been insignificant to date and no substantial expenditures are expected in the future. The Mining Division does not engage in any surface mining.

        The Mining Division's coal is sold to a diversified base of domestic and foreign customers. The division's metallurgical coal is sold to customers in numerous markets throughout Europe, Latin America and the Middle East. Most metallurgical coal sales are made under fixed price supply contracts, usually with the duration of one year, running from July through June. However, some sales, of both metallurgical and steam coal, are conducted in the spot market as dictated by available JWR supply and market demand. During 2004, JWR's two largest customers represented approximately 19% and 14% of the Mining Division's sales, respectively. The Company believes that the loss of those

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customers would not have a material adverse effect on the results of operations of the Company as the loss of volume from these customers would be replaced with sales to other existing or new customers due to high worldwide demand of both metallurgical and steam coal. Foreign sales accounted for approximately 69% of of the Mining Division's sales during the year.

De-Gas Division

        The De-Gas Division, headquartered in Brookwood, Alabama, extracts and sells natural gas from the coal seams owned or leased by JWR, primarily through Black Warrior Methane Corp., an equal joint venture with El Paso Production Co., a subsidiary of El Paso Corp. ("El Paso").

        The original motivation for the joint venture was to increase safety in JWR's Blue Creek mines by reducing natural gas concentrations with wells drilled in conjunction with the mining operations. There were 399 wells producing approximately 14.9 billion cubic feet of natural gas in 2004 (JWR's interest was 7.9 billion cubic feet in 2004). Approximately 52 additional wells are planned for development in 2005. The degasification operation, as originally expected, has improved mining operations and safety by reducing methane gas levels in the mines, and has also been a profitable operation.

Other

        The Other segment includes Sloss Industries Corporation ("Sloss"), the Company's land subsidiaries and corporate expenses. Sloss manufactures and distributes furnace and foundry coke to the domestic steel industry as well as to the ductile iron foundries, and also manufactures specialty chemicals and slag fiber. The land subsidiaries engage in maximizing the value of vacant land, primarily through outright property sales and realizing royalty income on coal, timber and other minerals. Corporate expenses consist primarily of salaries, overhead and other costs associated with executive management, finance, accounting, tax, treasury, legal, information technology, risk management, human resources, payroll, and other management services.

Sloss Industries

        Sloss is a manufacturing operation, founded in 1918 and headquartered in Birmingham, Alabama, which has four major product lines: foundry coke, furnace coke, slag fiber and specialty chemicals. Foundry coke is marketed to ductile iron pipe plants and foundries producing castings, such as for the automotive and agricultural equipment industries. For the year ended December 31, 2004, approximately 60% of the foundry coke produced by Sloss was sold to U.S. Pipe. Furnace coke is sold primarily to the domestic steel industry for producing steel in blast furnaces. Slag fiber is an insulating fiber utilized principally as a raw material by acoustical ceiling tile manufacturers. Specialty chemical products are composed primarily of rubber additives, plastics additives, pharmaceutical raw materials, and nutraceutical components, as well as other custom manufactured products.

Seasonality

        Certain of the businesses of the Company are subject to seasonal fluctuations to varying degrees. Sales for U.S. Pipe and JWH are usually their lowest in the winter months due to weather and the level of construction activity. The businesses of the Company may also be significantly influenced by the general economy, interest rates, levels of construction activity and commodity prices.

Trade Names, Trademarks and Patents

        The names of each of the Company's subsidiaries are well established in the respective markets they serve. Management believes that customer recognition of such trade names is of significant importance. The Company's subsidiaries have numerous patents and trademarks. Management does not

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believe, however, that any one such patent or trademark is material to the Company's individual segments or to the business as a whole.

Research and Development

        Research activities conducted by each business are directed toward new products, improvement of existing products, development of new uses for existing products, process and systems development, and cost reduction efforts. Total research and development expenditures for all of the businesses in the years ended December 31, 2004, 2003 and 2002, were less than 1% of the Company's consolidated net sales and revenues.

Raw Materials

        Substantially all of the raw materials needed for the operations of the Company and its subsidiaries are either purchased from domestic sources or produced by the Company and its subsidiaries. All materials used by the various businesses of the Company are available in quantities required to support their respective operations. Availability and the cost of raw materials may have a significant influence over the revenues and costs of the Company. Costs potentially having a significant influence on the Company include costs for scrap metal and steel as well as labor, lumber and other building materials.

Environmental

        The Company and its subsidiaries are subject to a wide variety of laws and regulations concerning the protection of the environment, both with respect to the construction and operation of many of its plants, mines and other facilities, and with respect to remediating environmental conditions that may exist at its own and other properties. The Company believes that it and its subsidiaries are in substantial compliance with federal, state and local environmental laws and regulations. Expenses charged to the statement of operations for compliance of ongoing operations and for remediation of environmental conditions arising from past operations in the years ended December 31, 2004, 2003 and 2002, were approximately $14.6 million, $10.8 million and $7.0 million, respectively. The increase in expenses from 2003 to 2004 was primarily due to a $4.0 million charge related to legacy environmental issues in Anniston, Alabama. The increase in expenses from 2002 to 2003 occurred at Sloss, which increased approximately $4.5 million due to additional compliance costs for ongoing operations primarily related to obtaining a new permit for its Biological Treatment Facility of $1.7 million and an increase of approximately $2.7 million related to remediation activities mandated by the Environmental Protection Agency ("EPA"). Because environmental laws and regulations continue to evolve, and because conditions giving rise to obligations and liabilities under environmental laws are in some circumstances not readily identifiable, it is difficult to forecast the amount of such future environmental expenditures or the effects of changing standards on future business operations or results. Consequently, the Company can give no assurance that such expenditures will not be material in the future. Capital expenditures for environmental requirements are anticipated to average approximately $3.3 million per year in the next five years. Capital expenditures for the years ended December 31, 2004 and 2003 for environmental requirements were $3.8 million and $2.0 million, respectively.

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

9

required. Management does not believe monitoring or further cleanup costs, if any, will have a material adverse effect on the financial condition or results of operations of the Company and its subsidiaries.

        The Federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), generally imposes liability, which may be joint and several and is without regard to fault or the legality of waste generation or disposal, on certain classes of persons, including owners and operators of sites at which hazardous substances are released into the environment (or pose a threat of such release), persons that disposed or arranged for the disposal of hazardous substances at such sites, and persons who owned or operated such sites at the time of such disposal. CERCLA authorizes the EPA, the States and, in some circumstances, private entities to take actions in response to public health or environmental threats and to seek to recover the costs they incur from the same classes of persons. Certain governmental authorities can also seek recovery for damages to natural resources. Currently, U.S. Pipe has been identified as a potentially responsible party ("PRP") by the EPA under CERCLA with respect to cleanup of hazardous substances at two sites to which its wastes allegedly were transported or deposited. U.S. Pipe is among many PRP's at such sites and a significant number of the PRP's are substantial companies. An agreement has been reached with the EPA and a Consent Order, signed by U.S. Pipe and the EPA, has been finalized respecting one of the sites. U.S. Pipe has satisfied its obligations under the Consent Order at a cost that was not material. Natural resource damage claims respecting that same site have now also been made by the State of California, but U.S. Pipe, as a member of the same group of PRPs, believes it has adequate first dollar insurance coverage covering the State's claims. With respect to the other site, located in Anniston, Alabama, the PRPs have been negotiating an administrative consent order with the EPA. Based on these negotiations, management estimates the Company's share of liability for cleanup, after allocation among several PRPs, will be approximately $4 million, which was accrued in 2004. Civil litigation in respect of the site is also ongoing. Management does not believe that U.S. Pipe's share of any liability will have a material adverse effect on the financial condition of the Company and its subsidiaries, but could be material to results of operations in future reporting periods.

        Sloss Industries entered into a consent 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/absence 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 substantively complete. An Interim Remedial Measure (IRM) Work Plan for the Chemical Plant groundwater, which was presented to the EPA, was implemented during 2003 with progress continuing in 2004. Monitoring requirements will continue on a long-term basis and contamination levels are expected to continue to decline. Additionally, new EPA requirements relating to surface soil sampling and results are now being considered. This change in focus will possibly delay the timing of efforts relating to ground water remediation.

        The Jefferson County (Alabama) Department of Health has alleged emissions and reporting failures that violated provisions of Sloss' Title V Air Permit and regulations under the Clean Air Act. A notice of violation was issued in December of 2003, and Sloss received notice of a proposed penalty of $0.3 million in January of 2005. The penalty is subject to negotiation.

        Although no assurances can be given that the Company's subsidiaries will not be required in the future to make material expenditures relating to these or other sites, management does not believe at this time that the cleanup costs, if any, associated with these or other sites will have a material adverse effect on the financial condition or results of operations of the Company and its subsidiaries, but such cleanup costs could be material to results of operations in a reporting period.

10

Employees

        As of December 31, 2004, the Company and its subsidiaries employed 4,953 people, of whom 2,964 were hourly workers and 1,989 were salaried employees. Unions represented approximately 2,705 employees under collective bargaining agreements, of which approximately 1,041 were covered by one contract with the United Mine Workers of America, which expires on December 31, 2006.

Item 2.    Description of Property

        The administrative headquarters and manufacturing facilities of the Company and its subsidiaries are summarized as follows:

				Square Footage
Facility/Location			Land Acreage
		Principal Products/Operations		Leased	Owned
Homebuilding
	Tampa, FL	Administrative headquarters		24,200
	Laurinburg, NC	Modular homes	26		245,000
Financing
	Tampa, FL	Administrative headquarters		22,300
	Richland Hills, TX	Administrative headquarters for Walter Mortgage Company		8,600
Industrial Products
U. S. Pipe
	Birmingham, AL	Administrative headquarters	6		122,000
	Bessemer, AL	Ductile iron pipe	169		648,000
	N. Birmingham, AL	Ductile iron pipe	77		360,000
	Union City, CA	Ductile iron pipe	70		122,000
	Burlington, NJ	Ductile iron pipe	109		329,000
	Chattanooga, TN	Fittings, valves & hydrants	91		659,000
	Anniston, AL	Closed facility	21
Natural Resources
	Brookwood, AL	Administrative headquarters			42,000
	Brookwood, AL	Central shop, supply center and training center			128,000
	Brookwood, AL	Real estate	7,000
	Brookwood, AL	Coal mines	35,800		548,000
Other
Sloss
	Birmingham, AL	Administrative headquarters			12,000
	Birmingham, AL	Furnace & foundry coke battery	511		148,000
	Birmingham, AL	Slag fiber	5		63,000
	Birmingham, AL	Closed facility	3		53,000
	Birmingham, AL	Chemical Pilot Plant	2		10,000
	Alexandria, IN	Closed facility	33		112,000
	Ariton, AL	Specialty chemicals	53		7,000
Corporate
	Tampa, FL	Corporate headquarters		33,000

11

        Recoverable coal reserves assigned to currently operating mines were estimated to be approximately 147 million tons as of December 31, 2004.

        A summary of mineral reserves, as calculated by Natural Resources' Mine Planning and Engineering department, is as follows:

Estimated Recoverable(1) Coal Reserves as of December 31, 2004
(In Thousands of Tons)

	Reserves(2)			Classifications(3)		Type(4)	JWR's Interest		Quality(9)			Production
Mining Property	Total(9)	Assigned	Unassigned	Measured	Indicated	Steam (S) or Metallur- gical (M)	Owned	Leased(5)	Ash	Sulf.	BTU/lb	2004	2003	2002
No. 3 Mine(7)	—	—	—	—	—	—	—	—	—	—	—	—	—
No. 4 Mine	65,048	65,048	—	59,369	5,679	S/M	—	65,048	9	.80	14,150	3,053	2,798	2,817
No. 5 Mine(6)	1,956	1,956	—	1,956	—	S/M	1,746	210	10	.77	14,000	1,484	1,416	664
No. 7 Mine(7)	80,150	80,150	—	68,379	11,771	S/M	1,702	78,448	9	.70	14,150	2,339	1,861	1,982
	147,154	147,154	—	129,704	17,450		3,448	143,706
Bessie(8)	658	—	658	658	—	S/M	658	—				—	—	—
TOTAL	147,812	147,154	658	130,362	17,450		4,106	143,706				6,876	6,075	5,463

(1)

"Recoverable" reserves are defined as tons of mineable coal in the Blue Creek and Mary Lee seams which can be extracted and marketed after a deduction for coal to be left in pillars, etc. and adjusted for reasonable preparation and handling losses. The Company's coal reserves have not been reviewed by an independent third party in the last three years.

(2)

"Assigned" reserves represent coal which has been committed by JWR to its operating mines and plant facilities. "Unassigned" reserves represent coal which is not committed to an operating mine and would require additional expenditures to recover. The division of reserves into these two categories is based upon current mining plans, projections and techniques.

(3)

The recoverable reserves (demonstrated resources) are the sum of "Measured" and "Indicated" resources. Measured coal extends ¹/4 mile from any point of observation or measurement. Indicated coal is projected to extend from ¹/4 mile to ³/4 mile from any point of observation or measurement. Inferred coal extends from ³/4 mile to 3 miles from any point of observation or measurement. Inferred reserves are not included in recoverable reserves.

(4)

All of the coal in the Blue Creek and Mary Lee seams is suitable for metallurgical purposes and as compliance steam coal.

(5)

Leases are renewable until the reserves are mined to exhaustion or are of sufficient duration to permit mining of all of the reserves before the expiration of the term.

(6)

During December 2003, a determination was made to close Mine No. 5 during the fourth quarter of 2004. In April 2004, a determination was made to extend the coal production schedule for Mine No. 5 to mid-2005. In December 2004, the coal production schedule was further extended to fourth quarter 2006.

(7)

In February 1999, a decision was made to close Mine No. 3. The Mine No. 3 reserves accessible from Mine No. 7 were re-assigned to Mine No. 7.

(8)

Bessie Mine suspended operations in August 1988.

(9)

Quality factors are on a "received basis", which includes an estimate for moisture, which averaged 1.4% to 1.8% during 2004.

Item 3.    Legal Proceedings

        See the section entitled "Environmental" in Description of Business and Notes 11 and 17 of "Notes to Consolidated Financial Statements" included herein.

12

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

        None.

Executive Officers of the Registrant

        Set forth below is a list showing the names, ages and positions of the executive officers of the Company.

Name	Age	Position
Don DeFosset	56	Chairman, President, Chief Executive Officer
William F. Ohrt	56	Executive Vice President, Chief Financial Officer
Charles E. Cauthen	46	Senior Vice President, Controller
Miles C. Dearden	45	Senior Vice President, Treasurer
Victor P. Patrick	47	Senior Vice President, General Counsel and Secretary
Joseph J. Troy	41	Senior Vice President-Financial Services; President of Mid-State Homes
Larry E. Williams	57	Senior Vice President, Human Resources
George R. Richmond	54	President and Chief Operating Officer of Jim Walter Resources
Lawrence S. Comegys	53	President of Jim Walter Homes
Ray Torok	58	President of U.S. Pipe

        Our executive officers as of March 16, 2005 are listed below. On February 22, 2005, the Company announced that Don DeFosset, Chairman, President and Chief Executive Officer, intends to retire. He will continue his duties as President, Chief Executive Officer and Chairman of the Board of Directors until the hiring of his successor.

Don DeFosset was appointed President and Chief Executive Officer on November 2, 2000 and elected a Director on November 6, 2000. He was appointed to the additional position of Chairman of the Board of Directors on March 1, 2002. He served as Executive Vice President and Chief Operating Officer of Dura Automotive Systems, Inc. from 1999 through October 2000. He is also a Director of Terex Corporation and Safelite Glass Corp.

William F. Ohrt was appointed Executive Vice President and Chief Financial Officer of the Company in January 2001. Prior thereto, he was Vice President and Chief Financial Officer of Dura Automotive Systems, Inc. from 1999 through January 2001.

Charles E. Cauthen was appointed Senior Vice President and Controller in November 2000. Prior thereto, he was Senior Vice President and Chief Financial Officer—Consumer Products Group, Bank of America, from 1999 to November 2000.

Miles C. Dearden was appointed Senior Vice President in February 2005 and Vice President, Treasurer in April 2002. Previously, he was Assistant Treasurer beginning in March 2001. Prior to joining the Company, he worked for Bank of America from 1987 until 2001, most recently as a managing director for the bank's Global Corporate and Investment Bank.

Victor P. Patrick was appointed Senior Vice President, General Counsel and Secretary of the Company in August 2002. Prior to joining the Company, he worked for Honeywell International from 1994 to July 2002, most recently as Vice President, Secretary and Deputy General Counsel.

Joseph J. Troy was appointed Senior Vice President—Financial Services in April 2002 and President of Mid-State Homes in August 2001. Prior thereto, he was Senior Vice President and Treasurer of the Company from November 2000. He was Executive Vice President and Chief Financial Officer of Gold Standard Multimedia from February 2000 to November 2000. From 1998 through February 2000, he was Vice President and Treasurer of the Company.

13

Larry E. Williams was appointed Senior Vice President, Human Resources in November 2001. Previously, he was Senior Vice President/Human Resources for CoBank from 1989 to 2001.

George R. Richmond was appointed President and Chief Operating Officer of Jim Walter Resources in 1997. Mr. Richmond has held various positions at JWR from 1978 to 1997.

Lawrence S. Comegys was appointed President of Jim Walter Homes in January 2004. Prior to joining the Company, from January 2002 to January 2004 he was Vice President of the Wilherst Group, Inc. and President of Gulf Urban Group, from February 2002 to September 2002, Vice President of Landmar LLC., all companies involved in residential and commercial real estate development. Prior thereto, he was President of East Coast Homebuilding at WCI Communities from February 2001 to December 2001, and from 1997 to January 2001 was Florida Region President with Pulte Home Corporation.

Ray Torok was appointed President of U.S. Pipe in July 2004. Prior to joining the Company, from May 2003 to December 2003, he was interim President at Golden Casting Corporation, a foundry operation producing highly engineered precision castings and from 1998 to February 2003, he was President and Chief Executive Officer at Cold Metal Products, a steel production company.

PART II

Item 5.    Market for the Registrant's Common Stock and Related Stockholder Matters

        The Company's common stock (the "Common Stock") has been listed on the New York Stock Exchange under the trading symbol "WLT" since December 18, 1997. The table below sets forth, for the fiscal periods indicated, the range of high and low closing sales prices of the Common Stock.

	Year ended December 31, 2004
	High		Low
1st Fiscal quarter	$	13.09	$	10.05
2nd Fiscal quarter		13.88		11.73
3rd Fiscal quarter		16.02		13.03
4th Fiscal quarter		33.97		15.37

	Year ended December 31, 2003
	High		Low
1st Fiscal quarter	$	10.95	$	8.70
2nd Fiscal quarter		13.09		8.66
3rd Fiscal quarter		12.96		9.51
4th Fiscal quarter		13.38		10.95

        During the year ended December 31, 2004, the Company declared and paid to shareholders of record on February 18, May 13, and August 13, a dividend of $.03 per share as of each of these dates, and on November 12 a dividend of $.04 per share. During the year ended December 31, 2003, the Company declared and paid to shareholders of record on February 20, May 15, August 14 and November 13 a dividend of $.03 per share as of each of these dates. Covenants contained in certain of the debt instruments referred to in Note 12 of "Notes to Consolidated Financial Statements" may restrict the amount the Company can pay in cash dividends.

        As of March 1, 2005, there were 150 shareholders of record of the Common Stock.

14

        The following table sets forth certain information relating to the Company's equity compensation plans as of December 31, 2004:

		Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights	Weighted Average Exercise Price of Outstanding Options Warrants and Rights		Number of Securities Remaining Available for Future Issuance
Equity compensation plans approved by Security holders:
	2002 Long-term Incentive Award Plan	576,777	$	7.09	2,345,941
	1995 Long-term Incentive Stock Plan	2,436,066	$	10.49	740,607
	1996 Employee Stock Purchase Plan	—		—	1,667,114

Recent Sales of Unregistered Securities

        On April 20, 2004, the Company issued and sold in a private placement, $175 million principal amount of 3.75% convertible senior subordinated notes, due 2024, to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. Proceeds to the Company were approximately $168.9 million, net of approximately $6.1 million of underwriting fees and expenses.

        The convertible senior subordinated notes are convertible, subject to certain conditions and under certain circumstances, into the Company's common stock at an initial conversion rate of 56.0303 shares of common stock per $1,000 principal amount of notes, which is equivalent to an initial conversion price of approximately $17.85 per share, subject to adjustment.

        A registration statement in respect of the convertible senior subordinated notes and the shares issuable upon conversion was deemed effective by the SEC on October 13, 2004.

Purchase of Equity Securities by the Company and Affiliated Purchasers

        The following table presents information with respect to purchases of common stock of the Company made during the year ended December 31, 2004 by Walter Industries, Inc. or any "affiliated purchaser" of Walter Industries, Inc., as defined in Rule 10b-18(a)(3) under the Exchange Act.

	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as part of Publicly Announced Programs	Approximate Dollar Value of Shares that May Yet be Purchased Under the Program
January 1, 2004–March 31, 2004	—			—	—		—
April 1, 2004–April 30, 2004	4,960,784	(1)	$	12.70	—		—
May 1, 2004–September 30, 2004	—			—	—		—
October 1, 2004–October 31, 2004	1,997,805	(2)		16.16	—		—
November 1, 2004–December 31, 2004	—			—	—		—
Total	6,958,589		$	13.70	—	$	7,500,000

(1)

The Company repurchased 3,960,784 shares of its common stock from certain affiliates of Kohlberg, Kravis, Roberts and Co. ("KKR") and 1,000,000 shares from the purchasers of the convertible senior subordinated notes. These shares were purchased pursuant to resolutions adopted by the Board of Directors on April 12 and April 22, 2004. There is no further authority available for stock repurchases pursuant to these resolutions.

(2)

The Company repurchased 1,997,805 shares of its common stock from certain affiliates of KKR. These shares were purchased pursuant to a resolution adopted by the Board of Directors on October 28, 2004. There is no further authority available for stock repurchases pursuant to this resolution.

15

Item 6.    Selected Financial Data

        During 2000, the Company changed its year end to December 31, resulting in a seven-month transition period ended December 31, 2000 ("the transition period"). The transition period results are shown in addition to results for the years ended December 31, 2004, 2003, 2002 and 2001 and the fiscal year ended May 31, 2000.

        The following data, insofar as it relates to each of the years ended December 31, 2004, 2003, 2002 and 2001, the transition period ended December 31, 2000 and the fiscal year ended May 31, 2000, has been derived from annual consolidated financial statements, including the consolidated balance sheets and the related consolidated statements of operations, changes in stockholders' equity and cash flows and the notes thereto as they relate to the Company's continuing operations as of December 31, 2004. The information presented below is for continuing operations and should be read in conjunction with the Company's consolidated financial statements and the notes thereto including Note 2 related to discontinued operations, Note 3 related to significant accounting policies, and the other information contained elsewhere in this report.

												Transition period ended December 31,
		Years ended December 31,
															Year Ended May 31, 2000
		2004			2003		2002		2001			2000
		(in thousands, except per share data)
Net sales and revenues		$	1,461,722		$	1,325,461	$	1,339,124	$	1,332,238		$	838,842		$	1,344,806
Income (loss) from continuing operations		$	49,917		$	3,319	$	52,278	$	22,850		$	(14,150	)	$	(139,959	)
Basic income (loss) per share from continuing operations		$	1.29		$	..08	$	1.18	$	..51		$	(.31	)	$	(2.87	)
Number of shares used in calculation of basic income (loss) per share from continuing operations			38,582			43,026		44,318		44,998			46,389			48,744
Diluted income (loss) per share from continuing operations		$	1.14		$	..08	$	1.17	$	..50		$	(.30	)	$	(2.87	)
Number of shares used in calculation of diluted income (loss) per share from continuing operations			46,255			43,364		44,726		45,293			46,454			48,744
Gross capital expenditures		$	50,463		$	56,268	$	66,222	$	70,232		$	41,541		$	66,632
Net property, plant and equipment		$	331,959		$	352,529	$	360,428	$	352,280		$	347,293		$	331,662
Total assets(1)		$	2,916,486		$	2,941,529	$	2,802,202	$	2,787,868		$	2,764,032		$	2,833,989
Senior debt:
	Mortgage-backed/asset-backed notes	$	1,763,827		$	1,829,898	$	1,776,020	$	1,833,442		$	1,769,833		$	1,783,712
	Senior debt	$	—		$	113,754	$	308,900	$	308,500		$	411,500		$	495,400
	Convertible senior subordinated notes	$	175,000		$	—	$	—	$	—		$	—		$	—
Quarterly cash dividend per common share		$	.03	(2)	$	.03	$	.03	$	.03	(3)	$	.03		$	.03

(1)

Excludes assets of discontinued operations held for sale

(2)

Raised to $0.04 per common share in the fourth quarter of 2004.

(3)

First quarter of 2001 was $0.04 per common share due to a four-month transition period associated with a change in the Company's fiscal year end.

16

Item 7.    Management's Discussion and Analysis of Results of Operations and Financial Condition and
Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

        Management's discussion and analysis is based on, and should be read in conjunction with, the consolidated financial statements and notes thereto, particularly Note 19 of "Notes to Consolidated Financial Statements" which presents net sales and revenues and operating income by operating segment. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in these financial statements or disclosed in the related notes thereto. Management evaluates these estimates and assumptions on an ongoing basis, utilizing historical experience, consultation with experts and other methods considered reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from management's estimates under different assumptions and conditions.

        Management believes the following discussion addresses the Company's most critical accounting policies, which are those that are most important to the portrayal of the Company's financial condition and results and require management's most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Revenue Recognition

        The Company recognizes revenue based on the recognition criteria set forth in the Securities and Exchange Commission's Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements."

        Homebuilding—The Company's homebuilding operations involve three principal types of homebuilding transactions:

a.

Selling a home constructed for consumers on real estate owned by the consumer ("On Your Lot Sales");



b.

Selling modular homes constructed in a factory principally to distributors for re-sale to consumers ("Modular Sales");



c.

Selling a home constructed for consumers on real estate owned by the consumer but encumbered by a previous borrowing ("Real Estate Sales");

        Sales for cash at closing do occasionally occur for each of the above categories. However, except for Modular Sales, most sales involve some form of seller financing.

        On Your Lot Sales constitute the majority of the sales in the homebuilding business (approximately 83% of new units sold in 2004). Since the real estate (land) is already owned by the customer and is not financed by the Company, these transactions represent sales of personal property financed by instalment sales contracts ("Notes"). Revenue from the construction and sale of a home is recognized upon completion of construction and legal transfer of ownership to the customer.

        Modular Sales are the second largest component of homebuilding sales. These sales are made principally to distributors for resale to consumers and do not involve sales of real estate. Sales are made under various customary industrial credit terms, with receivables typically due within 10 to 90 days following delivery. Revenue is recognized when legal ownership has transferred and upon delivery to the distributor or to a customer site.

17

        For Real Estate Sales, the Company finances both a home and the related real estate. Revenues on Real Estate Sales are recognized by the full accrual method in accordance with SFAS 66, "Accounting for Sales of Real Estate," when:

a.

The sale is consummated at closing with the customer after construction is completed and legal transfer of ownership has occurred.



b.

The buyer's initial cash investment is no less than 5% of the sales value. The buyer's continuing investment is required to be a level monthly payment sufficient to amortize the borrowing over a term not to exceed 30 years.



c.

The Company's receivable is secured by a first mortgage and is not subject to future subordination.



d.

The Company transfers to the buyer the risks and rewards of ownership and does not have any continuing involvement with the property.

        Financing—Within the Financing Segment, MSH purchases and services mortgage instalment notes originated by JWH and WMC offers financing to homebuyers that is secured by mortgages and liens. References to instalment notes or mortgage instalment notes include mortgage loans offered by WMC.

        Instalment notes receivable are initially recorded at the discounted value of the future instalment note payments using an imputed interest rate in accordance with Accounting Principles Board Opinion No. 21. "Interest on Receivables and Payables," ("APB 21") by JWH. The imputed interest rate used represents the estimated prevailing market rate of interest for credit of similar terms issued to customers with similar credit ratings to JWH's customers. The Company estimates this rate by adding a credit spread and a margin to a benchmark funding rate in order to cover costs and expected losses. This rate is periodically compared to rates charged by competitors and other lenders to customers of similar credit quality to validate that the methodology results in a market rate of interest. These estimates affect revenue recognition by determining the allocation of income between the amount recognized by the Homebuilding segment from the construction of the home and the amount recognized by the Financing Segment over the life of the instalment note as interest income. Variations in the estimated market rate of interest used to initially record instalment notes receivable could affect the amount and timing of income recognition in each of these segments. Instalment note payoffs received in advance of scheduled maturity (prepayments) cause interest income to increase due to the recognition of remaining unamortized discounts arising from the application of APB 21 at the note's inception.

        The interest income on instalment notes generated by both MSH and WMC is recognized using the interest method. The legal instruments used in each company allow for different amounts to be charged to the customer for late fees and ultimately recognized as revenue. JWH offers instalment notes, which state the maximum amount to be charged to the customer, and ultimately recognized as revenue, based on the contractual number of payments and dollar amount of monthly payments. WMC offers mortgage loans that have fixed monthly payments and repayment terms similar to instalment notes. Both MSH and WMC have the ability to levy costs to protect their collateral position upon default, such as attorney fees and late charges as allowed by state law.

        Instalment notes and mortgage loans are placed on non-accrual status when any portion of the principal or interest is ninety days past due. When placed on non-accrual status, the related interest accrued is reversed against interest income of the current period. Instalment notes are removed from non-accrual status when the amount financed and the associated interest income become current. Recoveries of advanced taxes and insurance related to instalment notes are recognized as income when collected.

18

        The Financing segment sells homes and related real estate repossessed or foreclosed on by MSH or WMC from customers in default of their loans or notes ("Repo Sales"). Repo Sales involve the sale and in most circumstances the financing of both a home and related real estate. Revenues from Repo Sales are recognized in accordance with SFAS 66 by the full accrual method where appropriate. However, the requirement for a minimum 5% initial cash investment per SFAS 66 is frequently not met. When this is the case, losses are immediately recognized, and gains are deferred and recognized by the instalment method until the buyer's investment reaches the minimum 5%. At that time, revenue is recognized by the full accrual method.

        Industrial Products—For shipments via rail or truck, revenue is recognized when title passes upon delivery to the customer. Revenue earned for shipments via ocean vessel is recognized under international shipping standards as defined by Incoterms 2000 when title and risk of loss transfer to the customer.

        Natural Resources—For coal shipments via rail, revenue is recognized when title and risk of loss transfer to the customer when the railcar is loaded. Revenue earned for coal shipments via ocean vessel is recognized under international shipping standards as defined by Incoterms 2000 when title and risk of loss transfer to the customer. For the Company's natural gas operations, revenues are recognized when the gas has been transferred to the customers' pipeline, at which time transfer of title occurs.

        Other—For products shipped via rail or truck, revenue is recognized when the product is placed on the rail or in the truck, which is when risk of loss and title transfers to the customer. Land sales are recognized as revenue when legal transfer of ownership to the buyer occurs, which is at closing.

        Given the diversity of the Company's businesses, many transactions have unique characteristics, which have to be analyzed on a case-by-case basis. This diversity of products and contracts can lead to variations in the timing of income recognition. However, most transactions are not individually significant, nor could they materially impact earnings.

Allowances for Losses

        Allowances for losses on trade and other accounts receivable are based, in large part, upon judgments and estimates of expected losses and specific identification of problem trade accounts and other receivables. Significantly weaker than anticipated industry or economic conditions could impact customers' ability to pay or could impact the value of underlying collateral such that actual losses are greater than the amounts provided for in these allowances.

        Management's periodic evaluation of the adequacy of the allowance for losses on instalment notes is based on the Company's past loss experience, known and inherent risks in the portfolio, delinquencies, the estimated value of the underlying real estate collateral and current economic and market conditions within the applicable geographic areas surrounding the underlying real estate. The allowance for losses on instalment notes and mortgage loans is increased by provisions for losses charged to income and is reduced by charge-offs net of recoveries.

Employee Benefits

        The Company provides a range of benefits to its employees and retired employees, including pensions and postretirement healthcare. The Company records annual amounts relating to these plans

19

based on calculations specified by generally accepted accounting principles, which include various actuarial assumptions including the following:

		Pension Benefits				Other Benefits
		December 31, 2004		December 31, 2003		December 31, 2004		December 31, 2003
Weighted average assumptions used to determine benefit obligations:
	Discount rate	6.00	%	6.35	%	6.00	%	6.35	%
	Rate of compensation increase	3.50	%	3.50	%	—		—
Weighted average assumptions used to determine net periodic cost:
	Discount rate	6.35	%	7.25	%	6.35	%	7.25	%
	Expected return on plan assets	8.90	%	9.25	%	—		—
	Rate of compensation increase	3.50	%	3.50	%	—		—
Assumed health care cost trend rates:
	Health care cost trend rate assumed for the next year	—		—		10.00	%	10.00	%
	Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)	—		—		5.00	%	5.00	%
	Year that the rate reaches the ultimate trend rate	—		—		2009		2008

        The discount rate used to determine pension and other post-retirement expense was decreased to 6.00% for 2005 from 6.35% used in 2004. The rate of return on plan assets used to determine pension expense is 8.90% for both 2005 and 2004. The discount rate is based on a model portfolio of AA rated bonds with a maturity matched to the estimated payouts of future pension benefits. The expected return on plan assets is based on the Company's expectation of the long-term average rate of return on assets in the pension funds, which was modeled based on the current and projected asset mix of the funds and considering the historical returns earned on the type of assets in the funds. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when appropriate. As required by U.S. GAAP, the effects of the modifications are amortized over future periods.

        Assumed health care cost trend rates, discount rates, expected return on plan assets and salary increases have a significant effect on the amounts reported for the pension and health care plans. A

20

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

		1-Percentage Point Increase			1-Percentage Point Decrease
Health care cost trend:
	Effect on total of service and interest cost components	$	1,856		$	(1,698	)
	Effect on postretirement benefit obligation		27,094			(22,828	)
Discount rate:
	Effect on postretirement service and interest cost components		183			(465	)
	Effect on postretirement benefit obligation		(28,436	)		32,220
	Effect on current year postretirement expense		(1,386	)		2,289
	Effect on pension service and interest cost components		(453	)		189
	Effect on pension benefit obligation		(41,044	)		50,097
	Effect on current year pension expense		(3,151	)		3,246
Expected return on plan assets:
	Effect on current year pension expense		(2,570	)		2,570
Rate of compensation increase:
	Effect on pension service and interest cost components		997			(882	)
	Effect on pension benefit obligation		8,136			(7,228	)
	Effect on current year pension expense		1,639			(1,453	)

        The Company also has significant liabilities for uninsured or partially insured employee-related liabilities, including workers' compensation liabilities, miners' Black Lung benefit liabilities and liabilities for various life and health benefits. The recorded amounts of these liabilities are based on estimates of loss from individual claims and on estimates determined on an actuarial basis from historical experience.

        Workers compensation and Black Lung benefit liabilities are also affected by discount rates used. Changes in the frequency or severity of losses from historical experience, changes in discount rates or actual losses on individual claims that differ materially from estimated amounts could affect the recorded amount of these liabilities. A one-percentage-point increase in the discount rate on the discounted Black Lung liability would decrease the liability by $0.9 million, while a one-percentage-point decrease in the discount rate would increase the liability by $1.1 million.

        The Company applies a discount rate at a risk-free interest rate, generally a U.S. Treasury bill rate, for each policy year. The rate used is one with a duration that corresponds to the weighted average expected payout period for each policy year. Once a discount rate is applied to a policy year, it remains the discount rate for the year until all claims are paid. The use of this method decreases the volatility of the liability as impacted by changes in the discount rate.

Litigation, Investigations and Claims

        The Company is involved in litigation, investigations, and claims arising out of the normal conduct of its business, including those relating to commercial transactions, as well as environmental, health and safety matters. The Company estimates and accrues its liabilities resulting from such matters based on a variety of factors, including outstanding legal claims and proposed settlements; assessments by internal counsel of pending or threatened litigation; and assessments of potential environmental liabilities and remediation costs. The Company believes it has adequately accrued for these potential liabilities; however facts and circumstances may change that could cause the actual liability to exceed the estimates, or that may require adjustments to the recorded liability balances in the future.

        As discussed in Note 11 of "Notes to Consolidated Financial Statements," the Company is in dispute with the Internal Revenue Service (the "IRS") on a number of Federal income tax issues. The

21

Company believes that its tax filing positions have substantial merit and it intends to vigorously defend these positions. The Company has established accruals that it feels are sufficient to address claims, including related interest and penalties, where its defense may be unsuccessful or where a settlement of issues may be warranted. The amount of the accrual is based on an assessment by management of both the probability and extent of loss for each of the disputed issues involved. Since the issues involved are highly complex, are subject to the uncertainties of extensive litigation and/or administrative processes and may require an extended period of time to reach ultimate resolution, it is possible that management's estimate of this liability could change.

Accounting for the Impairment of Long-Lived Assets Including Goodwill and Other Intangibles

        Long-lived assets, including goodwill and other intangibles, are reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. The Company periodically evaluates whether events and circumstances have occurred that indicate possible impairment. Goodwill and other intangibles are also reviewed for possible impairment at least annually. The Company uses estimates of future cash flows of the related asset, asset grouping or reporting unit in measuring whether the assets are recoverable. Changes in actual or estimated future cash flows could have an impact on the recoverability of such assets, resulting in future impairment charges.

RESULTS OF OPERATIONS

2004 Summary Operating Results

		For the Year Ended December 31, 2004
		Homebuilding			Financing			Industrial Products			Natural Resources		Other			Cons Elims			Total
		($ in thousands)
Net sales		$	233,076		$	16,977		$	545,040		$	347,531	$	101,492		$	(19,842	)	$	1,224,274
Interest income on instalment notes			—			220,041			—			—		—			—			220,041
Miscellaneous income			679			5,759			1,515			3,821		8,347			(2,714	)		17,407
	Net sales and revenues		233,755			242,777			546,555			351,352		109,839			(22,556	)		1,461,722
Cost of sales			185,336			7,302			471,404			230,600		85,971			(19,766	)		960,847
Interest expense(1)			—			127,273			—			—		—			—			127,273
Gross profit/net interest income			48,419			108,202			75,151			120,752		23,868			(2,790	)		373,602
Depreciation			4,792			1,471			26,672			22,464		4,821			—			60,220
Selling, general & administrative			77,439			30,739			42,232			17,220		39,901			(80	)		207,451
Provision for losses on instalment notes			—			12,402			—			—		—			—			12,402
Postretirement benefits			(465	)		(207	)		(1,483	)		10,896		(601	)		—			8,140
Amortization of other intangibles			—			4,976			—			—		—			—			4,976
Provision for estimated hurricane losses			—			3,983			—			—		—			—			3,983
Restructuring & impairment charges			—			—			121			470		—			—			591
	Operating income (loss)	$	(33,347	)	$	54,838		$	7,609		$	69,702	$	(20,253	)	$	(2,710	)		75,839
	Corporate debt interest expense																			(18,687	)
	Income from continuing operations before income taxes																		$	57,152

(1)

Excludes corporate debt interest expense.

22

Year Ended December 31, 2004 and 2003

Overview

        The Company's net income for the year ended December 31, 2004 was $49.9 million, or $1.14 per diluted share, which compares to a net loss of $29.0 million, or $0.67 per diluted share in the prior year period. Net income in the year ago period includes a loss from discontinued operations of $32.7 million, or $0.76 per diluted share. Income from continuing operations for the year ago period was $3.3 million, or $0.08 per diluted share, which included income of $21.4 million due to favorable resolution of an IRS tax matter related to tax returns in fiscal years 1995 and 1996, partially offset by $8.1 million in after-tax expense in the Industrial Products segment related to settlements of litigation matters and ceasing manufacturing operations at U.S. Pipe's castings plant in Anniston, Alabama, $4.4 million in after-tax expense in the Natural Resources segment for increased benefits costs associated with the curtailment of the other postretirement benefits plan for the announced closure of Mine No. 5, $1.6 million of after-tax impairment charges for the write-off of remaining goodwill in connection with the shutdown of the pattern shop at Southern Precision and $1.1 million in an after-tax impairment charge related to the sale of the Company's former headquarters building.

        Other principal factors impacting income from continuing operations in the current year results compared to the prior year period include:

•

Average selling price increases at Natural Resources for coal and natural gas were 31% and 33%, respectively, in the current period compared to the prior year period.



•

Financing results in the current period include a decrease in provision for losses, lower delinquency rates and reduced interest expense, partially offset by a $4.0 million provision for estimated hurricane losses and increased loss accruals associated with the repossessed homes inventory.



•

Price increases in Industrial Products during 2004 have more than offset increases in scrap metal, transportation and other manufacturing costs.



•

Homebuilding had fewer unit completions and higher costs that resulted in lower margins.



•

The current period reflects a decrease in income from land sales compared to the year-ago period.



•

Results for 2004 reflect improvements at Sloss from higher prices for furnace and foundry coke.



•

The Company reversed certain valuation allowances related to state deferred income tax assets previously provided by $12.5 million in the Natural Resources and Other segments. The Company established valuation allowances of $4.6 million for certain state deferred income tax assets in the Industrial Products and Homebuilding segments.

        Natural Resources' dramatic increase in results in 2004 was due to a 31% increase in average coal prices, a strong increase in coal production, higher natural gas prices, lower production costs and increased shipments at favorable spot coal pricing. The improvement in Industrial Products (after excluding the prior year charges related to settled litigation matters, ceasing manufacturing operations at the U.S. Pipe castings plant in Anniston, Alabama and a write-off of goodwill related to a disposed entity and the current year environmental costs) is due to improved ductile iron pipe selling prices, partially offset by higher scrap metal and other costs. The current period results also include losses in the Homebuilding segment caused by lower new home order volumes in the second half of 2003 and first half of 2004, resulting in fewer unit completions during the current year, increased lumber costs, job cost overruns and expenses associated with closing and updating sales centers. Financing results, excluding the $4.0 million provision for estimated hurricane losses, improved $7.4 million compared to

23

the prior year period due to a decrease in the provision for losses, improved delinquency performance, lower interest expense and higher prepayment income.

Continuing Operations

        Net sales and revenues for the year ended December 31, 2004 were $1.462 billion, a 10% increase from $1.326 billion in 2003. Revenue increases within the Natural Resources and Industrial Products segments were partially offset by the decrease in the Homebuilding segment. Natural Resources revenues increased due to price increases for coal and natural gas and an increase in coal tons sold, partially offset by a decrease in natural gas volumes. Industrial Products revenues increased due to price increases implemented during the year to keep pace with the rising costs of scrap metal and other materials. Homebuilding revenues decreased due to the lower unit completions partially offset by higher average selling prices.

        Cost of sales, exclusive of depreciation, of $960.8 million was 78.5% of net sales in 2004 versus $922.0 million and 85.0% of net sales in 2003. Cost of sales increased $38.8 million primarily due to higher volumes and increased scrap metal and other costs in the Industrial Products segment. The gross margin percentage improved as compared to the prior year period because of increases in sales prices in Natural Resources and Industrial Products, partially offset by higher scrap metal and other costs in the Industrial Products segment and higher lumber costs and job cost overruns in the Homebuilding segment.

        Depreciation for the year ended December 31, 2004 was $60.2 million, an increase of $6.8 million compared with 2003, primarily as a result of the purchase of mining equipment at Natural Resources.

        Selling, general and administrative expenses of $207.5 million were 14.2% of net sales and revenues in 2004, compared to $178.3 million and 13.5% in 2003. An increase of $11.5 million in the Homebuilding segment related primarily to costs incurred to remodel and close branches and for higher insurance, employee-related, consulting and legal costs. The increase of $2.4 million in the Financing segment was due to higher employee-related and legal costs. This increase was slightly offset by a decrease at Industrial Products due to a legal settlement expensed in 2003 which was partially offset by current year environmental charges. The increase of $6.2 million in the Natural Resources segment was primarily due to increased legal expenses associated with the Mine No. 5 accident and increased employee-related costs. Corporate expenses increased $12.1 million mainly due to increased employee-related costs, plus higher internal and external audit and consulting fees related to Sarbanes-Oxley compliance.

        Provision for losses on instalment notes decreased to $12.4 million in 2004, compared to $15.7 million in 2003 due to improved recovery rates on sales of repossessed homes.

        Interest expense for mortgage-backed and asset-backed notes decreased to $127.3 million in 2004, compared to $129.3 million in 2003 due to the decrease in mortgage-backed and asset-backed note borrowings.

        Interest expense on corporate debt decreased $3.9 million to $18.7 million in 2004 due to reduced interest rates and lower debt balances in 2004. The 2003 period included a $2.5 million reduction related to the favorable IRS settlement. The convertible senior subordinated notes have a fixed interest rate of 3.75%. The prior year debt included a revolving credit facility, paid in full during the second quarter of 2004, which had an interest rate of 350 basis points over LIBOR and a term loan facility which had an interest rate of 425 basis points over LIBOR.

        The provision for estimated hurricane losses in 2004 of $4.0 million relates to estimated claims incurred by insurance customers of the Company's Financing segment from four major hurricanes that impacted the Southeastern United States during the third quarter.

24

        The Company's effective tax rate for 2004 and 2003 differed from the federal statutory rate primarily due to depletion deductions related to the Company's mining operations and the effect of state income taxes. Additionally, the Company had a net reduction of valuation allowances of $7.9 million related to deferred state income tax assets. The prior year tax rate also differed from the statutory tax rate due to a reduction of income tax accruals as a result of the favorable settlement of a dispute with the IRS. In connection with the IRS dispute settlement, the Company recorded reductions of $2.5 million and $18.9 million to interest expense and income taxes, respectively, in the statement of operations.

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

Segment Analysis

Homebuilding

        Net sales and revenues were $233.8 million during 2004, a decrease of $43.1 million, or 15.6% from the prior period as a result of fewer unit completions, partially offset by higher average selling prices. The higher selling price reflect price increases implemented in the first half of 2004, as well as the Company's on-going strategy to market and sell larger homes with more amenities. Total unit completions decreased by 913 or 22%, compared to the prior year, as a result of lower volumes of new sales orders beginning in the last half of 2003. This reduction was due to a variety of factors, including reduced advertising and promotional initiatives. Additionally, during the third quarter of 2004, a series of hurricanes and the resulting excessive rain caused construction delays, which reduced new starts and completions through much of the Southeast. This reduction also reflects market conditions that were weaker in the Company's historical affordable-housing market segment compared to the broader homebuilding industry. Excluding the modular business, 2,730 units were completed in the current period, compared to 3,523 in the year-ago period. The modular business completed 521 homes in the current period, 120 fewer than the year-ago period. This reduction reflects a weak economic environment in the Carolinas, the market area served by this business.

	For the year ended December 31,
	2004		2003
Homes Completed		3,251		4,164
Average Net Selling Price	$	71,700	$	66,200

        The segment operating loss was $33.3 million for the year ended December 31, 2004, compared to an operating loss of $0.5 million in the prior year. This decrease was primarily due to fewer unit completions ($8.9 million), reduced margins primarily due to higher job and lumber costs ($13.6 million), increases in payroll costs ($6.3 million) related to market adjustments to salaries, severance related to more than 100 eliminated positions and a change in the commission structure. Additionally, other costs, primarily other employee costs increased $5.1 million in 2004 compared to the prior year primarily related to hiring experienced industry personnel, consulting expenses, legal expenses and the closure of twenty-six branches. The Homebuilding segment instituted one price increase in the fourth quarter of 2003 and two price increases in 2004 in response to rising lumber and other costs. The first of these increases was effective October 1, 2003 and increased prices 3%, the second was effective March 13, 2004 and increased prices 5% and the third increase of 3% was effective May 17, 2004.

        Homebuilding has instituted new sales and marketing initiatives, including the creation of a new training program for its sales force and a more aggressive and focused approach to advertising, which, coupled with the redesign of its sales centers and enhanced model offerings, are among the revitalized

25

business approaches being taken to drive higher volumes. Homebuilding is in the process of automating a new construction scheduling system and is upgrading the staffing and training in the purchasing and construction functions. These actions are expected to improve cycle times and accelerate new starts. Because of the long lot preparation and building cycle in the scattered lot business, it normally requires six to eight months for new sales to generate revenues. The Homebuilding segment is expected to return to a profitable run rate during the fourth quarter of 2005.

Financing

        Net sales and revenues were $242.8 million in 2004, an increase of $3.0 million from the prior year. This increase is attributable to higher prepayment-related interest income and higher property insurance revenues. Operating income was $54.8 million in 2004, compared to $51.4 million in the year-ago-period. The segment results improved as a result of a decline in provision for losses on instalment notes, higher prepayment income (prepayment speeds were 10.1% in 2004 compared to 8.9% in 2003) and lower interest expense partially offset by a $4.0 million provision for estimated hurricane losses. Delinquencies (the percentage of amounts outstanding over 30 days past due) were 4.9% at December 31, 2004, down from 5.7% at December 31, 2003, reflecting strong portfolio performance.

        Repossessed inventory units remained constant with 459 units ($28.9 million) at December 31, 2004, compared to 455 units ($27.5 million) at December 31, 2003.

        Financing expects instalment notes, related debt balances and corresponding interest income and expense to decrease due to unit declines at Homebuilding, which is expected to be partially offset by continued purchases of seasoned mortgages. The Financing segment has also completed a new warehouse facility for $200.0 million, which will provide temporary financing for the purchases of instalment notes and loans. Additionally, the segment anticipates to spend $3.0 to $5.0 million for system upgrades over the next two years to upgrade its portfolio management capabilities.

Industrial Products

        Net sales and revenues were $546.6 million for the year ended December 31, 2004, an increase of $84.7 million from $461.9 million for the year ended December 31, 2003. This increase was primarily due to higher sales prices and increased sales volumes, especially for ductile iron pipe which had a 22% increase in average selling price and an 8% increase in sales volume. Prices were lower in the prior year as a result of an industry price war that began in the second quarter of 2002. U.S. Pipe's pricing actions since June 2003 have offset scrap metal cost increases and other manufacturing costs. The increase in revenue from increased selling prices was partially offset by a decrease in revenues from the Southern Precision and Vestal Manufacturing subsidiaries, which were sold in 2003 and 2004, respectively.

        Operating income for the segment was $7.6 million, compared to a $13.5 million loss in the prior year. The profit improvement in 2004 was primarily attributable to higher sales prices ($77.7 million), slightly higher volumes ($8.2 million), recoveries from an environmental-related insurance settlement ($1.9 million), partially offset by higher costs for scrap metal and other materials ($64.1 million), higher manufacturing costs ($7.6 million), environmental costs ($4.0 million) and higher costs related to workers' compensation, salaries and wages, legal expenses and depreciation ($2.7 million). The current year also includes a loss resulting from the sale of Vestal Manufacturing ($1.2 million). Prior year operating income includes charges related to restructuring costs to cease operations at the castings plant in Annistion, Alabama ($5.9 million); settled litigation matters ($6.5 million); write-off of goodwill related to a disposed entity ($2.4 million); and settlement of a commercial dispute ($1.7 million).

26

        Significant increases in the cost of scrap metal occurred at U.S. Pipe in 2004. Scrap metal is a primary raw material in the production of ductile iron pipe, accounting for up to 40% of the costs of producing pipe. Historically averaging $110 per net ton or less in costs, scrap metal cost averages were in excess of $220 per ton in 2004. Unparalleled scrap export volume, especially to China, has been the principal reason for the record high costs of scrap metal. The Company believes that these sales price increases have more than offset the increases in cost that have occurred and have and will continue to enable the Company to enhance profitability. However, the Company's ability to achieve expected improved 2005 results is dependent on its continued ability to pass along scrap cost volatility to customers in the form of price increases. This ability could be affected by the reactions of customers or competitors to these price increases.

Natural Resources

        Net sales and revenues were $351.4 million for the year ended December 31, 2004, an increase of $93.6 million from $257.8 million in the prior year. The increase was primarily due to higher metallurgical coal and natural gas prices and increased coal production, partially offset by decreased natural gas volumes.

	For the year ended December 31,
	2004	2003
Average Natural Gas Selling Price (per MCF)	$  6.08	$  4.58
Billion Cubic Feet of Natural Gas Sold	7.9	8.7
Number of Natural Gas Wells	399	392
Average Coal Selling Price (per ton)	$46.22	$35.22
Tons of Coal Sold	6.5 million	6.1 million

        The average natural gas selling prices shown for 2004 and 2003 include the effects of approximately $1.5 million of hedge gains and $5.6 million of hedge losses, respectively, on hedges of anticipated natural gas production and sales.

        For 2004, Natural Resources' operating income was $69.7 million, compared to an operating loss of $26.4 million in the prior year. The increase was due to higher metallurgical coal and natural gas sales prices and higher metallurgical coal volumes, partially offset by lower gas volumes, legal expenses related to the settlement of the Mine No. 5 accident and increased employee related costs. Prior year operating income included $6.7 million of restructuring charges related to the announced accelerated closure of Mine No. 5.

        In December 2003, the Company announced that JWR expected to close Mine No. 5 during the fourth quarter of 2004, approximately two years earlier than originally scheduled, due to continuing adverse geologic conditions. In April 2004, the Company announced that due to increases in metallurgical coal prices, it had extended its coal production schedule for Mine No. 5 into 2005. In December 2004, the Company extended its coal production schedule for Mine No. 5 into the fourth quarter of 2006. The Company previously estimated total costs of the shutdown at approximately $17.8 million, of which approximately $12.7 million would qualify as restructuring costs. As a result of the delay in the shutdown of the mine, total expected costs decreased to approximately $14.5 million, of which approximately $9.4 million would qualify as restructuring costs. Due to the change in the timing of the mine shutdown and the related decrease in estimated restructuring costs, the Company remeasured the liability, which resulted in a $0.7 million reversal during the first quarter of 2004 of amounts previously charged to restructuring expense in 2003 and $1.0 million reversal during the fourth

27

quarter of 2004 of amounts previously charged to restructuring expense during 2004. Estimated costs associated with the restructuring are as follows (in thousands):

	Total Expected Costs		Restructuring and impairment expenses recognized from inception to December 31, 2004
Termination benefits	$	4,046	$	1,311
Other employee related costs		8,475		5,790
Other costs		2,001		67
Total	$	14,522	$	7,168

        On December 16, 2004, the Company announced that it has approved up to $135 million for a capital investment program to increase coal production capacity at Mine No. 7. It is anticipated that the development of the program will occur over a four-year period and increase annual production capacity by approximately 2.7 million tons per year starting in the fourth quarter of 2008. Capital expenditures for 2005 related to this expansion project are expected to be $15.5 million. In addition, at Mine No.4, the Company expects to spend $4.5 million in 2005 to increase hoist capacity by 10% to alleviate a forecasted bottleneck in the production process starting in early 2006.

        Strong performance at Natural Resources is expected to continue in 2005. Increased demand, particularly from China, as well as reduced supplies, has contributed to price increases in the world's metallurgical coal markets. In the first quarter of 2005, Jim Walter Resources completed negotiations for most of its annual metallurgical coal supply contracts, which generally cover the period from July 2005 through June 2006 at prices of $107 per ton, nearly double the 2004 contract level. The price increase in metallurgical coal should have a positive impact on Natural Resources profitability in 2005. In 2005, Jim Walter Resources expects to produce between 6.0 and 6.4 million tons of coal, which is lower than 2004 primarily because output at Mine No. 5 is expected to decline over the course of the year due to shorter panels and more difficult geologic conditions related to the remaining coal.

Other

        Net sales and revenues were $109.8 million for 2004 compared to $107.0 million in the prior year. Sloss revenues were $13.0 million higher than the prior year, which were partially offset by land sales that were $8.6 million lower than the prior year. Sloss revenues increased in 2004 due to overall increased sales volumes and higher prices for furnace and foundry coke, which increased 37% and 10%, respectively, over the prior year. Sloss operating income was $12.1 million higher than the previous year due to higher coke volumes and increased pricing.

        Net general corporate expenses principally included in selling, general and administrative expenses were $28.6 million in 2004 compared to $16.5 million in 2003. In 2004, corporate expenses were higher due to employee costs of $5.3 million primarily related to incentive compensation expense, higher professional service fees of $4.5 million related to internal and external audit services related to implementation of Sarbanes-Oxley Act requirements and increased workers compensation and medical expenses.

28

2003 Summary Operating Results

		For the Year Ended December 31, 2003
		Homebuilding			Financing			Industrial Products			Natural Resources			Other			Cons Elims			Total
		($ in thousands)
Net sales		$	275,679		$	14,081		$	459,775		$	261,708		$	88,296		$	(15,113	)	$	1,084,426
Interest income on instalment notes			—			220,401			—			—			—			—			220,401
Miscellaneous income			1,176			5,272			2,075			(3,873	)		18,699			(2,715	)		20,634
	Net sales and revenues		276,855			239,754			461,850			257,835			106,995			(17,828	)		1,325,461
Cost of sales			207,371			8,178			394,789			238,673			86,631			(13,681	)		921,961
Interest expense(1)			—			129,344			—			—			—			—			129,344
Gross profit/net interest income			69,484			102,232			67,061			19,162			20,364			(4,147	)		274,156
Depreciation			4,755			860			26,119			16,312			5,330			—			53,376
Selling, general & administrative(2)			65,858			28,294			47,966			11,035			26,673			(1,486	)		178,340
Provision for losses on instalment notes			—			15,660			—			—			—			—			15,660
Postretirement benefits			(667	)		(137	)		(1,829	)		11,541			(828	)		—			8,080
Amortization of other intangibles			—			6,132			—			—			—			—			6,132
Restructuring & impairment charges			—			—			8,347			6,698			1,747			—			16,792
	Operating income (loss)	$	(462	)	$	51,423		$	(13,542	)	$	(26,424	)	$	(12,558	)	$	(2,661	)		(4,224	)
Corporate debt interest expense																					(22,572	)
Loss from continuing operations before income taxes																				$	(26,796	)

(1)

Excludes corporate debt interest expense.

(2)

Effective January 1, 2004, the Company revised its methodology of allocating certain corporate overhead expenses to all segments. Operating income for each segment now includes on allocation of corporate overhead expenses that are directly attributable to each segment's operations. 2003 amounts have been reclassified to conform to the 2004 presentation.

Year Ended December 31, 2003 and 2002

Continuing Operations

        Net sales and revenues for the year ended December 31, 2003 were $1.325 billion, substantially the same as in 2002. Revenue decreases within the Industrial Products and Other segments were offset by increases in the Homebuilding and Natural Resources segments. Industrial Products segment revenues decreased due to lower pipe, valve, hydrant and fittings volumes, partially offset by price increases. The volume decline occurred during the course of 2003 as U.S. Pipe instituted multiple price increases. These price increases were in response to rising scrap metal and other costs and an easing of the intense pricing competition within the industry that occurred in 2002. Revenues for the Other segment declined on lower sales volume for Sloss, partially offset by higher pricing for furnace coke and increased sales of land. Homebuilding revenues improved on higher average selling prices, partially offset by lower unit completions. Revenues were higher in Natural Resources due to an increase in coal tons sold and higher natural gas prices, partially offset by a decrease in natural gas volumes and slightly lower coal prices.

        Cost of sales, exclusive of depreciation, of $922.0 million was 85.0% of net sales in 2003 versus $862.4 million and 78.6% of net sales in 2002. The increase in cost of sales as a percentage of net sales

29

is primarily due to increased costs of lumber and other building materials in the Homebuilding segment, higher scrap metal, alloy, natural gas and other costs in the Industrial Products segment and higher production costs in the Natural Resources segment.

        Depreciation for the year ended December 31, 2003 was $53.4 million, an increase of $2.0 million compared with 2002 primarily due to increases at Homebuilding and Financing related to implementations of new enterprise systems and at Natural Resources due to capital expenditures for mining equipment.

        Selling, general and administrative expenses were $178.3 million in 2003, compared to $167.2 million in 2002. The increase in the Homebuilding segment was a result of higher costs related to a reorganization of the sales and construction organizations, as well as the implementation of a new enterprise system and new advertising and marketing initiatives. Industrial Products' increase principally related to the settlement of a class action employment matter of $6.5 million. In addition, there was an increase in environmental-related expenses at Sloss in 2003 of approximately $2.3 million. The increased costs in 2003 were partially offset by productivity and cost reduction programs in place throughout the Company. The 2002 results included a $2.6 million charge to bad debt expense related to a Sloss customer that filed for bankruptcy protection, as well as higher professional fees related to restating Mid-State Home's accounting for interest income on instalment notes to the interest method.

        Provision for losses on instalment notes increased to $15.7 million in 2003, compared to $12.4 million in 2002 due principally to anticipated increases in the estimated level of losses, as indicated by an increase in the number of repossessions and slightly higher losses on resales of repossessed homes.

        Postretirement benefits expense was $8.1 million in 2003, a reduction of $7.6 million from 2002 due to plan amendments effective January 1, 2003, which placed a monthly cap on Company contributions for salary post retirement healthcare coverage.

        Interest expense for mortgage-backed and asset-backed notes decreased to $129.3 million in 2003, compared to $135.1 million in 2002. This reflected lower interest rates, partially offset by higher borrowings.

        Interest expense on corporate debt was $22.6 million in 2003 versus $18.1 million in 2002. This increase resulted from higher interest rates on the 2003 facility beginning in April 2003, as compared to the previous facility, as well as the accelerated recognition of $2.4 million of term loan debt issue costs and discount amortization as a result of mandatory debt repayments required by the sale of AIMCOR and JW Aluminum in December 2003.

        The Company recorded approximately $16.8 million in restructuring and impairment charges during 2003 related to the cessation of various operations in the Industrial Products segment, the anticipated closure of Mine No. 5 in the Natural Resources segment, and a write-down of the Company's former headquarters building to its net realizable value prior to its sale.

        The Company's effective income tax rate for the year ended December 31, 2003 differed from the Federal statutory tax rate due to a reduction of income tax accruals as a result of the favorable settlement of a dispute with the IRS, a deduction for depletion related to the Company's mining operations, the effect of state and foreign income taxes and amortization of goodwill. In July 2003, the Company favorably resolved a longstanding dispute with the IRS concerning Federal income tax returns for fiscal years ended May 31, 1995 and 1996. The IRS had previously disallowed deductions of $391 million and related legal fees of $15 million associated with the settlement of veil piercing litigation in the Bankruptcy Proceedings. The Company successfully defended its position through an IRS appeals process, and will not be required to pay income taxes related to this issue. The Company had previously established accruals for both Federal income taxes and interest associated with this issue that were no longer required. Accordingly, the Company recorded reductions of $2.5 million and

30

$18.9 million to interest expense and income tax expense, respectively, in the statement of operations. The Company's effective tax rate for the year ended December 31, 2002 of 22.6% differed from the federal statutory tax rate due to a $2.8 million tax benefit related to the November 1998 sale of JW Window Components, a deduction for depletion related to the Company's mining operations and the utilization of a nonconventional fuel credit. The $2.8 million tax benefit was from an increased capital loss carryforward due to a change in the consolidated return loss disallowance rules, which favorably affected the Company's previous treatment of the November 1998 sale of JW Window Components.

        Discontinued operations for the year ended December 31, 2003 produced a net loss of $32.7 million, or $0.76 per diluted share, including a net loss on the sale of AIMCOR and JW Aluminum of $51.4 million, or $1.18 per diluted share. Income from discontinued operations for 2003 was $18.7 million, or $0.43 per diluted share, as compared to $21.1 million, or $0.47 per diluted share in 2002.

        The net loss for the year ended December 31, 2003 was $29.0 million, or $0.67 per diluted share. The net loss for the year ended December 31, 2002 was $52.5 million, or $1.17 per diluted share, which included an after-tax charge of $125.9 million, or $2.81 per diluted share, from the cumulative effect of a change in accounting principle related to the initial adoption of SFAS No. 142.

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

Segment Analysis

Homebuilding

        Net sales and revenues were $276.9 million during 2003, an increase of $6.7 million, or 2.5%, from the prior period. As compared to the prior year, average net selling prices increased in 2003, but were partially offset by fewer home completions. Average net selling prices increased as a result of the Company's on-going strategy to market and sell new product options, amenity upgrades and larger, more upscale models. Excluding the modular business, 3,523 homes were completed in 2003, compared to 3,596 in 2002. This reduction principally reflects market conditions that were weaker in the Company's historical affordable-housing, credit-challenged customer base, as compared to the broader homebuilding industry. The Company's modular business completed 641 homes during 2003, 30 less than in 2002. This reduction reflects a weak economic environment in the Carolinas, the market area served by this business.

	For the year ended December 31,
	2003		2002
Homes Completed		4,164		4,267
Average Net Selling Price	$	66,200	$	63,000

        The segment operating loss was $0.5 million for the year ended December 31, 2003 compared to operating income of $15.2 million in 2002. The $15.7 million decrease was principally caused by fewer unit completions, higher lumber and other material costs, and expenses related to significant investments in a major advertising campaign, a reorganization of the sales and construction organizations, and installation of a new enterprise system during 2003, partially offset by increases in average selling prices.

Financing

        Net sales and revenues were $239.8 million in 2003, a decrease of $1.2 million from 2002. This decrease is attributable to lower interest income earned on restricted cash balances due to lower interest rates, partially offset by higher insurance revenues. Operating income was $51.4 million in 2003,

31

compared to $54.5 million in 2002. The decrease was a result of an increase in the provision for losses on instalment notes receivable due to anticipated higher losses resulting from a record level of bankruptcies and related foreclosures that will continue to move through the repossession and resale process. Income was also impacted by increased expenses related to higher commissions paid for insurance placed on customer homes and costs related to the implementation of new financial systems. This increase was offset by a $5.7 million decrease in interest expense, principally as a result of a reduction in the interest rates on borrowings. In addition, there was an increase in interest income on instalment notes from higher prepayment speeds as a result of increased recognition of unamortized discount that occurs when payoffs are received in advance of maturity. Prepayment speeds were 8.88% in 2003 compared to 6.85% in 2002. Delinquencies (the percentage of amounts outstanding over 30 days past due) at December 31, 2003 were 5.7% of net instalment balances outstanding.

        Repossession inventory units at December 31, 2003 increased to 455 units ($27.5 million), compared to 255 units ($16.3 million) at December 31, 2002. This increase is attributable to higher levels of bankruptcies and the Company's efforts to accelerate foreclosure activity during 2002 and 2003.

Industrial Products

        Net sales and revenues were $461.9 million for the year ended December 31, 2003, a decrease of $27.3 million from $489.2 million for the year ended December 31, 2002. This decrease was due to lower pipe, valve, hydrant and fittings volumes, partially offset by price increases. Total U.S. Pipe tons shipped were down 5.6% in 2003 compared to 2002. The volume decline occurred during the course of the year as U.S. Pipe instituted multiple price increases. These price increases were in response to rising scrap metal and other costs and an easing of the intense pricing competition within the industry that occurred in 2002.

        The operating loss of $13.5 million for 2003 was a $38.1 million deterioration from operating income of $24.6 million for 2002. Operating income decreased as a result of lower volumes, higher scrap metal costs ($15.6 million), increased litigation accruals principally related to an employment matter at U.S. Pipe ($6.5 million), increased workers compensation costs ($3.5 million) and increased natural gas costs ($3.7 million). Segment results also reflected $1.7 million to settle a commercial dispute during 2003 that had previously been accrued in the Other segment and, accordingly, there was no net impact on consolidated results of operations. In addition, U.S. Pipe recorded a restructuring charge related to ceasing production and manufacturing operations at the U.S. Pipe Anniston casting plant ($5.9 million), which is more fully described below.

        Major increases in the cost of scrap metal occurred at U.S. Pipe in 2003. Scrap metal is a primary raw material in the production of ductile iron pipe, accounting for up to 40% of the costs of producing pipe. Historically averaging $110 per net ton or less in cost, scrap metal cost averaged in excess of $145 per ton in 2003. Unparalleled scrap export volume, especially to China, has been the principal reason for the record high costs of scrap metal.

        On April 29, 2003, U.S. Pipe ceased production and manufacturing operations at its U.S. Castings plant in Anniston, Alabama. The decision to cease operations was the result of several years of declining financial results and increased foreign competition and resulted in the termination of 80 employees. Exit costs associated with the plant closure are estimated to be $6.5 million and such costs

32

will be incurred within twelve months. Estimated costs associated with the restructuring are as follows (in thousands):

		Total Expected Costs		Restructuring and impairment charges expensed for the year ended December 31, 2003
Termination benefits		$	819	$	726
Contract termination costs			324		285
Other associated costs			657		227
	Restructuring charges		1,800		1,238
Impairment charge—write-off of fixed assets and related parts and materials			4,700		4,700
Total		$	6,500	$	5,938

        Other associated costs principally included site clean-up costs that were expensed as incurred.

Natural Resources

        Net sales and revenues were $257.8 million for the year ended December 31, 2003, an increase of $8.0 million from the $249.8 million in 2002. The increase in net sales and revenues is attributable to an increase in coal tons sold and an increase in natural gas selling prices, partially offset by a decrease in natural gas volumes and slightly lower coal prices.

	For the year ended December 31,
	2003		2002
Average Natural Gas Selling Price (per MCF)	$	4.58	$	3.04
Billion Cubic Feet of Natural Gas Sold		8.7		9.5
Number of Natural Gas Wells		392		384
Average Coal Selling Price (per ton)	$	35.22	$	36.17
Tons of Coal Sold (in millions)		6.1		6.0

        The average natural gas selling prices shown for 2003 are net of approximately $5.6 million of losses on hedges of anticipated natural gas production and sales.

        For 2003, Natural Resources had an operating loss of $26.4 million, compared to income of $21.6 million for 2002. This decline was due to the effect of adverse geological conditions and unanticipated equipment repairs in Mine No. 7, which resulted in 31 days of lost longwall production. In Mine No. 5 a scheduled longwall move took longer than expected, resulting in 18 days of lost production, and a geologic fault slowed the longwall advance rate in the second half of 2003. Additionally, the Mine Safety and Health Administration temporarily ordered the closure of Mine No. 5 for approximately two weeks in July 2003, resulting in $1.3 million of idle mine costs. The temporary closure resulted in no fines or penalties. Partially offsetting these negatives, the natural gas operation posted increased revenue and operating income, due to higher gas prices.

        In December 2003, the Company announced that JWR expected to close Mine No. 5 during the fourth quarter of 2004, approximately two years earlier than originally scheduled, due to continuing adverse geologic conditions. As a result, Natural Resources expected to incur restructuring charges and additional operating costs associated with the shutdown of approximately $17.8 million, of which approximately $12.7 million would qualify as restructuring charges. Costs associated with this closure recorded in 2003 included $6.7 million recorded as restructuring charges, which was primarily for an increase in benefits costs associated with a curtailment of the other post-retirement benefits plan

33

($5.8 million) and severance costs ($0.8 million). Estimated costs associated with the restructuring were as follows (in thousands):

	Total Expected Costs		Restructuring charges expensed for the year ended December 31, 2003
Termination benefits	$	5,925	$	841
Other employee related costs		9,218		5,790
Other costs		2,682		67
Total	$	17,825	$	6,698

        The Company's remaining two mines will benefit from the closure by redeploying miners and equipment to increase productivity and reduce capital requirements.

        During the third quarter of 2002, Mine No. 5 returned to full production following a September 2001 accident. Business interruption and property insurance covered the impact on operating results of reduced production and shipments and higher costs during the recovery period. Natural Resources recognized $25.4 million of business interruption claims as reductions to cost of sales in 2002. In addition, cost of sales included $12.7 million for re-entry costs that were fully offset by property insurance and casualty claims reflected as reductions to cost of sales. The Company also recorded a $3.7 million reduction in the allowance for potential uncollectible insurance recoveries as a reduction of cost of sales in 2002. Additionally, approximately $2.2 million of expected insurance proceeds were recorded as miscellaneous income in 2002, representing the gain on a reimbursement of fully depreciated equipment, the replacement cost of which was capitalized during the year ended December 31, 2002. The only other insurance-related amounts reflected in 2003 was a further $1.9 million reduction in the allowance for potential uncollectible insurance recoveries recorded as a reduction to cost of sales, based on the final settlement of all insurance recoveries. As of the end of January 2004, approximately $54.7 million of insurance proceeds have been collected in full satisfaction of the Company's claims under its insurance policies.

Other

        Net sales and revenues were $107.0 million for 2003 compared to $109.8 million in the prior year. Sloss revenues were $9.1 million lower than the prior year, which were partially offset by higher revenues from land sales of $5.7 million compared to the prior year. Sloss revenues declined during the current period due to lower sales of foundry coke, fiber and specialty chemicals, partially offset by higher furnace coke volumes and favorable furnace coke pricing.

        The operating loss for the Other segment declined from $23.7 million in 2002, to $12.6 million in 2003. General corporate expenses included in this segment were approximately $16.5 million in 2003 compared to $21.9 million in 2002. Of the $5.4 million decrease, $2.2 million relates to credits to expenses of this segment in 2003 for charges made to other segments, primarily Industrial Products, in 2003. These expenses were included as costs of this segment in 2002. The remaining decrease was due to lower incentive compensation and other personnel-related costs ($4.1 million), lower depreciation expenses ($0.7 million) and higher life-insurance- related income ($0.9 million). Corporate expenses also reflected reduced income from land sales ($3.0 million) that was offset by increased gains of $6.4 million from sales of land in the Land Group. Sloss' operating loss increased by $0.7 million in 2003 on weaker slag wool and specialty chemical results, increases in environmental-related expenditures ($2.3 million), and other increased expenses, partially offset by income from asset sales ($1.1 million) and the effect of a $2.6 million bad debt expense in 2001.

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Discontinued Operations

AIMCOR

        Net sales and revenues were $398.5 million for 2003, a decrease of $4.5 million from 2002. The decrease reflects approximately one less month of operations, as the sale of AIMCOR was effective on December 3, 2003, partially offset by higher fuels grade petcoke volumes from the start-up of St. Croix operations, higher calcined volumes and an increase in Metals volumes and pricing.

        Income from discontinued operations for AIMCOR was $7.6 million in 2003 compared to $10.3 million in 2002. This also reflected approximately one less month of operations, costs associated with repairing a furnace at the Bridgeport, Alabama ferrosilicon production facility, reduced petcoke margins and a decrease in terminal services activity.

        The loss in 2003 to dispose of AIMCOR's operations was $71.5 million, net of $27.6 million of income tax benefit.

JW Aluminum

        JW Aluminum's net sales and revenues were $209.9 million in 2003, compared to $202.1 million in 2002. The increase reflected strong demand for JW Aluminum's foil and sheet products, partially offset by approximately one less month of operations, as the sale of JW Aluminum was effective on December 5, 2003.

        Income from discontinued operations for JW Aluminum was $11.1 million, $0.2 million above 2002, even though 2003 results reflected only approximately 11 months of operations. These results also reflected increased shipments of aluminum foil and sheet products, as well as improved productivity.

        The gain resulting from the 2003 sale of JW Aluminum was $20.1 million, net of $15.5 million of income tax expense.

FINANCIAL CONDITION

        Cash and cash equivalents decreased from $60.0 million at December 31, 2003 to $46.9 million at December 31, 2004, reflecting $103.4 million in cash flows provided by operations, offset by $28.5 million of cash flows used in investing activities and $88.0 million of cash flows used in financing activities, which included $95.3 million used for share repurchases. See additional discussion in the Statement of Cash Flows section that follows.

        Net receivables, consisting principally of trade receivables, were $170.2 million at December 31, 2004, an increase of $14.7 million from December 31, 2003. The increase occurred primarily at Industrial Products which increased $20.0 million principally due to higher pricing and volume and at Corporate due to a $7.3 million increase in receivables from the exercise of employee stock options. These higher balances were partially offset by lower sales at Homebuilding and the timing of collections at Natural Resources.

        Inventories were $233.5 million at December 31, 2004, an increase of $9.0 million from December 31, 2003 primarily due to increased production in the Natural Resources segment ($13.7 million) partially offset by a decrease in homes under construction at Homebuilding ($10.1 million).

        Property, plant and equipment was $332.0 million at December 31, 2004, a decrease of $20.5 million reflecting depreciation expense ($60.2 million) and the sale of Vestal Manufacturing ($3.1 million), partially offset by additions, net of retirements ($42.8 million).

        Other long-term assets were $46.3 million at December 31, 2004, an increase of $10.2 million from $36.1 million at December 31, 2003, reflecting an increase in pensions of approximately $14.9 million.

35

        Goodwill and other intangibles, net, were $145.0 million at December 31, 2004, a decrease of $5.0 million from December 31, 2003. This decrease was due to the normal amortization associated with the reduction in the Financing segment's Trust II instalment notes receivable portfolio.

        Accounts payable of $90.2 million at December 31, 2004 decreased $9.7 million compared to December 31, 2003 primarily as a result of timing of vendor payments.

        Accrued expenses were $125.7 million at December 31, 2004, an increase of $16.6 million from December 31, 2003, primarily due to the accrual for estimated hurricane losses and employee-related incentive costs, professional service accruals primarily related to the implementation of Sarbanes-Oxley Act requirements and increased workers' compensation.

        Other senior debt decreased $113.8 million, reflecting the payoff of the senior secured term loan funded by proceeds from the issuance of $175 million of convertible senior subordinated notes in April 2004.

        Instalment notes receivable as shown on the balance sheet include instalment notes generated principally from the financing of homes constructed by the Homebuilding segment and purchased by the Financing segment and mortgage loans originated. Instalment notes were $1,619.1 million at December 31, 2004, a decrease of $65.5 million from December 31, 2003, as a result of reduced volume of Homebuilding units and an increase in the prepayment rate of outstanding balances. Mortgage loans were $109.3 million at December 31, 2004, an increase of $33.8 million from the prior year period resulting from acquisitions of third party loans and refinancing of instalment notes. The allowance for losses on instalment notes receivable was $11.2 million at December 31, 2004 compared to $10.9 million at December 31, 2003. See Note 6 of "Notes to the Consolidated Financial Statements." The following table shows information about the allowance for losses for the periods presented.

	Allowance for Losses		As a % of Instalment Notes Receivable		Net Losses and Charge Offs Deducted from the Allowance		As a % of Instalment Notes Receivable
	($ in thousands)
December 31, 2002	$	10,783	0.62	%	$	12,282	0.71	%
December 31, 2003		10,907	0.62			15,536	0.88
December 31, 2004		11,200	0.65			12,109	0.70

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

		December 31,
		2004			2003			2002
Total Number of Accounts Outstanding			46,785			51,086			53,879
Delinquencies as a Percent of Number of Accounts Outstanding
	31-60 Days		1.32	%		1.53	%		1.81	%
	61-90 Days		0.59	%		0.75	%		0.74	%
	91-Days or more		2.23	%		3.25	%		4.06	%
			4.14	%		5.53	%		6.61	%
Instalment Notes Receivable Outstanding(1) ($ in millions)		$	1,728		$	1,760		$	1,735
Delinquencies as a Percent of Amounts Outstanding(1)
	31-60 Days		1.84	%		1.82	%		1.94	%
	61-90 Days		0.62	%		0.90	%		0.86	%
	91-Days or more		2.46	%		3.02	%		3.95	%
			4.92	%		5.74	%		6.75	%

(1)

Based on gross instalment balances outstanding.

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LIQUIDITY AND CAPITAL RESOURCES

Overview

        The Company's principal sources of short-term funding are operating cash flows and borrowings under the revolving credit facility and committed secured warehouse lines of credit. The Company's principal sources of long-term funding are the convertible senior subordinated notes and its financings under mortgage-backed/asset-backed notes.

        The Company believes that, based on current forecasts and anticipated market conditions, sufficient operating cash flow will be generated to meet substantially all operating needs, to make planned capital expenditures and to make all required interest payments on indebtedness. 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 gas, levels of construction activity, levels of government spending on water projects, costs of raw materials and interest rates.

        At December 31, 2004, non-recourse mortgage-backed/asset-backed notes outstanding totaled $1.8 billion and primarily consisted of seven issues of public debt providing financing for instalment notes receivable purchased by Mid-State. Mortgage debt also includes outstanding borrowings under a $400.0 million warehouse facility (the "Trust IX Variable Funding Loan Facility") providing temporary financing to Mid-State for its current purchases of instalment notes from JWH and purchases of loans from Walter Mortgage Company. At December 31, 2004, there was $37.0 million outstanding under this warehouse facility and $363.0 million was available for future borrowings.

        As of December 31, 2004, total debt has decreased by $4.8 million compared to December 31, 2003, resulting from the issuance of $175.0 million of convertible senior subordinated notes offset by a $66.1 million decrease in mortgage debt and a $113.7 million decrease in other senior debt. During this period, net borrowings of mortgage debt decreased as principal payments on the various mortgage-backed/asset-backed notes, amounting to $475.6 million, more than offset financings for the sale of homes and purchases of mortgage loans.

Convertible Notes and Senior Debt

        In April 2004, the Company issued $175 million of convertible senior subordinated notes which will mature on May 1, 2024, unless earlier converted, redeemed or repurchased. The notes are redeemable by the Company at par on or after May 6, 2011. The holders of the notes may require the Company to repurchase some or all of the notes at par plus accrued and unpaid interest, including contingent interest, if any, initially on May 1, 2014, and subsequently on May 1, 2019, or at any time prior to their maturity following a fundamental change, as defined in the indenture.

        The notes bear interest at 3.75% per annum. Commencing on May 1, 2011, the Company will pay contingent interest for the applicable interest period if the average trading price of the notes during the specified five trading days in the applicable interest period equals or exceeds 120% of the principal amount of the notes. The contingent interest payable per note will equal 0.40% per year of the average trading price of such note during the applicable five trading-day reference period. The notes are convertible into shares of the Company's common stock, initially at a conversion rate of 56.0303 shares of common stock per $1,000 principal amount of notes (equivalent to a conversion price of approximately $17.85 per share), subject to adjustment and under certain circumstances as outlined in the indenture. Holders can surrender their notes for conversion in any fiscal quarter after the quarter ending June 30, 2004 if the last reported sale price per share of Walter Industries' common stock for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the previous fiscal quarter is greater than or equal to 130% of the applicable conversion price per share of Walter Industries' common stock on such last trading day. Holders may also convert the notes if certain trading price conditions are met, the notes are called for redemption, upon the occurrence of

37

certain corporate transactions or if credit ratings are three or more subcategories below the initial credit rating.

        Other than the occurrence of certain corporate transactions, such as the sale of the Company, the agreement has no provisions that accelerate maturity of the debt. A significant downgrade of the credit rating of the debt or a suspension of the ratings by both rating agencies would result in an acceleration of the conversion feature of the notes.

        The notes are convertible through March 31, 2005 having satisfied, as of December 31, 2004, the common stock sale price condition. The notes may be convertible during future periods if the common stock sale price condition or other conditions are satisfied.

        Proceeds upon issuance of the notes were $168.9 million, net of approximately $6.1 million of underwriting fees and expenses. A portion of the proceeds was used to repay in full the Term Loan, which had a principal balance outstanding of $111.7 million. Using the remaining proceeds and borrowings under the revolving credit facility, the Company repurchased 4,960,784 shares of its common stock for approximately $63.0 million.

        In April 2003, the Company entered into a $500 million bank credit facility (the "2003 Credit Facility) which consisted of a $245 million senior secured revolving credit facility that matures in April 2008 and a $255 million senior secured Term Loan originally maturing in April 2010. As stated previously, the Term Loan was paid off on April 20, 2004 from the proceeds from the issuance of the convertible senior subordinated notes. The 2003 Credit Facility is secured by the stock of Walter Industries' subsidiaries and by certain assets (excluding real property) of the Company. The interest rate on the new revolving credit facility is a floating rate of 350 basis points over LIBOR and on the Term Loan was a floating rate of 425 basis points over LIBOR. LIBOR was 2.4% and 1.2% at December 31, 2004 and December 31, 2003, respectively.

        At December 31, 2004 there were no borrowings under the $245 million revolving credit facility. The revolving credit facility includes a sub-facility for trade and other standby letters of credit in an amount up to $100.0 million at any time outstanding. At December 31, 2004 letters of credit with a face amount of $66.3 million were outstanding. At December 31, 2004, approximately $178.7 million was available under the revolving credit facility.

        The 2003 Credit Facility, as amended, contains a number of significant covenants that, among other things, restrict the ability of the Company and certain subsidiaries to dispose of assets, incur additional indebtedness, pay dividends and repurchase stock, create liens on assets, enter into capital leases, make investments or acquisitions, engage in mergers or consolidations, or engage in certain transactions with subsidiaries and affiliates and otherwise restrict corporate activities (including a change of control). In addition, under the 2003 Credit Facility, the Company and its Restricted Subsidiaries (as defined in the 2003 Credit Facility) are required to maintain specified financial ratios and comply with certain other financial tests.

        Effective March 24, 2004, April 13, 2004 and October 28, 2004, the Company entered into amendments of the 2003 Credit Facility to provide the Company with flexibility in the timing of its long term financing under mortgage backed/asset-backed notes; to permit the issuance of the senior convertible notes; and to increase its ability to make restricted payments such as share repurchases and dividends under the 2003 Credit Facility. These amendments modified the 2003 Credit Facility as follows: (a) the definition of Consolidated EBITDA will not include any cash expenditure made on or after July 1, 2004 in connection with post employment benefits to the extent such expenditures are not deducted in computing Consolidated Net Income; (b) permitted the Company to incur additional indebtedness related to the issuance of convertible senior subordinated notes and repurchase additional shares of the Company's common stock and (c) increased the amount available to make restricted payments, which include share repurchases.

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        EBITDA, as defined in the 2003 Credit Facility, excludes the EBITDA generated by the Financing subsidiary, and substitutes instead, the cash released to the Company via its ownership of the residual beneficial interest in the financing trusts and the net cash proceeds from the periodic issuance of asset-backed notes. EBITDA also excludes certain non-cash restructuring charges, non-cash write-downs of goodwill and asset impairments. The Company's failure to comply with the covenants in its 2003 Credit Facility could result in an event of default, which, if not cured, amended, or waived, could result in the Company's senior secured debt becoming immediately due and payable. At December 31, 2004, the Company was in compliance with these covenants.

        As of December 31, 2004, the Company's 2003 Credit Facility was rated BB by Standard & Poors and Ba2 by Moody's Investor Services, both with a stable outlook. Additionally, the Company's convertible senior subordinated notes were rated B1 by Moody's and B+ by Standard & Poors.

Mid-State Activity

        On February 4, 2005, a Variable Funding Loan Agreement was completed between Mid-State Trust XIV and several financial institutions for a $200.0 million warehouse facility renewable on February 3, 2006 (see Note 24).

        Trust IX is a Delaware Statutory Trust whose assets are limited to pledged instalment notes, mortgage notes and mortgages purchased from Mid-State. The Trust IX Variable Funding Loan Facility's covenants, among other things, restrict the ability of Trust IX to dispose of assets, create liens and engage in mergers or consolidations. In addition, events of default under the Trust IX Facility include the mortgage pool exceeding average consecutive three month delinquency and default ratios of 2.5% and 5.0%, respectively. Trust IX's failure to comply with the covenants in the Trust IX Variable Funding Loan Facility could result in an event of default, which, if not cured, amended or waived, could result in the entire principal balance and accrued interest becoming immediately due and payable. A default under the Trust IX Variable Funding Loan Facility that remains uncured might result in the curtailment of the Company's production activities and negatively affect its ability to securitize its production, which would have a material adverse effect on its business, financial condition, liquidity, and results of operations. Trust IX was in compliance with these covenants at December 31, 2004. Mid-State Homes and Walter Mortgage Company are servicers under the Trust IX Variable Funding Loan Facility and make customary representations and warranties with regard to their servicing activities. A servicer default under the Trust IX Variable Funding Loan Facility, which includes the maintenance of a minimum net worth at Mid-State, if not cured, amended or waived, could result in the servicers being terminated and replaced by a successor servicer. The replacement of Mid-State and WMC would have a negative effect on their financial condition as they no longer would receive servicing fees. The Trust IX Variable Funding Loan Facility matured on February 2, 2004 and was subsequently extended to April 29, 2005.

        The Company believes that the Mid-State Trust IX Variable Funding Loan Facility, the Mid-State Trust XIV Variable Funding Loan Agreement or similar warehouse lines of credit, will provide Mid-State with the funds needed to purchase the instalment notes and mortgages generated by the Homebuilding segment and Walter Mortgage Company.

        In December 2003, Mid-State Capital Corporation, a wholly-owned subsidiary of Mid-State Holdings Corporation, filed a shelf registration statement on Form S-3 totaling $1.2 billion for future permanent financings of instalment notes and mortgage loans. On July 15, 2004, Mid-State Capital Corporation completed its first trust offering of mortgage-backed notes under this shelf registration, Mid-State 2004-1, for $294 million. Proceeds from the offering were used to repay the Mid-State Trust IX Variable Funding Loan Facility in full and provided approximately $86.4 million of additional funds, including $50.0 million to fund additional instalment notes receivable and $36.4 million for general corporate purposes.

39

        It is anticipated that Mid-State will continue to use the Trust IX Variable Funding Loan Facility, Mid-State Trust XIV Variable Funding Loan Agreement or similar warehouse lines of credit, to finance the purchase of additional instalment notes and mortgage loans generated from the future sales of homes as well as the origination and purchase of seasoned loans by Walter Mortgage Company. The Company also expects to utilize all or a significant portion of the remaining $906 million under its shelf registration to provide long-term financing of its originated mortgage assets.

Statement of Cash Flows

        Cash was approximately $46.9 million and $60.0 million at December 31, 2004 and December 31, 2003, respectively. The decrease in cash is primarily the result of expenditures for the purchase of treasury stock ($95.3 million) and purchases of property, plant and equipment, net of retirements ($42.8 million) which exceeded cash flows provided by operating activities ($103.4 million) and cash flows provided by other financing and investing activities.

        Cash flows provided by operating activities for the year ended December 31, 2004, were $103.4 million compared with $105.1 million for the year ended December 31, 2003. The increase in cash flows provided by continuing operations was principally due to increased income partially offset by an increase in net working capital. Cash flows provided by discontinued operations decreased by $17.3 million from the prior year. For the year ended December 31, 2004, the Company paid approximately $3.6 million of selling expenses related to the disposition of AIMCOR and JW Aluminum.

        Capital expenditures, net of retirements, totaled $42.8 million in the year ended December 31, 2004 related principally to longwall and natural gas well equipment at Natural Resources and molding equipment at Industrial Products. Commitments for capital expenditures at December 31, 2004 were not significant; however, it is estimated that gross capital expenditures for the year ending December 31, 2005 will approximate $124 million. Actual expenditures in 2005 may be more or less than this amount, depending upon the level of earnings and cash flow, or expansion opportunities in certain markets.

        For the year ended December 31, 2004, the Company paid approximately $14.8 million of interest on corporate debt. For the year ending December 31, 2005, the Company estimates total cash interest payments related to corporate debt will be approximately $11.8.

        On January 31, 2005, the Board of Directors declared a $0.04 per share dividend payable on March 17, 2005 to shareholders of record on February 18, 2005.

Contractual Obligations and Commercial Commitments

        The Company has certain contractual obligations and commercial commitments. Contractual obligations are those that will require cash payments in accordance with the terms of a contract, such as a borrowing or lease agreement. Commercial commitments represent potential obligations for performance in the event of demands by third parties or other contingent events, such as lines of credit or guarantees of debt.

        During the fourth quarter of 2004, the Company entered into a letter of intent to lease certain longwall mining equipment for a five year period commencing during the latter half of 2005. Annual lease payments are expected to be $5.4 million. The lease agreement is expected to be completed during the first quarter of 2005.

        The following tables summarize the Company's contractual obligations and commercial commitments as of December 31, 2004. The unconditional purchase obligations primarily represent commitments to purchase raw materials as well as certain property, plant and equipment.

40

        Contractual obligations:

			Payments Due by Period
	Total		2005		2006		2007		2008		2009		Thereafter
	(in Thousands)
Mortgage-backed/asset-backed debt(1)	$	1,763,827	$	255,506	$	213,069	$	207,606	$	202,142	$	196,679	$	688,825
Convertible Senior Subordinated Notes		175,000		—		—		—		—		—		175,000
Operating leases		41,044		10,347		8,056		6,687		5,868		4,352		5,734
Unconditional purchase obligations		47,403		28,437		16,710		2,256		—		—		—
Total contractual cash obligations	$	2,027,274		294,290		237,835		216,549		208,010		201,031	$	869,559
Other long-term liabilities(2)				36,904		37,576		40,268		40,010		41,324
Total cash obligations			$	331,194	$	275,411	$	256,817	$	248,020	$	242,355

(1)

The asset-backed notes are based on scheduled maturities, adjusted for estimated prepayments and delinquencies. Prepayments are estimated based on historical experience and expectations about future economic conditions, particularly interest rates.

(2)

Other long-term liabilities include pension and other post-employment benefit liabilities. While the estimated total liability is actuarially determined, there are no definitive payments by period as pension contributions depend on government-mandated minimum funding requirements and other post-employment benefits are paid as incurred. Accordingly, amounts by period included in this schedule are estimates.

        Other commercial commitments:

			Amounts of Commitment Expiration per Year
	Total Amounts Committed		Less than 1 Year		1–3 Years		4–5 Years		Over 5 Years
	(in Thousands)
Trust IX Variable Funding Loan Facility(1)	$	363,026	$	363,026	$	—	$	—	$	—
Trust XIV Variable Funding Loan Facility		200,000		200,000		—		—		—
Revolving Credit Facility(2)		245,000		—		—		245,000		—
Total commercial commitments	$	808,026	$	563,026	$	—	$	245,000	$	—

(1)

Reflects renewal of facility subsequent to year end to April 29, 2005.

(2)

Includes a sub-facility for standby and commercial letters of credit in the amount of $100,000 of which $66,300 was utilized at December 31, 2004.

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 (i) interest rate risk and (ii) commodity risks.

Interest rate risk

        The Company's primary interest rate risk exposures relate to (i) restricted short-term investments, (ii) interest rate risk on the instalment notes receivable portfolio, (iii) pre-payments on the instalment notes receivable portfolio, (iv) interest rate risk on short and long-term borrowings and (v) interest rate risk on pension and other post employment benefit obligations. The Company has periodically used

41

derivative financial instruments to manage interest rate risk. At December 31, 2004, there were no such instruments outstanding.

        On January 31, 2005, the Company entered into two identical $50 million hedge transactions with two separate counter-parties. The objective of the hedge is to protect against the negative effect that rising interest rates would have on the Company's future forecasted issuance of mortgage-backed securities (see Note 24 to the Consolidated Financial Statements).

        Restricted short-term investments of $99.9 million at December 31, 2004 are invested primarily in commercial paper maintaining a weighted average interest rate of 2.23% as of December 31, 2004. A one hundred basis point decrease in the interest rate on these investments would result in a reduction of annual pre-tax interest income of approximately $1.0 million.

        The Company's fixed-rate gross instalment notes receivables were $1.728 billion and fixed-rate mortgage-backed/asset-backed notes were $1.727 billion as of December 31, 2004. The fixed rate nature of these instruments and their offsetting positions effectively mitigate significant interest rate risk exposure from these instruments. If interest rates decrease, the Company may be exposed to higher prepayment speeds. This could result in a modest increase in short-term profitability. However, it could adversely impact long-term profitability as a result of a shrinking portfolio. Changes in interest rates may impact the fair value of these financial instruments.

        The level of prepayments on the fixed rate instalment notes will fluctuate with changes in interest rates. Income generated from prepayments will vary each period based on the current interest rate environment and the interest rates associated with the outstanding instalment notes.

        The Trust IX Variable Funding Loan Facility does have a variable rate of interest that makes it subject to interest rate risk. The outstanding balance of the Facility at December 31, 2004 was $37.0 million at an interest rate of 2.66%. A one hundred basis point increase in this rate would result in a $0.4 million increase in annual pre-tax interest expense.

        The Company's exposure to long-term interest rate risk has been reduced as a result of the issuance of fixed-rate convertible senior subordinated notes and the payoff of the variable-rate Term Loan during April 2004.

        The Company has other senior debt that is used to finance working capital, capital expenditures and for general corporate purposes. As of December 31, 2004, there were no amounts outstanding under the 2003 Credit Facility. The Company is exposed to interest rate risk on its Credit Facility as a result of the variable rate feature of the debt.

        The Company provides a range of benefits to its employees and retired employees, including pensions and postretirement healthcare. In addition, the Company has liabilities for workers compensation and Black Lung. Estimated liabilities for such benefits are actuarially determined utilizing certain assumptions, including a discount rates. The estimated impacts of changes in interest rates on these amounts is shown in the "Critical Accounting Policies" section.

Commodity risks

        In the ordinary course of business, the Company is also exposed to commodity price risks primarily related to the acquisition of raw materials. Availability and the cost of raw materials may have a significant influence over the revenues and costs of the Company. Costs potentially having a significant influence on the Company include costs for lumber and other building materials, natural gas and scrap metal and steel.

        The Company is exposed to commodity price risk on sales and purchases of natural gas. On an annual basis, the Company's sales of natural gas, net of purchases, approximates seven million mmbtu's. At December 31, 2004, the sales price of natural gas was approximately $6.35 per mmbtu. A 10%

42

decrease in the price per MCF could result in an estimated reduction in pre-tax income of approximately $4.4 million on an annual basis.

        The Company occasionally utilizes derivative commodity instruments to manage certain of these exposures where considered practical to do so. Such derivative instruments are held for other than trading. During 2004 and 2003, the Company hedged approximately 28% and 24%, respectively of its natural gas production with swap contracts. These swap contracts effectively converted a portion of forecasted sales at floating-rate natural gas prices to a fixed-rate basis. As a result of decreases in natural gas prices during 2004 and increases in 2003, these swap contracts resulted in cash inflows of $1.5 million in 2004 and cash outflows of $5.6 million in 2003, impacting net sales and revenues.

        As of December 31, 2004, swap contracts to hedge anticipated sales in 2005 of natural gas totaling 900,000 mmbtu were outstanding at an average price of $7.43 per mmbtu. At December 31, 2004, the net gain from this hedge, which was $0.7 million, was recorded in other liabilities and accumulated comprehensive income (loss).

        The Company also annually purchases approximately 610,000 tons of scrap iron and steel used in the production of ductile iron pipe products. A 10% increase in the cost of this scrap iron and steel would cause an increase in cost of sales of approximately $13.4 million.

NEW ACCOUNTING PRONOUNCEMENTS

        In May 2004, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug Improvement and Modernization Act of 2003, which provides guidance on the accounting for the effects of the Act. FASB Staff Position 106-2 is effective for the first interim or annual period ending after June 15, 2004. The Company has determined that it sponsors health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. The effect of the subsidy on the measurement of net periodic postretirement benefit cost for 2004 is $0.7 million, recorded as a reduction to postretirement benefits expense.

        In September 2004, the Emerging Issues Task Force ("EITF") of the FASB adopted EITF 04-8, The Effect of Contingently Convertible Instruments on Diluted Earnings per Share, which requires that the dilutive effect of contingently convertible instruments be included in diluted earnings per share using "if converted" method, effective December 15, 2004. The Company was required to recalculate and restate diluted earnings per share to include the dilutive effect of common stock issuable associated with the Company's $175 million contingent convertible senior subordinated notes. Restatement for the three and six months ended June 30, 2004 and for the three and nine months ended September 30, 2004 resulted in diluted earnings per share of $0.20, $0.09, $0.42 and $0.54, respectively. This compares to originally reported diluted earnings per share of $0.21, $0.09, $0.50 and $0.57, respectively.

        In November 2004, the FASB issued FASB Statement No. 151, Inventory Costs—an amendment of ARB No. 43, Chapter 4, which was issued to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. This statement requires that such items be recorded to expense as incurred. The Company believes that the effects of this statement will not be material.

        In December 2004, the FASB released revised FASB Statement No. 123(R) (FAS 123R), Share-Based Payment, which requires companies to expense the fair value of employee stock options and other forms of stock-based compensation. FAS 123R is effective for all interim periods beginning after June 15, 2005, and, thus, will be adopted by the Company beginning with the third quarter of 2005. The Company expects to adopt the modified prospective application, which excludes restatement of prior periods in the year of adoption. The expected results of the adoption of FAS 123R on the 2005 financial statements is estimated at $0.9 million, net of tax. See Note 3 for information related to the pro forma effects on the Company's reported net income and net income per share of applying the fair value recognition provisions of the previous FAS 123, Accounting for Stock-Based Compensation.

43

PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT

        Except for historical information contained herein, the statements in this release are forward-looking and made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties that may cause the Company's actual results in future periods to differ materially from forecasted results. Those risks include, among others, changes in customers' demand for the Company's products, changes in raw material, labor, equipment and transportation costs and availability, geologic and weather conditions, changes in extraction costs and pricing in the Company's mining operations, changes in customer orders, pricing actions by the Company's competitors, the collection of approximately $14 million of receivables associated with a working capital adjustment arising from the sale of a subsidiary in 2003, potential changes in the mortgage-backed capital market, and general changes in economic conditions. Risks associated with forward-looking statements are more fully described in the Company's filings with the Securities and Exchange Commission. The Company assumes no duty to update its outlook statements as of any future date.

44

Unaudited Interim Financial Information:
(in thousands, except per share amounts)

	Quarter ended
Fiscal Year 2004
	March 31			June 30		September 30		December 31
Net sales and revenues	$	326,036		$	379,868	$	388,324	$	367,494
Gross profit		39,691			63,965		74,415		85,356
Net income (loss)		(4,602	)		8,263		19,073		27,183
Diluted income (loss) per share:(1)(2)	$	(.11	)	$	..20	$	..42	$	..59

	Quarter ended
Fiscal Year 2003
	March 31		June 30			September 30			December 31
Net sales and revenues	$	307,175	$	354,535		$	343,995		$	319,756
Gross profit		47,161		46,925			40,361			28,018
Income (loss) from continuing operations		5,687		16,956			(28	)		(19,296	)
Income from discontinued operations		5,597		3,632			4,034			5,454
Gain (loss) on sale of discontinued operations		—		(47,700	)		(13,263	)		9,546
Cumulative effect of change in accounting principle		376		—			—			—
Net income (loss)	$	11,660	$	(27,112	)	$	(9,257	)	$	(4,296	)
Diluted income (loss) per share:(1)
Income (loss) from continuing operations	$	.13	$	.39		$	—		$	(.46	)
Income from discontinued operations		.12		.08			.09			.13
Gain (loss) on sale of discontinued operations		—		(1.08	)		(.31	)		.23
Cumulative effect of change in accounting principle		.01		—			—			—
Net income (loss)	$	.26	$	(0.61	)	$	(.22	)	$	(.10	)

(1)

The sum of quarterly EPS amounts may be different than annual amounts as a result of the impact of variations in shares outstanding due to treasury stock repurchases and due to rounding differences.

(2)

Dilutive earnings per share, beginning in the second quarter, includes the dilutive effect of the Company's contingent convertible senior subordinated notes, issued April 2004, in accordance with EITF 04-8, The Effect of Contingently Convertible Debt on Diluted Earnings per Share.

Item 8. Financial Statements and Supplementary Data

        Financial Statements and Supplementary Data consist of the financial statements as indexed on page F-1 and unaudited financial information presented in Part II, Item 7, "Management's Discussion and Analysis of Results of Operations and Financial Condition".

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

        None.

Item 9a. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

        We have established a system of disclosure controls and procedures that are designed to ensure that material information relating to the Company, which is required to be timely disclosed, is accumulated and communicated to management in a timely fashion. An evaluation of the effectiveness

45

of the design and operation of our disclosure controls and procedures (as defined in Rule 13a—15(e) under the Securities Exchange Act of 1934 ("Exchange Act") was performed as of the end of the period covered by this annual report. This evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer.

        Based upon that evaluation, our CEO and CFO have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms.

Management's Report on Internal Control over Financial Reporting

        Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of management, including our CEO and CFO, we conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in "Internal Control—Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in "Internal Control—Integrated Framework", our management concluded that our internal control over financial reporting was effective as of December 31, 2004. Our management's assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an independent registered certified public accounting firm, as stated in their report which is included herein.

Changes in Internal Control over Financial Reporting

        There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART III

Item 10. Directors and Executive Officers of the Registrant

        Incorporated by reference to the Proxy Statement (the "2005 Proxy Statement") included in the Schedule 14A to be filed by the Company with the Securities and Exchange Commission (the "Commission") under the Securities Exchange Act of 1934, as amended. Certain information with respect to executive officers is included in Part I, Item 4.

Code of Conduct

        The Board has adopted a Code of Conduct Policy and Compliance Program ("Code of Conduct") which is applicable to all employees, directors and officers of the Company. The code of Conduct is posted on the Company's website at www.walterind.com and is available in print to stockholders who request a copy. The Company has made available an Ethics Hotline, where employees can anonymously report a violation of the Code of Conduct.

Item 11. Executive Compensation

        Incorporated by reference to the 2005 Proxy Statement.

46

Item 12. Security Ownership of Certain Beneficial Owners and Management

        The equity compensation plan information as required by Item 201(d) of Regulation S-K is illustrated in Part II, Item 5 of this document. All other information as required by Item 12 is incorporated by reference to the 2005 Proxy Statement.

Item 13. Certain Relationships and Related Transactions

        Incorporated by reference to the 2005 Proxy Statement.

Item 14. Principle Accounting Fees and Services

        Incorporated by reference to the 2005 Proxy Statement.

PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)

(1) Financial Statements and Schedules—See Index to Financial Statements on page F-1.



(2)

Schedule II—Valuation and Qualifying Accounts.



(3)

Exhibits—See Item 15(b) below.



(b)

Reports on Form 8-K

The Company filed a Current Report on Form 8-K on October 21, 2004 with respect to the press release issued on October 21, 2004 announcing that its Board of Directors have increased its quarterly dividend to 4 cents per common share, payable December 10, 2004 to shareholders of record on November 12, 2004.

The Company filed a Current Report on Form 8-K on October 27, 2004 with respect to the press release issued on October 26, 2004 providing updated full year and fourth quarter earnings guidance.

The Company filed a Current Report on Form 8-K on October 27, 2004 with respect to the press release issued on October 26, 2004 announcing the third quarter 2004 earnings.

The Company filed a Current Report on Form 8-K on October 29, 2004 announcing the Sixth Amendment of its Credit Agreement dated April 13, 2003 effective October 28, 2004, and also with respect to the press release issued on October 29, 2004 announcing the purchase of approximately 2 million shares of the Company's common stock from certain affiliates of KKR in a private transaction occurring concurrently with a public offering made by KKR of approximately 8 million shares of the Company's common stock.

The Company filed a Current Report on Form 8-K on November 1, 2004 announcing that the Company entered into an underwriting agreement dated October 28, 2004 relating to the offer and sale by certain affiliates of KKR of 8 million shares of the Company's common stock.

The Company filed a Current Report on Form 8-K on November 23, 2004 announcing that the Company entered into an amended and restated Trust IX Variable Funding Loan Agreement on November 19, 2004 renewable on January 31, 2005.

The Company filed a Current Report on Form 8-K on December 17, 2004 with respect to the press release issued on December 16, 2004 announcing that its Board of Directors approved up to $135 million for a capital investment program to significantly increase coal production capacity at JWR's Mine No. 7 and that JWR has negotiated several international metallurgical coal contracts for prices in excess of $100 per short ton.

(c)

Exhibits—See Index to Exhibits on pages E1—E-3.

47

SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	WALTER INDUSTRIES, INC.
March 16, 2005
	/s/  WILLIAM F. OHRT William F. Ohrt, Executive Vice President and Principal Financial Officer

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

March 16, 2005	/s/  DON DEFOSSET Don DeFosset, Chairman, President and Chief Executive Officer
March 16, 2005	/s/  DONALD N. BOYCE* Donald N. Boyce, Director*
March 16, 2005	/s/  SIMON E. BROWN* Simon E. Brown, Director*
March 16, 2005	/s/  HOWARD L. CLARK* Howard L. Clark, Jr., Director*
March 16, 2005	/s/  PERRY GOLKIN* Perry Golkin, Director*
March 16, 2005	/s/  JERRY, W. KOLB* Jerry W. Kolb, Director*
March 16, 2005	/s/  BERNARD G. RETHORE* Bernard G. Rethore, Director*
March 16, 2005	/s/  NEIL A. SPRINGER* Neil A. Springer, Director*
March 16, 2005	/s/  MICHAEL T. TOKARZ* Michael T. Tokarz, Director*
March 16, 2005	/s/  WILLIAM F. OHRT William F. Ohrt, Executive Vice President and Principal Financial Officer
March 16, 2005	/s/  CHARLES E. CAUTHEN Charles E. Cauthen, Senior Vice President, Controller and Principal Accounting Officer

*By:
/s/  CHARLES E. CAUTHEN Charles E. Cauthen
Attorney-in-Fact

48

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Walter Industries, Inc. and Subsidiaries
	Report of Independent Certified Public Accountants	F-2
	Consolidated Balance Sheets—December 31, 2004 and 2003	F-4
	Consolidated Statements of Operations for the Three Years Ended December 31, 2004	F-5
	Consolidated Statements of Changes in Stockholders' Equity for the Three Years Ended December 31, 2004	F-6
	Consolidated Statements of Cash Flows for the Three Years Ended December 31, 2004	F-7
	Notes to Consolidated Financial Statements	F-8

F-1

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

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

        We have completed an integrated audit of Walter Industries Inc.'s 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on audits, are presented below.

Consolidated financial statements

        In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Walter Industries, Inc. and its subsidiaries (the "Company") at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        As discussed in Note 3, the Company changed its method of accounting for obligations associated with the retirement of tangible long-lived assets in accordance with Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations," effective January 1, 2003.

        As discussed in Note 10, the Company changed its method of accounting for amortization of goodwill in accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," effective January 1, 2002.

Internal control over financial reporting

        Also, in our opinion, management's assessment, included in Management's Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the COSO. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management's assessment and on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control

F-2

over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal controls and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

        A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

        Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PricewaterhouseCoopers LLP
Tampa, Florida
March 15, 2005

F-3

WALTER INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)

			December 31, 2004			December 31, 2003
ASSETS
Cash and cash equivalents			$	46,924		$	59,982
Short-term investments, restricted				99,905			100,315
Instalment notes receivable, net of allowance of $11,200 and $10,907, respectively				1,717,205			1,749,162
Receivables, net				170,219			155,497
Income tax receivable				14,977			17,271
Inventories				233,547			224,525
Prepaid expenses				19,590			6,528
Property, plant and equipment, net				331,959			352,529
Investments				6,165			6,326
Deferred income taxes				47,943			47,498
Unamortized debt expense				36,726			35,810
Other long-term assets, net				46,340			36,124
Goodwill and other intangibles, net				144,986			149,962
			$	2,916,486		$	2,941,529
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable			$	90,217		$	99,889
Accrued expenses				125,681			109,136
Debt:
	Mortgage-backed/asset-backed notes			1,763,827			1,829,898
	Senior debt			—			113,754
	Convertible senior subordinated notes			175,000			—
Accrued interest				16,813			17,119
Accumulated postretirement benefits obligation				282,599			292,300
Other long-term liabilities				203,122			202,823
	Total liabilities			2,657,259			2,664,919
Commitments and Contingencies (Note 17)
Stockholders' equity:
	Common stock, $.01 par value per share:
		Authorized—200,000,000 shares
		Issued—57,953,136 and 55,692,942 shares		580			557
	Capital in excess of par value			1,178,121			1,150,442
	Accumulated deficit			(609,048	)		(658,965	)
	Treasury stock—20,771,902 and 13,813,313 shares, at cost			(259,317	)		(164,018	)
	Accumulated other comprehensive loss			(51,109	)		(51,406	)
		Total stockholders' equity		259,227			276,610
			$	2,916,486		$	2,941,529

See accompanying "Notes to Consolidated Financial Statements"

F-4

WALTER INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

		For the years ended December 31,
		2004			2003			2002
Net sales and revenues:
	Net sales	$	1,224,274		$	1,084,426		$	1,096,737
	Interest income on instalment notes		220,041			220,401			220,499
	Miscellaneous		17,407			20,634			21,888
			1,461,722			1,325,461			1,339,124
Cost and expenses:
	Cost of sales (exclusive of depreciation)		960,847			921,961			862,417
	Depreciation		60,220			53,376			51,418
	Selling, general and administrative		207,451			178,340			167,173
	Provision for losses on instalment notes		12,402			15,660			12,400
	Postretirement benefits		8,140			8,080			15,684
	Interest expense—mortgage-backed/asset-backed notes		127,273			129,344			135,073
	Interest expense—corporate debt		18,687			22,572			18,126
	Amortization of other intangibles		4,976			6,132			7,225
	Provision for estimated hurricane losses		3,983			—			—
	Restructuring and impairment charges		591			16,792			—
			1,404,570			1,352,257			1,269,516
Income (loss) from continuing operations before income tax expense			57,152			(26,796	)		69,608
Income tax (expense) benefit			(7,235	)		30,115			(17,330	)
Income from continuing operations			49,917			3,319			52,278
Discontinued operations, net of income taxes (2003 includes a net loss from sales of discontinued operations of $51.4 million, net of income taxes)			—			(32,700	)		21,147
Cumulative effect of change in accounting principle (net of income tax expense (benefit) of $123 in 2003 and ($75,053) in 2002)			—			376			(125,947	)
Net income (loss)		$	49,917		$	(29,005	)	$	(52,522	)
Basic income (loss) per share:
	Income from continuing operations	$	1.29		$	.08		$	1.18
	Discontinued operations		—			(.76	)		.48
	Cumulative effect of change in accounting principle		—			.01			(2.85	)
	Net income (loss)	$	1.29		$	(.67	)	$	(1.19	)
Diluted income (loss) per share:
	Income from continuing operations	$	1.14		$	.08		$	1.17
	Discontinued operations		—			(.76	)		.47
	Cumulative effect of change in accounting principle		—			.01			(2.81	)
	Net income (loss)	$	1.14		$	(.67	)	$	(1.17	)

See accompanying "Notes to Consolidated Financial Statements"

F-5

WALTER INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 2004
(in thousands)

			Total			Comprehensive Income (Loss)			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Common Stock		Capital in Excess			Treasury Stock
Balance at December 31, 2001			$	440,651					$	(577,438	)	$	(5,102	)	$	554	$	1,157,202		$	(134,565	)
Comprehensive loss:
	Net loss			(52,522	)	$	(52,522	)		(52,522	)
	Other comprehensive income (loss), net of tax:
		Foreign currency translation adjustment		20			20						20
		Increase in additional pension liability		(43,718	)		(43,718	)					(43,718	)
		Net unrealized loss on hedge		(958	)		(958	)					(958	)
Comprehensive loss						$	(97,178	)
Stock issued upon exercise of stock options				2,722												2		2,720
Purchases of treasury stock				(1,887	)																(1,887	)
Dividends paid, $.12 per share				(5,314	)													(5,314	)
Balance at December 31, 2002				338,994						(629,960	)		(49,758	)		556		1,154,608			(136,452	)
Comprehensive loss:
	Net loss			(29,005	)	$	(29,005	)		(29,005	)
	Other comprehensive income (loss), net of tax:
		Foreign currency translation adjustment		1,151			1,151						1,151
		Increase in additional pension liability		(3,845	)		(3,845	)					(3,845	)
		Net unrealized gain on hedge		1,046			1,046						1,046
Comprehensive loss						$	(30,653	)
Stock issued upon exercise of stock options				975												1		974
Purchases of treasury stock				(27,566	)																(27,566	)
Dividends paid, $.12 per share				(5,140	)													(5,140	)
Balance at December 31, 2003				276,610						(658,965	)		(51,406	)		557		1,150,442			(164,018	)
Comprehensive income:
	Net income			49,917		$	49,917			49,917
	Other comprehensive income (loss), net of tax:
		Increase in additional pension liability		(405	)		(405	)					(405	)
		Net unrealized gain on hedge		702			702						702
Comprehensive income						$	50,214
Stock issued upon exercise of stock options				26,580												23		26,557
Tax benefit from the exercise of stock options				5,363														5,363
Purchases of treasury stock				(95,299	)																(95,299	)
Dividends paid, $.13 per share				(4,939	)													(4,939	)
Stock-based compensation				698														698
Balance at December 31, 2004			$	259,227					$	(609,048	)	$	(51,109	)	$	580	$	1,178,121		$	(259,317	)

See accompanying "Notes to Consolidated Financial Statements"

F-6

WALTER INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

					For the years ended December 31,
					2004			2003			2002
OPERATING ACTIVITIES
	Income from continuing operations				$	49,917		$	3,319		$	52,278
	Adjustments to reconcile income to net cash provided by continuing operations:
		Provision for losses on instalment notes receivable				12,402			15,660			12,400
		Depreciation				60,220			53,376			51,418
		Provision for deferred income taxes				465			2,820			10,512
		Tax benefit on the exercise of employee stock options				5,363			—			—
		Accumulated postretirement benefits obligation				(9,701	)		(9,892	)		224
		Provision for other long-term liabilities				1,595			1,827			7,066
		Amortization of other intangibles				4,976			6,132			7,225
		Amortization of debt expense				8,554			8,553			4,758
		Loss on sale of assets				1,294			—			—
		Restructuring and impairment charges(a)				—			14,646			—
		Stock-based compensation expense				698			—			—
	Decrease (increase) in assets:
		Receivables				(16,588	)		20,714			(18,102	)
		Income taxes receivable				1,384			(7,495	)		(16,946	)
		Inventories				(12,082	)		(29,249	)		(635	)
		Prepaid expenses				(13,062	)		1,117			(1,459	)
	Increase (decrease) in liabilities:
		Accounts payable				(8,453	)		5,159			17,146
		Accrued expenses(a)				20,322			6,245			(25,764	)
		Accrued interest				(306	)		(1,533	)		(3,860	)
			Cash flows provided by continuing operations			106,998			91,399			96,261
			Cash flows (used in) provided by discontinued operations			(3,611	)		13,663			36,003
				Cash flows provided by operating activities		103,387			105,062			132,264
INVESTING ACTIVITIES
		Notes originated from sales and resales of homes and purchases of loan portfolios				(455,242	)		(505,661	)		(455,904	)
		Cash collections on accounts and payouts in advance of maturity				474,797			452,594			418,330
		Decrease (increase) in short-term investments, restricted				410			(2,429	)		28,865
		Purchases of available-for-sale securities				(20,000	)		—			—
		Sales of available-for-sale securities				20,000			—			—
		Additions to property, plant and equipment, net of retirements				(42,805	)		(49,277	)		(59,566	)
		(Increase) decrease in investments and other assets, net				(11,652	)		2,764			6,060
		Disposal of assets held for sale				—			10,425			162
		Additions to property, plant and equipment of discontinued operations				—			(21,907	)		(10,599	)
		Proceeds from sale of subsidiaries, net of cash disposed				6,000			242,286			—
				Cash flows (used in) provided by investing activities		(28,492	)		128,795			(72,652	)
FINANCING ACTIVITIES
		Issuance of debt				720,218			1,209,331			693,714
		Retirement of debt				(726,483	)		(1,351,887	)		(750,736	)
		Additions to unamortized debt expense				(8,030	)		(7,822	)		(93	)
		Purchases of treasury stock				(95,299	)		(27,566	)		(1,887	)
		Dividends paid				(4,939	)		(5,140	)		(5,314	)
		Exercise of employee stock options				26,580			975			2,722
				Cash flows used in financing activities		(87,953	)		(182,109	)		(61,594	)
Net (decrease) increase in cash and cash equivalents						(13,058	)		51,748			(1,982	)
Cash and cash equivalents at beginning of period						59,982			8,234			10,216
Cash and cash equivalents at end of period					$	46,924		$	59,982		$	8,234
SUPPLEMENTAL DISCLOSURES:
		Interest paid			$	137,646		$	144,110		$	145,872
		Income taxes (refunded) paid, net				(466	)		(19,422	)		22,649

(a)

The Company recorded restructuring and impairment charges of $591 and $16,792 for the years ended December 31, 2004 and 2003, respectively. A portion of these charges, consisting of write offs of assets and the increase in postretirement benefits costs associated with the early shutdown of Mine No. 5, were non-cash and are reconciled below:

		December 31, 2004		December 31, 2003
Accrued expenses		$	591	$	2,146
Non-cash			—		14,646
	Total restructuring and impairment charges	$	591	$	16,792

See accompanying "Notes to Consolidated Financial Statements"

F-7

WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—Organization

        Walter Industries, Inc. ("the Company") is a diversified company which operates in five reportable segments: Homebuilding, Financing, Industrial Products, Natural Resources, and Other (See Note 19). Through these operating segments, the Company offers a diversified line of products and services including home construction and financing, ductile iron pressure pipe and related products, coal, methane gas, furnace and foundry coke, chemicals and slag fiber.

NOTE 2—Discontinued Operations

        In December 2003, the Company sold Applied Industrial Materials Corporation ("AIMCOR"), previously a wholly-owned subsidiary of the Company to Oxbow Carbon and Minerals LLC ("Oxbow") for $127.7 million, subject to certain post-closing adjustments. This resulted in a loss on the sale of approximately $71.5 million, net of $27.6 million of income taxes. AIMCOR marketed and distributed petroleum coke and performed related refinery outsourcing services and supplied ferroalloys and other steel and foundry products.

        The components of the loss on disposal of AIMCOR were recorded as follows (in thousands):

	For the year ended December 31, 2003
Impairment of goodwill	$	56,944
Write-down of property, plant and equipment		36,197
Selling expenses		5,962
Loss before income tax benefit		99,103
Income tax benefit		(27,586	)
Loss on disposal	$	71,517

        Per the sales agreement for the divestiture of AIMCOR, the final sales price is subject to certain post-closing cash and net working capital adjustments. These adjustments are defined in the sales agreement and are subject to resolution and arbitration processes provided for in the agreement. Receivables at December 31, 2004 and December 31, 2003 included approximately $14.5 million and $16.2 million, respectively, for estimated net cash and working capital adjustments due to the Company. The ultimate recovery of this receivable is subject to the resolution and arbitration processes described above. Management believes it has a valid basis for its claims and intends to vigorously pursue recovery through these processes (See Note 17).

        Based on the Company's history of taxable earnings and expectations for future earnings, it is more likely than not that the Company will achieve sufficient future taxable income to recognize all of the tax benefits associated with the tax loss from the disposition of AIMCOR.

        The Company also completed the sale of JW Aluminum Company ("JW Aluminum"), previously a wholly-owned subsidiary of the Company to Wellspring Capital Management LLC for $125.0 million in December 2003, resulting in a gain on the sale of approximately $20.1 million, net of $15.5 million of income taxes. JW Aluminum manufactured specialty flat-rolled aluminum products, including "fin stock," used by the heating and cooling industry.

        As a result of the above sales, in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the operations

F-8

of AIMCOR and JW Aluminum have been classified as discontinued operations in the accompanying statements of operations.

        Net sales and revenues and income (loss) from discontinued operations for the years ended December 31, 2003 and 2002 were as follows (in thousands):

	AIMCOR						JW Aluminum						Total
	2003			2002			2003			2002			2003			2002
Net sales and revenues	$	398,522		$	403,071		$	209,865		$	202,079		$	608,387		$	605,150
Income from discontinued operations before tax		10,543			16,064			17,560			16,051			28,103			32,115
Income tax expense		(2,898	)		(5,783	)		(6,488	)		(5,185	)		(9,386	)		(10,968	)
Income from discontinued operations		7,645			10,281			11,072			10,866			18,717			21,147
Gain (loss) on disposal of discontinued operations before tax		(99,103	)		—			35,627			—			(63,476	)		—
Income tax (expense) benefit		27,586			—			(15,527	)		—			12,059			—
Gain (loss) on disposal of discontinued operations		(71,517	)		—			20,100			—			(51,417	)		—
Discontinued operations	$	(63,872	)	$	10,281		$	31,172		$	10,866		$	(32,700	)	$	21,147

NOTE 3—Summary of Significant Accounting Policies

Basis of Presentation

        The consolidated financial statements include the accounts of the Company and all of its subsidiaries. Preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. Actual results could differ from those estimates. All significant intercompany balances and transactions have been eliminated. The Notes to Consolidated Financial Statements, except where otherwise indicated, relate to continuing operations only.

Concentrations of Credit Risk

        Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist principally of cash and cash equivalents, short-term investments, investments, instalment notes receivable, and trade and other receivables.

        The Company maintains cash and cash equivalents in high quality securities with various financial institutions. Concentrations of credit risk with respect to instalment notes receivable and trade and other receivables are limited due to the large number of customers and their dispersion across many geographic areas. However, of the gross amount of instalment notes receivable at December 31, 2004, 31%, 15%, 9%, and 7%, (December 31, 2003, 29%, 14%, 9%, and 8%) are secured by homes located in the states of Texas, Mississippi, Alabama and Florida, respectively. The Company believes the potential for incurring material losses related to the concentration of these credit risks is remote. Derivatives are entered into only with counterparties that management considers to be highly credit-worthy.

Revenue Recognition

        The Company recognizes revenue based on the recognition criteria set forth in the Securities and Exchange Commission's Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements."

F-9

        Homebuilding—The Company's operations involve three principal types of homebuilding transactions:

a.

Selling a home constructed for consumers on real estate owned by the consumer ("On Your Lot Sales");



b.

Selling modular homes constructed in a factory principally to distributors for re-sale to consumers ("Modular Sales");



c.

Selling a home constructed for consumers on real estate owned by the consumer but encumbered by a previous borrowing ("Real Estate Sales").

        Sales for cash at closing occasionally occur for each of the above categories. However, except for Modular Sales, most involve some form of seller financing.

        On Your Lot Sales constitute the majority of the sales in the homebuilding business (approximately 83% of new units sold in 2004). Since the real estate (land) is already owned by the customer and is not financed by the Company, these transactions represent sales of personal property financed by instalment sales contracts ("Notes"). Revenue from the construction and sale of a home is recognized upon completion of construction and legal transfer of ownership to the customer.

        Modular Sales are the second largest component of homebuilding sales (approximately 16% of new units sold in 2004). These sales are generally made principally to distributors for resale to consumers and do not involve sales of real estate. Sales are made under various customary industrial credit terms, with receivables due within 10 to 90 days following delivery. Revenue is recognized when legal ownership has transferred and upon delivery to the distributor or to a customer site.

        For Real Estate Sales, the Company finances both a home and the related real estate. Revenues on Real Estate Sales are recognized by the full accrual method in accordance with SFAS 66, "Accounting for Sales of Real Estate," when:

a.

The sale is consummated at a closing with the customer after construction is completed and legal transfer of ownership has occurred.



b.

The buyer's initial cash investment is no less than 5% of the sales value. The buyer's continuing investment is required to be a level monthly payment sufficient to amortize the borrowing over a term not to exceed 30 years.



c.

The Company's receivable is secured by a first mortgage and is not subject to future subordination.



d.

The Company transfers to the buyer the risks and rewards of ownership and does not have any continuing involvement with the property.

        Financing—Within the Financing Segment, Mid-State Homes, Inc. ("MSH") purchases and services mortgage instalment notes originated by JWH and Walter Mortgage Company ("WMC") offers financing to homebuyers that is secured by mortgages and liens. References to instalment notes or mortgage instalment notes include mortgage loans offered by WMC.

        Instalment notes receivable are initially recorded at the discounted value of the future instalment note payments using an imputed interest rate in accordance with Accounting Principles Board Opinion ("APB") No. 21, "Interest on Receivables and Payables," ("APB 21") by JWH. The imputed interest rate used represents the estimated prevailing market rate of interest for credit of similar terms issued to customers with similar credit ratings to JWH's customers. The Company estimates this rate by adding a credit spread and a margin to a benchmark funding rate in order to cover costs and expected losses. This rate is periodically compared to rates charged by competitors and other lenders to

F-10

customers of similar credit quality to validate that the methodology results in a market rate of interest. These estimates affect revenue recognition by determing the allocation of income between the amount recognized by the Homebuilding segment from the construction of the home and the amount recognized by the Financing Segment over the life of the instalment note as interest income. Variations in the estimated market rate of interest used to initially record instalment notes receivable could affect the amount and timing of income recognition in each of these segments. Instalment note payoffs received in advance of scheduled maturity (prepayments) cause interest income to increase due to the recognition of remaining unamortized discounts arising from the application of APB 21 at the note's inception.

        The interest income on instalment notes generated by both MSH and WMC is recognized using the interest method. The legal instruments used in each company allow for different amounts to be charged to the customer for late fees and ultimately recognized as revenue. JWH offers instalment notes, which state the maximum amount to be charged to the customer, and ultimately recognized as revenue, based on the contractual number of payments and dollar amount of monthly payments. WMC offers mortgage loans that have fixed monthly payments and repayment terms similar to instalment notes. Both MSH and WMC have the ability to levy costs to protect their collateral position upon default, such as attorney fees and late charges, as allowed by state law.

        Instalment notes are placed on non-accrual status when any portion of the principal or interest is ninety days past due. When placed on non-accrual status, the related interest receivable is reversed against interest income of the current period. Instalment notes are removed from non-accrual status when the amount financed and the associated interest income become current. Recoveries of advanced taxes and insurance related to instalment notes are recognized as income when collected.

        The Financing segment sells homes and related real estate repossessed or foreclosed on by the Company from customers in default of their loans or notes to the Company ("Repo Sales"). Repo Sales involve the sale, and in most circumstances the financing of both a home and related real estate. Revenues from Repo Sales are recognized in accordance with SFAS 66 by the full accrual method where appropriate. However, the requirement for a minimum 5% initial cash investment per SFAS 66 frequently is not met. When this is the case, losses are immediately recognized, and gains are deferred and recognized by the instalment method until the buyer's investment reaches the minimum 5%. At that time, revenue is recognized by the full accrual method.

        Industrial Products—For shipments via rail or truck, revenue is recognized when title passes upon delivery to the customer. Revenue earned for shipments via ocean vessel is recognized under international shipping standards as defined by Incoterms 2000 when title and risk of loss transfer to the customer.

        Natural Resources—For coal shipments via rail, revenue is recognized when title and risk of loss transfer to the customer when the railcar is loaded. Revenue earned for coal shipments via ocean vessel is recognized under international shipping standards as defined by Incoterms 2000 when title and risk of loss transfer to the customer. For the Company's methane gas operations, revenues are recognized when the gas has been transferred to the customers' pipeline, at which time transfer of title occurs.

        Other—For products shipped via rail or truck, revenue is recognized when the product is placed on the rail or in the truck, which is when risk of loss and title transfers to the customer. Land sales are recognized as revenue when legal transfer of ownership to the buyer occurs, which is at closing.

        Given the diversity of the Company's businesses, many transactions have unique characteristics, which have to be analyzed on a case-by-case basis. This diversity of products and contracts can lead to

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variations in the timing of income recognition. However, most transactions are not individually significant, nor could they materially impact earnings.

Allowances for Losses

        Allowances for losses on trade and other accounts receivables are based, in large part, upon judgments and estimates of expected losses and specific identification of problem trade accounts and other receivables. Significantly weaker than anticipated industry or economic conditions could impact customers' ability to pay such that actual losses are greater than the amounts provided for in these allowances.

        Management's periodic evaluation of the adequacy of the allowance for losses on instalment notes is based on the Company's past loss experience, known and inherent risks in the portfolio, delinquencies, the estimated value of the underlying real estate collateral and current economic and market conditions within the applicable geographic areas surrounding the underlying real estate. The allowance for losses on instalment notes is increased by provisions for losses charged to income and is reduced by charge-offs net of recoveries.

Insurance Claims

        Accruals for property-liability claims and claims expense are the estimated amounts necessary to settle both reported and unreported claims of insured property-liability losses, based upon the facts in each case and the Company's experience with similar cases. The establishment of appropriate accruals, including accruals for catastrophes such as hurricanes, is an inherently uncertain process. Accrual estimates are regularly reviewed and updated, using the most current information available.

Repossessed Property

        Repossessed property is recorded at its estimated fair value less estimated costs to sell. Gains on sales of repossessed land and homes are recorded into income based on the buyer's equity in the property. On sales to buyers with at least a 5% equity in the property, gains are recorded into income at time of sale when title passes. For those sales to buyers with less than a 5% equity in the property, the gain on sale is deferred and recorded to income on a pro-rata basis in relation to payments received until buyer's equity equals 5%, at which time the remaining deferred gain is recorded into income.

Cash and Cash Equivalents

        Cash and cash equivalents include short-term deposits and highly liquid investments which have original maturities of three months or less and are stated at cost which approximates market. The Company's cash management system provides for the reimbursement of all major bank disbursement accounts on a daily basis. Checks issued but not yet presented to the banks for payment are included in accounts payable.

Available-for-Sale Securities

        The Company occasionally invests some of its available cash in auction rate securities on which the interest rates are reset in periods of less than 90 days. These auction rate securities derive their value from underlying securities having maturities in excess of 90 days. The Company normally invests in these securities for a period of less than 60 days at which time the interest rates are reset. At the time the interest rate is reset, the auction rate security is sold and the Company either purchases the same or a similar type of auction rate security for another short period or sells the security. The Company

F-12

classifies these auction rate securities as available for sale investments. Since the Company did not own any of these securities at either December 31, 2003 or 2004 no such investments are included on the consolidated balance sheets. The Company did, however, invest in auction rate securities during 2004. The Company also reflects the gross purchases and sales of these securities as investing activities in its Consolidated Statement of Cash Flows.

Inventories

        Inventories are valued at the lower of cost or market using either the first-in, first-out ("FIFO") or average cost method of accounting.

Accounting for the Impairment of Long-Lived Assets

        Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. The Company periodically evaluates whether events and circumstances have occurred that indicate possible impairment. The Company uses an estimate of the future undiscounted net cash flows of the related asset or asset grouping over the remaining life in measuring whether the assets are recoverable. See Note 4, "Restructuring, Impairment and Other Charges."

Investments

        The Company consolidates all majority owned and controlled subsidiaries, applies the equity method of accounting for investments of between 20% and 50%, and accounts for investments below the 20% level under the cost method.

Goodwill and Other Intangible Assets

        Goodwill and intangible assets that have an indefinite life are reviewed for impairment on an annual basis, or more frequently if events or circumstances indicate possible impairment. Intangible assets that have a definite life are amortized over their useful lives. Definitive-lived intangible assets consist primarily of premiums on the Trust II instalment note receivable portfolio and certain mineral and timber rights. Premiums are amortized to expense over the life of the notes based on collections of the outstanding balances. Mineral and timber rights are amortized to expense over the estimated lives of the mineral and timber production and related sales.

Property, Plant and Equipment

        Property, plant and equipment is recorded at cost. Depreciation is recorded principally on the straight-line method over the estimated useful lives of the assets. Assets (primarily mine development costs) for extending the full life of a coal mine are depreciated on the unit of production basis. Leasehold improvements are amortized on the straight-line method over the lesser of the useful life of the improvement or the remaining lease term. Estimated useful lives used in computing depreciation expense are 3 to 20 years for machinery and equipment, 3 to 50 years for land improvements and buildings, and mine life for mine development costs. Gains and losses upon disposition are reflected in the statement of operations in the period of disposition.

        Direct internal and external costs to implement computer systems and software are capitalized as incurred. Capitalized costs are amortized over the estimated useful life of the system or software, beginning when site installations or module development is complete and ready for its intended use, which generally is 3 to 5 years.

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        The Company adopted SFAS 143, "Accounting for Asset Retirement Obligations," as of January 1, 2003 related to plant closure and reclaimation efforts for its Industrial Products and Natural Resources segments. Under SFAS 143, liabilities are recognized at fair value for an asset retirement obligation in the period in which it is incurred and the carrying amount of the related long-lived asset is correspondingly increased. Over time, the liability is accreted to its future value. The corresponding asset capitalized at inception is depreciated over the useful life of the asset. The adoption of SFAS 143 was recorded in the first quarter of 2003 and resulted in an increase to net property, plant and equipment of approximately $0.9 million, a net increase to the asset retirement obligation of approximately $0.4 million, and as a cumulative effect of a change in accounting principle, a pretax increase in income of approximately $0.5 million ($0.4 million, net of taxes).

Workers' Compensation and Pneumoconiosis ("Black Lung")

        The Company is self-insured for workers' compensation benefits for work related injuries. Liabilities, including those related to claims incurred but not reported, are recorded principally using annual valuations based on discounted future expected payments and using historical data of the division or combined insurance industry data when historical data is limited. Workers' compensation liabilities were as follows (in thousands):

	December 31,
	2004		2003
Undiscounted aggregated estimated claims to be paid	$	56,289	$	58,957
Workers compensation liability recorded on a discounted basis	$	46,915	$	46,052

        The Company applies a discount rate at a risk-free interest rate, generally a U.S. Treasury bill rate, for each policy year. The rate used is one with a duration that corresponds to the weighted average expected payout period for each policy year. Once a discount rate is applied to a policy year, it remains the discount rate for the year until all claims are paid. The use of this method decreases the volatility of the liability as impacted by changes in the discount rate. The weighted average rate used for discounting the liability at December 31, 2004 was 4.9%. A one-percentage-point increase in the discount rate on the discounted claims liability would decrease the liability by $0.3 million, while a one-percentage-point decrease in the discount rate would increase the liability by $0.3 million.

        The Company is responsible for medical and disability benefits for black lung disease under the Federal Coal Mine Health and Safety Act of 1969, as amended and is self-insured against black lung related claims. The Company performs an annual evaluation of the overall black lung liabilities at the balance sheet date. The calculation is performed using assumptions regarding rates of successful claims, discount factors, benefit increases and mortality rates, among others. The actuarially determined present value of the obligation using a discount factor of 6.0% and 6.35% for 2004 and 2003, respectively, recorded by the Company was $6.8 million and $6.9 million as of December 31, 2004 and 2003, respectively, and was recorded in other long-term liabilities. A one-percentage-point increase in the discount rate on the discounted claims liability would decrease the liability by $0.9 million, while a one-percentage-point decrease in the discount rate would increase the liability by $1.1 million.

Environmental Expenditures

        The Company capitalizes environmental expenditures that increase the life or efficiency of property or that reduces or prevents environmental contamination. The Company accrues for environmental expenses resulting from existing conditions that relate to past operations when the costs are probable and reasonably estimable. For the years ended December 31, 2004, 2003 and 2002, environmental

F-14

expenses were approximately $14.6 million, $10.8 million and $7.0 million, respectively. See Note 17 for additional discussion of environmental matters.

Stock-Based Compensation Plans

        The Company has three stock-based employee compensation plans, which are described more fully in Note 16. The Company uses the intrinsic value method prescribed in APB 25 and related interpretations in accounting for stock options. The Company's restricted stock units are accounted for as a fixed plan under APB 25. Accordingly, compensation costs are measured using the excess, if any, of the Company's stock price at the grant dates in excess of the option or restricted stock unit price. Had compensation cost for the Company's option plans been determined based on the fair value at the grant dates as prescribed by Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation," the Company's net income (loss) and net income (loss) per share on a pro forma basis would have been (in thousands, except per share data):

		For the years ended December 31,
		2004			2003			2002
Net income (loss), as reported		$	49,917		$	(29,005	)	$	(52,522	)
Add: Stock-based compensation expense included in reported net income, net of related tax effects			456			—			—
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(3,041	)		(3,125	)		(4,485	)
Pro forma net income (loss)		$	47,332		$	(32,130	)	$	(57,007	)
Net income (loss) per share:
	Basic—as reported	$	1.29		$	(0.67	)	$	(1.19	)
	Basic—pro forma		1.23			(0.75	)		(1.29	)
	Diluted—as reported		1.14			(0.67	)		(1.17	)
	Diluted—pro forma		1.09			(0.74	)		(1.27	)

        The preceding pro forma results were calculated with the use of the Black Scholes option-pricing model. Assumptions used for the following periods were:

	For the years ended December 31,
	2004		2003		2002
Risk free interest rate	4.99	%	3.90	%	4.70	%
Dividend yield	1.00	%	1.00	%	1.00	%
Expected life (years)	6.9		8.0		7.5
Volatility	39.83	%	40.17	%	40.55	%

Income (Loss) per Share

        The Company calculates basic income (loss) per share based on the weighted average common shares outstanding during each period and diluted income (loss) per share based on weighted average and dilutive common equivalent shares outstanding during each period. Dilutive common equivalent shares include the dilutive effect of stock options, as well as the Company's convertible senior subordinated notes in accordance with EITF 04-8, The Effect of Contingently Convertible Instruments on Diluted Earnings per Share (see Note 15).

Reclassifications

        Certain reclassifications have been made to prior years' amounts to conform with the current period presentation.

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NOTE 4—Restructuring, Impairment and Other Charges

        A summary of restructuring and impairment charges included the following (in thousands):

		For the years ended December 31,
		2004			2003
Restructuring charges:
	Mine No. 5 shutdown	$	470		$	6,698
	Shutdown of castings plant		383			1,238
Impairment of long-lived assets:
	Shutdown of castings plant		(262	)		4,700
	Southern Precision goodwill		—			2,409
	Former headquarters facility		—			1,747
Total restructuring and impairment charges		$	591		$	16,792

        In December 2003, the Company announced that it expected to close Mine No. 5 during the fourth quarter of 2004 due to continuing adverse geologic conditions. The mine was originally scheduled to close in 2006. However, given the poor operating conditions, management concluded that it was not economically advisable to access Mine No. 5's remaining coal reserves beyond 2004.

        On April 6, 2004, the Company announced that it would extend its coal production schedule for Mine No. 5 to mid-2005 due to favorable increases in metallurgical coal prices around the world. The Company previously estimated total costs of the shutdown at approximately $17.8 million, of which approximately $12.7 million would qualify as restructuring costs. As a result of the delay in the shutdown of the mine, total expected costs decreased to approximately $14.5 million, of which approximately $9.4 million would qualify as restructuring costs. Due to the change in the timing of the mine shutdown and the related decrease in estimated restructuring costs, the Company remeasured the liability, which resulted in a $0.7 million reversal during the first quarter of 2004 of amounts previously charged to restructuring expense in 2003.

        In the fourth quarter of 2004, the Company decided to further extend its coal production schedule for Mine No. 5 to fourth quarter 2006 due to continued favorable in metallurgical coal pricing. The Company remeasured the liability at that time, which resulted in a $1.0 million reversal recorded during the fourth quarter of 2004 of amounts previously charged to restructuring expense earlier in 2004. Estimated expected costs associated with the shutdown and the amounts recorded to restructuring expenses are as follows (in thousands):

	Total Expected Costs		Restructuring & impairment charges expensed from inception to December 31, 2004		Restructuring & impairment charges expensed for the year ended December 31, 2004		Restructuring & impairment charges expensed for the year ended December 31, 2003
Termination benefits	$	4,046	$	1,311	$	470	$	841
Other employee-related costs		8,475		5,790		—		5,790
Other costs		2,001		67		—		67
Total	$	14,522	$	7,168	$	470	$	6,698

        Termination benefits consist primarily of one year's post-employment health benefits for United Mine Workers of America ("UMWA") employees and severance related to staff reductions of salaried

F-16

personnel. Other employee-related costs include approximately $5.8 million expensed in 2003 related to an increase in benefit costs associated with the curtailment of the UMWA other post-retirement benefits plan and expected increases in other employee-related costs, such as workers compensation, that will be expensed when incurred. Other costs primarily represent incremental costs related to the closure of the mine that will be charged to operating costs when incurred.

        On April 29, 2003, U.S. Pipe, the primary component of the Industrial Products segment, ceased production and manufacturing operations at its castings plant in Anniston, Alabama. The decision to cease operations was the result of several years of declining financial results and resulted in the termination of approximately 80 employees. Exit costs associated with the plant closure were $6.1 million. Costs associated with the restructuring are as follows (in thousands):

	Total Costs		Restructuring & impairment charges expensed from inception to December 31, 2004		Restructuring & impairment charges expensed for the year ended December 31, 2004			Restructuring & impairment charges expensed for the year ended December 31, 2003
One-time termination benefits	$	758	$	758	$	32		$	726
Contract termination costs		76		76		(209	)		285
Other associated costs		787		787		560			227
Write-off of property, plant and equipment and related parts and materials		4,438		4,438		(262	)		4,700
Total	$	6,059	$	6,059	$	121		$	5,938

        Other associated costs principally include site clean-up costs that were expensed as restructuring charges when incurred. Adjustments were made in 2004 to reduce restructuring and impairment expense by $0.3 million related to unanticipated scrap material recoveries from demolition of the manufacturing facility and $0.2 million related to an unexpected early termination of a power contract.

        During the fourth quarter of 2003, the Company sold its Southern Precision resin-coated sand operations and announced the shutdown of its pattern shop. In connection with the shutdown of the pattern shop, the Company wrote-off the remaining goodwill related to Southern Precision of approximately $2.4 million.

        Also in 2003, the Company recorded an impairment charge of approximately $1.7 million to reduce the carrying value the Company's former headquarters building to its estimated net realizable value. The sale of this asset was completed in December 2003.

        Activity in accrued restructuring was as follows (in thousands):

	For the years ended December 31,
	2004			2003			2002
Beginning balance	$	1,388		$	1,225		$	3,902
Restructuring expenses accrued		2,519			2,146			—
Restructuring payments		(653	)		(1,983	)		(2,677	)
Reversal of prior accruals		(1,666	)		—			—
Ending balance	$	1,588		$	1,388		$	1,225

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        In September 2001, an explosion and fire occurred at one of Jim Walter Resources' mines in Alabama. The accident caused extensive damage to the mine and resulted in the deaths of thirteen employees. For the year ended December 31, 2002, $25.4 million associated with this accident expected to be recovered from business interruption insurance was recorded as a reduction of cost of sales in the statement of operations. In addition, cost of sales included $12.7 million that had been incurred for re-entry costs. These re-entry costs were fully offset in cost of sales by amounts expected to be recovered through property and casualty insurance. Changes in estimated allowances for potential unrealizable amounts recoverable from insurance were also recorded to cost of sales in 2003 and 2002. Approximately $2.2 million of expected insurance proceeds was recorded as miscellaneous income, representing a gain on the reimbursement of fully depreciated equipment, the replacement cost of which was capitalized during the year ended December 31, 2002. As of January 2004, $54.8 million of insurance proceeds had been collected in full satisfaction of the Company's claims under its insurance policies.

        Activity in the Company's insurance receivable account and the related allowance for potential uncollectible insurance claims was (in thousands):

	For the years ended December 31,
	2004			2003			2002
Beginning balance	$	1,616		$	18,456		$	13,760
Business interruption insurance claims		—			—			25,365
Property & casualty insurance claims		—			—			12,706
Cash collected		(1,616	)		(16,840	)		(33,375	)
Ending balance		—			1,616			18,456
Beginning allowance		—			(1,858	)		(5,581	)
Allowance reduced		—			1,858			3,723
Ending allowance		—			—			(1,858	)
Net receivable	$	—		$	1,616		$	16,598

NOTE 5—Restricted Short-Term Investments

        Restricted short-term investments at December 31, 2004 and 2003 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 Mid-State Trusts IV, VI, VII, VIII, IX, X, XI and 2004-1 (the "Trusts") ($93.4 million and $94.0 million, respectively) which are available only to pay expenses of the Trusts and principal and interest on indebtedness of the Trusts, and (ii) miscellaneous other segregated accounts restricted to specific uses ($6.5 million and $6.3 million, respectively).

NOTE 6—Instalment Notes Receivable and Mortgage Loans

        Instalment notes receivable arise from sales of detached, single-family homes to JWH customers. Mortgage loans are originated by Walter Mortgage Company by re-financing JWH customers, providing land and home financing for JWH customers, or the direct purchase of seasoned loans from other homebuilders and third parties. These receivables require periodic payments, over periods of 10 to

F-18

30 years, and are secured by first mortgages or similar security instruments. The credit terms offered by Jim Walter Homes and its affiliates are usually for 100% of the purchase price of the home. The buyer's ownership of the land and improvements necessary to complete the home constitute an equity investment to which the Company has access should the buyer default on payment of the instalment note obligation. The Company currently holds fixed-rate instalment notes ranging from 5.75% to 12.75% annual percentage rate, without points or closing costs. Origination costs are deferred and amortized over the average life of the note portfolio. The aggregate amount of instalment notes receivable having at least one payment 91 or more days delinquent was 2.46% and 3.02% of total instalment notes receivable at December 31, 2004 and 2003, respectively.

        The instalment notes receivable is summarized as follows (in thousands):

	December 31,
	2004			2003
Instalment notes receivable	$	1,619,148		$	1,684,602
Mortgage loans		109,257			75,467
Less: Allowance for losses		(11,200	)		(10,907	)
Net	$	1,717,205		$	1,749,162

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

	For the years ended December 31,
	2004			2003
Balance at beginning of year	$	10,907		$	10,783
Provisions charged to income		12,402			15,660
Charge-offs, net of recoveries		(12,109	)		(15,536	)
Balance at end of year	$	11,200		$	10,907

        Charge-offs on instalment notes occur when management believes it will be unable to collect all amounts contractually due and begins the foreclosure process. The charge-off is measured based upon the excess of the recorded investment in the receivable over the estimated fair value of the collateral as reduced by estimated selling costs. Recoveries on charge-offs are immaterial to aggregate charge-offs.

        MSH has created a number of business trusts for the purpose of purchasing instalment notes and mortgages owned by MSH and/or Walter Mortgage Company with the net proceeds from the issuance of mortgage backed notes or asset-backed notes. MSH directly or indirectly owns all of the beneficial interests in these trusts. The assets of the trusts are not available to satisfy claims of general creditors of the Company and the liabilities for notes issued by the trusts are to be satisfied solely from the proceeds of the instalment notes owned by the trusts and are non-recourse to the Company.

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NOTE 7—Receivables

        Receivables are summarized as follows (in thousands):

		December 31,
		2004			2003
Trade receivables		$	134,959		$	115,877
Other receivables			36,944			41,279
	Less: Allowance for losses		(1,684	)		(1,659	)
Receivables, net		$	170,219		$	155,497

        Other receivables at December 31, 2004 include $7.5 million due from the agent handling the proceeds from the exercise of stock options, $8.9 million of coal excise tax refund claims and $14.5 million of estimated cash and net working capital adjustment claims related to the sale of AIMCOR. Other receivables at December 31, 2003 include $1.6 million of insurance claims, $8.9 million of coal excise tax refund claims and $16.2 million of estimated cash and net working capital adjustment claims related to the sale of AIMCOR.

NOTE 8—Inventories

        Inventories are summarized as follows (in thousands):

		December 31,
		2004		2003
Finished goods		$	122,956	$	116,075
Goods in process			37,597		31,071
Raw materials and supplies			44,095		49,854
Repossessed houses held for resale			28,899		27,525
	Total inventories	$	233,547	$	224,525

NOTE 9—Property, Plant and Equipment

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

		December 31,
		2004			2003
Land and minerals		$	75,784		$	79,775
Land improvements			28,991			30,462
Buildings and leasehold improvements			103,507			109,569
Mine development costs			8,624			8,695
Machinery and equipment			606,877			625,780
Construction in progress			19,692			13,528
	Total		843,475			867,809
	Less: Accumulated depreciation		(511,516	)		(515,280	)
	Net	$	331,959		$	352,529

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NOTE 10—Goodwill and Other Intangible Assets

Goodwill

        The Company adopted SFAS No. 142 effective January 1, 2002. The fair value of each of the Company's reporting units was individually determined, using valuation models and expected future cash flow projections related to each reporting unit, which were then discounted using a risk-adjusted discount rate and adjusted for comparable industry earnings multiples. The Company's reporting units are similar, although not identical, to its reporting segments. This analysis indicated that the carrying value of the AIMCOR reporting units exceeded their fair value. The Company recorded an impairment loss of $125.9 million, net of income taxes of $75.1 million, during 2002 related to the goodwill of the AIMCOR reporting units which was accounted for as a cumulative effect of a change in accounting principle. This impairment resulted from a change in the profitability of the business since its acquisition due to increased competition and eroding industry margins.

Finite Lived Intangibles

        The Company identified and classified intangible assets with finite useful lives, which met recognition criteria under SFAS No. 141, "Business Combinations," as finite lived intangibles. These intangible assets have historically been amortized by the Company and will continue to be amortized over their useful lives.

        Finite lived intangible assets are principally associated with the instalment notes receivable portfolio and were $12.5 million and $17.5 million, net of accumulated amortization at December 31, 2004 and 2003, respectively. Finite lived intangible assets amortization expense was $5.0 million, $6.1 million and $7.2 million for the years ended December 31, 2004, 2003 and 2002, respectively. Estimated remaining annual amortization expense is approximately $2.2 million for each year from 2005 to 2009.

Changes in Carrying Amount

        Goodwill and finite lived intangible assets are reviewed for impairment on an annual basis, or more frequently if significant events occur that indicate that an impairment could exist. The Company performed its annual impairment review as of January 1, 2005.

        During 2003, the Company ceased operations at Southern Precision and charged the remaining goodwill balance of $2.5 million to restructuring and impairment charges in the Statement of Operations.

        The changes in the carrying amount of goodwill and finite-lived intangibles by reportable segment for the years ended December 31, 2004 and 2003 are as follows (in thousands):

	Goodwill							Intangibles
	Homebuilding		Financing		Industrial Products			Financing & Other			Totals
Net balance as of January 1, 2003	$	63,210	$	10,895	$	60,868		$	23,578		$	158,551
Impairment loss		—		—		(2,457	)		—			(2,457	)
Amortization		—		—		—			(6,132	)		(6,132	)
Net balance as of December 31, 2003		63,210		10,895		58,411			17,446			149,962
Amortization		—		—		—			(4,976	)		(4,976	)
Net balance as of December 31, 2004	$	63,210	$	10,895	$	58,411		$	12,470		$	144,986

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NOTE 11—Income Taxes

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

		For the years ended December 31,
		2004								2003									2002
		Current		Deferred			Total			Current			Deferred			Total			Current		Deferred			Total
Federal		$	6,283	$	12,960		$	19,243		$	(31,422	)	$	(1,709	)	$	(33,131	)	$	6,362	$	11,046		$	17,408
State and local			487		(12,495	)		(12,008	)		4,895			(1,879	)		3,016			457		(535	)		(78	)
	Total	$	6,770	$	465		$	7,235		$	(26,527	)	$	(3,588	)	$	(30,115	)	$	6,819	$	10,511		$	17,330

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

		For the years ended December 31,
		2004		2003		2002
Statutory tax rate		35.0	%	(35.0	)%	35.0	%
Effect of:
	State and local income tax	0.7		2.5		0.4
	Amortization of goodwill	—		3.2		—
	Nonconventional fuel credit	—		—		(2.2	)
	Foreign sales benefit	(0.6	)	(1.3	)	—
	Depletion	(12.4	)	(8.2	)	(4.5	)
	Capital loss on sale of subsidiary	—		—		(3.7	)
	Federal tax accrual reversal	—		(74.0	)	—
	Change in valuation allowances	(13.8	)	—		—
	Change in other, net	3.8		0.1		(2.4	)
Effective tax rate		12.7	%	(112.7	)%	22.6	%

        The change in valuation allowances consists of a $12.6 million reduction in valuation allowances for state tax benefits of Jim Walter Resources and Sloss previously reserved, partially offset by $4.7 million of state income tax benefits at US Pipe and Homebuilding for which the Company believes it is more likely than not that the deferred tax asset will not be realized.

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

	December 31,
	2004			2003
Allowance for losses	$	(4,013	)	$	(4,526	)
Inventories		(1,168	)		(4,140	)
Interest income on instalment notes		112,880			113,265
Instalment sales method for instalment notes receivable in prior years		520			2,325
Depreciation and amortization		70,281			58,761
Net operating loss/capital loss/credit carryforwards		(69,678	)		(48,008	)
Accrued expenses		(45,802	)		(56,725	)
Postretirement benefits other than pensions		(104,855	)		(107,719	)
Pensions		(17,057	)		(23,100	)
		(58,892	)		(69,867	)
Valuation allowance		10,949			22,369
Total deferred tax liabilities (assets) of continuing operations	$	(47,943	)	$	(47,498	)

F-22

        The Company has Federal net operating loss carryforwards of approximately $129 million which expire in 2023. If certain changes in ownership occur, utilization of the net carryforwards may be limited. Various operating subsidiaries have net operating loss carryforwards in various state jurisdictions which begin expiring in 2005.

        In July 2003, the Company favorably resolved a longstanding dispute with the Internal Revenue Service ("IRS") concerning federal income tax returns for fiscal years ended May 31, 1995 and 1996. The IRS had previously disallowed deductions of $391 million and related legal fees of $15 million associated with the settlement of veil piercing litigation in the Bankruptcy Court. The Company successfully defended its position through an IRS appeals process, and will not be required to pay income taxes related to this issue. The Company had previously established accruals for both taxes and interest associated with this issue that are no longer required. Accordingly, the Company reduced such accruals during the second quarter of 2003, recording reductions of $2.5 million and $18.9 million to interest expense and income tax expense, respectively, in the statement of operations. In addition, as a result of the resolution of this case, approximately 3.9 million shares of common stock issued to an escrow account pending resolution of certain Federal income tax matters has been distributed to persons who were stockholders of the Company as of the Company's emergence from bankruptcy proceedings in 1995.

        Due to a 2002 tax law change in the consolidated return loss disallowance rules which favorably affected the Company's previous treatment of the November 1998 sale of JW Window Components, Inc., an additional capital loss of $8.1 million was allowed, resulting in a reduction of income tax expense of $2.8 million recorded in the year ended December 31, 2002.

        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 million for issues currently in dispute in the Adversary Proceeding. This amount is subject to interest and penalties. Of the $34 million in claimed tax, $21 million represents issues in which the IRS is not challenging the deductibility of the particular expense but only whether such expense is deductible in a

F-23

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 its 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.

NOTE 12—Debt

        Debt, in accordance with its contractual terms, consisted of the following at each year end (in thousands):

				December 31,
									Estimated Final Maturity
				2004		2003		Interest Rate
Mortgage-Backed/Asset Backed Notes:
	Trust IV Asset Backed Notes(1)			$	322,357	$	398,544	8.33%	2030
	Trust VI Asset Backed Notes(1)				198,366		228,620	7.34% to 7.79%	2035
	Trust VII Asset Backed Notes(1)				167,525		196,461	6.34%	2036
	Trust VIII Asset Backed Notes(2)				214,994		254,182	7.79%	2027
	Trust IX Variable Funding Loan				36,974		129,759	—	—
	Trust X Asset Backed Notes(2)				292,178		328,121	5.94% to 7.54%	2036
	Trust XI Asset Backed Notes(2)				257,086		294,211	5.44%	2038
	2004-1 Trust Asset Backed Notes(2)				274,347		—	6.64%	2037
					1,763,827		1,829,898
Other senior debt:
	Walter Industries, Inc.
		Convertible Senior Subordinated Notes			175,000		—
		Term Loan, net of discount of $1,440			—		113,754
					175,000		113,754
			Total	$	1,938,827	$	1,943,652

(1)

Interest is payable quarterly. Quarterly payment periods vary by each Note.

(2)

Interest is payable monthly.

F-24

        The Company's debt repayment schedule as of December 31, 2004 is as follows:

	Payments Due
	2005		2006		2007		2008		2009		Thereafter
Mortgage-backed/asset-backed notes(1)	$	255,506	$	213,069	$	207,606	$	202,142	$	196,679	$	688,825
Convertible Senior Subordinated Notes		—		—		—		—		—		175,000
	$	255,506	$	213,069	$	207,606	$	202,142	$	196,679	$	863,825

(1)

Based on scheduled maturities, adjusted for estimated prepayment and delinquencies.

        The asset-backed notes of the various Trusts generally are secured by instalment sales contracts, promisorry notes and mortgages originally acquired by the Finance Business. The net proceeds from the various issues of such notes were used to repay borrowings under variable funding loan facilities and to provide funds for general corporate purposes.

        The Mid-State Trust IX Variable Funding Loan Facility is a $400.0 million warehouse facility with two lenders. Interest is based on the cost of A-1 and P-1 rated commercial paper. Other borrowing costs include a facility fee on the outstanding amount of 0.35% and a facility fee on the unused amount of 0.15%. The weighted average interest rate was 2.66% as of December 31, 2004. Trust IX matured on February 2, 2004, was renewed to January 31, 2005 and was amended on November 19, 2004 to revise terms and include another vendor. Trust IX has been extended to April 29, 2005.

        Trust IX is a Delaware Statutory Trust whose assets are limited to pledged instalment notes and mortgages purchased from Mid-State. The Trust IX Variable Funding Loan Agreement's covenants, among other things, restrict the ability of Trust IX to dispose of assets, create liens and engage in mergers or consolidations. In addition, events of default under the Trust IX Agreement include the mortgage pool exceeding average consecutive three month delinquency and default ratios of 2.5% and 5.0%, respectively. Trust IX's failure to comply with the covenants in the Trust IX Agreement could result in an event of default, which, if not cured, amended or waived, could result in the entire principal balance and accrued interest becoming immediately due and payable. A default under the Trust IX Variable Funding Loan Agreement that remains uncured might result in the curtailment of the Company's loan production activities and negatively affect its ability to securitize its loan production, which would have a material adverse effect on its business, financial condition, liquidity, and results of operations. Trust IX was in compliance with these covenants at December 31, 2004. Mid-State Homes and Walter Mortgage Company are servicers under the Trust IX Agreements and make customary representations and warranties with regard to their servicing activities. A servicer default under the Trust IX Agreement, which includes the maintenance of a minimum net worth at Mid-State, which if not cured, amended or waived, could result in the servicers being terminated and replaced by a successor servicer. The replacement of Mid-State and WMC would have a negative effect on their financial condition as they no longer would receive servicing fees.

        On February 4, 2005, a Variable Funding Loan Agreement was entered into between Mid-State Trust XIV, a newly formed business trust organized by MSH, and several financial institutions for a $200.0 million warehouse facility (See Note 24).

        In April 2004, the Company issued $175 million of convertible senior subordinated notes which will mature May 1, 2024, unless earlier converted, redeemed or repurchased. The notes are redeemable by the Company at par on or after May 6, 2011. The holders of the notes may require the Company to

F-25

repurchase some or all of the notes at par plus accrued and unpaid interest, including contingent interest, if any, initially on May 1, 2014, and subsequently on May 1, 2019, or at any time prior to their maturity following a fundamental change, as defined in the indenture.

        The notes bear interest at 3.75% per annum. Commencing on May 1, 2011, the Company will pay contingent interest for the applicable interest period if the average trading price of the notes during the specified five trading days in the applicable interest period equals or exceeds 120% of the principal amount of the notes. The contingent interest payable per note will equal 0.40% per year of the average trading price of such note during the applicable five trading-day reference period. The notes are convertible into shares of the Company's common stock, initially at a conversion rate of 56.0303 shares of common stock per $1,000 principal amount of notes (equivalent to a conversion price of approximately $17.85 per share), subject to adjustment and under certain circumstances as outlined in the indenture. The conversion rate is subject to adjustment if certain events occur. Upon a surrender of convertible notes for conversion, the Company will have the right to deliver, in lieu of shares of common stock, cash or a combination of cash and shares of common stock. Holders can surrender their notes for conversion in any fiscal quarter if the last reported sale price per share of Walter Industries' common stock for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the previous fiscal quarter is greater than or equal to 130% of the applicable conversion price per share of Walter Industries' common stock on such last trading day. Holders may also convert the notes if certain trading price conditions are met, the notes are called for redemption, upon the occurrence of certain corporate transactions or if future credit ratings are three or more subcategories below the initial credit rating. Other than the occurrence of certain corporate transactions, such as the sale of the Company, the agreement has no provisions that accelerate maturity of the debt. A significant downgrade of the credit rating of the debt or a suspension of the ratings by both rating agencies would result in an acceleration of the conversion feature of the notes.

        Proceeds upon issuance of the notes were approximately $168.9 million, net of approximately $6.1 million of underwriting fees and expenses. A portion of the proceeds was used to repay in full the Term Loan, which had a principal balance outstanding of approximately $111.7 million. Using the remaining proceeds and borrowings under the revolving credit facility, the Company repurchased 4,960,784 shares of its common stock for approximately $63.0 million, of which 3,960,784 shares totaling $50.0 million were repurchased from certain affiliates of Kohlberg, Kravis, Roberts and Co. ("KKR").

        The notes are convertible through March 31, 2005 having satisfied, as of December 31, 2004, the common stock sale price condition. The notes may be convertible during future periods if the common stock sale price condition or other conditions are satisfied.

        In April 2003, the Company entered into a $500 million bank credit facility (the "2003 Credit Facility") which consisted of a $245 million senior secured revolving credit facility that matures in April 2008 and a $255 million senior secured Term Loan originally maturing in April 2010. In April 2004, the Company repaid the remaining balance of the term loan from the proceeds of the convertible debt issue. The 2003 revolving credit facility is secured by the stock of Walter Industries' subsidiaries and by certain assets (excluding real property) of the Company. The interest rate on the revolving credit facility is a floating rate of 350 basis points over LIBOR and on the retired term loan was a floating rate of 425 basis points over LIBOR. LIBOR was 2.4% and 1.2% at December 31, 2004 and December 31, 2003, respectively.

        At December 31, 2004, there were no borrowings under the $245 million Revolving Credit Facility. The Revolving Credit Facility includes a sub-facility for trade and other standby letters of credit in an

F-26

amount up to $100.0 million at any time outstanding. At December 31, 2004 letters of credit with a face amount of $66.3 million were outstanding and approximately $178.7 million was available under the Revolving Credit Facility.

        In connection with the 2003 Credit Facility, the Company originally incurred debt issuance costs of approximately $5.4 million, which was being amortized over the life of the loans. In addition, the Company recorded a discount on the term loan of approximately $3.2 million, which was recorded as a reduction of the term loan and was being accreted to face value over the life of the loan. As the result of the repayment of the term loan, unamortized term loan debt issue costs of approximately $1.2 million and discount of approximately $1.4 million were charged to interest expense in the second quarter of 2004.

        The 2003 Credit Facility, as amended, contains a number of significant covenants that, among other things, restrict the ability of the Company and certain subsidiaries to dispose of assets, incur additional indebtedness, pay dividends and repurchase stock, create liens on assets, enter into capital leases, make investments or acquisitions, engage in mergers or consolidations, or engage in certain transactions with subsidiaries and affiliates and otherwise restrict corporate activities (including a change of control). In addition, under the 2003 Credit Facility, the Company and its Restricted Subsidiaries (as defined in the 2003 Credit Facility) are required to maintain specified financial ratios and comply with certain other financial tests.

        Effective March 24, 2004, April 13, 2004 and October 28, 2004, the Company entered into amendments of the 2003 Credit Facility to provide the Company with flexibility in the timing of its long term financing under mortgage backed/asset-backed notes, to permit the issuance of senior convertible notes, and to increase the amount of availability to make restricted payments such as share repurchases and dividends under the 2003 Credit Facility. These amendments modified the 2003 Credit Facility as follows: (a) the definition of Consolidated EBITDA will not include any cash expenditure made on or after July 1, 2004 in connection with post employment benefits to the extent such expenditures are not deducted in computing Consolidated Net Income; (b) permitted the Company to incur additional indebtedness related to the issuance of convertible senior subordinated notes and repurchase additional shares of the Company's common stock and (c) increased the amount available to make restricted payments, which include share repurchases.

        EBITDA, as defined in the 2003 Credit Facility, excludes the EBITDA generated by the Financing subsidiary, and substitutes instead, the cash released to the Company via its ownership of the residual beneficial interest in the financing trusts and the net cash proceeds from the periodic issuance of asset-backed notes. EBITDA also excludes certain non-cash restructuring charges, non-cash write-downs of goodwill and asset impairments. The Company's failure to comply with the covenants in its 2003 Credit Facility could result in an event of default, which, if not cured, amended, or waived, could result in the Company's senior secured debt becoming immediately due and payable. At December 31, 2004, the Company was in compliance with these covenants.

        The Company periodically uses interest rate lock agreements as hedge instruments to manage interest rate risks. The Company has two types of interest rate risks: (i) risk on interest rates related to debt which has floating rates and (ii) risk of interest rate fluctuations from indebtedness secured by fixed-rate instalment notes receivable generated by its homebuilding business. During fiscal 1998, the Company entered into forward-interest rate lock agreements in order to fix the interest rate on a portion of asset-backed long-term debt, which was anticipated to be issued in the second quarter of fiscal 1999. The lock agreements had a total notional amount of $250.0 million and had a weighted-

F-27

average interest rate of 5.57%. Approximately $100.0 million notional amount of interest rate lock agreements were held by Lehman Brothers, Inc. These agreements were terminated on October 9, 1998. The losses incurred ($24.0 million) have been deferred and are being amortized to interest expense over the life of Trust VII Asset Backed Notes. There were no interest rate lock agreements at December 31, 2004 or December 31, 2003. On January 31, 2005, the Company entered into two identical $50 million hedge transactions with two separate counter-parties to protect against the negative effect rising interest rates would have on the Company's future forecasted issuance of mortgage-backed securities (see Note 24).

NOTE 13—Pension and Other Employee Benefits

        The Company has various pension and profit sharing plans covering substantially all employees. In addition to its own pension plans, the Company contributes to certain multi-employer plans. Combined total pension expense for the years ended December 31, 2004, 2003 and 2002 was $17.0 million, $18.0 million and $5.6 million, respectively. The Company funds its retirement and employee benefit plans in accordance with the requirements of the plans and, where applicable, in amounts sufficient to satisfy the "Minimum Funding Standards" of the Employee Retirement Income Security Act of 1974 ("ERISA"). The plans provide benefits based on years of service and compensation or at stated amounts for each year of service.

        The Company also provides certain postretirement benefits other than pensions, primarily health care, to eligible retirees. The Company's postretirement benefit plans are not funded. No new salaried employees have been eligible to participate in postretirement healthcare benefits since May 2000. Effective January 1, 2003, the Company placed a monthly cap on Company contributions for postretirement healthcare coverage of $350 per salaried participant (pre-Medicare eligibility) and $150 per participant (post-Medicare eligibility).

        In April 2004, the Company sold the assets of Vestal Manufacturing Company and the hourly pension plan was assumed by the buyer. As discussed in Note 2, the Company sold AIMCOR and JW Aluminum in 2003. The AIMCOR pension plans were assumed by the buyer. The JW Aluminum pension plan was retained by the Company and benefits were frozen as of December 31, 2003. As discussed in Note 4, the Company shut down its Southern Precision operations and benefits under the Southern Precision pension plan were frozen effective December 31, 2003. Also in 2003, the Company announced a planned shutdown of Natural Resources' Mine No. 5. In connection with that, curtailment expenses related to other post-employment benefits of approximately $5.8 million was recorded in the statement of operations as restructuring and impairment expense.

F-28

        The Company uses a September 30 measurement date for all of its pension and post-retirement benefit plans. The amounts recognized for such plans are as follows:

		Pension Benefits						Other Benefits
		December 31, 2004			December 31, 2003			December 31, 2004			December 31, 2003
		(in thousands)						(in thousands)
Accumulated benefit obligation		$	347,028		$	329,597		$	274,740		$	253,992
Change in benefit obligation:
	Benefit obligation at beginning of year	$	362,420		$	319,166		$	253,992		$	216,214
	Service cost		7,504			7,097			1,936			1,835
	Interest cost		22,227			22,360			14,782			15,240
	Amendments		552			—			—			58
	Actuarial loss		14,073			35,107			16,441			26,873
	Benefits paid		(21,817	)		(21,036	)		(12,826	)		(12,018	)
	Other(a)(b)		(5,181	)		(274	)		415			5,790
	Benefit obligation at end of year	$	379,778		$	362,420		$	274,740		$	253,992
Change in plan assets:
	Fair value of plan assets at beginning of year	$	259,342		$	223,591		$	—		$	—
	Actual gain on plan assets		28,136			40,280			—			—
	Employer contribution		30,341			16,507			12,826			12,018
	Benefits paid		(21,737	)		(21,036	)		(12,826	)		(12,018	)
	Other(a)		(4,726	)		—			—			—
	Fair value of plan assets at end of year	$	291,356		$	259,342		$	—		$	—
	Funded (unfunded) status	$	(88,422	)	$	(103,078	)	$	(274,740	)	$	(253,992	)
	Unrecognized net actuarial loss		115,026			114,290			31,892			5,018
	Unrecognized prior service cost		5,312			5,803			(43,986	)		(48,711	)
	Unrecognized transition amount		—			(2	)		—			—
	Contribution after measurement date		—			—			4,235			5,385
	Prepaid (accrued) benefit cost	$	31,916		$	17,013		$	(282,599	)	$	(292,300	)
Amounts recognized in the balance sheet:
	Prepaid benefit cost	$	31,916		$	17,013		$	—		$	—
	Accrued benefit cost		(87,249	)		(86,767	)		(282,599	)		(292,300	)
	Intangible asset		5,350			5,853			—			—
	Accumulated other comprehensive income, before tax effects		81,899			80,914			—			—
	Net amount recognized	$	31,916		$	17,013		$	(282,599	)	$	(292,300	)

(a)

Other principally consists of (1) the transfer of assets due to the sale of Vestal Manufacturing Company in 2004 and (2) the settlement of other postretirement benefits for some salaried retirees life insurance benefits.

(b)

Other principally consists of (1) the settlement of AIMCOR pension obligations in 2003 in connection with the assumption of the obligation by the buyer and (2) the curtailment of other post-employment benefits in the Natural Resources segment in 2003.

F-29

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

	December 31,
	2004		2003
Projected benefit obligation	$	377,046	$	360,184
Accumulated benefit obligation		344,296		327,361
Fair value of plan assets		287,833		256,016

        The amounts in each year reflected in other comprehensive income are as follows (in thousands):

	Pension Benefits
	December 31, 2004		December 31, 2003		December 31, 2002
Increase in minimum liability (before tax effects) included in other comprehensive income	$	2,255	$	5,992	$	71,594

        A summary key of assumptions used is as follows:

			Pension Benefits						Other Benefits
			December 31,						December 31,
			2004		2003		2002		2004		2003		2002
Weighted average assumptions used to determine benefit obligations:
		Discount rate	6.00	%	6.35	%	7.25	%	6.00	%	6.35	%	7.25	%
		Rate of compensation increase	3.50	%	3.50	%	3.50	%	—		—		—
Weighted average assumptions used to determine net periodic cost:
		Discount rate	6.35	%	7.25	%	7.75	%	6.35	%	7.25	%	7.75	%
		Expected return on plan assets	8.90	%	9.25	%	10.00	%	—		—		—
		Rate of compensation increase	3.50	%	3.50	%	4.50	%	—		—		—
Assumed health care cost trend rates at December 31:
	Health care cost trend rate assumed for next year		—		—		—		10.00	%	10.00	%	11.50	%
	Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)		—		—		—		5.00	%	5.00	%	5.00	%
	Year that the rate reaches the ultimate trend rate		—		—		—		2009		2008		2007

F-30

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

		Pension Benefits									Other Benefits
		For the years ended December 31,									For the years ended December 31,
		2004			2003			2002			2004			2003			2002
Components of net periodic benefit cost:
	Service cost	$	7,862		$	7,471		$	7,403		$	1,936		$	1,835		$	3,812
	Interest cost		22,227			22,360			22,190			14,782			15,240			18,085
	Expected return on plan assets		(22,871	)		(19,700	)		(25,655	)		—			—			—
	Amortization of transition amount		(2	)		(690	)		(1,151	)		—			—			—
	Amortization of prior service cost		690			851			716			(6,831	)		(6,535	)		(2,735	)
	Amortization of net loss (gain)		6,491			6,001			1,330			(2,162	)		(2,639	)		(1,653	)
	Reimbursement of black lung benefits		—			—			—			—			—			(1,544	)
	Curtailment settlement loss		1,133			328			—			415			—			—
	Net periodic benefit cost		15,530			16,621			4,833			8,140			7,901			15,965
	Discontinued operations		—			—			—			—			179			(281	)
Net periodic benefit cost for continuing operations		$	15,530		$	16,621		$	4,833		$	8,140		$	8,080		$	15,684

        The discount rate is based on a model portfolio of Moody's AA rated bonds with a maturity matched to the estimated payouts of future pension benefits. The expected return on plan assets is based on the Company's expectation of the long-term average rate of return on assets in the pension funds, which was modeled based on the current and projected asset mix of the funds and considering the historical returns earned on the types of assets in the funds.

        The Company's pension plans weighted-average asset allocations at September 30, 2004 and 2003, by asset category, are as follows:

Asset Category:	2004		2003
Equity securities	68	%	56	%
Debt securities	30	%	26	%
Real estate	0	%	0	%
Other(a)	2	%	18	%
Total	100	%	100	%

(a)

Represents temporary cash holdings as of September 30, 2003 in anticipation of a pending transition in investment managers.

F-31

        The plan assets of the pension plans are contributed to, held and invested by the Walter Industries, Inc. Subsidiaries Master Pension Trust ("Pension Trust"). The Pension Trust employs a total return investment approach whereby a mix of equity and fixed income investments are used to meet the long-term funding requirements of the Pension Trust. The asset mix strives to generate rates of return sufficient to fund plan liabilities and exceed the long-term rate of inflation, while maintaining an appropriate level of portfolio risk. Risk tolerance is established through careful consideration of plan liabilities, plan funded status, and corporate financial condition. The investment portfolio is diversified across domestic and foreign equity holdings, and by investment styles and market capitalizations. Fixed income holdings are diversified by issuer, security type, and principal and interest payment characteristics. Derivatives may be used to gain market exposure in an efficient and timely manner; however, derivatives may not be used to leverage the portfolio beyond the market value of the underlying investments. Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews, annual benefits liability measurements, and periodic asset/liability studies.

        As of September 30, 2004 the Trust's strategic asset allocation was as follows:

Asset Class		Strategic Allocation		Tactical Range
Total Equity		70.0	%	65-70	%
	Large Capitalization Stocks	47.5	%	42.5-52.5	%
	Mid Capitalization Stocks	7.5	%	5.0-10.0	%
	Small Capitalization Stocks	0.0	%	0.0	%
	International Stocks	15.0	%	11.0-19.0	%
Total Fixed Income		30	%	25-35	%
Total Cash		0	%	0-2	%

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

        The Pension Trust employs a building block approach in determining the long-term rate of return for plan assets. Historical market returns are studied and long-term risk/return relationships between equity and fixed income asset classes are analyzed. This analysis supports the widely accepted fundamental investment principle that assets with greater risk generate higher returns over long periods of time. The historical impact of returns in one asset class on returns of another asset class is reviewed to evaluate portfolio diversification benefits. Current market factors including inflation rates and interest rate levels are considered before assumptions are developed. The long-term portfolio return is established via the building block approach by adding interest rate risk and equity risk premiums to the anticipated long-term rate of inflation. Proper consideration is given to the importance of portfolio diversification and periodic rebalancing. Peer data and historical return assumptions are reviewed to check for reasonableness.

        Assumed health care cost trend rates, discount rates, expected return on plan assets and salary increases have a significant effect on the amounts reported for the pension and health care plans. A

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

		1-Percentage Point Increase			1-Percentage Point Decrease
Health care cost trend:
	Effect on total of service and interest cost components	$	1,856		$	(1,698	)
	Effect on postretirement benefit obligation		27,094			(22,828	)
Discount rate:
	Effect on postretirement service and interest cost components		183			(465	)
	Effect on postretirement benefit obligation		(28,436	)		32,220
	Effect on current year postretirement benefits expense		(1,386	)		2,289
	Effect on pension service and interest cost components		(453	)		189
	Effect on pension benefit obligation		(41,044	)		50,097
	Effect on current year pension expense		(3,151	)		3,246
Expected return on plan assets:
	Effect on current year pension expense		(2,570	)		2,570
Rate of compensation increase:
	Effect on pension service and interest cost components		997			(882	)
	Effect on pension benefit obligation		8,136			(7,228	)
	Effect on current year pension expense		1,639			(1,453	)

        In May 2004, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug Improvement and Modernization Act of 2003, which provides guidance on the accounting for the effects of the Act. FASB Staff Position 106-2 is effective for the first interim or annual period ending after June 15, 2004. The Company has determined that it sponsors health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. The effect of the subsidy on the measurement of net periodic postretirement benefit cost for 2004 is $0.7 million, recorded as a reduction to postretirement benefits expense.

        The Company and certain of its subsidiaries maintain profit sharing and 401(k) plans. The total cost of these plans for the years ended December 31, 2004, 2003 and 2002 was $2.0 million, $2.5 million and $1.9 million, respectively.

        Under the labor contract with the United Mine Workers of America, JWR makes payments into multi-employer pension plan trusts established for union employees. Under ERISA, as amended by the Multiemployer Pension Plan Amendments Act of 1980, an employer is liable for a proportionate part of the plans' unfunded vested benefits liabilities upon its withdrawal from the plan. At December 31, 2004, one of three plans to which the Company makes contributions is unfunded; however, the amount allocable to the Company cannot be determined, as information regarding the unfunded liability, its components, the relative position of each employer with respect to the actuarial present value of accumulated benefits and net assets available for benefits are not available to the Company. The Employee Retirement Income Security Act of 1974 (ERISA) as amended in 1980, imposes certain liabilities on contributors to multi-employer pension plans in the event of a contributor's withdrawal from the plan. The withdrawal liability would be calculated based on the contributor's proportionate share of the plan's unfunded vested benefits liabilities.

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        The Company's minimum pension plan funding requirement for 2005 is $2.2 million, which the Company expects to fully fund. The Company also expects to contribute $15.5 million to its other post-employment benefit plan in 2005. The following estimated benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in thousands):

	Pension Benefits		Other Postretirement Benefits Before Medicare Subsidy		Medicare Part D Subsidy
2005	$	21,369	$	15,535	$	—
2006		21,627		16,471		522
2007		23,482		17,316		530
2008		22,454		18,090		534
2009		22,986		18,875		537
Years 2010-2014		126,888		103,479		2,561

NOTE 14—Stockholders' Equity

        During the three years ended December 31, 2004, the Company acquired shares of treasury stock as follows: 2004, 6,959,000 shares; 2003, 2,529,000 shares; and 2002, 181,000 shares.

        On July 21, 2003, the Company's Board of Directors authorized an increase in the Common Stock share buyback program to $25.0 million. At December 31, 2004, $7.5 million remains available under this authorization. During the three years ended December 31, 2004, the Company acquired no shares, 2,529,000 shares and 181,000 shares, respectively, pursuant to the program.

        As discussed in Note 12, in April 2004 the Company purchased 4,960,784 shares of its common stock for approximately $63.0 million, of which 3,960,784 shares costing $50.0 million were purchased from certain affiliates of KKR. In October 2004, the Company purchased 1,997,805 shares of its common stock from certain KKR affiliates for approximately $32.3 million in a private transaction that occurred concurrently with an offering by KKR of its 8,000,000 remaining shares of the Company's common stock. Following the offering, KKR did not own any shares of the Company's common stock.

        During the three years ended December 31, 2004, the Company issued stock for the exercise of stock options as follows: 2004, 2,244,000 shares; 2003, 93,000 shares; and 2002, 216,000 shares.

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NOTE 15—Net Income (Loss) Per Share

        A reconciliation of the basic and diluted net income (loss) per share computations for the years ended December 31, 2004, 2003 and 2002 are as follows (in thousands, except per share data):

			For the years ended December 31,
			2004				2003						2002
			Basic		Diluted		Basic			Diluted			Basic			Diluted
Numerator:
	Net income (loss)		$	49,917	$	49,917	$	(29,005	)	$	(29,005	)	$	(52,522	)	$	(52,522	)
	Effect of dilutive securities:
		Interest related to 3.75% convertible senior subordinated notes, net of tax(a)		—		3,021		—			—			—			—
			$	49,917	$	52,938	$	(29,005	)	$	(29,005	)	$	(52,522	)	$	(52,522	)
Denominator:
	Average number of common shares outstanding			38,582		38,582		43,026			43,026			44,318			44,318
	Effect of dilutive securities:
		Stock options(b)		—		885		—			338			—			408
		3.75% convertible senior subordinated notes(a)		—		6,788		—			—			—			—
				38,582		46,255		43,026			43,364			44,318			44,726
Net income (loss) per share			$	1.29	$	1.14	$	(0.67	)	$	(0.67	)	$	(1.19	)	$	(1.17	)

(a)

Represents the interest, net of tax, and shares issuable upon conversation related to the Company's $175 million contingent convertible senior subordinated notes in accordance with EITF 04-8, The Effect of Contingently Convertible Instruments on Diluted Earnings per Share.

(b)

Represents the number of shares of common stock issuable on the exercise of dilutive employee stock options less the number of shares of common stock which could have been purchased with the proceeds from the exercise of such options. These purchases were assumed to have been made at the higher of either the market price of the common stock at the end of the period or the average market price for the period. Although these securities have an anti-dilutive effect on net income (loss) for the years ended December 31, 2003 and 2002, they are included in the calculation because such shares have a dilutive effect on the calculation of per share income from continuing operations.

NOTE 16—Stock-Based Compensation Plans

Equity Award Plans

        The stockholders of the Company approved the 2002 Long-Term Incentive Award Plan (the "2002 Plan") effective February 21, 2002. Under the 2002 Plan, an aggregate of 3,000,000 shares of the Company's common stock have been reserved for grant and issuance of incentive and non-qualified stock options, stock appreciation rights ("SARs") and stock awards.

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        Under the Long-Term Incentive Stock Plan approved by stockholders in October 1995 and amended in September 1997, an aggregate of 6,000,000 shares of the Company's common stock have been reserved for the grant and issuance of incentive and non-qualified stock options, stock appreciation rights and stock awards.

        Under both plans, an option becomes exercisable at such times and in such installments as set by the Compensation Committee of the Board of Directors (generally, vesting occurs over three or five years in equal annual increments), but no option will be exercisable after the tenth anniversary of the date on which it is granted.

        Information on stock options is summarized as follows:

	For the years ended
	December 31, 2004				December 31, 2003				December 31, 2002
	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
Outstanding at beginning of year.	5,057,780		$	11.423	4,808,594		$	11.786	4,838,227		$	12.118
Granted	528,547			12.084	948,350			9.880	866,795			11.204
Exercised	(2,244,379	)		12.214	(93,334	)		8.863	(215,945	)		11.525
Canceled	(551,090	)		13.000	(605,830	)		12.252	(680,483	)		13.411
Outstanding at end of year	2,790,858			10.619	5,057,780			11.423	4,808,594			11.798
Exercisable at end of year	1,600,977			10.662	3,467,764			12.257	3,194,265			13.016

	Options Outstanding		Options Exercisable
Range of Exercise Prices	Number Outstanding at December 31, 2004	Weighted Average Remaining Contractual Life (years)	Number Exercisable at December 31, 2004	Weighted Average Exercise Price
$  6.328—8.438	811,208	5.8	625,989	$	7.429
8.438—10.547	586,554	7.5	207,963		10.032
10.547—12.656	974,860	6.6	445,446		11.571
12.656—14.766	151,986	6.5	55,329		13.891
14.766—18.984	266,250	2.1	266,250		16.565
	2,790,858	6.1	1,600,977		10.662

        Under both plans, the Company may issue restricted stock units, which fully vest after seven years of continuous employment with the Company. Approximately 260,000 units were granted in the first quarter of 2004. Approximately 222,000 units were outstanding at December 31, 2004, none of which were vested at December 31, 2004.

        The restricted units are subject to accelerated vesting if the stock price of the Company reaches certain pre-established targets within certain time periods after issuance. The price conditions have been met for the 2004 awards and, therefore, the 2004 units vest in 25% increments beginning on the first anniversary date of the grant. The Company records an equity and contra-equity amount, both equal to the market value of the restricted stock units on the date of grant, as a component of capital

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in excess of par value. Compensation expense is charged in the income statement based on the vesting period of the restricted stock units with a corresponding credit to capital in excess of par value. For the year ended December 31, 2004, the Company recorded approximately $0.7 million of compensation expense.

Employee Stock Purchase Plan

        The Walter Industries, Inc. Employee Stock Purchase Plan was adopted in January 1996 and amended in April 2004. All full-time employees of the Company who have attained the age of majority in the state in which they reside are eligible to participate. The Company contributes a sum equal to 15% (20% after five years of continuous participation) of each participant's actual payroll deduction as authorized, and remits such funds to a designated brokerage firm which purchases in the open market, as agent for the Company, as many shares of the Company's common stock as such funds will permit for the accounts of the participants. The total number of shares that may be purchased under the plan is 3,500,000. Total shares purchased under the plan during the years ended December 31, 2004, 2003 and 2002 were approximately 122,000, 211,000 and 307,000, respectively, and the Company's contributions were approximately $0.3 million, $0.4 million and $0.4 million during such years.

NOTE 17—Commitments and Contingencies

Income Tax Litigation

        The Company is currently engaged in litigation with regard to Federal income tax disputes (see Note 11 for a more complete explanation).

Environmental Matters

        The Company and its subsidiaries are subject to a wide variety of laws and regulations concerning the protection of the environment, both with respect to the construction and operation of many of its plants, mines and other facilities, and with respect to remediating environmental conditions that may exist at its own and other properties. The Company believes that it and its subsidiaries are in substantial compliance with federal, state and local environmental laws and regulations. Expenses charged to the statement of operations for compliance of ongoing operations and for remediation of environmental conditions arising from past operations in the years ended December 31, 2004, 2003 and 2002, were approximately $14.6 million, $10.8 million and $7.0 million, respectively. The increase in expenses from 2003 to 2004 was primarily due to a $4.0 million charge related to legacy environmental issues in Anniston, Alabama. The increase in expenses from 2002 to 2003 occurred at Sloss, which increased approximately $4.5 million due to additional compliance costs for ongoing operations primarily related to obtaining a new permit for its Biological Treatment Facility of $1.7 million and an increase of approximately $2.7 million related to remediation activities mandated by the Environmental Protection Agency ("EPA"). Because environmental laws and regulations continue to evolve, and because conditions giving rise to obligations and liabilities under environmental laws are in some circumstances not readily identifiable, it is difficult to forecast the amount of such future environmental expenditures or the effects of changing standards on future business operations or results. Consequently, the Company can give no assurance that such expenditures will not be material in the future. Capital expenditures for environmental requirements are anticipated to average approximately

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$3.3 million per year in the next five years. Capital expenditures for the years ended December 31, 2004 and 2003 for environmental requirements were $3.8 million and $2.0 million, respectively.

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

        The Federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), generally imposes liability, which may be joint and several and is without regard to fault or the legality of waste generation or disposal, on certain classes of persons, including owners and operators of sites at which hazardous substances are released into the environment (or pose a threat of such release), persons that disposed or arranged for the disposal of hazardous substances at such sites, and persons who owned or operated such sites at the time of such disposal. CERCLA authorizes the EPA, the States and, in some circumstances, private entities to take actions in response to public health or environmental threats and to seek to recover the costs they incur from the same classes of persons. Certain governmental authorities can also seek recovery for damages to natural resources. Currently, U.S. Pipe has been identified as a potentially responsible party ("PRP") by the EPA under CERCLA with respect to cleanup of hazardous substances at two sites to which its wastes allegedly were transported or deposited. U.S. Pipe is among many PRP's at such sites and a significant number of the PRP's are substantial companies. An agreement has been reached with the EPA and a Consent Order, signed by U.S. Pipe and the EPA, has been finalized respecting one of the sites. U.S. Pipe has satisfied its obligations under the Consent Order at a cost that was not material. Natural resource damage claims respecting that same site have now also been made by the State of California, but U.S. Pipe, as a member of the same group of PRPs, believes it has adequate first dollar insurance coverage covering the State's claims. With respect to the other site, located in Anniston, Alabama, the PRPs have been negotiating an administrative consent order with the EPA. Based on these negotiations, management estimates the Company's share of liability for cleanup, after allocation among several PRPs, will be approximately $4 million, which was accrued in 2004. Civil litigation in respect of the site is also ongoing. Management does not believe that U.S. Pipe's share of any liability will have a material adverse effect on the financial condition of the Company and its subsidiaries, but could be material to results of operations in future reporting periods.

        Sloss Industries entered into a consent 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/absence 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 substantively complete. An Interim Remedial Measure (IRM) Work Plan for the Chemical Plant groundwater, which was presented to the EPA, was implemented during 2003 with progress continuing in 2004. Monitoring requirements will continue on a long-term basis and

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contamination levels are expected to continue to decline. Additionally, new EPA requirements relating to surface soil sampling and results are now being considered. This change in focus will possibly delay the timing of efforts relating to ground water remediation.

        The Jefferson County (Alabama) Department of Health has alleged emissions and reporting failures that violated provisions of Sloss' Title V Air Permit and regulations under the Clean Air Act. A notice of violation was issued in December of 2003, and Sloss received notice of a proposed penalty of $0.3 million in January of 2005. The penalty is subject to negotiation.

        Although no assurances can be given that the Company's subsidiaries will not be required in the future to make material expenditures relating to these or other sites, management does not believe at this time that the cleanup costs, if any, associated with these or other sites will have a material adverse effect on the financial condition or results of operations of the Company and its subsidiaries, but such cleanup costs could be material to results of operations in a reporting period.

        In 2004, the Company entered into a settlement and release agreement with a former insurer whereby the Company released the insurance company from liability for certain environmental contamination, asbestos and silica claims that may have been asserted in the future in exchange for a payment to the Company. The Company collected $1.9 million, net of legal fees, which was recorded as a reduction to selling, general and administrative expenses in the Industrial Products segment.

Miscellaneous Litigation

        In 2003, the Company increased its accruals for outstanding litigation by approximately $6.5 million, principally related to the settlement of a class action employment matter at U.S. Pipe. The settlement was finalized in May 2004.

        In settlement of allegations of permit violations relating to wastewater discharges into an adjacent creek, Sloss paid a fine of approximately $0.7 million and donated approximately 300 acres of land for public use to the Alabama Department of Environmental Management in 2003.

        Drummond Company, Inc. filed suit in state court in Tuscaloosa County, Alabama on October 29, 2001, against the Corporation and several of its subsidiaries (Drummond Company, Inc. v. Walter Industries, Inc., et al., Case No. CV 2002-0673). Drummond claims that it is entitled to exclusive surface mining rights on certain lands owned by United Land Corporation, a wholly-owned subsidiary of the Company, and alleges $200 million in lost profits. The Company has filed a counterclaim seeking injunctive relief, substantial actual damages, and punitive damages against Drummond based on fraud. Drummond's claims do not affect the underground mining operations of the Jim Walter Resources subsidiary. Management does not believe that this litigation will have a material adverse effect on the financial condition or results of operations of the Company and its subsidiaries.

        Per the agreement between the Company and Oxbow Carbon and Minerals LLC for the sale of the AIMCOR business, the final sales price is subject to certain post-closing cash and working capital adjustments defined in the agreement and are subject to resolution through an arbitration process provided for in the agreement. The Company recorded a receivable in 2003 of approximately $16 million for estimated net cash and working capital adjustments due to the Company based upon the monthly closing financial statements provided by AIMCOR's management as of November 30, 2003. That receivable has been reduced by insurance proceeds to approximately $14 million. Oxbow claimed that the cash and net working capital adjustment, based on statements Oxbow prepared as of

F-39

December 2, 2003, should result in a payment to Oxbow in excess of $20 million. The Company filed for arbitration against Oxbow in May of 2004. Oxbow has challenged the impartiality of the arbitrator in Texas state court. On March 2, 2005, the arbitrator issued an award on the initial $35 million in disputed items that had been submitted to arbitration and awarded $22.7 million to the Company and $12.3 million to Oxbow. Items totaling $86 million remain in dispute, of which approximately $10 million would need to be adjudicated in the Company's favor in order for us to fully collect the receivable. The ultimate collection of the receivable, or any amount in excess of the receivable, is subject to the resolution of Oxbow's litigation and the arbitration described above. Management intends to vigorously pursue full recovery. Management does not believe that this matter will have a material adverse effect on the financial condition or results of operations of the Company and its subsidiaries.

        The Company and its subsidiaries are parties to a number of other lawsuits arising in the ordinary course of their businesses. 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 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.

Operating Leases and Purchase Obligations

        The Company accounts for operating leases in accordance with FAS 13, "Accounting for Leases", which includes evaluating free rent periods, amortization period of leasehold improvements and incentives related to leasehold improvements. The Company's operating leases are primarily for mining equipment, automobiles and office space.

        Rent expense was $16.2 million, $13.9 million, and $12.5 million for the years ended December 31, 2004, 2003 and 2002, respectively. Future minimum payments under non-cancelable operating leases and purchase obligations as of December 31, 2004 are (in thousands):

	Operating Leases		Purchase Obligations
2005	$	10,347	$	28,437
2006		8,056		16,710
2007		6,687		2,256
2008		5,868		—
2009		4,352		—
Thereafter		5,734		—

        During the fourth quarter of 2004, the Company entered into a letter of intent to lease certain longwall mining equipment for a five year period commencing during the latter half of 2005. Annual lease payments are expected to be $5.4 million. The lease agreement is expected to be completed during the first quarter of 2005.

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NOTE 18—Financial Instruments

Fair Value of Financial Instruments

        The following methods and assumptions were used to estimate fair value disclosures:

Cash and cash equivalents, restricted short-term investments, trade receivables, other receivables and accounts payable—The carrying amounts reported in the balance sheet approximate fair value.

Instalment notes receivable—The estimated fair value of instalment notes was $1.9 billion and $2.0 million at December 31, 2004 and 2003, respectively, based upon valuations prepared as of those dates and were determined by a comparison with the quoted market price of financial instruments believed to be comparable to and have similar characteristics as the Company's instalment notes receivable. The value of mortgage-backed assets such as instalment notes receivable are very sensitive to changes in interest rates.

Debt—The estimated fair value of mortgage-backed/asset-backed notes approximated $1.9 billion at December 31, 2004 and 2003 based on current yields for comparable debt issues or prices for actual transactions. The value of mortgage-backed debt obligations are very sensitive to changes in interest rates. The fair value of the Company's 3.75% convertible senior subordinated notes due May 1, 2024 was estimated based on several standard market variables including the Company's common stock price, its volatility and yields on comparable debt. The estimated fair value of the Company's convertible notes was approximately $352.0 million at December 31, 2004. At December 31, 2003, the Company's fair value of the term loan approximated its stated value of $113.8 million.

Cash Flow Hedges

        SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", requires companies to recognize all of its derivative instruments as either assets or liabilities in the balance sheet at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument based on the exposure being hedged, as either a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation.

        For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current earnings during the period of change.

        The Company uses derivative instruments with maturities of less than 12 months principally to manage exposures to natural gas price fluctuations. The Company's objective for holding derivatives is to minimize risk using the most effective methods to eliminate or reduce the impacts of exposures. The Company documents all relationships between hedging instruments and hedged items, and links all derivatives designated as fair value, cash flow or foreign currency hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also

F-41

assesses and documents, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows associated with the hedged items.

        To protect against the reduction in value of forecasted cash flows resulting from sales of natural gas, the Company periodically engages in a natural gas hedging program. The Company hedges portions of its forecasted revenues from sales of natural gas with swap contracts. The Company enters into natural gas swap agreements that effectively convert a portion of its forecasted sales at floating-rate natural gas prices to a fixed-rate basis, thus reducing the impact of natural gas price changes on sales revenues. When natural gas prices fall, the decline in value of future natural gas sales is offset by gains in the value of swap contracts designated as hedges. Conversely, when natural gas prices rise, the increase in the value of future cash flows from natural gas sales is offset by losses in the value of the swap contracts.

        At various times, the Company may also engage in a natural gas hedging program to protect against the reduction in value of forecasted cash flows resulting from purchases of natural gas, The Company hedges portions of its forecasted costs from purchases of natural gas with swap contracts. The Company enters into natural gas swap agreements that effectively convert a portion of its forecasted purchases at floating-rate natural gas prices to a fixed-rate basis, thus reducing the impact of natural gas price changes on cost of sales. When natural gas prices rise, the increase in cost of future natural gas purchases is offset by gains in the value of swap contracts designated as hedges. Conversely, when natural gas prices falls, the decline in the cost of future natural gas purchases is offset by losses in the value of the swap contracts.

        During 2004 and 2003, the Company hedged approximately 28% and 24%, respectively of its natural gas production with swap contracts. These swap contracts effectively converted a portion of forecasted sales at floating-rate natural gas prices to a fixed-rate basis. As a result of decreases in natural gas prices during 2004 and increases in 2003, these swap contracts resulted in cash inflows of $1.5 million in 2004 and cash outflows of $5.6 million in 2003, impacting net sales and revenues.

        Swap contracts to hedge anticipated sales of natural gas totaling 900,000 mmbtu were outstanding at an average price of $7.43 per mmbtu at December 31, 2004. The Company recorded an unrealized gain from outstanding swap contracts, net of tax, of $0.7 million at December 31, 2004 in Other Comprehensive Income. There were no outstanding swap contracts at December 31, 2003.

NOTE 19—Segment Analysis

        The Company's reportable segments are strategic business units that offer different products and services and have separate management teams. The business units have been aggregated into five reportable segments since the long-term financial performance of these reportable segments is affected by similar economic conditions. The five reportable segments are: Homebuilding, Financing, Industrial Products, Natural Resources, and Other. The Company markets and supervises the construction of detached, single-family residential homes, primarily in the southern United States, through the Homebuilding segment. The Financing segment provides mortgage financing on such homes and purchases mortgages originated by others. Ductile iron pressure pipe, fittings, valves and hydrants are manufactured and marketed through the Industrial Products segment. The Natural Resources segment is comprised of coal mining and methane gas operations. The Other segment includes the

F-42

manufacturing of foundry and furnace coke, slag fiber and specialty chemicals as well as the land division and corporate expenses.

        The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on operating earnings of the respective business units.

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

			For the years ended December 31,
			2004			2003			2002
Sales and revenues:
	Homebuilding		$	233,755		$	276,855		$	270,166
	Financing			242,777			239,754			240,955
	Industrial Products			546,555			461,850			489,214
	Natural Resources			351,352			257,835			249,823
	Other			109,839			106,995			109,825
	Consolidating eliminations			(22,556	)		(17,828	)		(20,859	)
		Sales and revenues(a)(b)	$	1,461,722		$	1,325,461		$	1,339,124
Segment operating income (loss)(c)(d)(e):
	Homebuilding		$	(33,347	)	$	(462	)	$	15,197
	Financing(f)			54,838			51,423			54,489
	Industrial Products			7,609			(13,542	)		24,594
	Natural Resources			69,702			(26,424	)		21,584
	Other			(20,253	)		(12,558	)		(23,694	)
	Consolidating eliminations			(2,710	)		(2,661	)		(4,436	)
	Segment operating income (loss)			75,839			(4,224	)		87,734
	Less corporate debt interest expense			(18,687	)		(22,572	)		(18,126	)
	Income (loss) from continuing operations before income tax (expense) benefit			57,152			(26,796	)		69,608
	Income tax (expense) benefit			(7,235	)		30,115			(17,330	)
		Income from continuing operations	$	49,917		$	3,319		$	52,278
Depreciation:
	Homebuilding		$	4,792		$	4,755		$	3,775
	Financing			1,471			860			196
	Industrial Products			26,672			26,119			26,674
	Natural Resources			22,464			16,312			12,937
	Other			4,821			5,330			7,836
		Total	$	60,220		$	53,376		$	51,418

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Gross capital expenditures:
	Homebuilding			$	2,647	$	7,975	$	9,424
	Financing				924		2,546		2,633
	Industrial Products				20,484		18,451		26,793
	Natural Resources				21,733		21,329		24,778
	Other				4,675		5,967		2,594
		Total		$	50,463	$	56,268	$	66,222
Identifiable assets:
	Homebuilding			$	148,212	$	160,607	$	149,582
	Financing				1,790,663		1,835,548		1,781,044
	Industrial Products				463,580		457,358		462,835
	Natural Resources				235,726		209,843		240,079
	Other				278,305		278,173		168,662
		Total assets of continuing operations			2,916,486		2,941,529		2,802,202
		Total assets of discontinued operations			—		—		417,932
			Total	$	2,916,486	$	2,941,529	$	3,220,134

(a)

Intra-segment sales (made primarily at prevailing market prices) are deducted from sales of the selling segment. Inter-segment sales (made primarily at prevailing market prices) are eliminated using consolidating eliminations.

(b)

Export sales were $234.6 million, $160.5 million, and $169.6 million in the years ended December 31, 2004, 2003 and 2002, respectively. Export sales to any single geographic area do not exceed 10% of consolidated sales and revenues.

(c)

Effective January 1, 2004, the Company revised its methodology of allocating certain corporate overhead expenses to all segments. Operating income for each segment now includes an allocation of corporate overhead expenses that are directly attributable to each segment's operations. Prior year amounts have been reclassified to conform to the current year presentation.

(d)

Operating income amounts are after deducting amortization of other intangibles. A breakdown by segment of amortization is as follows (in thousands):

	For the years ended December 31,
	2004		2003		2002
Homebuilding	$	—	$	—	$	—
Financing		4,976		6,132		6,846
Industrial Products		—		—		—
Other		—		—		379
	$	4,976	$	6,132	$	7,225

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(e)

Operating income amounts include expenses for postretirement benefits. A breakdown by segment of postretirement benefits expense is as follows (in thousands):

	For the years ended December 31,
	2004			2003			2002
Homebuilding	$	(465	)	$	(667	)	$	1,324
Financing		(207	)		(137	)		158
Industrial Products		(1,483	)		(1,829	)		2,570
Natural Resources		10,896			11,541			11,148
Other		(601	)		(828	)		484
	$	8,140		$	8,080		$	15,684

(f)

Operating income amounts for the Financing segment include interest expense on the mortgage-backed/asset-backed notes of $127.3 million, $129.3 million and $135.1 million for the years ended December 31, 2004, 2003 and 2002, respectively.

Note 20—Related Party Transactions

        The Company owns a 50% joint venture interest in Black Warrior Methane ("BWM") and 50% of the outstanding stock of Black Warrior Transmission ("BWT"). BWM is accounted for under the proportionate consolidation method and BWT is accounted for under the equity method and is not required to be consolidated with the Company under FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). The Company has granted the rights to produce and sell methane gas from its coal mines to BWM, which transmits the gas through BWT. The Company also supplies labor and equipment to BWM and charges the joint venture for such costs on a monthly basis. Revenues, receivables and payables associated with BWM and BWT reflected in the consolidated financial statements are as follows (in thousands):

	For the years ended December 31,
	2004		2003		2002
Sales of methane gas recorded by the Company	$	47,955	$	39,699	$	29,354

	December 31,
	2004		2003
Accounts receivable of BWM	$	4,376	$	3,334
Accounts payable of BWM	$	1,970	$	1,153
Other long-term liability of BWT	$	5,156	$	5,560

        See Notes 12 and 21 for discussion of transactions with KKR and Mr. Tokarz, a member of the Company's Board of Directors, respectively.

Note 21—Sale of Assets

        On April 30, 2004, the Company completed the sale of the assets of Vestal Manufacturing Company, a wholly-owned subsidiary, for $6.0 million, subject to certain post-closing adjustments. The Company recorded an after tax loss of approximately $0.8 million on the sale. Michael T. Tokarz, a

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member of the Company's Board of Directors, is the chairman and investment manager of MVC Capital, an investment fund that participated in the acquisition of Vestal's assets. Mr. Tokarz owns less than five percent of the equity of MVC Capital. There were no fees paid to Mr. Tokarz in connection with the sale. Mr. Tokarz did not vote on the transaction or participate in the Board's decision to approve the sale of Vestal.

Note 22—Hurricane Losses

        The Company recorded a provision for estimated hurricane losses of $4.0 million. These estimated losses were recorded for claims at Cardem Insurance Company, Ltd., which is part of the Financing segment, as a result of damage from four hurricanes that impacted the Company's market area during the third quarter of 2004.

Note 23—New Accounting Pronouncements

        In May 2004, the FASB issued FASB Staff Position ("FSP") FAS 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2004. See Note 13 for discussion of the impact of this pronouncement.

        In September 2004, the Emerging Issues Task Force ("EITF") of the FASB adopted EITF 04-8, The Effect of Contingently Convertible Instruments on Diluted Earnings per Share, which requires that the dilutive effect of contingently convertible instruments be included in diluted earnings per share using the "if converted" method, effective December 15, 2004. The Company was required to recalculate and restate diluted earnings per share to include the dilutive effect of common stock issuable associated with the Company's $175 million contingent convertible senior subordinated notes. Restatement for the three and six months ended June 30, 2004 and for the three and nine months ended September 30, 2004 resulted in diluted earnings per share of $0.20, $0.09, $0.42 and $0.54, respectively. This compares to originally reported diluted earnings per share of $0.21, $0.09, $0.50 and $0.57, respectively.

        In November 2004, the FASB issued FASB Statement No. 151, "Inventory Costs—an amendment of ARB No. 43, Chapter 4", which was issued to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. This statement requires that such items be recorded to expense as incurred. The Company's current accounting policies are in accordance with FAS 151 and as a result the Company believes that the effect of adopting this statement will not be material to the consolidated financial statements.

        In December 2004, the FASB released revised FASB No. 123(R), "Share-Based Payment", ("FAS 123R") which requires companies to expense the fair value of employee stock options and other forms of stock-based compensation. FAS 123R is effective for all interim periods beginning after June 15, 2005, and will be adopted by the Company beginning with the third quarter of 2005. The Company expects to utilize the modified prospective application method of adoption, which excludes restatement of prior periods in the year of adoption. The impact of the adoption of FAS 123R on the 2005 financial statements is estimated at $0.9 million, net of tax. However, see Note 3 for information related to the pro forma effects on the Company's reported net income and net income per share of applying the fair value recognition provisions of the previous FAS 123, "Accounting for Stock-Based Compensation".

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Note 24—Subsequent Events

        On January 31, 2005, the Board of Directors declared a $0.04 per share dividend, payable on March 17, 2005, to shareholders of record on February 18, 2005.

        On January 31, 2005, the Company entered into two identical $50 million hedge transactions with two separate counter-parties. The objective of the hedge is to protect against the negative effect that rising interest rates would have on the Company's future forecasted issuance of mortgage-backed securities. The structure of the hedge is a 7.5 year forward starting swap which starts on December 1, 2005, which is the forecasted issuance date of the Company's next securitization. The swap agreements call for the Company to make fixed rate payments over the term at 4.573% per annum and receive payments based on one month LIBOR from the counter-parties. It is anticipated that the swap will be settled at securitization. The Company will account for the hedge as a cash flow hedge. As such, changes in the fair value of the swap through the date of securitization that takes place will be recorded in accumulated other comprehensive income, assuming the securitization remains likely.

        On February 4, 2005, a Variable Funding Loan Agreement (the "Facility") was completed between Mid-State Trust XIV (the borrower) and several financial institutions for a $200.0 million warehouse facility renewable on February 3, 2006. The Facility provides temporary financing to Mid-State Homes, Inc. for its purchases of instalment notes from Jim Walter Homes, Inc. and its affiliated builders and purchases of loans from Walter Mortgage Company. Mid-State Trust XIV is a Delaware Statutory Trust whose assets are limited to pledged instalment notes, mortgage notes and mortgages purchased from Mid-State.

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REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM
ON FINANCIAL STATEMENT SCHEDULES

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

        Our audits of the consolidated financial statements of Walter Industries, Inc. referred to in our report dated March 15, 2005 appearing on page F-2 of this Form 10-K also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

PricewaterhouseCoopers LLP
Tampa, Florida
March 15, 2005

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SCHEDULE II

WALTER INDUSTRIES, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

Description		Balance at Beginning of Period		Additions Charged to Cost and Expenses		Deductions from/ Adjustments to reserves			Balance at end of Period
		(in thousands)
For the year ended December 31, 2002
	Allowance for losses deducted from instalment notes receivable	$	10,665	$	12,400	$	(12,282	)(1)	$	10,783
	Allowance for losses deducted from trade receivables	$	1,580	$	3,517	$	(3,592	)(1)	$	1,505
	Allowance for losses deducted from other receivables	$	474	$	1	$	(156	)(1)	$	319
	SFAS 109 valuation allowance	$	20,772	$	—	$	(307	)	$	20,465
For the year ended December 31, 2003
	Allowance for losses deducted from instalment notes receivable	$	10,783	$	15,660	$	(15,536	)(1)	$	10,907
	Allowance for losses deducted from trade receivables	$	1,505	$	317	$	(292	)(1)	$	1,530
	Allowance for losses deducted from other receivables	$	319	$	70	$	(260	)(1)	$	129
	SFAS 109 valuation allowance	$	20,465	$	1,904	$	—		$	22,369
For the year ended December 31, 2004
	Allowance for losses deducted from instalment notes receivable	$	10,907	$	12,402	$	(12,109	)(1)	$	11,200
	Allowance for losses deducted from trade receivables	$	1,530	$	348	$	(858	)(1)	$	1,020
	Allowance for losses deducted from other receivables	$	129	$	565	$	(30	)(1)	$	664
	SFAS 109 valuation allowance	$	22,369	$	—	$	(11,420	)	$	10,949

(1)

Notes and accounts written off as uncollectible.

F-49

EXHIBIT INDEX

Exhibit Number		Description
2(a)(i)	—	Amended Joint Plan of Reorganization of Walter Industries, Inc. and certain of its subsidiaries, dated as of December 9, 1994(1)
2(a)(ii)	—	Modification to the Amended Joint Plan of Reorganization of Walter Industries, Inc. and certain of its subsidiaries, as filed in the Bankruptcy Court on March 1, 1995(2)
2(a)(iii)	—	Findings of Fact, Conclusions of Law and Order Confirming Amended Joint Plan of Reorganization of Walter Industries, Inc. and certain of its subsidiaries, as modified(3)
3(i)	—	Amended and Restated Certificate of Incorporation of the Company(4)
3(ii)	—	Amended and Restated By-Laws(5)
4.1	—	Indenture dated as of April 20, 2004 between Walter Industries, Inc. and the Bank of New York Trust Company, N.A., as Trustee(6)
4.2	—	Form of 3.75% Convertible Senior Subordinated Notes due 2024 (included as Exhibit A to Exhibit 4.1)(6)
4.3	—	Resale Registration Rights Agreement dated April 20, 2004 between Walter Industries, Inc. and Banc of America Securities, LLC and Morgan Stanley & Co. Incorporated, as representatives of the Initial Purchasers(6)
4.4	—	Form of Specimen Certificate for Registrant's Common Stock (incorporated by reference to Exhibit 4(b) to Registration Statement on Form S-1 filed by the Registrant (No 033-59013)(8)
10.1*	—	Director and Officer Indemnification Agreement, dated as of March 3, 1995, among the Company and the Indemnitee parties thereto(9)
10.2*	—	Walter Industries, Inc. Executive Change-in-Control Severance Agreement.
10.3*	—	Walter Industries Executive Deferred Compensation and Supplemental Retirement Plan
10.4*	—	Walter Industries, Inc. Directors' Deferred Fee Plan(10)
10.5*	—	Walter Industries, Inc. Supplemental Pension Plan
10.6*	—	Annual Incentive Plan for Key Employees(11)
10.7*	—	1995 Long-Term Incentive Stock Plan of Walter Industries, Inc.(12)
10.8*	—	2002 Long-Term Incentive Award Plan of Walter Industries, Inc.(13)
10.9*	—	Restricted Stock Unit Award Agreement
10.10*	—	Non-Statutory Stock Option Agreement
10.11	—	$500 million Credit Agreement by and among Walter Industries, Inc. as borrower, Bank of America, N.A., as Administrative Agent, Swing Line Lender and Letter of Credit Issuer, SunTrust Bank as Syndication Agent and Letter of Credit issuer, BNP Paribas and Credit Lyonnais New York Branch as Co-Documentation Agents and the Lender's Party hereto, as amended.(5)
10.11.1	—	Amendment No. 3 to Credit Agreement dated as of March 24, 2004(14)
10.11.2	—	Amendment No. 4 to Credit Agreement dated as of April 13, 2004(15)
10.11.3	—	Amendment No. 6 to Credit Agreement dated as of October 28, 2004(16)

E-1

10.12	—	Amended and Restated Variable Funding Loan Agreement, dated as of November 19, 2004, among YC Susi Trust, Atlantic Asset Securitization Corporation, Mid-State Trust IX, Wachovia Bank, N.A., Bank of America, N.A. and Calyon New York Branch
10.13	—	Variable Funding Loan Agreement dated as of February 4, 2005, among Three Pillars Funding, LLC, Mid-State Trust XIV, Wachovia Bank, N.A., SunTrust Capital Markets, Inc. and SunTrust Bank(17)
10.14*	—	Agreement, dated as of November 2, 2000, between the Company and Donald DeFosset(19)
10.15*	—	Agreement dated as of March 2, 2005 between the Company and Donald DeFosset(20)
10.16*	—	Agreement, dated as of December 29, 2001, between the Company and William F. Ohrt(21)
10.17*	—	Agreement, dated as of July 24, 2002, between the Company and Victor Patrick(10)
10.18*	—	Agreement dated September 29, 2000, between the Company and George R. Richmond(22)
10.19*	—	Agreement dated December 19, 2003, between the Company and Lawrence Comegys(18)
10.20	—	Amended and Restated Purchase Agreement and Plan of Merger dated as of November 13, 2003 by and between Walter Industries, Inc., Applied Industrial Materials Corporation, Gans Transport Agencies (USA), Inc., AIMCOR (Far East), Inc. and Oxbow Carbon & Minerals, LLC(7)
10.21	—	Stock Purchase Agreement dated October 30, 2003 by and among Walter Industries, Inc., Wellspring Aluminum Acquisition Co. 2 and Wellspring Capital Partners III, LP(10)
21	—	Subsidiaries of the Company
23	—	Consent of PricewaterhouseCoopers LLP
24	—	Power of Attorney
31.1	—	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002—Chief Executive Officer
31.2	—	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002—Chief Financial Officer
32.1	—	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350—Chief Executive Officer
32.2	—	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,18 U.S.C. Section 1350—Chief Financial Officer

The Exhibits identified above with an asterisk (*) are management contracts or compensatory plans or arrangements.

(1)

This Exhibit is incorporated by reference to the Application for Qualification of Indenture of Form T-3 filed by the Company with the Commission on February 6, 1995.

(2)

This Exhibit is incorporated by reference to Amendment No. 2 to the Application for Qualification of Indenture on Form T-3 filed by the Company with the Commission on March 7, 1995.

E-2

(3)

This Exhibit is incorporated by reference to the Registration Statement of Form S-1 (File No. 33-59013) filed by the Company with the Commission on May 2, 1995.

(4)

This Exhibit is incorporated by reference to the Form 10-Q filed by the Company with the Commission on August 9, 2004.

(5)

This Exhibit is incorporated by reference to Form 10-Q filed by the Company with the Commission on May 15, 2003.

(6)

This Exhibit is incorporated by reference to Form S-3 filed by the Company with the Commission on July 15, 2004.

(7)

This Exhibit is incorporated by reference to Form 10-Q filed by the Company with the Commission on November 14, 2003.

(8)

This Exhibit is incorporated by reference to Exhibit 4(b) to Registration Statement on Form S-1 filed by the Company.

(9)

This Exhibit is incorporated by reference to Amendment No. 1 to the Registration Statement on Form S-1 (File No. 33-59013) filed by the Company with the Commission on May 2, 1995.

(10)

This Exhibit is incorporated by reference to the Form 10-K filed by the Company with the Commission on March 15, 2004.

(11)

This Exhibit is incorporated by reference to Exhibit A to the Company's Proxy Statement, dated September 16, 1997, filed by the Company with the Commission on August 12, 1997.

(12)

This Exhibit is incorporated by reference to the Registration Statement on Form S-8 filed by the Company with the Commission on April 1, 1996.

(13)

This Exhibit is incorporated by reference to Exhibit A of the Company's Proxy Statement, dated March 25, 2002, filed by the Company with the Commission on March 25, 2002.

(14)

This Exhibit is incorporated by reference to Form 10-Q filed by the Company with the Commission on May 10, 2004.

(15)

This Exhibit is incorporated by reference to Form 10-Q filed by the Company with the Commission on August 9, 2004.

(16)

This Exhibit is incorporated by reference to Form 8-K filed by the Company with the Commission on October 29, 2004.

(17)

This Exhibit is incorporated by reference to Form 8-K filed by the Company with the Commission on February 8, 2005.

(18)

This Exhibit is incorporated by reference to Form 8-K filed by the Company with the Commission on February 24, 2005.

(19)

This Exhibit is incorporated by reference to Form 10-K filed by the Company with the Commission on March 20, 2001.

(20)

This Exhibit is incorporated by reference to Form 8-K filed by the Company with the Commission on March 3, 2005.

(21)

This Exhibit is incorporated by reference to Form 10-K filed by the Company with the Commission on March 20, 2002.

(22)

This Exhibit is incorporated by reference to Form 10-K filed by the Company with the Commission on March 21, 2003.

E-3

QuickLinks

Documents Incorporated by Reference
PART I
Estimated Recoverable(1) Coal Reserves as of December 31, 2004 (In Thousands of Tons)
PART II
RESULTS OF OPERATIONS
Unaudited Interim Financial Information: (in thousands, except per share amounts)
PART III
PART IV
SIGNATURES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
WALTER INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts)
WALTER INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
WALTER INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE THREE YEARS ENDED DECEMBER 31, 2004 (in thousands)
WALTER INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT SCHEDULES
WALTER INDUSTRIES, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS
EXHIBIT INDEX

EX-10.2

Exhibit 10.2

Executive Change-in-Control
Severance Agreement

Walter Industries, Inc.

January 2004

Contents

Walter Industries, Inc.
Executive Change-in-Control Severance Agreement

THIS EXECUTIVE CHANGE-IN-CONTROL SEVERANCE AGREEMENT is made, entered into, and is effective this                             day of                         , 2004 (hereinafter referred to as the “Effective Date”), by and between Walter Industries, Inc. (the “Company”), a Delaware corporation, and                                (the “Executive”).

WHEREAS, the Executive is currently employed by the Company and possesses considerable experience and knowledge of the business and affairs of the Company concerning its policies, methods, personnel, and operations; and

WHEREAS, the Company is desirous of assuring insofar as possible, that it will continue to have the benefit of the Executive’s services; and the Executive is desirous of having such assurances; and

WHEREAS, the Company recognizes that circumstances may arise in which a Change in Control of the Company occurs, through acquisition or otherwise, thereby causing uncertainty of employment without regard to the Executive’s competence or past contributions. Such uncertainty may result in the loss of the valuable services of the Executive to the detriment of the Company and its shareholders; and

WHEREAS, both the Company and the Executive are desirous that any proposal for a Change in Control or acquisition will be considered by the Executive objectively and with reference only to the business interests of the Company and its shareholders; and

WHEREAS, the Executive will be in a better position to consider the Company’s best interests if the Executive is afforded reasonable security, as provided in this Agreement, against altered conditions of employment which could result from any such Change in Control or acquisition.

NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements of the parties set forth in this Agreement, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows:

Article 1. Definitions

Wherever used in this Agreement, the following terms shall have the meanings set forth below and, when the meaning is intended, the initial letter of the word is capitalized:

(a)“Agreement” means this Executive Change-in-Control Severance Agreement.

(b)“Base Salary” means, at any time, the then regular annual rate of pay which the Executive is receiving as annual salary, excluding amounts: (i) received under short-term or long-term incentive or other bonus plans, regardless of whether or not the amounts are deferred, or (ii) designated by the Company as payment toward reimbursement of expenses.

1

(c)“Beneficial Owner” shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Exchange Act.

(d)“Board” means the Board of Directors of the Company.

(e)“Cause” shall be determined solely by the Committee in the exercise of good faith and reasonable judgment, and shall mean the occurrence of any one or more of the following:

(i)The Executive’s willful and continued failure to substantially perform his duties with the Company (other than any such failure resulting from the Executive’s Disability), after a written demand for substantial performance is delivered to the Executive that specifically identifies the manner in which the Committee believes that the Executive has not substantially performed his duties, and the Executive has failed to remedy the situation within fifteen (15) business days of such written notice from the Company; or

(ii)The Executive’s conviction of a felony; or

(iii)The Executive’s willful engaging in conduct that is demonstrably and materially injurious to the Company, monetarily or otherwise. However, no act or failure to act on the Executive’s part shall be deemed “willful” unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the action or omission was in the best interests of the Company.

(f)“Change in Control” of the Company shall mean the occurrence of any one (1) or more of the following events:

(i)Any Person (other than the Company, Kohlberg Kravis Roberts & Co. (“KKR”) or its affiliates, or any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, and any trustee or other fiduciary holding securities under an employee benefit plan of the Company or such proportionately owned corporation), is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing more than thirty percent (30%) of the combined voting power of the Company’s then outstanding securities;

(ii)During any period of not more than thirty-six (36) consecutive months, individuals who at the beginning of such period constitute the Board of Directors of the Company, and any new director whose election by the Board or nomination for election by the Company’s stockholders was approved by a vote of at least a majority (rounded up to the nearest whole number) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof;

2

(iii)The consummation of a merger or consolidation of the Company with any other corporation, other than: (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than sixty-six and two-thirds percent (66-2/3%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person acquires more than thirty percent (30%) of the combined voting power of the Company’s then outstanding securities; or

(iv)The Company’s stockholders approve a plan or an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets (or any transaction or series of transactions having a similar effect).

(g)“Code” means the Internal Revenue Code of 1986, as amended.

(h)“Committee” means the Compensation Committee of the Board of Directors of the Company, or, if no Compensation Committee exists, then the full Board of Directors of the Company, or a committee of Board members, as appointed by the full Board to administer this Agreement.

(i)“Company” means Walter Industries, Inc., a Delaware corporation (including any and all subsidiaries), or any successor thereto as provided in Article 9 herein.

(j)“Disability” or “Disabled” shall have the meaning ascribed to such term in the Executive’s governing long-term disability plan, or if no such plan exists, at the discretion of the Board.

(k)“Effective Date” means the date this Agreement is approved by the Board, or such other date as the Board shall designate in its resolution approving this Agreement, and as specified in the opening sentence of this Agreement.

(l)“Effective Date of Termination” means the date on which a Qualifying Termination occurs, as provided in Section 2.2 herein, which triggers the payment of Severance Benefits hereunder.

(m)“Exchange Act” means the Securities Exchange Act of 1934, as amended.

(n)“Good Reason” means, without the Executive’s express written consent, the occurrence after a Change in Control of the Company of any one (1) or more of the following:

(i)The assignment of the Executive to duties materially inconsistent with the Executive’s authorities, duties, responsibilities, and status (including offices, titles, and reporting requirements) as an executive and/or officer of the Company, or a material reduction or alteration in the nature or status of the Executive’s

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authorities, duties, or responsibilities from those in effect as of ninety (90) calendar days prior to the Change in Control, other than an insubstantial and inadvertent act that is remedied by the Company promptly after receipt of notice thereof given by the Executive;

(ii)The Company’s requiring the Executive to be based at a location in excess of fifty (50) miles from the location of the Executive’s principal job location or office immediately prior to the Change in Control; except for required travel on the Company’s business to an extent substantially consistent with the Executive’s then present business travel obligations;

(iii)A reduction by the Company of the Executive’s Base Salary in effect on the Effective Date hereof, or as the same shall be increased from time to time;

(iv)The failure of the Company to continue in effect any of the Company’s short- and long-term incentive compensation plans, or employee benefit or retirement plans, policies, practices, or other compensation arrangements in which the Executive participates unless such failure to continue the plan, policy, practice, or arrangement pertains to all plan participants generally; or the failure by the Company to continue the Executive’s participation therein on substantially the same basis, both in terms of the amount of benefits provided and the level of the Executive’s participation relative to other participants, as existed immediately prior to the Change in Control of the Company;

(v)The failure of the Company to obtain a satisfactory agreement from any successor to the Company to assume and agree to perform the Company’s obligations under this Agreement, as contemplated in Article 9 herein; and

(vi)A material breach of this Agreement by the Company which is not remedied by the Company within ten (10) business days of receipt of written notice of such breach delivered by the Executive to the Company.

Unless the Executive becomes Disabled, the Executive’s right to terminate employment for Good Reason shall not be affected by the Executive’s incapacity due to physical or mental illness. The Executive’s continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason herein.

(o)“Notice of Termination” shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon, and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provision so indicated.

(p)“Person” shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a “group” as defined in Section 13(d).

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(q)“Qualifying Termination” means any of the events described in Section 2.2 herein, the occurrence of which triggers the payment of Severance Benefits hereunder.

(r)“Severance Benefits” mean the payment of severance compensation as provided in Section 2.3 herein.

Article 2. Severance Benefits

2.1Right to Severance Benefits. The Executive shall be entitled to receive from the Company Severance Benefits as described in Section 2.3 herein, if there has been a Change in Control of the Company and if, within twenty-four (24) calendar months thereafter, the Executive’s employment with the Company shall end for any reason specified in Section 2.2 herein as being a Qualifying Termination.

The Executive shall not be entitled to receive Severance Benefits if he is terminated for Cause, or if his employment with the Company ends due to death, Disability, voluntary normal retirement (as defined under the then established rules of the Company’s tax-qualified retirement plan), or due to a voluntary termination of employment for reasons other than as specified in Section 2.2(b) herein.

No Executive shall be entitled to receive duplicative severance benefits under any other Company-related plans or programs if benefits are triggered hereunder.

2.2Qualifying Termination. The occurrence of any one of the following events within twenty-four (24) calendar months after a Change in Control of the Company shall trigger the payment of Severance Benefits to the Executive under this Agreement:

(a)The Company’s involuntary termination of the Executive’s employment without Cause; and

(b)The Executive’s voluntary employment termination for Good Reason.

For purposes of this Agreement, a Qualifying Termination shall not include a termination of employment by reason of death, Disability, or voluntary normal retirement (as such term is defined under the then established rules of the Company’s tax-qualified retirement plan), the Executive’s voluntary termination for reasons other than as specified in Section 2.2(b) herein, or the Company’s involuntary termination for Cause.

2.3Description of Severance Benefits. In the event the Executive becomes entitled to receive Severance Benefits, as provided in Sections 2.1 and 2.2 herein, the Company shall pay to the Executive and provide him with the following Severance Benefits:

(a)A lump-sum amount equal to the Executive’s unpaid Base Salary, accrued vacation pay, unreimbursed business expenses, and all other items earned by and owed to the Executive through and including the Effective Date of Termination.

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(b)A lump-sum amount equal to the Executive’s annual bonus award earned as of the Effective Date of Termination, based on actual year-to-date performance, as determined at the Committee’s discretion (excluding any special bonus payments). This payment will be in lieu of any other payment to be made to the Executive under the annual bonus plan in which the Executive is then participating for the plan year.

(c)A lump-sum amount equal to one and one-half (1.5) multiplied by the sum of the following: (i) the higher of: (A) the Executive’s annual rate of Base Salary in effect upon the Effective Date of Termination, or (B) the Executive’s annual rate of Base Salary in effect on the date of the Change in Control; and (ii) the average of the actual annual bonus earned (whether or not deferred) by the Executive under the annual bonus plan (excluding any special bonus payments) in which the Executive participated in the three (3) years preceding the year in which the Executive’s Effective Date of Termination occurs. If the Executive has less than three (3) years of annual bonus participation preceding the year in which the Executive’s Effective Date of Termination occurs, then the Executive’s annual target bonus established under the annual bonus plan in which the Executive is then participating for the bonus plan year in which the Executive’s Effective Date of Termination occurs shall be used for each year that the Executive did not participate in the annual bonus plan, up to a maximum of three (3) years, to calculate the three (3) year average bonus payment.

(d)A lump-sum amount equal to one-half (.5) multiplied by the sum of the following: (i) the higher of: (A) the Executive’s annual rate of Base Salary in effect upon the Effective Date of Termination, or (B) the Executive’s annual rate of Base Salary in effect on the date of the Change in Control; and (ii) the average of the actual annual bonus earned (whether or not deferred) by the Executive under the annual bonus plan (excluding any special bonus payments) in which the Executive participated in the three (3) years preceding the year in which the Executive’s Effective Date of Termination occurs. If the Executive has less than three (3) years of annual bonus participation preceding the year in which the Executive’s Effective Date of Termination occurs, then the Executive’s annual target bonus established under the annual bonus plan in which the Executive is then participating for the bonus plan year in which the Executive’s Effective Date of Termination occurs shall be used for each year that the Executive did not participate in the annual bonus plan, up to a maximum of three (3) years, to calculate the three (3) year average bonus payment. Such amount shall be in consideration for the Executive entering into a noncompete agreement as described in Article 4 herein.

(e)Upon a Qualifying Termination, vesting and cash-out of any and all outstanding cash-based long-term incentive awards held by the Executive, as granted to the Executive by the Company as a component of the Executive’s compensation. The cash-out shall be in a lump-sum amount equal to the target award level established for each award, multiplied by a fraction the numerator of which is the full number of completed days in the preestablished performance period as of the Effective

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Date of termination, and the denominator of which is the full number of days in the entire performance period (i.e., typically thirty-six (36) months). This payment will be in lieu of any other payment to be made to the Executive under these long-term performance-based award plans.

(f)Upon the occurrence of a change in control, an immediate full vesting and lapse of all restrictions on any and all outstanding equity-based long-term incentives, including but not limited to stock options and restricted stock awards held by the Executive. This provision shall override any conflicting language contained in the Executive’s respective Award Agreements.

(g)Retirement benefits under the Walter Industries, Inc. Profit Sharing Plan will become immediately fully vested, to the extent not already fully vested, upon a Qualifying Termination.

(h)Continuation for twenty-four (24) months of the Executive’s medical insurance and life insurance coverage. These benefits shall be provided by the Company to the Executive beginning immediately upon the Effective Date of Termination. Such benefits shall be provided to the Executive at the same coverage level and cost to the Executive as in effect immediately prior to the Executive’s Effective Date of Termination.

The Executive shall qualify for full COBRA health benefit continuation coverage beginning upon the expiration of the aforementioned twenty-four (24) month period.

Notwithstanding the above, these medical and life insurance benefits shall be discontinued prior to the end of the stated continuation period in the event the Executive receives substantially similar benefits from a subsequent employer, as determined solely by the Committee in good faith. For purposes of enforcing this offset provision, the Executive shall be deemed to have a duty to keep the Company informed as to the terms and conditions of any subsequent employment and the corresponding benefits earned from such employment, and shall provide, or cause to provide, to the Company in writing correct, complete, and timely information concerning the same.

(i)For a period of up to twenty-four (24) months following a Qualifying Termination, the Executive shall be entitled, at the expense of the Company, to receive standard outplacement services from a nationally recognized outplacement firm of the Executive’s selection. However, the Company’s total obligation shall not exceed thirty-five percent (35%) of the Executive’s final annual rate of Base Salary with the Company, and such Company obligation shall end prior to the end of the twenty-four (24) month period upon the Executive becoming employed by a subsequent employer.

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2.4Termination for Total and Permanent Disability. Following a Change in Control, if the Executive’s employment is terminated with the Company due to Disability, the Executive’s benefits shall be determined in accordance with the Company’s retirement, insurance, and other applicable plans and programs then in effect.

2.5Termination for Retirement or Death. Following a Change in Control, if the Executive’s employment with the Company is terminated by reason of his voluntary normal retirement (as defined under the then established rules of the Company’s tax-qualified retirement plan), or death, the Executive’s benefits shall be determined in accordance with the Company’s retirement, survivor’s benefits, insurance, and other applicable programs then in effect.

2.6Termination for Cause or by the Executive Other Than for Good Reason. Following a Change in Control, if the Executive’s employment is terminated either: (i) by the Company for Cause; or (ii) voluntarily by the Executive for reasons other than as specified in Section 2.2(b) herein, the Company shall pay the Executive his full Base Salary at the rate then in effect, accrued vacation, and other items earned by and owed to the Executive through the Effective Date of Termination, plus all other amounts to which the Executive is entitled under any compensation plans of the Company at the time such payments are due, and the Company shall have no further obligations to the Executive under this Agreement.

2.7Notice of Termination. Any termination of the Executive’s employment by the Company for Cause or by the Executive for Good Reason shall be communicated by Notice of Termination to the other party.

Article 3. Form and Timing of Severance Benefits

3.1Form and Timing of Severance Benefits. The Severance Benefits described in Sections 2.3(a), 2.3(b), 2.3(c), and 2.3(d) herein shall be paid in cash to the Executive in a single lump sum as soon as practicable following the Effective Date of Termination, but in no event beyond ten (10) calendar days from such date.

3.2Withholding of Taxes. The Company shall withhold from any amounts payable under this Agreement all federal, state, city, or other taxes as legally shall be required.

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Article 4. Noncompetition and Confidentiality

In the event the Executive becomes entitled to receive Severance Benefits as provided in Section 2.3 herein, the following shall apply:

(a)Noncompetition. During the term of employment and for a period of twelve (12) months after the Effective Date of Termination, the Executive shall not: (i) directly or indirectly act in concert or conspire with any person employed by the Company in order to engage in or prepare to engage in or to have a financial or other interest in any business or any activity which he knows (or reasonably should have known) to be directly competitive with the business of the Company as then being carried on; or (ii) serve as an employee, agent, partner, shareholder, director or consultant for, or in any other capacity participate, engage, or have a financial or other interest in any business or any activity which he knows (or reasonably should have known) to be directly competitive with the business of the Company as then being carried on (provided, however, that notwithstanding anything to the contrary contained in this Agreement, the Executive may own up to two percent (2%) of the outstanding shares of the capital stock of a company whose securities are registered under Section 12 of the Securities Exchange Act of 1934).

(b)Confidentiality. The Company has advised the Executive and the Executive acknowledges that it is the policy of the Company to maintain as secret and confidential all Protected Information (as defined below), and that Protected Information has been and will be developed at substantial cost and effort to the Company. All Protected Information shall remain confidential permanently and no Executive shall at any time, directly or indirectly, divulge, furnish, or make accessible to any person, firm, corporation, association, or other entity (otherwise than as may be required in the regular course of the Executive’s employment with the Company), nor use in any manner, either during the term of employment or after termination, at any time, for any reason, any Protected Information, or cause any such information of the Company to enter the public domain.

For purposes of this Agreement, “Protected Information” means trade secrets, confidential and proprietary business information of the Company, and any other information of the Company, including, but not limited to, customer lists (including potential customers), sources of supply, processes, plans, materials, pricing information, internal memoranda, marketing plans, internal policies, and products and services which may be developed from time to time by the Company and its agents or employees, including the Executive; provided, however, that information that is in the public domain (other than as a result of a breach of this Agreement), approved for release by the Company or lawfully obtained from third parties who are not bound by a confidentiality agreement with the Company, is not Protected Information.

(c)Nonsolicitation. During the term of employment and for a period of twelve (12) months after the Effective Date of Termination, the Executive shall not employ or retain or solicit for employment or arrange to have any other person, firm, or other entity employ or retain or solicit for employment or otherwise participate in the employment or retention of any person who is an employee or consultant of the Company.

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(d)Cooperation. Executive agrees to cooperate with the Company and its attorneys in connection with any and all lawsuits, claims, investigations, or similar proceedings that have been or could be asserted at any time arising out of or related in any way to Executive’s employment by the Company or any of its subsidiaries.

(e)Nondisparagement. At all times, the Executive agrees not to disparage the Company or otherwise make comments harmful to the Company’s reputation.

Article 5. Excise Tax Equalization Payment

5.1Excise Tax Equalization Payment. If any portion of the Severance Benefits or any other payment under this Agreement, or under any other agreement with, or plan of the Company (in the aggregate, “Total Payments”) would constitute an “excess parachute payment,” such that a golden parachute excise tax is due, the Company shall provide to the Executive, in cash, an additional payment in an amount sufficient to cover the full cost of any excise tax and all of the Executive’s additional federal, state, and local income, excise, and employment taxes that arise on this additional payment (cumulatively, the “Full Gross-Up Payment”), such that the Executive is in the same after-tax position as if he had not been subject to the excise tax. For this purpose, the Executive shall be deemed to be in the highest marginal rate of federal, state, and local income taxes in the state and locality of the Executive’s residence on the Effective Date of Termination. This payment shall be made as soon as possible following the date of the Executive’s Qualifying Termination, but in no event later than ten (10) calendar days from such date.

For purposes of this Agreement, the term “excess parachute payment” shall have the meaning assigned to such term in Section 280G of the Internal Revenue Code, as amended (the “Code”), and the term “excise tax” shall mean the tax imposed on such excess parachute payment pursuant to Sections 280G and 4999 of the Code.

5.2Subsequent Recalculation. In the event the Internal Revenue Service subsequently adjusts the excise tax computation herein described, the Company shall reimburse the Executive for the full amount necessary to make the Executive whole on an after-tax basis (less any amounts received by the Executive that the Executive would not have received had the computations initially been computed as subsequently adjusted), including the value of any underpaid excise tax, and any related interest and/or penalties due to the Internal Revenue Service.

Article 6. The Company’s Payment Obligation

6.1Payment Obligations Absolute. The Company’s obligation to make the payments and the arrangements provided for herein shall be absolute and unconditional, and shall not be affected by any circumstances including, without limitation, any offset, counterclaim, recoupment, defense, or other right which the Company may have against the Executive or anyone else. All amounts payable by the Company hereunder shall be paid without notice or demand. Each and every payment made hereunder by the Company shall be final, and the Company shall not seek to recover all or any part of such payment from the Executive or from whomsoever may be entitled thereto, for any reasons whatsoever.

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The Executive shall not be obligated to seek other employment in mitigation of the amounts payable or arrangements made under any provision of this Agreement, and the obtaining of any such other employment shall in no event effect any reduction of the Company’s obligations to make the payments and arrangements required to be made under this Agreement, except to the extent provided in Sections 2.3(g) and 2.3(h) herein.

6.2Contractual Rights to Benefits. This Agreement establishes and vests in the Executive a contractual right to the benefits to which he is entitled hereunder. However, nothing herein contained shall require or be deemed to require, or prohibit or be deemed to prohibit, the Company to segregate, earmark, or otherwise set aside any funds or other assets, in trust or otherwise, to provide for any payments to be made or required hereunder.

Article 7. Term of Agreement

This Agreement will commence on the Effective Date and shall continue in effect for two (2) full years. However, at the end of such two (2) year period and, if extended, at the end of each additional year thereafter, the term of this Agreement shall be extended automatically for one (1) additional year, unless either party delivers written notice six (6) months prior to the end of such term, or extended term, stating that the Agreement will not be extended. In such case, the Agreement will terminate at the end of the term, or extended term, then in progress.

However, in the event of a Change in Control of the Company, the term of this Agreement shall automatically be extended for two (2) years from the date of the Change in Control.

Article 8. Legal Remedies

8.1Dispute Resolution. The Executive shall have the right and option to elect to have any good faith dispute or controversy arising under or in connection with this Agreement settled by litigation or arbitration. If arbitration is selected, such proceeding shall be conducted by final and binding arbitration before a panel of three (3) arbitrators in accordance with the laws then in effect and under the administration of the American Arbitration Association.

8.2Payment of Legal Fees. In the event that it shall be necessary or desirable for the Executive to retain legal counsel and/or to incur other costs and expenses in connection with the enforcement of any or all of his rights under this Agreement, the Company shall pay (or the Executive shall be entitled to recover from the Company) the Executive’s attorneys’ fees, costs, and expenses in connection with the enforcement of his rights including the enforcement of any arbitration award. This shall include, without limitation, court costs and attorneys’ fees incurred by the Executive as a result of any claim, action, or proceeding, including any such action against the Company arising out of, or challenging the validity or enforceability of, this Agreement or any provision hereof.

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Article 9. Successors

9.1Successors to the Company. The Company shall require any successor (whether direct or indirect, by purchase, merger, reorganization, consolidation, acquisition of property or stock, liquidation, or otherwise) of all or a significant portion of the assets of the Company by agreement, in form and substance satisfactory to the Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. Regardless of whether such agreement is executed, this Agreement shall be binding upon any successor in accordance with the operation of law and such successor shall be deemed the “Company” for purposes of this Agreement.

9.2Assignment by the Executive. This Agreement shall inure to the benefit of and be enforceable by the Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees, and legatees. If the Executive dies while any amount would still be payable to him hereunder had he continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive’s devisee, legatee, or other designee, or if there is no such designee, to the Executive’s estate.

Article 10. Miscellaneous

10.1Employment Status. This Agreement is not, and nothing herein shall be deemed to create, an employment contract between the Executive and the Company or any of its subsidiaries. The Executive acknowledges that the rights of the Company remain wholly intact to change or reduce at any time and from time to time his compensation, title, responsibilities, location, and all other aspects of the employment relationship, or to discharge him prior to a Change in Control (subject to such discharge possibly being considered a Qualifying Termination pursuant to Section 2.2).

10.2Entire Agreement. This Agreement contains the entire understanding of the Company and the Executive with respect to the subject matter hereof. In addition, the payments provided for under this Agreement in the event of the Executive’s termination of employment shall be in lieu of any severance benefits payable under any severance plan, program, or policy of the Company to which he might otherwise be entitled.

10.3Notices. All notices, requests, demands, and other communications hereunder shall be sufficient if in writing and shall be deemed to have been duly given if delivered by hand or if sent by registered or certified mail to the Executive at the last address he has filed in writing with the Company or, in the case of the Company, at its principal offices.

10.4Execution in Counterparts. This Agreement may be executed by the parties hereto in counterparts, each of which shall be deemed to be original, but all such counterparts shall constitute one and the same instrument, and all signatures need not appear on any one counterpart.

10.5Conflicting Agreements. The Executive hereby represents and warrants to the Company that his entering into this Agreement, and the obligations and duties undertaken by him hereunder, will not conflict with, constitute a breach of, or otherwise violate the terms of, any other employment or other agreement to which he is a party, except to the extent any such conflict, breach, or violation under any such agreement has been disclosed to the Board in writing in advance of the signing of this Agreement.

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Notwithstanding any other provisions of this Agreement to the contrary, if there is any inconsistency between the terms and provisions of this Agreement and the terms and provisions of Company-sponsored compensation and welfare plans and programs, the Agreement’s terms and provisions shall completely supersede and replace the conflicting terms of the Company-sponsored compensation and welfare plans and programs, where applicable.

10.6Severability. In the event any provision of this Agreement shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Agreement, and the Agreement shall be construed and enforced as if the illegal or invalid provision had not been included. Further, the captions of this Agreement are not part of the provisions hereof and shall have no force and effect.

Notwithstanding any other provisions of this Agreement to the contrary, the Company shall have no obligation to make any payment to the Executive hereunder to the extent, but only to the extent, that such payment is prohibited by the terms of any final order of a federal or state court or regulatory agency of competent jurisdiction; provided, however, that such an order shall not affect, impair, or invalidate any provision of this Agreement not expressly subject to such order.

10.7Modification. No provision of this Agreement may be modified, waived, or discharged unless such modification, waiver, or discharge is agreed to in writing and signed by the Executive and by a member of the Board, as applicable, or by the respective parties’ legal representatives or successors.

10.8Applicable Law. To the extent not preempted by the laws of the United States, the laws of Delaware shall be the controlling law in all matters relating to this Agreement without giving effect to principles of conflicts of laws.

IN WITNESS WHEREOF, the parties have executed this Agreement on this                           day of                           , 2004.

ATTEST

Walter Industries, Inc.

By:

Title:

Executive

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EX-10.3

Exhibit 10.3

WALTER INDUSTRIES
EXECUTIVE DEFERRED COMPENSATION
AND
SUPPLEMENTAL RETIREMENT PLAN

AMENDED & RESTATED
AS OF
JANUARY 1, 2005

WARD ROVELL

TAMPA, FL

WALTER INDUSTRIES
EXECUTIVE DEFERRED COMPENSATION
AND
SUPPLEMENTAL RETIREMENT PLAN

Table of Contents

Article	Title
ARTICLE I	Definitions
ARTICLE II	Administration
ARTICLE III	Eligibility and Participation
ARTICLE IV	Deferral Elections and Supplemental Retirement Contributions
ARTICLE V	Participant Accounts and Investment of Deferred Amounts
ARTICLE VI	Plan Distributions
ARTICLE VII	Amendment and Termination
ARTICLE VIII	Miscellaneous

WALTER INDUSTRIES
EXECUTIVE DEFERRED COMPENSATION
AND
SUPPLEMENTAL RETIREMENT PLAN

PURPOSE

Walter Industries, Inc. (the “Company”) previously established the Walter Industries Executive Deferred Compensation Plan (the “Plan”) and the Walter Industries, Inc. Supplemental Profit Sharing Plan (the “Supplemental Plan”) for a select group of key management and highly compensated personnel to ensure that the Company’s and its Related Employer’s compensation program will attract, retain and motivate qualified personnel.  The Plan is hereby amended and restated effective as of January 1, 2005 to provide for the merger of the Supplemental Plan into the Plan and to rename the Plan the “Walter Industries Executive Deferred Compensation and Supplemental Retirement Plan”.  The purpose of this Plan is to provide certain key management and highly compensated employees who contribute or who are expected to contribute substantially to the success of the Company and its Related Employers with the opportunity to defer the receipt of compensation and to permit certain employees of the Company and its Related Employers who participate in the Walter Industries, Inc. Retirement Savings Plan to receive contributions equal to amounts in excess of the limitations on contributions imposed by Section 415 and 401(a)(17) of the Code, on defined contribution plans.  The Plan is intended to be an unfunded plan.

ARTICLE I

Definitions

(a)“Account” or “Accounts” shall mean a Participant’s Deferred Compensation Account, and/or Supplemental Retirement Account as described in Article V.  These Accounts are bookkeeping accounts that represent a Participant’s hypothetical interest with respect to the amounts credited to such Accounts in accordance with Article V.

(b)“Board” or “Board of Directors” shall mean the board of directors of the Company.

(c)“Code” shall mean the Internal Revenue Code of 1986, as amended.

(d)“Company” shall mean Walter Industries, Inc. and its successors.

(e)“Compensation” shall mean the same as “Compensation” under the Qualified Plan.

(f)“Deferred Compensation Account” shall mean the Account established pursuant to Article V, Section (a)(1), to hold Participant deferrals under the Plan.

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(g)“Effective Date” shall mean, for purposes of this amendment and restatement, January 1, 2005.  The Plan was originally effective January 1, 2002.  The Walter Industries, Inc. Supplemental Profit Sharing Plan was originally effective June 16, 1983.

(h)“Key Employee” shall mean an employee as defined in Section 416(i) of the Code, without regard to paragraph (5) thereof.

(i)“Participant” shall mean any employee of the Company or a Related Employer who is covered by this Plan as provided in Article III.

(j)“Plan” shall mean the Walter Industries Executive Deferred Compensation and Supplemental Retirement Plan hereby amended and restated and as it may be further amended from time to time.

(k)“Plan Administrator” shall mean the Retirement Plans Administrative Committee that has been appointed from time to time by the Board of Directors of the Company to serve as the Plan Administrator for the Plan.

(l)“Plan Year” shall mean the 12-month period ending on December 31.

(m)“Qualified Plan” shall mean the Walter Industries, Inc. Retirement Savings Plan, as amended, and each predecessor, successor or replacement profit sharing arrangement.

(n)“Qualified Plan Contribution” shall mean the total of all profit sharing contributions and/or matching contributions made by the Company or a Related Employer for the benefit of a Participant as well as any forfeitures allocated to a Participant’s Account under and in accordance with the terms of the Qualified Plan in any Plan Year.

(o)“Related Employer” shall mean any affiliate of the Company who adopts the Plan with the consent of the Company.

(p)“Supplemental Retirement Account” shall mean the Account established pursuant to Article V, Section (a)(2) to hold Supplemental Retirement Contributions.

(q)“Supplemental Retirement Contribution” shall mean the contribution made by the Company or a Related Employer for the benefit of a Participant under and in accordance with the terms of the Plan in any Plan Year.

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ARTICLE II

Administration

(a)Plan Administrator.  The Plan Administrator shall have complete control and discretion to manage the operation and administration of the Plan.  Not in limitation, but in amplification of the foregoing, the Plan Administrator shall have the following powers:

(1)To determine all questions relating to the eligibility of employees to participate or continue to participate;

(2)To maintain all records and books of account necessary for the administration of the Plan;

(3)To interpret the provisions of the Plan and to make and to publish such interpretive or procedural rules as are not inconsistent with the Plan and applicable law;

(4)To compute, certify and arrange for the payment of benefits to which any Participant or beneficiary is entitled;

(5)To process claims for benefits under the Plan by Participants or beneficiaries;

(6)To engage consultants and professionals to assist the Plan Administrator in carrying out its duties under this Plan; and

(7)To develop and maintain such instruments as may be deemed necessary from time to time by the Plan Administrator to facilitate payment of benefits under the Plan.

(b)Plan Administrator’s Authority.  The Plan Administrator may consult with Company officers, legal and financial advisers to the Company and others, but nevertheless the Plan Administrator shall have the full authority and discretion to act, and the Plan Administrator’s actions shall be final and conclusive on all parties.

(c)Claims and Appeal Procedure for Denial of Benefits.

(1)A Participant or a beneficiary (“Claimant”) may file with the Plan Administrator a written claim for benefits if the Participant or beneficiary determines the distribution procedures of the Plan have not provided him his proper interest in the Plan.  The Plan Administrator must render a decision on the claim within a reasonable period of time of the Claimant’s written claim for benefits.  The Plan Administrator must provide adequate notice in writing to the Claimant whose claim for benefits under the Plan the Plan Administrator has denied.  The Plan Administrator’s notice to the Claimant must set forth:

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(A)The specific reason for the denial;

(B)Specific references to pertinent Plan provisions on which the Plan Administrator based its denial;

(C)A description of any additional material and information needed for the Claimant to perfect his claim and an explanation of why the material or information is needed; and

(D)That any appeal the Claimant wishes to make of the adverse determination must be made in writing to the Plan Administrator within sixty (60) days after receipt of the Plan Administrator’s notice of denial of benefits.  The Plan Administrator’s notice must further advise the Claimant that his failure to appeal the action to the Plan Administrator in writing will render the Plan Administrator’s determination final, binding and conclusive.  The Plan Administrator’s notice of denial of benefits must identify the name and address of the Plan Administrator to whom the Claimant may forward his appeal.

(2)If the Claimant should appeal to the Plan Administrator, he, or his duly authorized representative, must submit, in writing, whatever issues and comments he, or his duly authorized representative, believes are pertinent.  The Claimant, or his duly authorized representative, may review pertinent Plan documents.  The Plan Administrator will re-examine all facts related to the appeal and make a final determination as to whether the denial of benefits is justified under the circumstances.  The Plan Administrator must advise the Claimant of its decision within a reasonable period of time of the Claimant’s written request for review.

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ARTICLE III

Eligibility and Participation

(a)Eligibility.  The Plan Administrator, in its sole discretion, shall determine those employees of the Company or a Related Employer eligible to participate in the Plan.  Accordingly, an employee of the Company or a Related Employer who, in the opinion of the Plan Administrator based upon its then current guidelines, has contributed or is expected to contribute significantly to the growth and successful operations of the Company or a Related Employer and who meets any additional criteria for eligibility that the Plan Administrator, in its sole discretion, may adopt from time to time, will be eligible to become a Participant with respect to deferrals in accordance with Article IV, Section (a).  Only those employees of the Company or Related Employer determined to be eligible for the Plan by the Plan Administrator who participate in the Qualified Plan and who are restricted by the limitations on contributions imposed by Code Sections 415 and 401(a)(17) shall be eligible to participate in the Plan for purposes of receiving Supplemental Retirement Contributions, if any.

(b)Participation.  An eligible employee shall become a Participant upon being notified by the Company.

III-1

ARTICLE IV

Deferral Elections and Supplemental Retirement Contributions

(a)Deferral Procedures.

(1)Any Participant may elect to defer for any calendar year all or any portion of his base salary and/or cash bonus payable during such calendar year as may be permitted by the Plan Administrator in its discretion; provided, however, that the minimum annual deferral amount from a Participant’s base salary shall be $2,000.

(2)Any deferral election under this paragraph (a) shall be in writing, signed by the Participant, and delivered to the Plan Administrator prior to January 1 of the calendar year in which the compensation to be deferred is otherwise payable to the Participant; provided, however, that within the 30-day period following a Participant’s eligibility to participate in the Plan, he shall be permitted to defer compensation payable subsequent to his deferral election.

(3)A Participant’s deferral election shall remain in effect until modified or revoked.  Except as provided in subparagraph (4) below, any modification or revocation will not be effective until the January 1 next following the date the modification or revocation is received by the Plan Administrator.

(4)(A)If a Participant suffers an unforeseeable emergency (as defined in paragraph (e) of Article VI), determined in the discretion of the Plan Administrator, the Participant will be permitted to revoke his deferral election for the remainder of the calendar year in which it is determined by the Plan Administrator that the unforeseeable emergency has occurred.

(B)A Participant who revokes his deferral election pursuant to this subparagraph (4) shall be eligible to make a new deferral election pursuant to the provisions of paragraph (a)(2) above effective as of the January 1 that next follows the effective date of the revocation of his deferral election under paragraph (a)(4)(A) above.

(b)Election Forms.  Any election by a Participant under this Article IV shall be made on a form or forms prescribed by the Plan Administrator (the terms of which are incorporated herein by reference), and shall specify the amount of compensation to be deferred.

(c)Revocation or Change.  Any permitted revocation of or change in any deferral election under this Article IV shall be in writing and shall be on such form as may be approved by the Plan Administrator.

IV-1

(d)Supplemental Retirement Contributions.

(1)For any Plan Year, the Company or a Related Employer may, in its discretion, credit a Participant with a Supplemental Retirement Contribution in an amount equal to the difference between (1) and (2) below:

(A)The Qualified Plan Contribution which would have been contributed to the Qualified Plan on behalf of the Participant for the Plan Year without giving effect to any reduction in the Qualified Plan Contribution required by the limitations imposed by Code Sections 415 or 401(a)(17) on the Qualified Plan;

LESS

(B)The amount of the Qualified Plan Contribution actually contributed to the Qualified Plan on behalf of the Participant for the Plan Year.

(2)Supplemental Retirement Contributions made for the benefit of a Participant for any Plan Year shall be credited to a Supplemental Retirement Contribution Account maintained under the Plan in the name of such Participant within thirty (30) days after the profit sharing contribution under the Qualified Plan is allocated to the Participant’s accounts in the Qualified Plan.

IV-2

ARTICLE V

Participant Accounts and Investment of Deferred Amounts

(a)In General.

(1)Any compensation deferred pursuant to Section (a) of Article IV of this Plan shall be recorded by the Plan Administrator in a Deferred Compensation Account maintained in the name of the Participant.  The Deferred Compensation Account shall be credited with all amounts that have been deferred by the Participant during the Plan Year pursuant to Article IV, Section (a), and such Account shall be charged from time to time with amounts that are distributed to the Participant from such Account.

(2)Any Supplemental Retirement Contributions credited pursuant to this Plan shall be recorded by the Plan Administrator in a Supplemental Retirement Account maintained in the name of the Participant.  The Supplemental Retirement Account shall be credited with all Supplemental Retirement Contributions that have been credited to the Participant during the Plan Year pursuant to Article IV, and such Account shall be charged from time to time with all amounts that are distributed to the Participant from such Account.

(3)All amounts that are credited to a Participant’s Accounts shall be credited solely for purposes of accounting and computation.  A Participant shall not have any interest in or right to such Accounts at any time.

(b)Subject to Claims.  The Plan constitutes an unsecured promise by the Company or Related Employer to pay benefits in the future.  Participants shall have the status of general unsecured creditors of the Company or Related Employer.  The Plan is unfunded for Federal tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974.  All amounts credited to a Participant’s Accounts will remain the general assets of the Company or Related Employer and shall remain subject to the claims of the Company’s or Related Employer’s creditors until such amounts are distributed to the Participants.

(c)Crediting of Interest.

(1)The Plan Administrator shall allow a Participant to make a hypothetical allocation of the amounts credited to his Accounts among investment options/indices that the Plan Administrator shall make available from time to time.  The Plan Administrator shall establish procedures regarding Participant investment allocations as are necessary, which procedures shall be communicated to the Participants.

(2)A Participant’s Accounts shall be credited at least monthly with interest equal to the aggregate/weighted average return on the investment options/indices selected by the Participant, less expenses.

V-1

(d)Valuation; Annual Statement.  The value of a Participant’s Accounts shall be determined by the Plan Administrator and the Plan Administrator may establish such accounting procedures as are necessary to account for the Participant’s interest in the Plan.  Each Participant’s Account shall be valued as of the last day of each Plan Year or more frequently as determined by the Plan Administrator.  The Plan Administrator shall furnish each Participant with an annual statement of his Accounts.

(e)Accounting Procedures.  The Plan Administrator shall establish such accounting procedures as are necessary to implement the provisions of the Plan.

(f)Establishment of Trust.

(1)The Company may establish one or more trusts located in the United States substantially in conformance with the terms of the model trust described in Revenue Procedure 92-64 to assist in meeting its obligations to Participants under this Plan.  Except as provided in paragraph (b) above and the terms of the trust agreement, any such trust or trusts shall be established in such manner as to permit the use of assets transferred to the trust and the earnings thereon to be used by the trustee solely to satisfy the liability of the Company in accordance with the Plan.

(2)The Company, in its sole discretion, and from time to time, may make contributions to the trust.  Unless otherwise paid by the Company, all benefits under the Plan and expenses chargeable to the Plan shall be paid from the trust.

(3)The powers, duties and responsibilities of the trustee shall be as set forth in the trust agreement and nothing contained in the Plan, either expressly or by implication, shall impose any additional powers, duties or responsibilities upon the trustee.

V-2

ARTICLE VI

Plan Distributions

(a)Timing of Payment.  In the case of a Participant who terminates employment for any reason and is no longer employed by the Company, a Related Employer or any member of the Company’s or Related Employer’s controlled group, payment of the amounts credited to a Participant’s Accounts shall commence, in the form described in paragraph (c) below, as soon as administratively practicable following the date of termination.  Notwithstanding the foregoing, Participants who are Key Employees of the Company or a publicly traded Related Employer cannot commence distribution until six months following termination of employment, or if earlier, upon death.

(b)Vesting of Amounts Credited to Participants.  A Participant shall be fully vested in all of his Accounts at all times.

(c)Form of Benefit Payment.

(1)A Participant shall elect one of the following forms of payment for his benefit (other than the death benefit) upon commencing participation in the Plan:

(A)a lump sum, or

(B)annual installments over a period of 5, 10 or 15 years.

(2)In the event a Participant elects installment payments, each such payment shall be equal to the balance in the Participant’s Account as of the end of the valuation date immediately preceding the date of payment, divided by the number of payment years remaining (the “Factor”).  For example:

5 Year Installment		10 Year Installment		15 Year Installment
Payment	Factor	Payment	Factor	Payment	Factor
1	5	1	10	1	15
2	4	2	9	2	14
3	3	3	8	3	13
4	2	4	7	4	12
5	1	5	6	5	11
		6	5	6	10
		7	4	7	9
		8	3	8	8
		9	2	9	7
		10	1	10	6
				11	5
				12	4
				13	3
				14	2
				15	1

VI-1

(3)At least 13 months prior to the distribution of benefits, the Participant may, subject to the approval of the Plan Administrator, modify his election as to the form of benefit payment.

(4)(A)(i)Notwithstanding the foregoing, at the time of each election to defer under paragraph (a) of Article IV, a Participant may elect to receive a distribution of such deferred amounts (plus earnings or losses thereon) in a lump sum as of a specified future calendar year date.  The date of distribution elected by the Participant shall be at least five full calendar years following the Participant’s deferral election under this subparagraph.

(ii)Any distribution pursuant to this subparagraph shall be made as of January 1 of the calendar year selected by the Participant for the receipt of his distribution.

(iii)A Participant may modify each election made pursuant to this subparagraph (4) to provide for a later calendar year distribution date; provided, however, that only one such modification per election may be made.  Such modification must be made at least 13 months prior to the original specified calendar year date of distribution and such modified date must be at least five full calendar years following the Participant’s original payment date.

(B)If the Participant terminates employment with the Company prior to the distribution date or dates elected in accordance with subparagraph (4)(A) above, then any such election or elections under subparagraph (4)(A) shall be null and void and the Participant’s benefit shall be distributed in accordance with the otherwise applicable provisions of the Plan.

(5)Notwithstanding subparagraph (2) above, if the value of the Participant’s Account is less than $5,000 as of the valuation date coincident with or immediately preceding the date the distribution of such Account is to commence, the amount credited to the Participant’s Account shall be paid in the form of a lump sum.

(d)Payment to Beneficiary.

(1)If the Participant dies before he has commenced receiving benefits under the Plan, the death benefit shall be paid to his beneficiary or beneficiaries designated to receive such benefits in a lump sum.

(2)If a Participant dies after benefits have commenced, but before he has received all of his benefits under the Plan, all unpaid amounts shall be paid to his beneficiary or beneficiaries in a lump sum.

VI-2

(3)A designation of beneficiaries shall be made on a form prescribed by and filed with the Plan Administrator, and may be changed at any time by filing a new form with the Plan Administrator.  If the Participant has designated no beneficiary, or if no beneficiary that he has designated survives him, then such unpaid amounts shall be paid to his estate.  In the event of any dispute as to the entitlement of any beneficiary, the Plan Administrator’s determination shall be final, and the Plan Administrator may withhold any payment until such dispute has been resolved.

(e)Accelerated Distribution for Unforeseeable Emergency.

(1)If a Participant suffers an unforeseeable emergency, the Plan Administrator may, in its discretion, accelerate the distribution of all or a portion of the amounts credited to his Accounts.  Any such accelerated distribution shall be made in a lump sum as soon as administratively practicable following a determination that the Participant has incurred an unforeseeable emergency.  The amount of any such distribution shall be limited to the amount necessary to satisfy the emergency need, including any amounts necessary to pay any federal, state or local income taxes reasonably anticipated to result from the distribution.

(2)For this purpose, the term “unforeseeable emergency” shall mean a severe financial hardship to the Participant resulting from the Participant’s illness or accident or that of the Participant’s spouse and dependents as defined in Code Section 152(a), an extraordinary and unforeseeable loss of the Participant’s property due to casualty as a result of events beyond the Participant’s control, or other similar extraordinary and unforeseeable events beyond the control of the Participant, which events cannot reasonably be relieved by reimbursement (by insurance or otherwise), liquidation of the Participant’s assets (to the extent the liquidation would not in itself cause a financial hardship) or cessation of deferrals under the Plan.

(f)Change of Control.

(1)If at any time there is a Change of Control (as described below), the trustee shall promptly pay to a Participant the balance of his Account in a lump sum.

(2)For purposes of this Plan, a “Change of Control” shall be deemed to have occurred when: (i) securities of the Company representing 30% or more of the combined voting power of the Company’s then outstanding voting securities are acquired pursuant to a tender offer or an exchange offer by a person or entity which is not a wholly-owned subsidiary of the Company or an affiliate of the Company; (ii) the Company (or an affiliate thereof) executes an agreement the consummation of which will result in a merger, reorganization or consolidation in which the Company is a constituent corporation and which results in less than 50% of the outstanding voting securities of the surviving or resulting entity being owned by the then existing stockholders of the Company; (iii) the Company (or an affiliate thereof) adopts a plan of liquidation or dissolution; or (iv) the Company (or an

VI-3

affiliate thereof) executes an agreement the consummation of which will result in a sale of substantially all of the Company’s assets.  Notwithstanding the foregoing, if a different definition of “Change of Control” is required by the regulations interpreting the American Jobs Creation Act, that definition shall apply in lieu of the above definition.

VI-4

ARTICLE VII

Amendment and Termination

(a)In General.

(1)The Plan may be amended at any time, or from time to time, by the Company, and the Plan may be terminated at any time by the Company.

(2)Any such amendment or termination shall be ratified and approved by the Company’s Board of Directors.

(b)Effect of Amendment or Termination.  No amendment or termination of the Plan shall affect the rights of any Participant with respect to any amounts credited to the Accounts of a Participant prior to such amendment or termination.  No distribution will be made upon Plan termination unless permitted by law.  If permitted by law, the Participants (or their beneficiaries) shall be paid the balance of their Account in a lump sum upon Plan termination.

VII-1

ARTICLE VIII

Miscellaneous

(a)Payments to Minors and Incompetents.  If the Plan Administrator receives satisfactory evidence that a person who is entitled to receive any benefit under the Plan, at the time such benefit becomes available, is a minor or is physically unable or mentally incompetent to receive such benefit and to give a valid release therefore, and that another person or an institution is then maintaining or has custody of such person, and that no guardian committee, or other representative of the estate of such person shall have been duly appointed, the Plan Administrator may authorize payment of such benefit otherwise payable to such person to such other person or institution; and the release of such other person or institution shall be a valid and complete discharge for the payment of such benefit.

(b)Plan Not a Contract of Employment.  The Plan shall not be deemed to constitute a contract between the Company or a Related Employer and any Participant, nor to be consideration for the employment of any Participant.  Nothing in the Plan shall give a Participant the right to be retained in the employ of the Company or a Related Employer; all Participants shall remain subject to discharge or discipline as employees to the same extent as if the Plan had not been adopted.

(c)No Interest in Assets.  Nothing contained in the Plan shall be deemed to give any Participant any equity or other interest in the assets, business or affairs of the Company or a Related Employer.  No Participant in the Plan shall have a security interest in assets of the Company or a Related Employer used to make contributions or pay benefits.

(d)Recordkeeping.  Appropriate records shall be maintained for the Plan, subject to the supervision and control of the Plan Administrator.

(e)Non-Alienation of Benefits.  No benefit under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt to do so shall be void.  No benefit under the Plan shall in any manner be liable for or subject to the debts, contracts, liabilities, engagements or torts of any person.  If any person entitled to benefits under the Plan shall become bankrupt or shall attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge any benefit under the Plan, or if any attempt shall be made to subject any such benefit to the debts, contracts, liabilities, engagements or torts of the person entitled to any such benefit, except as specifically provided in the Plan, then such benefits shall cease and terminate at the discretion of the Plan Administrator.  The Plan Administrator may then hold or apply the same or any part thereof to or for the benefit of such person or any dependent or beneficiary of such person in such manner and proportions as it shall deem proper.

(f)State Law.  This Plan shall be construed in accordance with the laws of Florida.

VIII-1

(g)Corporate Successors.  The Plan shall not be automatically terminated by a transfer or sale of assets of the Company or a Related Employer or by the merger or consolidated of the Company or a Related Employer into or with any other corporation or other entity, but the Plan shall be continued after such sale, merger or consolidation only if and to the extent that the transferee, purchaser or successor entity agrees to continue the Plan.  In the event that the Plan is not continued by the transferee, purchaser or successor entity, then the Plan shall terminate subject to the provisions of Article VII.

(h)Liability Limited.  In administering the Plan, neither the Plan Administrator nor any officer, director or employee thereof, shall be liable for any act or omission performed or omitted, as the case may be, by such person with respect to the Plan; provided, that the foregoing shall not relieve any person of liability for gross negligence, fraud or bad faith.  The Plan Administrator, its officers, directors and employees shall be entitled to rely conclusively on all tables, valuations, certificates, opinions and reports that shall be furnished by any actuary, accountant, trustee, insurance company, consultant, counsel or other expert who shall be employed or engaged by the Plan Administrator in good faith.

(i)Protective Provisions.  Each Participant shall cooperate with the Plan Administrator by furnishing any and all information requested by the Plan Administrator in order to facilitate the payment of benefits hereunder, taking such physical examinations as the Plan Administrator may deem necessary and taking such other relevant action as may be requested by the Plan Administrator.  If a Participant refuses so to cooperate or makes any material misstatement of information or nondisclosure of medical history, then no benefits will be payable hereunder to such Participant or his beneficiary, provided that, in the Plan Administrator’s sole discretion, benefits may be payable in an amount reduced to compensate the Company or a Related Employer for any loss, cost, damage or expense suffered or incurred by the Company as a result in any way of such action, misstatement or nondisclosure.

(j)General Conditions.  Any Qualified Plan Contribution shall be made solely in accordance with the terms and conditions of the Qualified Plan and nothing in this Plan shall operate or be construed in any way to modify, amend or affect the terms and provisions of the Qualified Plan.

(k)Plan Benefits Not Compensation.  The benefit payable to an Employee under this Plan shall not be deemed salary or other compensation for the purpose of computing any benefit to which an Employee may be entitled under the Company’s Qualified Plan, group insurance plan or any other benefit program maintained by the Company.

VIII-2

EX-10.5

Exhibit 10.5

WALTER INDUSTRIES, INC.

SUPPLEMENTAL PENSION PLAN

1.The purpose of this Plan is to provide supplemental benefits for employees whose pension benefits are limited by reason of the restrictions set forth in Sections 401 and 415 of the Internal Revenue Code.

2.As used herein, the term “Plan” shall mean the plan set forth herein; “Qualified Pension Plan” shall mean the Pension Plan for Salaried Employees of Walter Industries, Inc. Subsidiaries, Divisions and Affiliates (a plan “qualified” under Section 401(a) of the Internal Revenue Code); “Year” shall mean the 12-month period ending on each December 31; “Company” shall mean Walter Industries, Inc. and its subsidiaries, divisions and affiliates.

3.A supplemental benefit shall be established under this Plan for each employee participating in the Qualified Pension Plan whose benefit under said Plan has been reduced by reason of the limitation set forth in Section 401(a)(17) and/or Section 415(b) of the Internal Revenue Code.  The supplemental benefit shall be an amount equal to the value of the amount of pension benefit the employee would have been entitled to without regard to the limitations imposed by Sections 401 and 415 of the Internal Revenue Code less the actual amount of pension benefit he will receive.

4.The Company shall not be required to fund the benefits payable under this Plan or to segregate any of its assets for such purpose.  If the Company elects to earmark any assets to pay the benefits provided hereunder, title to and beneficial ownership of such assets shall at all times remain in the Company and employees shall not have any property interest whatsoever in such assets.

5.Upon termination of employment, including termination due to death, an employee (or, in the case of death, his designated beneficiary) shall be entitled to receive the supplemental benefit described in paragraph 3 above, the payment of which shall be subject to the same elections and options applicable to the benefits payable from the Qualified Pension Plan.  However, the Company may, in its sole discretion, elect to furnish any and all benefits due under this Plan by purchasing annuities, or by other means at its disposal, including payment of the present value of such benefits.

6.When an employee’s participation herein begins the employee shall be informed of such participation and shall be given a copy of the Plan.

7.Nothing contained in this Plan and no action taken pursuant to the provisions of this Plan shall be construed to create a trust of any kind, or a fiduciary relationship between the Company and any employee, his designated beneficiary or any other person.

8.If an employee has not designated a beneficiary under this Plan, his beneficiary hereunder shall be deemed to be the same as his designated beneficiary under the Qualified Pension Plan.

9.Nothing contained herein shall be construed as conferring upon an employee the right to continue in the employ of the Company as an executive or in any other capacity.

10.The benefit payable to an employee under this Plan shall not be deemed salary or other compensation for the purpose of computing any benefit to which an employee may be entitled under any other benefit programs.

11.The Executive Compensation Committee (“Committee”) of the Board of Walter Industries, Inc. shall have full power and authority to interpret, construe and administer this Plan, and its interpretations and construction thereof, including the amount or recipient of the payment to be made therefrom, shall be binding and conclusive on all persons for all purposes.  No member of the Committee shall be liable to any person for any action taken or omitted in connection with the interpretation and administration of this Plan unless attributable to his own willful misconduct or lack of good faith.

12.This Plan shall be construed in accordance with and governed by the laws of the State of Florida.

13.The use of the masculine gender herein shall be deemed to include the feminine gender.

EX-10.9

Exhibit 10.9

Walter Industries, Inc.
Long-Term Incentive Award Plan
Restricted Stock Unit Award Agreement

THIS AGREEMENT, effective as of the Date of Grant set forth below, represents a grant of restricted stock units (“RSUs”) by Walter Industries, Inc., a Delaware corporation (the “Company”), to the Participant named below, pursuant to the provisions of the Amended 1995 Long-Term Incentive Stock Plan of Walter Industries, Inc. (the “Plan”). You have been selected to receive a grant of RSUs pursuant to the Plan, as specified below.

The Plan provides a complete description of the terms and conditions governing the grant of RSUs.  If there is any inconsistency between the terms of this Agreement and the terms of the Plan, the Plan’s terms shall completely supersede and replace the conflicting terms of this Agreement.  All capitalized terms shall have the meanings ascribed to them in the Plan, unless specifically set forth otherwise herein.

Participant: «FirstName» «MI» «LastName»

Date of Grant: << date>>

Number of RSUs Granted: «RSU_Shares»

Purchase Price: None

Annual Share Price Targets:

First Anniversary	$
Second Anniversary	$
Third Anniversary	$
Fourth Anniversary	$
Fifth Anniversary	$
Sixth Anniversary	$
Seventh Anniversary	$

The parties hereto agree as follows:

1.Employment with the Company.  Except as may otherwise be provided in Section 6, the RSUs granted hereunder are granted on the condition that the Participant remains an Employee of the Company or its Subsidiaries from the Date of Grant through (and including) the vesting date, as set forth in Section 2 (referred to herein as the “Period of Restriction”).

This grant of RSUs shall not confer any right to the Participant (or any other Participant) to be granted RSUs or other Awards in the future under the Plan.

1

2.Vesting.  RSUs shall vest one hundred percent (100%) at the end of the seventh anniversary following the Date of Grant; provided, however, if the predetermined Annual Share Price Targets (as set forth on page 1) are achieved and you remain employed by the Company, vesting of the RSUs shall accelerate as follows:

(a)Twenty-five percent (25%) of the total number of RSUs granted shall vest on the first anniversary of the Date of Grant (i.e., you must be employed by the Company on such anniversary date and achieve the Annual Share Price Target to vest) if the closing price of the Company’s stock is at least equal to <<  >>dollars and <<  >>cents ($  ) for any period of sixty (60) consecutive calendar days during the calendar year preceding the first anniversary.

(b)Fifty percent (50%) of the total number of RSUs granted, less the number of any RSUs previously vested, shall vest on the second anniversary of the Date of Grant (i.e., you must be employed by the Company on such anniversary date and achieve the Annual Share Price Target to vest) if the closing price of the Company’s stock is at least equal to << >> dollars and << >> cents ($   ) for any period of sixty (60) consecutive calendar days preceding the second anniversary.

(c)Seventy-five percent (75%) of the total number of RSUs granted, less the number of any RSUs previously vested, shall vest on the third anniversary of the Date of Grant (i.e., you must be employed by the Company on such anniversary date and achieve the Annual Share Price Target to vest) if the closing price of the Company’s stock is at least equal to << >> dollars and << >> cents ($   ) for any period of sixty (60) consecutive calendar days preceding the third anniversary.

(d)One hundred percent (100%) of the total number of RSUs granted, less the number of any RSUs previously vested, shall vest on the fourth anniversary of the Date of Grant (i.e., you must be employed by the Company on such anniversary date and achieve the Annual Share Price Target to vest) if the closing price of the Company’s stock is at least equal to << >> dollars and << >> cents ($   ) for any period of sixty (60) consecutive calendar days preceding the fourth anniversary.

(e)One hundred percent (100%) of the total number of RSUs granted, less the number of any RSUs previously vested, shall vest at any time up to and including the fifth anniversary of the Date of Grant if the closing price of the Company’s stock is at least equal to << >> dollars and << >> cents ($   ) for any period of sixty (60) consecutive calendar days preceding the fifth anniversary.  Unless otherwise elected in a properly executed Deferral Election Form, payout will occur as soon as administratively feasible after fulfilling the Annual Share Price Target goal.

2

(f)One hundred percent (100%) of the total number of RSUs granted, less the number of any RSUs previously vested, shall vest at any time up to and including the sixth anniversary of the Date of Grant if the closing price of the Company’s stock is at least equal to << >> dollars and << >> cents ($   ) for any period of sixty (60) consecutive calendar days preceding the sixth anniversary.  Unless otherwise elected in a properly executed Deferral Election Form, payout will occur as soon as administratively feasible after fulfilling the Annual Share Price Target goal.

(g)One hundred percent (100%) of the total number of RSUs granted, less the number of any RSUs previously vested, shall vest at any time up to and including the seventh anniversary of the Date of Grant if the closing price of the Company’s stock is at least equal to << >> dollars and << >> cents ($   ) for any period of sixty (60) consecutive calendar days preceding the seventh anniversary.  Unless otherwise elected in a properly executed Deferral Election Form, payout will occur as soon as administratively feasible after fulfilling the Annual Share Price Target goal.

The following table summarizes the vesting treatment of a hypothetical grant of 1,000 RSUs, based upon whether or not annual Share Price Targets are achieved.

Earliest Date on Which RSUs Vest	Number of RSUs That Vest
	If Share Price Targets Achieved	If Share Price Targets Not Achieved
First anniversary of Date of Grant	250	0
Second anniversary of Date of Grant	500 less RSUs previously vested	0
Third anniversary of Date of Grant	750 less RSUs previously vested	0
Fourth anniversary of Date of Grant	1,000 less RSUs previously vested	0
Fifth anniversary of Date of Grant	1,000 less RSUs previously vested	0
Sixth anniversary of Date of Grant	1,000 less RSUs previously vested	0
Seventh anniversary of Date of Grant	1,000 less RSUs previously vested	1,000

3.Timing of Payout.  Payout of all RSUs shall occur as soon as administratively feasible after vesting, unless a Participant elects to defer the payout of RSUs upon vesting by completing in writing and returning to the Company an irrevocable deferral election form within six (6) months of the Date of Grant.

4.Form of Payout.  Vested RSUs will be paid out solely in the form of shares of stock of the Company.

5.Voting Rights and Dividends.  Until such time as the RSUs are paid out in shares of Company stock, the Participant shall not have voting rights.  Further, no dividends shall be paid on any RSUs.

3

6.Termination of Employment.  In the event of the Participant’s termination of employment with the Company or its Subsidiaries for any reason during the Period of Restriction, all RSUs held by the Participant at the time of employment termination and still subject to the Period of Restriction shall be forfeited by the Participant to the Company.  However, the Committee may, in its sole discretion, vest all or any portion of the RSUs held by the Participant.  For all previously vested RSUs that have been properly deferred, payout shall occur upon the earlier to occur of the elected deferred vesting date or the date of your employment termination for any reason.

7.Change in Control.  Notwithstanding anything to the contrary in this Agreement, in the event of a Change in Control of the Company during the Period of Restriction and prior to the Participant’s termination of employment, the Period of Restriction imposed on the RSUs shall immediately lapse, with all such RSUs vesting subject to applicable federal and state securities laws.

8.Restrictions on Transfer.  Unless and until actual shares of stock of the Company are received upon payout, RSUs granted pursuant to this Agreement may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated (a “Transfer”), other than by will or by the laws of descent and distribution, except as provided in the Plan.  If any Transfer, whether voluntary or involuntary, of RSUs is made, or if any attachment, execution, garnishment, or lien shall be issued against or placed upon the RSUs, the Participant’s right to such RSUs shall be immediately forfeited by the Participant to the Company, and this Agreement shall lapse.

9.Recapitalization.  In the event of any change in the capitalization of the Company such as a stock split or a corporate transaction such as any merger, consolidation, separation, or otherwise, the number and class of RSUs subject to this Agreement may be equitably adjusted by the Committee, in its sole discretion, to prevent dilution or enlargement of rights.

10.Beneficiary Designation.  The Participant may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under this Agreement is to be paid in case of his or her death before he or she receives any or all of such benefit.  Each such designation shall revoke all prior designations by the Participant, shall be in a form prescribed by the Company, and will be effective only when filed by the Participant in writing with the Secretary of the Company during the Participant’s lifetime.  In the absence of any such designation, benefits remaining unpaid at the Participant’s death shall be paid to the Participant’s estate.

11.Continuation of Employment.  This Agreement shall not confer upon the Participant any right to continue employment with the Company or its Subsidiaries, nor shall this Agreement interfere in any way with the Company’s or its Subsidiaries’ right to terminate the Participant’s employment at any time.

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12.Miscellaneous.

(a)This Agreement and the rights of the Participant hereunder are subject to all the terms and conditions of the Plan, as the same may be amended from time to time, as well as to such rules and regulations as the Committee may adopt for administration of the Plan.  The Committee shall have the right to impose such restrictions on any shares acquired pursuant to this Agreement, as it may deem advisable, including, without limitation, restrictions under applicable federal securities laws, under the requirements of any stock exchange or market upon which such shares are then listed and/or traded, and under any blue sky or state securities laws applicable to such shares.  It is expressly understood that the Committee is authorized to administer, construe, and make all determinations necessary or appropriate to the administration of the Plan and this Agreement, all of which shall be binding upon the Participant.

(b)The Committee may terminate, amend, or modify the Plan; provided, however, that no such termination, amendment, or modification of the Plan may in any material way adversely affect the Participant’s rights under this Agreement, without the written consent of the Participant.

(c)The Participant may elect, subject to any procedural rules adopted by the Committee, to satisfy the withholding requirement, in whole or in part, by having the Company withhold and sell shares having an aggregate Fair Market Value on the date the tax is to be determined, equal to the amount required to be withheld.

The Company shall have the power and the right to deduct or withhold from the Participant’s compensation, or require the Participant to remit to the Company, an amount sufficient to satisfy federal, state, and local taxes (including the Participant’s FICA obligation), domestic or foreign, required by law to be withheld with respect to any payout to the Participant under this Agreement.

(d)The Participant agrees to take all steps necessary to comply with all applicable provisions of federal and state securities laws in exercising his or her rights under this Agreement.

(e)This Agreement shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required.

(f)All obligations of the Company under the Plan and this Agreement, with respect to the RSUs, shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company.

(g)To the extent not preempted by federal law, this Agreement shall be governed by, and construed in accordance with, the laws of the state of Delaware.

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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed effective as of the Date of Grant.

	Walter Industries, Inc.
	By:
		Chairman, President, and Chief Executive Officer
ATTEST:
		Participant

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EX-10.10

Exhibit 10.10

NON-STATUTORY STOCK OPTION AGREEMENT

AGREEMENT dated <<   >> (hereinafter sometimes called the Grant Date) between Walter Industries, Inc., a Delaware corporation having its principal executive offices at 4211 W. Boy Scout Blvd., Tampa, Florida 33607 (hereinafter called the Company), and «First_Name»«MI». «Last_Name» (hereinafter called the Employee).

WHEREAS, the Employee is a key employee of the Company and the Company, in consideration of the Employee’s continued employment by the Company or a subsidiary corporation, desires to grant the Employee the right and option to purchase shares of common stock, par value $.01 per share, of the Company (hereinafter called Common Stock) on the terms and conditions set forth in this Agreement;

NOW, THEREFORE, it is agreed hereby as follows:

1.(a)The Company hereby grants to the Employee the right and option (hereinafter called the Option) to purchase from the Company at a price of $ << >> per share an aggregate number of «Target_NQ_Stock_Options» shares of Common Stock (hereinafter called the Option Shares).  The Option shall be exercisable only in accordance with the terms and conditions set forth in this Agreement.

(b)The Option may not be exercised at any time for a fractional share nor for fewer than 100 shares, unless fewer than 100 shares remain subject to the Option at such time, in which case the Option may be exercised for the full balance of the shares which remain subject to the Option at such time.

2.(a)In no event shall the Option be exercisable after the tenth anniversary of the Grant Date (the ten year period extending from the Grant Date to (and including) the tenth anniversary of the Grant Date being hereinafter called the Option Term).

(b)Subject to subparagraph 2(a) and the other provisions of this Agreement, the Option may be exercised at any time or from time to time during the Option Term, provided that (i) the Employee shall have been in the continuous employ of the Company or a subsidiary during the entire period extending from the Grant Date to (and including) the date of exercise, and (ii) the Option may not be exercised with respect to (A) any of the Option Shares until the first anniversary of the Grant Date, nor (B) more than one-third of the Option Shares prior to the second anniversary of the Grant Date, nor (C) more than two-thirds of the Option Shares prior to the third anniversary of the Grant Date.

3.(a)If the Employee’s employment with the Company and its subsidiaries shall terminate within the Option Term for cause, the Option shall terminate in all respects coincident with such termination of employment.

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(b)  (i)  If the Employee’s employment with the Company and its subsidiaries shall terminate during the Option Term as a result of the Employee’s “Retirement” (as defined in subparagraph 3(d) hereof), death or disability, then (A) the Employee or the person or persons to whom the Option shall have been transferred by will or the laws of descent and distribution, or the Employee’s legal representative, shall have the right, subject to the provisions of subparagraph 3(e) below, within three years from the date on which the Employee’s employment with the Company and its subsidiaries terminated as a result of Retirement, death or disability, to exercise the unexercised portion of the Option, but only to the extent, if any, that the Employee was entitled to exercise it pursuant to subparagraph 2(b) above immediately prior to such termination of employment, and (B) the Option shall terminate in all respects at the expiration of such three year period or, if sooner, at the expiration of the Option Term.

(ii)  If the Employee shall die during the three year period following the termination of the Employee’s employment as a result of Retirement or disability, or during the three-months’ period following the termination of the Employee’s employment for any reason other than cause, Retirement, death or disability, then (A) the person or persons to whom the Option shall have been transferred by will or the laws of descent and distribution, or the legal representative of the Employee’s estate, shall have the right, subject to the provisions of subparagraph 3(e) below, within three years from the date of the Employee’s death, to exercise the unexercised portion of the Option, but only to the extent, if any, that the Employee was entitled to exercise it pursuant to subparagraph 3(b)(i) above or subparagraph 3(c) below immediately prior to the Employee’s death, and (B) the Option shall terminate in all respects at the expiration of such three year period or, if sooner, at the expiration of the Option Term.

(c)  If the Employee’s employment with the Company and its subsidiaries shall terminate during the Option Term for any reason not covered by the preceding provisions of this paragraph 3 (i.e., for any reason other than cause, Retirement, death or disability), (i) the Employee, subject to the provisions of subparagraphs 2(a) and 3(b)(ii), shall have the right, at any time during the three months’ period ending at the close of the 90th day after the Employee’s last day of employment with the Company and its subsidiaries, to exercise the unexercised portion of the Option to the extent, if any, that the Employee was entitled to do so pursuant to subparagraph 2(b) above immediately prior to such termination of employment, and (ii) the Option shall terminate in all respects at the expiration of such three months’ period or, if sooner, at the expiration of the Option Term.

(d)  Whether the Employee’s absence from employment by reason of illness, military or government service or other causes shall constitute termination of employment, and whether the termination of Employee’s employment shall be for cause or disability, shall be determined by, and in the sole discretion of, the Compensation Committee (as defined in subparagraph 13(b) hereof), whose determination shall be final, binding and conclusive on the Employee, on any person or entity claiming under or through the Employee, and on all other interested parties, including the Company.  For all purposes of this paragraph 3, “Retirement” shall mean termination of the Employee’s employment with the Company and its subsidiaries (i) other than for cause,

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and (ii) either (A) on or after the date on which the Employee attains the age of sixty (60), or (B) on a date on which the sum of the Employee’s age and completed years of employment with the Company and its subsidiaries is at least eighty (80).

(e)  No provision of this Agreement, including but not limited to this paragraph 3, shall be deemed to extend the Option Term.  Any provision of this Agreement to the contrary notwithstanding, (i) in no event shall the Option be exercisable after the expiration of the Option Term, and (ii) in no event shall the Option be exercisable more than three months after termination of the Employee’s employment with the Company and its subsidiaries, except in the event of the Retirement, death or disability of the Employee, as provided in subparagraph 3(b) above.

4.Any provision of this Agreement to the contrary notwithstanding, in no event (whether before or after termination of employment) shall the Employee be entitled to exercise the Option unless the Employee shall have refrained, at all times prior to such exercise, from conduct which the Compensation Committee determines in its sole discretion is contrary to the best interests of the Company, including but not limited to competition with the Company.

5.The Option may be exercised by written notice signed by the Employee or, in the event of the Employee’s death, by the person or persons entitled to exercise the same under this Agreement, and delivered to the Secretary of the Company at the Company’s principal executive offices at the address set forth above, specifying the number of Option Shares in respect of which the Option is being exercised.  Upon such exercise, payment of the full purchase price for the shares so specified shall be made by tendering to the Company cash, certified check, bank draft, postal or express money order, personal check (subject to collection), whole shares of Common Stock already owned by the Employee, or a combination of the foregoing forms of payment, or by delivering to the Company a properly executed exercise notice together with irrevocable instructions to a stockbroker that the Company determines satisfies the provisions of section 220.3(e)(4) (or a successor provision) of Regulation T promulgated by the Board of Governors of the Federal Reserve System (hereinafter referred to as Regulation T) and such other criteria as the Company may in it sole discretion establish, provided that (a) in no event shall the sum of the cash, certified check, bank draft, postal or express money order, personal check (subject to collection) and the fair market value on the date of such exercise of any shares with which such purchase price is paid be less than the full purchase price, and (b) the Committee may, but need not, at any time or from time to time, without advance notice to the Employee, direct (or rescind any direction) that shares of Common Stock tendered in payment of all or part of the purchase price of the Option shall have been owned by the Employee for a specified period of time prior to such tender.  Neither the Employee nor the Employee’s legal representative, legatee(s) or distributee(s), as the case may be, will be, or will be deemed to be a holder of any shares pursuant to the exercise of an Option until the date of the issuance of a stock certificate for such shares.  Notice of exercise shall be deemed to have been delivered and the Option duly exercised in respect of the shares specified in the notice if and when such notice is received by the Secretary of the Company and payment in cash or in the form of a certified check, bank draft or postal

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or express money order, or in the form of a personal check subject to collection, or in the form of a certificate or certificates, properly endorsed, for whole shares of Common Stock that have been held for such period of time, if any, prior to the delivery as the Committee may direct, or in a combination of the foregoing forms of payment, shall have been mailed by registered or certified mail to the executive offices of the Company, attention of the Secretary of the Company, or shall have been received by the Secretary of the Company, or when the properly executed exercise notice and irrevocable instructions to a stockbroker that the Company determines satisfies the provisions of Regulation T and such other criteria as the Company may establish have been received by the Secretary of the Company.  It shall be a condition of the delivery by the Company of the certificate for the shares in respect of which the Option shall have been exercised that provision shall have been made for payment of any taxes that the Company determines are required to be withheld.

6.The Employee agrees that if, in the opinion of counsel for the Company, such representation(s), or evidence may be required by law, there shall be delivered to the Company (a) a representation in writing signed by the person or persons who shall exercise the Option, and such other evidence as may reasonably be required by counsel for the Company, that such shares of stock are being acquired for investment and not for resale or distribution, and (b) such other representation(s) or evidence as in the opinion of counsel is necessary to satisfy the requirements of any federal or state law at the time in effect relating to the acquisition of shares to which the Option relates.

7.The Option is not transferable by the Employee otherwise than by will or the laws of descent and distribution and is exercisable, during the Employee’s lifetime, only by the Employee.  Once transferred by will or by the laws of descent and distribution, the Option shall not be further transferable.  Any transferee of the Option must take the Option subject to the terms and conditions of this Agreement.  No such transfer of the Option shall be effective to bind the Company unless the Company shall have been furnished with written notice thereof, if by will, with a copy of the Employee’s will, and with such evidence as counsel for the Company may deem necessary to establish the validity of the transfer and the acceptance by the transferee(s) of the terms and conditions of this Agreement.  No sale, assignment, transfer or other disposition of the Option, whether voluntary or involuntary, by operation of law or otherwise, except a transfer by the Employee by will or by the laws of descent and distribution, shall vest in the purported assignee or transferee any interest or right hereunder whatsoever.

8.The Employee shall have no rights as a stockholder with respect to any share subject to the Option until the Employee shall have become the holder of record of such share and, subject to the provisions of paragraph 10 hereof, no adjustment shall be made for dividends (ordinary or extraordinary, whether in cash or securities or other property) or other distributions or other rights in respect of such share as to which the record date therefor is prior to the date upon which the Employee shall become the holder of record of such share.

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9.The existence of the Option shall not affect in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Company’s capital structure or its business, or any merger or consolidation of the Company, or any issue of bonds, debentures, preferred or prior preference stock ahead of or affecting the Common Stock or the rights thereof, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise.

10.If all or any portion of the Option shall be exercised subsequent to any stock dividend, split-up, spin-off, recapitalization, merger, consolidation, combination or exchange of shares, reorganization or liquidation occurring after the date hereof, as a result of which shares of any class or other property shall be issued in respect of outstanding shares of Common Stock, or shares of Common Stock shall be changed into the same or a different number of shares of the same or another class or classes, the person(s) so exercising the Option shall receive, for the aggregate price paid upon such exercise, the aggregate number and class of shares and amount of property which, if shares of Common Stock (as authorized at the date hereof) had been purchased at the date hereof for the same aggregate price (on the basis of the price per share set forth in paragraph 1(a) hereof) and had not been disposed of, such person(s) would be holding, at the time of such exercise, as a result of such purchase and all such stock dividends, split-ups, spin-offs, recapitalizations, mergers, consolidations, combinations or exchanges of shares, reorganizations or liquidations; provided, however, that no fractional shares shall be issued upon any such exercise, and the aggregate price paid shall be appropriately reduced on account of any fractional share not issued.  No adjustment shall be made in the minimum number of shares which may be purchased at any one time, as fixed by paragraph 1(b) hereof.

11.Neither this Agreement nor any provision hereof shall be deemed to create any limitation or restriction upon the right of the Company to terminate the employment of the Employee at any time with or without cause.

12.The exercise of the Option shall be subject to all requirements as to (a) the listing, registration or qualification of the Option Shares for trading on any securities exchange or securities trading system on which shares of the Common Stock are listed or traded or under any applicable federal or state law, and (b) the consent or approval of any governmental regulatory body determined by the Compensation Committee, in its sole discretion, to be necessary or desirable, and anything in this Agreement to the contrary notwithstanding, the Option may not be exercised in whole or in part unless and until the Company has been able to comply with all such requirements free of any conditions not acceptable to the Committee.  The Company shall make reasonable efforts at its own cost to comply with all such requirements.

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13.As used in this Agreement:

(a)With reference to employment with the Company, the term “Company” shall be deemed to include any successor to the Company, whether by merger, consolidation or otherwise, including any entity which acquires all or substantially all of the assets of the Company, and any corporation now or hereafter a subsidiary corporation of the Company, as that term is used in Section 424 of the Internal Revenue Code of 1986, as amended, as well as any entity in which the Company or its subsidiaries owns 50% or more of the equity; and

(b)The term “Compensation Committee” shall mean the Compensation Committee of the Board of Directors of the Company or such other committee as such Board may appoint to administer the plan under which the Option was granted.

14.Any dispute or disagreement which shall arise under or as a result of this Agreement shall be determined by the Compensation Committee in its sole discretion.  The Compensation Committee shall have the power to administer, interpret and construe all the provisions of this Agreement.  Any such determination by the Compensation Committee, and any administration, interpretation or construction of the provisions of this Agreement by the Compensation Committee shall be final, binding and conclusive on all interested parties.

15.This Agreement shall be binding upon and inure to the benefit of any successor(s) of the Company and the person(s) to whom the Option may have been transferred by will or the laws of descent and distribution.  All agreements by the Employee hereunder shall, in the event of the Employee’s death, be deemed to refer to, and be binding upon, such last-mentioned person(s).

16.The Option has been granted pursuant to and subject to the provisions of the Amended 1995 Long-Term Incentive Stock Plan of the Company (the Plan), which is enclosed with this Agreement and hereby incorporated herein by this reference.  Any provision of this Agreement to the contrary notwithstanding, each and every provision of this Agreement shall be subject to the terms and conditions of the Plan.

17.The Option is not intended to be an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended.  Each and every provision of this Agreement shall be administered, construed and interpreted so that the Option shall not be treated for Federal income tax purposes as such an incentive stock option, and any provision of this Agreement that cannot be so administered, construed and interpreted shall be disregarded.

18.This Agreement may only be amended in writing signed by the Employee and an officer of the Company duly authorized to do so.

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IN WITNESS WHEREOF, the Company has caused this Agreement to be executed in its corporate name by one of its officers thereunto duly authorized and its seal to be hereunto affixed and to be duly attested, and the Employee has executed this Agreement as of the day and year first above written.

WALTER INDUSTRIES, INC.

/s/ Don DeFosset

Chairman, President and Chief
Executive Officer

Employee

Plan enclosed

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EX-10.12

Exhibit 10.12

Execution copy

AMENDED AND RESTATED VARIABLE FUNDING LOAN AGREEMENT

dated as of November 19, 2004

among

YC SUSI TRUST,

(successor by assignment from Enterprise Funding Corporation)

a Lender,

ATLANTIC ASSET SECURITIZATION CORP.,

a Lender,

MID-STATE TRUST IX,

the Borrower,

WACHOVIA BANK, NATIONAL ASSOCIATION
(formerly known as First Union National Bank),

the Custodian/Collateral Agent,

BANK OF AMERICA, N.A.,

as the Agent, a Managing Agent and a Bank Investor

and

CALYON NEW YORK BRANCH,

a Managing Agent and a Bank Investor

TABLE OF CONTENTS

ARTICLE 1
GENERAL
Section 1.1.	Certain Defined Terms
Section 1.2.	Other Terms
Section 1.3.	Computation of Time Periods
ARTICLE 2
AMOUNT AND TERMS OF COMMITMENT
Section 2.1.	Revolving Credit Facility
Section 2.2.	[Reserved]
Section 2.3.	Loan Requests
Section 2.4.	Determination of Discount and Rate Periods
Section 2.5.	Payment of Principal, Interest and Other Amounts
Section 2.6.	Mandatory and Optional Prepayments
Section 2.7.	Proceeds
Section 2.8.	Pledged Accounts
Section 2.9.	Payments and Computations, Etc
Section 2.10.	Reports
Section 2.11.	[Reserved]
Section 2.12.	Sharing of Payments, Etc
Section 2.13.	Right of Setoff
Section 2.14.	Assignment by Lenders to Bank Investors
Section 2.15.	Downgrade of Bank Investor
Section 2.16.	Non-Renewing Bank Investors
Section 2.17.	Commitment Renewal Request
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
Section 3.1.	Representations and Warranties of the Borrower
Section 3.2.	Reaffirmation of Representations and Warranties by the Borrower
ARTICLE 4
CONDITIONS PRECEDENT
Section 4.1.	Conditions to Effectiveness
Section 4.2.	Conditions to Each Loan

ARTICLE 5
COVENANTS
Section 5.1.	Affirmative Covenants of Borrower
Section 5.2.	Negative Covenants of Borrower
ARTICLE 6
EVENTS OF DEFAULT AND FACILITY TERMINATION EVENTS
Section 6.1.	Events of Default
Section 6.2.	Facility Termination Events
Section 6.3.	Remedies
ARTICLE 7
INDEMNIFICATION; EXPENSES; RELATED MATTERS
Section 7.1.	Indemnities by the Borrower
Section 7.2.	Indemnity for Taxes, Reserves and Expenses
Section 7.3.	Taxes
Section 7.4.	Other Costs and Expenses; Breakage Costs
Section 7.5.	Payment
ARTICLE 8
MISCELLANEOUS
Section 8.1.	Term of Agreement
Section 8.2.	Waivers; Amendments
Section 8.3.	Notices
Section 8.4.	Governing Law; Submission to Jurisdiction; Integration
Section 8.5.	Severability; Counterparts
Section 8.6.	Successors and Assigns
Section 8.7.	Waiver of Confidentiality
Section 8.8.	Confidentiality Agreement
Section 8.9.	Liability of Owner Trustee
Section 8.10.	No Bankruptcy Petition Against the Lender
Section 8.11.	No Recourse Against Lender
Section 8.12.	Assignment by Lenders to Conduit Assignee.
Section 8.13.	Assignment by a Lender to Program Support Provider
Section 8.14.	Surety Provider Default
Section 8.15.	Subrogation and Cooperation
Section 8.16.	Benefits of Agreement
Section 8.17.	Limitation on Payments
	ARTICLE 9
	THE AGENT
Section 9.1.	Appointment and Authorization of Agent
Section 9.2.	Delegation of Duties

Section 9.3.	Liability of Agent
Section 9.4.	Reliance by Agent
Section 9.5.	Notice of Potential Event of Default, Event of Default Facility, Termination Event or Servicer Default
Section 9.6.	Credit Decision; Disclosure of Information by the Agent
Section 9.7.	Indemnification of the Agent
Section 9.8.	Agent in Individual Capacity
Section 9.9.	Resignation of Agent
Section 9.10.	Payments by the Agent
Section 9.11.	Notification by Agent
ARTICLE 10
THE MANAGING AGENTS
Section 10.1.	Appointment and Authorization of Agent
Section 10.2.	Delegation of Duties
Section 10.3.	Liability of Managing Agent
Section 10.4.	Reliance by Managing Agents
Section 10.5.	Notice of Potential Event of Default, Event of Default Facility, Termination Event or Servicer Default
Section 10.6.	Credit Decision; Disclosure of Information by the Agent
Section 10.7.	Indemnification of the Managing Agent
Section 10.8.	Managing Agent in Individual Capacity
Section 10.9.	Resignation of Managing Agents
Section 10.10.	Payments by the Managing Agents
Exhibit A - Form of Variable Funding Note
Exhibit B - Form of Borrowing Request
Exhibit C - Form of Borrower’s Counsel Opinion
Exhibit D - Form of Assignment and Assumption Agreement

AMENDED AND RESTATED VARIABLE FUNDING LOAN AGREEMENT

AMENDED AND RESTATED VARIABLE FUNDING LOAN AGREEMENT (this “Loan Agreement”), dated as of November 19, 2004, by and among YC SUSI TRUST, a Delaware statutory trust (successor by assignment from Enterprise Funding Corporation, and together with its successors and assigns, a “Lender”), ATLANTIC ASSET SECURITIZATION CORP., a Delaware corporation (together with its successors and assigns, a “Lender”), MID-STATE TRUST IX, a Delaware business trust, as borrower (the “Borrower”), WACHOVIA BANK, NATIONAL ASSOCIATION, a national banking association, as custodian and collateral agent (the “Collateral Agent”), BANK OF AMERICA, N.A., a national banking association, as agent and a managing agent (in such capacities, the “Agent” and a “Managing Agent” and as a bank investor (in such capacity, a “Bank Investor”) and CALYON NEW YORK BRANCH, a French bank acting through its New York branch, as a managing agent (in such capacity, a “Managing Agent” and as a bank investor (in such capacity, a “Bank Investor”).

PRELIMINARY STATEMENTS

WHEREAS, the Borrower has been established pursuant to the Trust Agreement dated as of February 5, 2001, as amended or modified from time to time;

WHEREAS, on the Closing Date, and from time to time pursuant to the Depositor Account Transfer Agreement dated as of the date hereof, as amended or restated from time to time (the “DAT Agreement”), Jim Walter Homes, Inc. (the “Originator”) and the Eligible Originators party thereto have agreed to convey certain Accounts to Mid-State Homes, Inc. (the “Depositor”), and the Depositor, pursuant to the Borrower Account Transfer Agreement dated as of the date hereof, as amended or restated from to time (the “BAT Agreement”), has agreed to convey certain Accounts to the Borrower;

WHEREAS, pursuant to the Custodian/Collateral Agent Agreement dated as of the date hereof (the “CCA Agreement”), and as collateral security for its obligations under this Loan Agreement and the Variable Funding Notes, the Borrower has agreed to assign all Accounts purchased by it, all of its rights under the DAT Agreement, the BAT Agreement, the Master Servicing Agreement and the Subservicing Agreement, and all of its right, title, interest in and to certain bank accounts and certain other collateral, and to deliver any notes evidencing indebtedness and certain other documents related to the Accounts, to the Collateral Agent for the benefit of the Secured Parties and to take such other steps as set forth in the CCA Agreement to create and perfect a first lien in all such rights in favor of the Collateral Agent, for the benefit of the Secured Parties;

WHEREAS, the Borrower has requested that the Lenders and/or Bank Investors make Loans to the Borrower, from time to time, which will be secured by the Collateral described above and evidenced by Variable Funding Notes, the proceeds of which will be used to purchase the Accounts;

WHEREAS, subject to the terms and conditions set forth herein, the Bank Investors are willing to make the Loans to the Borrower; and

WHEREAS, the Surety Provider intends to issue a financial guaranty insurance policy with respect to certain amounts owed by the Borrower hereunder and under the Variable Funding Notes.

NOW, THEREFORE, in consideration of the mutual benefits to be derived and the representations and warranties, conditions and promises herein contained, and intending to be legally bound hereby, the parties hereto hereby agree as follows:

ARTICLE 1

GENERAL

Section 1.1.Certain Defined Terms.  Capitalized terms used in this Loan Agreement shall have the meanings given such terms in Annex A hereto, unless otherwise defined herein.

Section 1.2.Other Terms.  All terms defined directly or by incorporation herein shall have the defined meanings when used in any certificate or other document delivered pursuant thereto unless otherwise defined therein.  For purposes of this Loan Agreement and all such certificates and other documents, unless the context otherwise requires:  (a) accounting terms not otherwise defined herein, and accounting terms partly defined herein to the extent not defined, shall have the respective meanings given to them under, and shall be construed in accordance with, GAAP; (b) terms used in Article 9 of the UCC in the State of New York, and not specifically defined herein, are used herein as defined in such Article 9; (c) references to any amount as on deposit or outstanding on any particular date means such amount at the close of business on such day; (d) the words “hereof”, “herein” and “hereunder” and words of similar import refer to this Loan Agreement (or other document in which they are used) as a whole and not to any particular provision of this Loan Agreement (or such certificate or document); (e) references to any Section, Schedule, Annex or Exhibit are references to Sections, Schedules, Annexes and Exhibits in or to this Loan Agreement (or the certificate or other document in which the reference is made) and references to any paragraph, subsection, clause or other subdivision within any Section or definition refer to such paragraph, subsection, clause or other subdivision of such Section or definition; (f) the term “including” means “including without limitation”; (g) references to any Law refer to that Law as amended from time to time and include any successor Law; (h) references to any agreement refer to that agreement as from time to time amended or supplemented or as the terms of such agreement are waived or modified in accordance with its terms; (i) references to any Person include that Person’s successors and permitted assigns; and (j) headings are for purposes of reference only and shall not otherwise affect the meaning or interpretation of any provision hereof.

Section 1.3.Computation of Time Periods.  Unless otherwise stated in this Loan Agreement, in the computation of a period of time from a specified date to a later specified date, the word “from” means “from and including” and the words “to” and “until” each means “to but excluding.”

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ARTICLE 2

AMOUNT AND TERMS OF COMMITMENT

Section 2.1.Revolving Credit Facility.

(a)Subject to the terms and conditions hereof, on the date hereof (the “Amendment Date”), and thereafter from time to time until the Facility Termination Date, upon the request of the Borrower in accordance with Section 2.3 hereof, each Lender may, in its sole discretion, make loans to the Borrower (each, a “Loan”) ratably in accordance with its Group’s Commitment, and if a Lender declines to make a Loan, its Group’s Bank Investors shall make such Loan ratably in accordance with its Group’s Commitment, all from time to time as permitted by this Loan Agreement; provided, however, that in no event shall either Lender nor any Bank Investor make any Loan if, after giving effect to such Loan, either (a) the Net Investment would exceed the Maximum Net Investment or (b) a Borrowing Base Deficiency would exist.  In the event that any Lender or Bank Investor fails to make a Loan for any reason, any other Lender may elect to assume the full funding obligation of such Lender or Bank Investor under this Agreement.  In the case such Lender elects to assume such funding obligations, it would also inherit the right to receive any and all fees and interest that would be due to the non-performing Lender or Bank Investor (if not for its failure to make the related Loan).

(b)Variable Funding Notes.  The Loans made by each Group shall be evidenced by promissory notes of the Borrower, substantially in the form of Exhibit A hereto (the “VFN” or “Variable Funding Notes”), payable to the order of the related Managing Agent for such Group for the account of the related Lender or Bank Investors, as applicable.  Each Managing Agent shall record the date and amount of each Loan made and the date and amount of each payment of principal thereof, and any such recordation shall constitute prima facie evidence of the accuracy of the information so recorded.  Each VFN shall (a) be dated the date hereof, (b) be stated to mature on the Scheduled Termination Date, and (c) provide for the payment of principal, interest and fees in accordance with Section 2.5 and Section 2.6 hereof.

Section 2.2.[Reserved].

Section 2.3.Loan Requests.

(a)Notice.  Prior to the Facility Termination Date, the Borrower may request Loans on any Business Day by delivering to the Agent and each Managing Agent irrevocable notice of each borrowing via facsimile in the form of Exhibit B hereto (a “Borrowing Request”) by 12:00 Noon (New York City time) (i) on the related Determination Date with respect to Loans to be made on a Remittance Date, (ii) at least one (1) Business Day prior to the proposed Loan Date with respect to any Loan which is to be made on any other Loan Date and for which the related Borrowing Request specifies the CP Rate as the desired Rate Type and (iii) at least three (3) Business Days prior to the proposed Loan Date with respect to any Loan which is to be made on any other Loan Date and for which the related Borrowing Request specifies either the Offshore Rate or the Base Rate as the desired Rate Type or for which such Borrowing Request is delivered when any Tranche accruing Discount at either such Rate Type has a Rate Period that

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has not yet then expired.  The Borrowing Request shall specify (a) the proposed date for such Loan (the “Loan Date”), (b) the amount of the Loan requested, which shall be at least $1,000,000 and integral multiples of $100,000 in excess thereof or, to the extent that the then available unused portion of the Maximum Net Investment is less than such amount, such lesser amount equal to such available unused portion of the Maximum Net Investment, (c) the desired Rate Period and Rate Type related thereto pursuant to Section 2.4 and (d) whether the request is to a Lender or the Bank Investors.  Each Borrowing Request shall be irrevocable and binding on the Borrower and the Borrower shall indemnify the Lenders, the Bank Investors, the Managing Agents and the Agent against any loss or reasonable expense incurred by any Lender, any Bank Investor, any Managing Agent or the Agent, either directly or through any Program Support Agreement, as a result of any failure by the Borrower to complete such borrowing, including, without limitation, any loss or reasonable expense incurred by any Lender, any Bank Investor, any Managing Agent or the Agent, either directly or pursuant to any Program Support Agreement, by reason of the liquidation or reemployment of funds acquired by any Lender, any Bank Investor, any Managing Agent or the Agent or Program Support Provider (including, without limitation, funds obtained by issuing commercial paper or promissory notes or obtaining deposits as loans from third parties) for the Lenders to fund such borrowing.

(b)Lender Acceptance or Rejection.  Each Managing Agent will promptly notify the related Lender and the Surety Provider, of the receipt of any Borrowing Request.  With respect to each Group, if the Borrowing Request is received prior to the related Lender Investment Termination Date, such Lender, in its sole discretion, shall instruct the related Managing Agent to accept or reject such Borrowing Request by notice given to the Borrower and the such Managing Agent by telephone or facsimile by no later than the close of business on the Business Day such Lender receives any such Borrowing Request.

(c)Bank Investor’s Commitment.  At no time will any Lender have any obligation to fund a Loan.  Subject to the conditions set forth herein, at all times on and after the related Lender Investment Termination Date and prior to the Facility Termination Date, all Loans shall be made by each Managing Agent on behalf of the related Bank Investors.  At any time when a Lender has rejected a request for a Loan, the related Managing Agent shall so notify the related Bank Investors, and the Surety Provider and the Bank Investors shall make such Loan, on a pro rata basis, in accordance with their respective Pro Rata Shares.  Notwithstanding anything contained in this Section 2.3(c) or elsewhere in this Loan Agreement to the contrary, no Bank Investor (including in its capacity as a Program Support Provider pursuant to the Program Support Agreement to which it is a party) shall be obligated to provide the Agent or the Borrower with funds in connection with the Net Investment in an amount that would result in the portion of the Net Investment then funded by it exceeding the dollar amount of its Commitment then in effect.  The obligation of each Bank Investor to remit its Pro Rata Share of any such Loan shall be several from that of each other Bank Investor, and the failure of any Bank Investor to so make such amount available to the Lender shall not relieve any other Bank Investor of its obligation hereunder.

(d)Payment of Loans.  With respect to each Group, on any Loan Date, the related Lender or the related Bank Investor, as the case may be, shall remit its share of the aggregate amount of such Loan (determined pursuant to Section 2.3(b) and (c) hereof) to the account of the related Managing Agent specified therefor from time to time by such Managing

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Agent by notice to such Persons by wire transfer of same day funds. Following each Managing Agent’s receipt of funds from the Lenders or Bank Investors as aforesaid, such Managing Agent shall remit such funds received to the Borrower’s account at the location indicated in Section 8.3 by wire transfer of same day funds.

(e)Managing Agents May Advance Funds.  With respect to each Group, unless the related Managing Agent shall have received notice from any Bank Investor or the related Lender that such Person will not make its share of any Loan available on the applicable Loan Date therefor, such Managing Agent may (but shall have no obligation to) make any such Bank Investor’s share of any Loan available to the Borrower in anticipation of the receipt by such Managing Agent of such amount from the applicable Bank Investor.  To the extent any such Bank Investor fails to remit any such amount to a Managing Agent after any such advance by such Managing Agent on such Loan Date, such Bank Investor shall be required to pay such amount to such Managing Agent for its own account, together with interest thereon at a per annum rate equal to the Federal Funds Rate, upon its demand therefor (provided that no Lender shall have an obligation to pay such interest amounts except to the extent that it shall have sufficient funds to pay the face amount of its Commercial Paper in full).  Until such amount shall be repaid, such amount shall be deemed to be Net Investment paid by a Managing Agent and such Managing Agent shall be deemed to have an interest in the Net Investment hereunder to the extent of such Loan.  Upon the payment of such amount to a Managing Agent by such Bank Investor, such payment shall constitute such Person’s payment of its share of the applicable Loan.

(f)Defaulting Bank Investor.  If, by 2:00 p.m. (New York City time) on any Loan Date, whether or not a Managing Agent has advanced the amount of the applicable Loan, one or more Bank Investors (each, a “Defaulting Bank Investor”, and each Bank Investor other than any Defaulting Bank Investor being referred to as a “Non-Defaulting Bank Investor”) fails to make its Pro Rata Share of any Loan available to the Agent pursuant to Section 2.3(d) or any Assignment Amount payable by it pursuant to Section 2.14(a) (the aggregate amount not so made available to a Managing Agent being herein called in either case the “Loan Deficit”), then the related Managing Agent shall, by no later than 2:30 p.m. (New York City time) on the applicable Loan Date or the applicable Assignment Date, as the case may be, instruct each Non-Defaulting Bank Investor to pay, by no later than 3:00 p.m. (New York City time), in immediately available funds, to the account designated by such Managing Agent, an amount equal to the lesser of (i) such Non-Defaulting Bank Investor’s proportionate share (based upon the relative Commitments of the Non-Defaulting Bank Investors) of the Loan Deficit and (ii) its unused Commitment.  A Defaulting Bank Investor shall forthwith, upon demand, pay to such Managing Agent for the ratable benefit of the Non-Defaulting Bank Investors all amounts paid by each Non-Defaulting Bank Investor on behalf of such Defaulting Bank Investor, together with interest thereon, for each day from the date a payment was made by a Non-Defaulting Bank Investor until the date such Non-Defaulting Bank Investor has been paid such amounts in full, at a rate per annum equal to the sum of the Base Rate, plus 2.00% per annum.  In addition, if, after giving effect to the provisions of the immediately preceding sentence, any Loan Deficit with respect to any Assignment Amount continues to exist, each such Defaulting Bank Investor shall pay interest to the related Managing Agent, for the account of the related Lender, on such Defaulting Bank Investor’s portion of such remaining Investment Deficit, at a rate per annum, equal to the sum of the Base Rate, plus 2.00% per annum, for each day from the applicable

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Assignment Date until the date such Defaulting Bank Investor shall pay its portion of such remaining Loan Deficit in full to such Lender.

Section 2.4.Determination of Discount and Rate Periods.

(a)Tranches.

(i)The Net Investment shall be allocated to tranches (each a “Tranche”) having Rate Periods and accruing Discount at the Rate Types specified and determined in accordance with this Section 2.4.  At any time, each Tranche shall have only one Rate Period and one Rate Type.

(ii)The Borrower shall give each Managing Agent irrevocable notice by telephone of each requested Rate Period and Rate Type by 12:00 Noon (New York City time) (i) at least one (1) Business Day prior to the requested Loan Date or the expiration of any then existing Rate Period, as applicable, with respect to any Loan or Tranche for which the Borrower specifies the CP Rate as the desired Rate Type and (ii) at least three (3) Business Days prior to the requested Loan Date or the expiration of any then existing Rate Period, as applicable, with respect to any Loan or Tranche for which the Borrower specifies either the Offshore Rate or the Base Rate as the desired Rate Type or for which such notice is delivered when any Tranche accruing Discount at either such Rate Type has a Rate Period that has not yet then expired; provided, however, that each Managing Agent may select, in its sole discretion, any such Rate Period or Rate Type if (i) the Borrower fails to provide such notice on a timely basis or (ii) a Managing Agent determines, in its sole reasonable discretion, that the Rate Period or Rate Type requested by the Borrower is unavailable or for any reason commercially undesirable to the related Lender, related Managing Agent, the Agent or the Bank Investors.

(b)Net Investment held on behalf of Lenders.  At all times on and after the Closing Date, but prior to the Facility Termination Date, solely with respect to any Tranche held on behalf of a Lender at any time when such Lender funds such Tranche through the issuance of Commercial Paper, the Borrower may, subject to the related Managing Agent’s approval and the limitations described in clause (a)(ii) above, request Rate Periods and Rate Types and allocate a Tranche to each selected Rate Period, so that the aggregate Tranches allocated to outstanding Rate Periods at all times shall equal the Net Investment held on behalf of such Lender.  Each Lender confirms that it is its intention to allocate all or substantially all of the Net Investment held on its behalf to one or more Rate Periods with respect to which the Discount applicable thereto is calculated by reference to the CP Rate; provided that either Managing Agent may determine, from time to time, in its sole reasonable discretion, that funding such Net Investment by means of one or more such Rate Periods or Rate Types is not possible or is not desirable for any reason.

(c)Net Investment funded pursuant to Program Support Agreement.  Each Rate Period applicable to any Tranche funded pursuant to a Program Support Agreement shall be a period, selected by each Managing Agent, and Discount with respect thereto shall be calculated by reference to the Alternate Rate.

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(d)Net Investment held on behalf of Bank Investors.  With respect to any Tranche held on behalf of the Bank Investors (or any of them), if prior to the Facility Termination Date, the Rate Period applicable thereto shall be determined in accordance with Section 2.4(a)(ii) hereof.

(e)Offshore Rate Protection; Illegality.

(i)If the Managing Agents are unable to obtain on a timely basis the information necessary to determine the Offshore Rate for any proposed Rate Period, then

(A)the Managing Agents shall forthwith notify the related Lender or Bank Investors, as applicable, and the Borrower that the Offshore Rate cannot be determined for such Rate Period, and

(B)while such circumstances exist, none of the Lenders, the Bank Investors or the related Managing Agent shall allocate any Tranches with respect to Loans made during such period or reallocate any Tranches allocated to any then existing Rate Period ending during such period, to a Rate Period with respect to which Discount is calculated by reference to the Offshore Rate.  Discount related to any such Tranches shall be calculated according to the Base Rate while such circumstances exist.

(ii)If, with respect to any outstanding Rate Period, the Lenders or any of the Bank Investors on behalf of which the Managing Agents hold any Tranche notifies the related Managing Agent that it is unable to obtain matching deposits in the London interbank market to fund its purchase or maintenance of such Tranche or that the Offshore Rate applicable to such Tranche will not adequately reflect the cost to the Person of funding or maintaining such Tranche for such Rate Period, then (A) such Managing Agent shall forthwith so notify the Borrower, the Lenders and the Bank Investors and (B) upon such notice and thereafter while such circumstances exist none of the Managing Agents, the Lenders or the Bank Investors, as applicable, shall allocate any other Tranche with respect to Investments made during such period or reallocate any Tranche allocated to any Rate Period ending during such period, to a Rate Period with respect to which Discount is calculated by reference to the Offshore Rate.  Discount related to any such Tranches shall be calculated according to the Base Rate while such circumstances exist.

(iii)Notwithstanding any other provision of this Loan Agreement, if the Lenders or any of the Bank Investors, as applicable, shall notify the Managing Agents that such Person has determined (or has been notified by any Program Support Provider) that the introduction of or any change in or in the interpretation of any Law makes it unlawful (either for such Lender, such Bank Investor, or such Program Support Provider, as applicable), or any central bank or other Governmental Authority asserts that it is unlawful, for such Lender, such Bank Investor or such Program Support Provider, as applicable, to fund or maintain any Tranche accruing Discount calculated by reference to the Offshore Rate, then (A) as of the effective date of such notice from such Person to the Agent, the obligation or ability of such Lender or such Bank Investor, as applicable, to

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fund the making or maintenance of any Tranche accruing Discount calculated by reference to the Offshore Rate shall be suspended until such Person notifies the related Managing Agent that the circumstances causing such suspension no longer exist and (B) each Tranche made or maintained by such Person shall either (1) if such Person may lawfully continue to maintain such Tranche accruing Discount calculated by reference to the Offshore Rate until the last day of the applicable Rate Period, be reallocated on the last day of such Rate Period to another Rate Period and shall accrue Discount calculated by reference to the Base Rate or (2) if such Person shall determine that it may not lawfully continue to maintain such Tranche accruing Discount calculated by reference to the Offshore Rate until the end of the applicable Rate Period, such Person’s share of such Tranche allocated to such Rate Period shall be deemed to accrue Discount at the Base Rate from the effective date of such notice until the end of such Rate Period.

(f)At all times on and after the occurrence of the Facility Termination Date, the Agent shall select all Rate Periods and Rate Types applicable thereto.

Section 2.5.Payment of Principal, Interest and Other Amounts.

(a)The Borrower will duly and punctually pay or cause to be paid amounts due in respect of principal and interest on the VFN in accordance with the terms of this Loan Agreement, the applicable Fee Letter, the VFN and the CCA Agreement.  Without limiting the foregoing, the Borrower will cause to be delivered to the Collateral Agent all amounts on deposit in the Holding Account when and as required by the Master Servicing Agreement for application as provided in the CCA Agreement.  The Borrower shall also pay or cause to be paid all other amounts payable by or on behalf of the Borrower pursuant to this Loan Agreement, the applicable Fee Letter, the VFN and the CCA Agreement to the parties entitled thereto in accordance with the terms hereof and in the manner and order of priority provided in the CCA Agreement.

(b)Breach of Representation or Warranty.  If on any day any of the representations or warranties with respect to eligibility set forth in Section 3.1(j) hereof was or becomes untrue with respect to an Account (whether on or after the date of the pledge thereof to the Collateral Agent, for the benefit of the Secured Parties), the Borrower shall be deemed to have received on such day a Collection of such Account in full and the Borrower shall on such day pay to the Master Servicer from funds other than actual Available Collections (other than actual Collections otherwise distributable to the Borrower under Section 4.1(d) of the CCA Agreement) an amount equal to the unpaid balance of such Account and such amount shall be allocated and applied by as a Collection in accordance with Article II of the Master Servicing Agreement and the CCA Agreement.

Section 2.6.Mandatory and Optional Prepayments.

(a)On each Remittance Date following the Facility Termination Date, Available Collections shall be applied to reduce the Net Investment in accordance with Section 4.1(d)(viii) of the CCA Agreement.

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(b)Prior to the Facility Termination Date, upon the occurrence of a Borrowing Base Deficiency, the Borrower shall either: (i) within five (5) Business Days (the “Deficiency Cure Period”) deliver or cause to be delivered additional Eligible Accounts to the Collateral Agent or deposit or cause to be deposited cash into the Principal Payment Account, in either case, in an amount (based , in the case of Eligible Accounts, on the lesser of the APB and AMV thereof on the date of delivery, as determined by the Agent) at least equal to such Borrowing Base Deficiency or (ii) in the event that the Borrowing Base Deficiency arises as a result of the determination of Market Value pursuant to clause (ii) of the definition thereof, at the Borrower’s option either (A) follow the procedures set forth in clause (i) of this Section 2.6(b) or (B) may employ the procedures set forth in the definition of Market Value, and upon a final determination of Market Value as contemplated therein, to the extent that a Borrowing Base Deficiency still exists after using the final determination of Market Value, then, the Borrower shall follow the procedures set forth in clause (i) of this Section 2.6(b); provided that in such event, the Deficiency Cure Period shall be fifteen (15) Business Days following the occurrence of a Borrowing Base Deficiency.  Funds deposited in the Principal Payment Account shall be applied to the reduction of the Net Investment in the manner and subject to the priority of payments provided in Section 4.1(c) of the CCA Agreement.  Any cash deposited by the Borrower pursuant to this Section 2.6(b) shall be made from funds other than Available Collections otherwise distributable to the Borrower pursuant to Section 4.1(d) of the CCA Agreement, which may be used by the Borrower for such purpose.

(c)[Reserved].

(d)[Reserved].

(e)[Reserved].

(f)The Borrower shall have the right on any date, upon written notice to the related Managing Agent not later than two (2) Business Days prior to such date, to deposit into the Principal Payment Account prepayments of principal on the VFN.  Any such prepayment (i) shall be at least $1,000,000 and integral multiples of $100,000 in excess thereof and (ii) shall be made from funds other than Available Collections, other than Available Collections otherwise distributable to the Borrower pursuant to Section 4.1(d) of the CCA Agreement, which may be used by the Borrower for such purpose.

(g)With respect to each Group, each Managing Agent agrees that amounts paid to the Managing Agents from amounts deposited in the Principal Payment Account pursuant to the provisions of the CCA Agreement shall be applied pro rata to repay: (i) maturing Tranches, Related Liquidity Draw or related Credit Support Disbursements as they mature or (ii) upon the Borrower’s request, with the approval of the related Managing Agent, in its sole discretion (except with respect to amounts deposited pursuant to Section 2.6(f) hereof as to which no such approval shall be required), any other Tranche; provided that the Borrower shall pay any costs incurred in connection with such repayment in accordance with Section 7.4(b) and (c) hereof.  The Net Investment shall be reduced by any amounts withdrawn and paid to or at the direction of such Managing Agent from the Principal Payment Account.

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(h)The entire principal balance of the VFN shall be due and payable on the applicable Stated Maturity Date together with all accrued and unpaid interest thereon.

Section 2.7.Proceeds.  The proceeds of the Loans shall be used by the Borrower solely to purchase Accounts and to pay other amounts expressly permitted under the terms and conditions of the Operative Documents.

Section 2.8.Pledged Accounts.

(a)The Borrower shall establish, on or prior to the Closing Date, an Eligible Bank Account No. 4072874419) at the Collateral Agent in the name of the Collateral Agent (the “Collection Account”), bearing a designation clearly indicating that the funds deposited therein are held for the benefit of the Secured Parties.

(b)The Borrower shall establish, on or prior to the Closing Date, an Eligible Bank Account (No. 4072874428) at the Collateral Agent in the name of the Collateral Agent (the “Reserve Account”) bearing a designation clearly indicating that the funds deposited therein are for the benefit of the Secured Parties.

(c)The Borrower shall establish, on or prior to the Closing Day, an Eligible Bank Account (No. 2090000975525) at the Collateral Agent in the name of the Collateral Agent (the “Holding Account”) bearing a designation clearly indicating that the funds deposited therein are for the benefit of the Secured Parties.

(d)The Borrower shall establish, on or prior to the Closing Date, an Eligible Bank Account (No. 1076010533) at the Agent (the “Principal Payment Account”) bearing a designation clearly indicating that the funds deposited therein are for the benefit of the Secured Parties.

(e)If at any time the Collection Account, the Reserve Account, the Principal Payment Accounts or the Holding Account shall no longer be an Eligible Bank Account, then the Borrower shall, within 10 Business Days (or such longer period, not to exceed 30 calendar days, as to which the Controlling Party shall consent), cause such account and the funds on deposit therein to be moved so that such account shall be an Eligible Bank Account.  The Borrower shall immediately notify the Agent and the Surety Provider of the new location and account number of such account.  For purposes of this Loan Agreement, the term “Eligible Bank Account” shall mean, if such bank account does not meet the requirements of paragraphs (a) and (b) of such definition, a bank account otherwise acceptable to the Controlling Party.

Section 2.9.Payments and Computations, Etc.

(a)On the second Business Day preceding a Determination Date relating to a Loan Date, the Borrower shall request from the Agent, and the Agent shall provide to the Borrower, the Market Discount Rate applicable to the related Loan Date.  On any other date on which a Managing Agent requests the Borrower to determine the Market Value of the Eligible Accounts, the Agent shall provide the Market Discount Rate applicable to such date to the Borrower.  On each Determination Date on which a Borrowing Request is made and within one Business Day of a written request from a Managing Agent, the Borrower shall calculate the

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APB, AMV and the Borrowing Base, using, in the case of the AMV, the Market Discount Rate supplied by the Agent.  Neither any Lender, any Bank Investor, the Surety Provider, any Managing Agent nor the Agent shall be bound by, any calculation of the APB, the AMV or the Borrowing Base by the Borrower.

(b)All amounts to be paid or deposited by the Borrower hereunder or under the CCA Agreement shall be paid or deposited in accordance with the terms hereof or thereof no later than 11:00 a.m. (New York City time) on the day when due in immediately available funds, payable to the Managing Agents, on behalf of the related Lender or the Bank Investors, as applicable.  Such payment shall be paid or deposited in the account indicated under the heading “Payment Information” in Section 8.3, until otherwise notified by the Managing Agents.  The Borrower shall, to the extent permitted by Law, pay to the Managing Agents, for the benefit of the Lenders or Bank Investors, as applicable, upon demand, interest on all amounts not paid or deposited when due hereunder (“Default Interest”) at a rate equal to 2.00% per annum, plus the Base Rate (the “Default Rate”).  Default Interest shall be paid in accordance with Section 4.2(d) of the CCA Agreement.  All computations of Discount and all per annum fees hereunder shall be made on the basis of a year of 360 days for the actual number of days (including the first but excluding the last day) elapsed.  Any computations by the Managing Agents of amounts payable by the Borrower hereunder shall be binding upon the Borrower absent manifest error.

Section 2.10.Reports.  On each Determination Date, the Borrower shall cause the Master Servicer to provide to the Managing Agents, the Agent and the Surety Provider (a) the Master Servicer’s Monthly Certificate for the related Collection Period, (b) a Schedule of Accounts with respect to all Accounts owned by the Borrower and (c) such other information as the Managing Agents, the Agent or the Surety Provider may reasonably request.

Section 2.11.[Reserved]

Section 2.12.Sharing of Payments, Etc.  If any Lender or any Bank Investor (for purposes of this Section only, being a “Recipient”) shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of setoff, or otherwise) on account of the portion of the Net Investment funded or maintained by it (other than pursuant to the applicable Fee Letter, Section 2.16(b) or Article VII and other than as a result of the differences in the timing of the applications of Available Collections) in excess of its ratable share of payments on account of the Net Investment obtained by the Recipient entitled thereto, such Recipient shall forthwith purchase from the Lenders or Bank Investors entitled to a share of such amount participations in the portions of the Net Investment funded or maintained by such Persons as shall be necessary to cause such Recipient to share the excess payment ratably with each such other Person entitled thereto; provided, however, that if all or any portion of such excess payment is thereafter recovered from such Recipient, such purchase from each such other Person shall be rescinded and each such other Person shall repay to the Recipient the purchase price paid by such Recipient for such participation to the extent of such recovery, together with an amount equal to such other Person’s ratable share (according to the proportion of (a) the amount of such other Person’s required payment to (b) the total amount so recovered from the Recipient) of any interest or other amount paid or payable by the Recipient in respect of the total amount so recovered.

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Section 2.13.Right of Setoff.  Without in any way limiting the provisions of Section 2.12, each of the Managing Agents, the Agent, each Lender and each Bank Investor is hereby authorized (in addition to any other rights it may have) at any time after the occurrence of the Facility Termination Date due to the occurrence of an Event of Default or Facility Termination Event or during the continuance of a Potential Event of Default, Event of Default, Potential Facility Termination Event or Facility Termination Event to set-off, appropriate and apply (without presentment, demand, protest or other notice which are hereby expressly waived) any deposits and any other indebtedness held or owing by the Managing Agents, the Agent, such Lender or such Bank Investor to, or for the account of, the Borrower.  The applicable Managing Agent shall cause any amounts so set-off to be deposited in the Collection Account, for application by the Collateral Agent in accordance with Section 4.1(d) of the CCA Agreement.

Section 2.14.Assignment by Lenders to Bank Investors.

(a)Assignment Amounts.  At any time on or prior to the Scheduled Termination Date, if any Managing Agent on behalf of one of the Lenders so elects, by written notice to the Agent, the Borrower hereby irrevocably requests and directs that the related Lender assign, and such Lender does hereby assign effective on the Assignment Date referred to below all or such portions as may be elected by such Lender of, its interest in the Net Investment at such time to the Bank Investors pursuant to this Section 2.14 and the Borrower hereby agrees to pay the amounts described in Section 2.14; provided, however, that unless such assignment is an assignment of all of such Lender’s interest in the Net Investment in whole on or after the related Lender Investment Termination Date, no such assignment shall take place pursuant to this Section 2.14 if a Borrowing Base Deficiency shall then exist; and provided, further, that no such assignment shall take place pursuant to this Section 2.14 at a time when an Event of Bankruptcy with respect to such Lender exists.  No further documentation or action on the part of such Lender or the Borrower shall be required to exercise the rights set forth in the immediately preceding sentence, other than the giving of the notice by the related Managing Agent on behalf of such Lender referred to in such sentence and the delivery by the Agent of a copy of such notice to each Bank Investor (the date of the receipt by the Agent of any such notice being the “Assignment Date”).  Each Bank Investor hereby agrees, unconditionally and irrevocably and under all circumstances, without setoff, counterclaim or defense of any kind, to pay the full amount of its Assignment Amount on such Assignment Date to the related Lender in immediately available funds to an account designated by the related Managing Agent.  Upon payment of its Assignment Amount, each Bank Investor shall acquire an interest in the Net Investment equal to its pro rata share (based on the outstanding portions of the Net Investment funded by it).  Upon any assignment in whole by a Lender to the Bank Investors on or after the related Lender Investment Termination Date as contemplated hereunder, such Lender shall cease to make any additional Loans hereunder.  At all times prior to the related Lender Investment Termination Date, nothing herein shall prevent such Lender from making a subsequent Loan hereunder, in its sole discretion, following any assignment pursuant to this Section 2.14 or from making more than one assignment pursuant to this Section 2.14.

(b)Bank Investor’s Obligation to Pay Certain Amounts; Additional Assignment Amount.  The Bank Investors shall pay to the Managing Agents, in accordance with their Pro Rata Shares, for the account of the related Lender, in connection with any assignment by such Lender to the Bank Investors pursuant to this Section 2.14 an aggregate amount equal to

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all Discount to accrue through the end of each outstanding Rate Period to the extent attributable to the portion of the Net Investment so assigned to the Bank Investors (as determined immediately prior to giving effect to such assignment), plus all other Aggregate Unpaids (other than the Net Investment and other than any Discount not described above).  Such amounts shall be additional consideration for the interests assigned to the Bank Investors and the amount of the “Net Investment” hereunder held by the Bank Investors shall be increased by an amount equal to the additional amount so paid by the Bank Investors.

(c)[Reserved

(d)[Reserved].

(e)Recovery of Net Investment.  In the event that the aggregate of the Assignment Amounts paid by the Bank Investors pursuant to this Section 2.14 on any Assignment Date occurring on or after the related Lender Investment Termination Date is less than the Net Investment of a Lender on such Assignment Date, then to the extent of amounts received by the Agent  in respect of the Net Investment in accordance with Section 4.1(d) of the CCA Agreement exceed the aggregate of the unrecovered Assignment Amounts and Net Investment funded by the Bank Investors, such excess shall be remitted by the related Managing Agent to such Lender rather than to such Bank Investors.

Section 2.15.Downgrade of Bank Investor.

(a)Downgrades Generally.  If at any time on or prior to the Scheduled Termination Date, the short term debt rating of any Bank Investor shall be “A-2” or “P-2” from S&P or Moody’s, respectively, with negative credit implications, such Bank Investor, upon request of the Agent, shall, within thirty (30) days of such request, assign its rights and obligations hereunder to another financial institution (which institution’s short term debt shall be rated at least “A-2” or “P-2” from S&P or Moody’s, respectively, and which shall not be so rated with negative credit implications and which is acceptable to the related Lender, the Agent, the related Managing Agent and the Borrower (in the Borrower’s case, in its reasonable discretion)).  If the short term debt rating of an Bank Investor shall be “A-3” or “P-3”, or lower, from S&P or Moody’s, respectively (or such rating shall have been withdrawn by S&P or Moody’s), such Bank Investor, upon request of the related Managing Agent, shall, within five (5) Business Days of such request, assign its rights and obligations hereunder to another financial institution (which institution’s short term debt shall be rated at least “A-2” or “P-2”, from S&P or Moody’s, respectively, and which shall not be so rated with negative credit implications and which is acceptable to the related Lender, the Agent, the related Managing Agent and the Borrower (in the Borrower’s case, in its reasonable discretion)).  In either such case, if any such Bank Investor shall not have assigned its rights and obligations under this Agreement within the applicable time period described above (in either such case, the “Required Downgrade Assignment Period”), each Managing Agent on behalf of the related Lender shall have the right to require such Bank Investor to pay upon one (1) Business Day’s notice at any time after the Required Downgrade Assignment Period (and each such Bank Investor hereby agrees in such event to pay within such time) to the related Managing Agent an amount equal to such Bank Investor’s unused Commitment (a “Downgrade Draw”) for deposit by the related Managing Agent into an account, in the name of the related Managing Agent (a “Downgrade Collateral Account”), which shall be

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in satisfaction of such Bank Investor’s obligations to make Loans and to pay its Assignment Amount upon an assignment from a Lender in accordance with Section 2.14; provided, however, that if, during the Required Downgrade Assignment Period, such Bank Investor delivers a written notice to the related Managing Agent of its intent to deliver a direct pay irrevocable letter of credit pursuant to this proviso in lieu of the payment required to fund the Downgrade Draw, then such Bank Investor will not be required to fund such Downgrade Draw.  If any Bank Investor gives the related Managing Agent such notice, then such Bank Investor shall, within one (1) Business Day after the Required Downgrade Assignment Period, deliver to such Managing Agent a direct pay irrevocable letter of credit in favor of such Managing Agent in an amount equal to the unused portion of such Bank Investor’s Commitment, which letter of credit shall be issued through an United States office of a bank or other financial institution (i) whose short-term debt ratings by S&P and Moody’s are at least equal to the ratings assigned by such statistical rating organization to the Commercial Paper and (ii) that is acceptable to the related Lender and the Agent.  Such letter of credit shall provide that the related Managing Agent may draw thereon for payment of any Loan or Assignment Amount payable by such Bank Investor which is not paid hereunder when required, shall expire no earlier than the Scheduled Termination Date and shall otherwise be in form and substance acceptable to such Managing Agent.

(b)Application of Funds in Downgrade Collateral Account.  If any Bank Investor shall be required pursuant to Section 2.15(a) to fund a Downgrade Draw, then the related Managing Agent shall apply the monies in the Downgrade Collateral Account applicable to such Bank Investor’s Pro Rata Share of Loans required to be made by the Bank Investors, to any Assignment Amount payable by such Bank Investor pursuant to Section 2.14 and to any purchase price payable by such Bank Investor pursuant to Section 2.16(b) at the times, in the manner and subject to the conditions precedent set forth in this Loan Agreement.  The deposit of monies in such Downgrade Collateral Account by any Bank Investor shall not constitute a Loan or the payment of any Assignment Amount (and such Bank Investor shall not be entitled to interest on such monies except as provided below in this Section 2.15, unless and until (and then only to the extent that) such monies are used to fund Investments or to pay any Assignment Amount or purchase price pursuant to Section 2.16(b) pursuant to the first sentence of this Section 2.15.  The amount on deposit in such Downgrade Collateral Account shall be invested by the related Managing Agent in Eligible Investments and such Eligible Investments shall be selected by such Managing Agent in its sole discretion.  Each Managing Agent shall remit to such Bank Investor, on the last Business Day of each month, the income actually received thereon.  Unless required to be released as provided below in this subsection, Available Collections received by each Managing Agent in respect of such Bank Investor’s portion of the Net Investment shall be deposited in the Downgrade Collateral Account for such Bank Investor.  Amounts on deposit in such Downgrade Collateral Account shall be released to such Bank Investor (or the stated amount of the letter of credit delivered by such Bank Investor pursuant to subsection (a) above may be reduced) within one Business Day after each Remittance Date following the Facility Termination Date to the extent that, after giving effect to the distributions made and received by the Lenders or Bank Investors on such Remittance Date, the amount on deposit in such Downgrade Collateral Account would exceed such Bank Investor’s Pro Rata Share (determined as of the day prior to the Facility Termination Date) of the sum of all Tranches then funded by the Lender, plus the Interest Component.  All amounts remaining in such Downgrade Collateral Account shall be released to such Bank Investor no later than the

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Business Day immediately following the earliest of (i) the effective date of any replacement of such Bank Investor or removal of such Bank Investor as a party to this Loan Agreement, (ii) the date on which such Bank Investor shall furnish the related Managing Agent with confirmation that such Bank Investor shall have short-term debt ratings of at least “A-2” or “P-2” from S&P and Moody’s, respectively, without negative credit implications, and (iii) the Scheduled Termination Date (or if earlier, the Scheduled Termination Date in effect prior to any renewal pursuant to Section 2.16 to which such Bank Investor does not consent, but only after giving effect to any required purchase pursuant to Section 2.16(b)).  Nothing in this Section 2.15 shall affect or diminish in any way any such downgraded Bank Investor’s Commitment to the Borrower or a Lender or such downgraded Bank Investor’s other obligations and liabilities hereunder and under the other Operative Documents.

(c)Program Support Agreement Downgrade Provisions.  Notwithstanding the other provisions of this Section 2.15, a Bank Investor shall not be required to make a Downgrade Draw (or provide for the issuance of a letter of credit in lieu thereof) pursuant to Section 2.15(a) at a time when such Bank Investor has a downgrade collateral account (or letter of credit in lieu thereof) established pursuant to the Program Support Agreement to which it is a party in an amount at least equal to its Commitment, and the related Managing Agent may apply monies in such downgrade collateral account in the manner described in Section 2.16(b) as if such downgrade collateral account were a Downgrade Collateral Account.

Section 2.16.Non-Renewing Bank Investors.

(a)If at any time the Borrower requests that the Bank Investors renew their Commitments hereunder and some but less than all the Bank Investors consent to such renewal within 30 days of the Borrower’s request, but in no event, no later than 20 days prior to the then current Scheduled Termination Date, the Borrower may arrange for an assignment to one or more financial institutions of all the rights and obligations hereunder of each such non-consenting Bank Investor in accordance with Section 8.6.  Any such assignment shall become effective on the then-current Scheduled Termination Date.  Each Bank Investor which does not so consent to any renewal shall cooperate fully with the Borrower in effectuating any such assignment.  If none or less than all the Commitments of the non-renewing Bank Investors are so assigned as provided above the Agent shall so notify the Borrower, and the Borrower shall notify the Agent if it desires to extend the then current Scheduled Termination Date.  In the event the Borrower, the Agent and the Surety Provider each elects to extend the then current Scheduled Termination Date, (i) the extended Scheduled Termination Date shall be effective with respect to the renewing Bank Investors, (ii) the Facility Limit shall automatically be reduced to an amount (rounded up to the nearest $1,000) equal to the excess of the Facility Limit then in effect over the lesser of (A) the aggregate of the Commitments of all non-renewing Bank Investors and (B) the quotient of (x) the Facility Limit, minus the Net Investment, divided by (y) .98, and (iii) this Loan Agreement and the Commitments of the renewing Bank Investors shall remain in effect in accordance with their terms notwithstanding the expiration of the Commitments of the non-renewing Bank Investors.

(b)If at any time the Borrower requests that the Bank Investors extend the Scheduled Termination Date hereunder and some but less than all the Bank Investors consent to such extension within 30 days after the Borrower’s request (but in no event, no later than 20 days

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prior to the then Scheduled Termination Date), and if none or less than all the Commitments of the non-renewing Bank Investors are assigned as provided in Section 2.16 and the Borrower, the Surety Provider and the Agent each has elected to extend the then current Scheduled Termination Date, then (without limiting the obligations of all the Bank Investors to make Loans and pay any Assignment Amount prior to the Scheduled Termination Date in accordance with the terms hereof) the Lender may sell an interest in the Net Investment hereunder for an aggregate purchase price equal to the lesser of (i) the maximum aggregate Assignment Amounts which would be payable if the Lender assigned its entire interest in the Net Investment at that time under Section 2.14, and (ii) the aggregate available Commitments of the non-renewing Bank Investors, which purchase price shall be paid solely by the non-renewing Bank Investors, pro rata according to their respective Commitments.  Following the payment of such purchase price, (i) the extended Scheduled Termination Date shall be effective with respect to the renewing Bank Investors, (ii) the Facility Limit shall automatically be reduced by the aggregate of the Commitments of all non-renewing Bank Investors, and (iii) this Loan Agreement and the Commitments of the renewing Bank Investors shall remain in effect in accordance with their terms notwithstanding the expiration of the Commitments of the non-renewing Bank Investors.  Prior to the Facility Termination Date, all amounts which, under Section 4.1 of the CCA Agreement are to be paid to the Agent and applied in reduction of the Net Investment, up to the aggregate Net Investment sold to the non-renewing Bank Investors as described above in this subsection, shall be distributed to the non-renewing Bank Investors ratably according to the aggregate Net Investment held by them, in reduction of their respective portions of Net Investment.  On and after the Facility Termination Date, each non-renewing Bank Investor shall be entitled to receive distributions as provided in Section 4.1 of the CCA Agreement based on its pro rata share of the Net Investment.  When (after the expiration of the Commitments of the non-renewing Bank Investors) the aggregate of the Net Investment described above in this subsection shall have been reduced to zero and all accrued Discount allocable thereto and all other Aggregate Unpaids owing to such Bank Investors shall have been paid to such Bank Investors in full, then such Bank Investors shall cease to be parties to this Loan Agreement for any purpose.

Section 2.17.Commitment Renewal Request.  Except in the case of an early renewal as agreed upon by the Borrower and the Managing Agents, the Borrower may, not earlier than 120 days or later than 60 days prior to the Scheduled Termination Date, request that the Bank Investors renew their Commitments hereunder, provided that no such renewal may be requested if it would cause the Scheduled Termination Date to be later than 364 days after the then-current Scheduled Termination Date (or, if the 364th day is not a Business Day, the immediately preceding Business Day) or such fewer number of days as the Agent shall specify by notice to the Borrower.  Each Bank Investor shall notify the Borrower as to whether it consents to such renewal within 30 days of the Scheduled Termination Date, and the failure of any Bank Investor to so notify the Borrower shall be deemed to mean that such Bank Investor does not consent to such renewal.  At the time such consent becomes effective, the Scheduled Termination Date shall be the date that was requested by the Borrower in accordance with the first sentence of this Section 2.17.

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ARTICLE 3

REPRESENTATIONS AND WARRANTIES

Section 3.1.Representations and Warranties of the Borrower.  The Borrower represents and warrants to each of the Secured  Parties on the Closing Date and each Loan Date that:

(a)Existence and Standing.  The Borrower (i) is a business trust duly organized, validly existing, and in good standing under the laws of the State of Delaware, (ii) has all power and all material governmental licenses, authorizations, consents, and approvals required to carry on its business in each jurisdiction in which its business is now conducted, and (iii) is duly qualified to do business and is in good standing under the laws of each jurisdiction where the conduct of its business requires such qualification.

(b)Authorization and Contravention.  The execution, delivery, and performance by the Borrower of this Loan Agreement, the VFN, and the other Operative Document to which the Borrower is a party are within the Borrower’s powers, have been duly authorized by all necessary action, require no action by or in respect of, or filing with, any Governmental Authority, and do not contravene, or constitute a default under, any provision of applicable law or regulation or any other Operative Document to which the Borrower is a party, or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Borrower, or result in the creation or imposition of any lien on assets of the Borrower.

(c)Binding Effect.  This Loan Agreement and the VFN constitute the legal, valid, and binding obligations of the Borrower, enforceable in accordance with their terms, subject to applicable bankruptcy, insolvency, moratorium, or other similar laws affecting the rights of creditors.

(d)Perfection.  At all times, the Borrower shall be the owner of all of the Collateral, free and clear of all liens, encumbrances, security interests, preferences, or other security arrangement of any kind or nature whatsoever (other than those permitted by the Operative Documents), and all mortgages, financing statements, and other documents required to be recorded or filed in order to perfect and protect the Collateral against all creditors of and purchasers from the Borrower will have been duly filed in each filing office necessary for such purpose and all filing fees and taxes, if any, payable in connection with such filings shall have been paid in full.

(e)Good Title.  At all times, the Collateral Agent, for the benefit of the Secured Parties, shall have a valid and perfected first-priority security interest in the Collateral free and clear of any Adverse Claim, other than any Claims made through the Collateral Agent or the Secured Parties.

(f)Accuracy of Information.  All information heretofore furnished by the Borrower or any Affiliate of the Borrower (including, without limitation, any information delivered pursuant to Sections 2.10 and 5.1 hereof) to the Surety Provider, any Lender, any Bank Investor, the Agent or any Managing Agent for purposes of or in connection with this Loan

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Agreement or any transactions contemplated hereby is, and all such information hereafter furnished by the Borrower to any Lender, any Bank Investor, the Agent, the Surety Provider or any Managing Agent will be, true and accurate in every material respect on the date such information is stated or certified.

(g)Tax Status.  The Borrower has filed all tax returns (federal, state, and local) required to be filed and has paid or made adequate provision for the payment of all taxes, assessments, and other governmental charges.

(h)Use of Proceeds.  The proceeds of the Loans will be used solely to purchase Accounts and to pay other amounts expressly permitted under the terms and conditions of the Operative Documents.

(i)Place of Business.  The chief place of business of the Borrower is located at the address of the Borrower indicated in Section 8.3 hereof and all of the Borrower’s Records are kept at the offices of the Collateral Agent.

(j)Nature of Accounts.  Each Account to be purchased with the proceeds of a Loan is an Eligible Account and an “eligible asset” as defined in Rule 3a-7 under the Investment Company Act of 1940, as amended.

(k)No Event of Default or Facility Termination Event.  No event has occurred and is continuing and no condition exists which constitutes an Event of Default or Facility Termination Event or, to the knowledge of the Borrower, a Potential Event of Default or Potential Facility Termination Event.

(l)Not an Investment Company.  The Borrower is not an “investment company” within the meaning of the Investment Company Act of 1940, as amended, or is exempt from all provisions of such Act.

(m)ERISA.  The Borrower is in compliance in all material respects with ERISA and no lien in favor of the Pension Benefit Guaranty Corporation on any of the Accounts exists.

(n)Beneficial Ownership.  The Depositor holds a 100% beneficial ownership in the Borrower.

(o)Debt for Tax.  The Borrower will treat the Loans as indebtedness for federal income tax purposes.

(p)Unacceptable Investment.  The Borrower has no knowledge of any material circumstance or condition with respect to the Accounts, the Obligors, or the credit standing of the Obligors that could reasonably be expected to cause an Account to be an unacceptable investment or adversely affect the value of any Account.

(q)Action, Error, Omission, Etc.  To the knowledge of the Borrower, no material action, error, omission, misrepresentation, negligence, fraud, or similar occurrence with respect to an Account has taken place on the part of any person, including, without limitation,

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any Obligor, the Depositor, the Originator or Eligible Originator, any appraiser, any builder, or developer, or any other party involved in the origination of the Accounts or in the application of insurance in relation to such Accounts.

(r)No Litigation.  There are no actions, suits, or proceedings pending, or to the knowledge of the Borrower, threatened against or affecting the Borrower or any Affiliate of the Borrower or their respective properties, in or before any court, arbitrator, or other body which question the validity of this Loan Agreement or the transactions contemplated herein, or which could be reasonably expected to have a materially adverse effect on the financial condition of the Borrower or its ability to perform its obligations under this Loan Agreement.

(s)Monthly Payments.  All Monthly Payments (net of the Servicing Fee) on the Accounts to be purchased with the proceeds of a Loan due after the applicable Cut-Off Date and received more than three Business Days prior to the Loan Date, plus the proceeds of each Full Prepayment of any such Account (including any related payment of interest) received by the Master Servicer after the Cut-Off Date but more than three Business Days prior to the Loan Date, will have been for deposited in the Holding Account in accordance with Section 2.7 of the Master Servicing Agreement.

Any document, instrument, certificate or notice delivered to the Agent or the Managing Agents under this Loan Agreement shall be deemed a representation and warranty by the Borrower.

Section 3.2.Reaffirmation of Representations and Warranties by the Borrower.  On each day that a Loan is made hereunder, the Borrower, by accepting the proceeds of such Loan, shall be deemed to have certified that all representations and warranties described in Section 3.1 are true and correct on and as of such day as though made on and as of such day.

ARTICLE 4

CONDITIONS PRECEDENT

Section 4.1.Conditions to Effectiveness.  On or prior to the effectiveness of this Agreement, each Managing Agent, the Agent and the Surety Provider shall have received the following documents, instruments, and fees, all of which shall be in a form and substance acceptable to each of them, or the following actions shall have occurred:

(a)each Managing Agent, the Agent and the Surety Provider shall have received a copy of the Insurance Agreement duly executed by the parties thereto and the original executed Surety Bond shall have been delivered to the Collateral Agent;

(b)each Managing Agent, the Agent and the Surety Provider shall have received a Good Standing Certificate for (i) the Borrower issued by the Secretary of State of Delaware; (ii) for the Depositor issued by the Secretary of State of Florida; (iii) for the Originator, issued by the Secretary of State of Florida; and (iv) for each Eligible Originator, issued by the Secretary of State of Texas, in each case, the certificates of qualification in all foreign jurisdictions where such qualification is material to the transactions contemplated by this Loan Agreement or the other Operative Documents;

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(c)each Managing Agent, the Agent and the Surety Provider shall have received an Opinion of Counsel of special counsel to the Borrower, the Originator, the Eligible Originators and the Depositor, covering certain tax, corporate, enforceability, perfection and priority matters set forth in Exhibit C hereto;

(d)(i) each Managing Agent, the Agent and the Surety Provider shall have received this Loan Agreement, the BAT Agreement, the DAT Agreement, the Master Servicing Agreement, the Subservicing Agreement and the CCA Agreement, duly executed by the parties thereto and a certified copy of the Trust Agreement duly executed by the Depositor, as Grantor, and the Owner Trustee and (ii) the Agent shall have received the VFN, duly executed by the Borrower;

(e)(i) each Managing Agent, the Agent shall have received the Fee Letter related to its Group duly executed by the parties thereto; (ii) the Borrower shall have paid or caused to be paid to the Agent all amounts to be paid on the Closing Date pursuant to such Managing Agent’s Fee Letter; and (iii) the Surety Provider shall have received any amounts required to be paid to it pursuant to the Insurance Agreement on the Closing Date;

(f)a certificate of the secretary or assistant secretary of each of the Borrower, Depositor, each Eligible Originator and Originator certifying and (in the case of clauses (i) through (iii)) attaching as exhibits thereto, among other things:

(i)the articles of incorporation of such entity (certified by the Secretary of State or other similar official of the such entity’s jurisdiction of incorporation or organization, as applicable, as of a recent date);

(ii)the by-laws of such entity;

(iii)resolutions of the board of directors or other governing body of such entity authorizing the execution, delivery and performance by it of each Operative Document to be delivered by it hereunder or thereunder and all other documents evidencing necessary corporate action (including shareholder consents) and government approvals, if any; and

(iv)the incumbency, authority and signature of each officer of such entity executing the Operative Documents or any certificates or other documents delivered hereunder or thereunder on behalf of it;

(g)each Managing Agent, the Agent and the Surety Provider shall have received an Opinion of Counsel to the Originator, Eligible Originators and the Depositor (i) addressing the true sale of the Accounts (A) from the Originator and each Eligible Originator to the Depositor and (B) from the Depositor to the Borrower; and (ii) to the effect that, in the event of the insolvency of the Originator, any Eligible Originator or the Depositor, the Borrower would not be substantively consolidated with any such Person for purposes of the Bankruptcy Code;

(h)each Managing Agent, the Agent and the Surety Provider shall have received lien searches in the State of Florida with respect to the Originator and the Depositor, the

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State of its incorporation with respect to any Eligible Originator, and in the State of Delaware with respect to the Borrower, in form and substance satisfactory to the Agent and the Surety Provider;

(i)each Managing Agent, the Agent and the Surety Provider shall have received an opinion of counsel to the Collateral Agent, in form and substance satisfactory to the Agent and the Surety Provider;

(j)each Managing Agent, the Agent shall have received an opinion of the Vice President and Assistant General Counsel to the Surety Provider, in form and substance satisfactory to the Agent;

(k)all amounts, fees and expenses required to be paid on or prior to the Closing Date pursuant to each Managing Agent’s Fee Letter (to the extent not covered pursuant to clause (e) of this Section 4.1) and Section 7.4 hereof;

(l)each Managing Agent, the Agent and the Surety Provider shall have received (i) financing statements on Form UCC-3 terminating all existing security interests in the Collateral and (ii) financing statements on Form UCC-1 (A) naming each of the Originator and Eligible Originator as Debtor/Seller and the Depositor as Secured Party/Purchaser; (B) naming the Depositor as Debtor/Seller and the Borrower as Secured Party/Purchaser; and (C) naming the Borrower as Debtor and the Collateral Agent as Secured Party; and

(m)the Agent and the Surety Provider shall have received such other approvals, documents, instruments, certificates and opinions as either of them shall reasonably request.

Section 4.2.Conditions to Each Loan.  No Loan shall be made hereunder, and the Bank Investors shall have no obligation to make any Loan, unless the following conditions have been satisfied:

(a)each Managing Agent shall have received an officers’ certificate to be included in the form of the Borrowing Request attached hereto as Exhibit B from the Borrower stating that:

(i)no Event of Default, Potential Event of Default, Potential Facility Termination Event or Facility Termination Event shall have occurred and the Loan to be made on such date will not result in any breach of any of the terms, conditions or provisions of, or constitute a default under any of the Operative Documents to which the Borrower is a party, or any indenture, mortgage, deed of trust or other agreement or instrument to which the Borrower is a party or by which it is bound, or any order of any Governmental Authority entered in any proceeding to which the Borrower is a party or by which it may be bound or to which it may be subject, and all conditions precedent provided in this Loan Agreement relating to the Loan to be made on such date have been complied with;

(ii)the Borrower is the owner of and has good title to each Account, has not assigned any interest or participation in any such Account (or, if any such interest

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or participation has been assigned, it has been released) and has the right to Grant each such Account to the Collateral Agent, and no other Person has any lien on, security interest in or other rights to any such Account;

(iii)the Borrower has Granted to the Collateral Agent all of its right, title, and interest in and to each Account Granted to the Collateral Agent by it to secure the VFN and the amounts owed hereunder;

(iv)the information set forth in the Schedule of Accounts delivered to the Collateral Agent and the Agent is correct in all material respects;

(v)no Material Adverse Effect shall have occurred in the affairs of the Borrower or the Master Servicer or the value of the Accounts since June 30, 2004, with respect to the first Loan made on or after the Closing Date, or the immediately preceding Loan Date, with respect to each Loan thereafter; and

(vi)the representations and warranties set forth in Section 3.1 are true and correct on and as of such day as though made on and as of such day.

(b)all of the Account Documents relating to the Accounts to be purchased on such date have been delivered to the Collateral Agent within the time periods specified in Section 3.1 of the CCA Agreement, except that (i) in lieu of delivering the Account Documents for any Account which has been the subject of a Full Prepayment received by the Master Servicer after the Cut-Off Date but no later than three Business Days prior to the Loan Date, the Borrower may deliver, or cause to be delivered, as indicated in the Officers’ Certificate from the Master Servicer delivered pursuant to paragraph (a) of this Section 4.2, the cash proceeds of such Full Prepayment and (ii) in lieu of delivering the Account Documents for any Account with respect to which foreclosure proceedings have been commenced and such Account Documents are required in connection with the prosecution of such proceedings, the Borrower may deliver a trust receipt pursuant to Section 3.2 of the CCA Agreement;

(c)the Borrower shall have delivered a Borrowing Request (with a copy to the Surety Provider) to the Agent and the Managing Agents pursuant to Section 2.3 hereof;

(d)each Managing Agent, the Agent, the Surety Provider and the Collateral Agent shall have received the Schedule of Accounts relating to the Accounts to be purchased with the proceeds of such Loan;

(e)each Managing Agent and the Agent shall have received acknowledgment copies of proper financing statements, duly filed under the Uniform Commercial Code of all jurisdictions that the Lender may deem necessary or desirable in order to perfect the ownership interest of the Depositor created by the DAT, the ownership interest of the Borrower created by the BAT Agreement and the security interest in favor of the Collateral Agent created by the CCA Agreement and all other filings, notifications, consents and recordings necessary to consummate the transactions contemplated hereunder and under the other Operative Documents shall be accomplished and the Agent shall have received evidence of such filings, notifications, consents and recordings satisfactory in form and substance to the Agent and the Surety Provider;

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(f)each Managing Agent and the Agent shall have received copies of all consents, licenses and approvals, if any, required in connection with the execution, delivery and performance by it and the validity and enforceability against it of the Operative Documents to approvals shall be in full force and effect;

(g)the Depositor shall have continued to purchase or otherwise acquire all or substantially all of the Accounts originated by the Originator (or originated by an Eligible Originator and sold to the Depositor) on an ongoing basis;

(h)after giving effect to any requested Loan, no Borrowing Base Deficiency shall exist;

(i)the Facility Termination Date shall not have occurred;

(j)no Servicer Default or default under any Subservicing Agreement shall have occurred and be continuing, and no condition that with the giving of notice or the passage of time world constitute a Servicer Default or a default under any Subservicing Agreement shall have occurred and be continuing;

(k)no more than 7% of the Accounts then owned by the Borrower may be in arrears for 60 days or more as of the last day of any month preceding the Borrowing Date;

(l)on such date, the weighted average interest rate of all Eligible Accounts, after giving effect to all Eligible Accounts to be added on such date, shall be greater than or equal to 7.25% per annum; and

(m)if after giving effect to any requested Loan, the Net Investment shall be equal to or greater than $250,000,000, the Borrower shall provide to the Surety Provider information regarding interest rate protection on the facility.  If none exists, or the current hedge is unacceptable to the Surety Provider, the Borrower and Surety Provider will work together to agree on a mutually acceptable solution to be put in place if required by the Surety Provider.

ARTICLE 5

COVENANTS

Section 5.1.Affirmative Covenants of Borrower.  At all times from the date hereof to the date on which all amounts due and owing to any of the Secured Parties under the Operative Documents have been paid in full and this Loan Agreement has terminated unless the Controlling Party shall otherwise consent in writing:

(a)Agreed Upon Procedures Report.  Prior to December 31, 2004 and December 31^st of each calendar year thereafter, the Borrower shall deliver to each Managing Agent and the Surety Provider an Agreed Upon Procedures Report with respect to all Accounts owned by the Borrower and such other matters as the Agent reasonably requests; provided, however, so long as no Event of Default, Potential Event of Default, Facility Termination Event or Potential Facility Termination Event has occurred, the Borrower shall only be required to deliver one Agreed Upon Procedures report at its expense in any calendar year.

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(b)Other Information.  The Borrower shall deliver to each Managing Agent and the Agent (i) a copy of all financial documents and reports provided to the Borrower by the Depositor, the Originator, any Eligible Originator or any other Person in any capacity pursuant to the Operative Documents, (ii) any material notices with respect to any Mortgaged Property and (iii) such other information (including non-financial information) as any Managing Agent, the Agent or the Surety Provider may from time to time reasonably request.

(c)Compliance Certificate.  The Borrower shall deliver to the Agent, each Managing Agent and the Surety Provider within 90 days after the close of the Borrower’s fiscal year, a compliance certificate signed by an authorized signatory of the Borrower stating that no Event of Default or Potential Event of Default exists, or if any Event of Default or Potential Event of Default exists, stating the nature and status thereof.

(d)Notice of Borrowing Base Deficiency, Event of Default, Potential Event of Default, Facility Termination Event or Potential Facility Termination Event.  As soon as possible and in any event within two Business Days after the Borrower receives notice or has actual knowledge of the occurrence of a Borrowing Base Deficiency, an Event of Default, a Potential Event of Default, Facility Termination Event or Potential Facility Termination Event, the Borrower shall provide to each Managing Agent and the Surety Provider a statement setting forth details of such Borrowing Base Deficiency, Event of Default, Potential Event of Default, Potential Facility Termination Event or Facility Termination Event, and the action which the Borrower proposes to take with respect thereto.  The Borrower shall notify the Agent and the Surety Provider when the Borrower receives notice or has actual knowledge of the occurrence of any event of default or event, which, due to the giving of notice or lapse of time, or both, could become an event of default by itself, the Master Servicer, the Depositor, any Eligible Originator or the Originator in any capacity under any of the Operative Documents of which it becomes aware.

(e)Conduct of Business.  The Borrower will carry on and conduct its business in substantially the same manner as it is presently conducted and do all things necessary to remain duly organized, validly existing, and in good standing as a business trust in the State of Delaware and maintain all requisite authority to conduct its business in each jurisdiction in which its business is conducted.

(f)Compliance with Laws.  The Borrower will comply with all laws, rules, regulations, orders, writs, judgments, injunctions, decrees, or awards to which it may be subject.

(g)Furnishing of Information and Inspection of Records.  The Borrower will furnish to each Managing Agent, the Agent and the Surety Provider from time to time such information with respect to the Accounts as the Agent or the Surety Provider may reasonably request, including, without limitation, a schedule identifying the Obligor and the Principal Balance for each Account.

(h)Payment of Obligations.  The Borrower shall pay, discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all its obligations of whatever nature.

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(i)Further Assurances.  The Borrower shall do such further acts and things and execute and deliver to the Agent such assignments (including, without limitation, assignments in blank), agreements, powers and instruments as are reasonably required by any Managing Agent, the Agent or the Surety Provider to carry into effect the purposes of this Loan Agreement and the other Operative Documents or to better assure and confirm unto the Secured Parties their respective rights, powers and remedies hereunder and under the other Operative Documents, including, without limitation, to obtain such consents and give such notices, and to file and record all such documents and instruments, and renew each such consent, notice, filing and recordation, at such time or times, in such manner and at such places, as may be necessary or desirable to preserve and protect the position of the Secured Parties hereunder and under the other Operative Documents.  This covenant shall survive the termination of this Loan Agreement.

(j)Access.  The Borrower shall allow, and cause the Depositor to allow, each Managing Agent, the Agent, the Surety Provider and their representatives full and complete access during normal business hours and upon reasonable notice to the books, records, documents, and facilities of the Borrower and the Depositor, and will on the same conditions make the officers, employees, attorneys, agents, independent accountants, and actuaries of the Borrower and the Depositor available to discuss such aspects of the business, financial condition, or prospects of the Borrower and the Depositor as may be reasonably necessary.

(k)Reliance Letters.  Upon the request of either Managing Agent or the Agent, the Borrower shall provide to the Agent within five (5) Business Days, reliance letters with respect to all legal opinions delivered on the Closing Date (or new legal opinions addressing the same matters covered in the original legal opinions) addressed to any entity which becomes a Program Support Provider after the Closing Date, to the extent such legal opinions did not permit reliance when delivered.

(l)Amendments; Miscellaneous.

(i)The Borrower shall furnish to the Surety Provider, Collateral Agent, each Managing Agent and the Agent copies of the form of each proposed amendment to the Trust Agreement, the Master Servicing Agreement or the Subservicing Agreement at least 60 days prior to the proposed date of adoption of any such proposed amendment.

(ii)The Borrower will at all times hold itself out to the public under the Borrower’s own name and as a separate and distinct entity from Walter Industries, Inc. and any of its Affiliates.

(iii)The Borrower will at all times be responsible for the payment of all its obligations and indebtedness, will at all times maintain a business office, records, books of account, and funds separate from the Depositor and will observe all customary formalities of independent existence.

(iv)To the extent such compliance involves questions of law, the Borrower shall be deemed in compliance with the requirements of any provision of this

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paragraph (l) if it is acting in accordance with an opinion of counsel as to such requirements.

(m)Weighted Average.  The weighted average interest rate of all Eligible Accounts shall not be less than 7.25% per annum.  The Borrower shall take all necessary steps (including, without limitation, the addition or removal of Accounts) as frequently as necessary (and in any event within two Business Days after the Borrower receives notice or has actual knowledge of noncompliance with this Section 5.1(m)) to ensure that in no event shall the weighted average interest rate of all Eligible Accounts be less than 7.25% per annum.

(n)Assignments.  The Borrower shall prepare and execute Assignments in recordable form at the reasonable request of any Managing Agent, the Agent or the Surety Provider.

(o)Due Diligence Review.  Prior to October 15th of each calendar year, the Borrower shall complete a Due Diligence Review with respect to all Accounts owned by the Borrower and such other matters as any Managing Agent or the Agent reasonably requests; provided, however, so long as no Event of Default, Potential Event of Default, Facility Termination Event or Potential Facility Termination Event has occurred, the Borrower shall only be required to complete one Due Diligence Review at its expense in any calendar year.

Section 5.2.Negative Covenants of Borrower.  At all times from the date hereof to the date on which all amounts due and owing to any of the Secured Parties under the Operative Documents have been paid in full and this Loan Agreement has terminated, unless the Controlling Party shall otherwise consent in writing:

(a)No Extension or Amendment of Accounts.  Except as permitted by Section 2.1(j) of the Master Servicing Agreement or Section 3.4 of the CCA Agreement, the Borrower will not extend, amend, or otherwise modify the terms of any Account, or amend, modify, or waive any term or condition of any Account Document related thereto.

(b)No Sale.  The Borrower shall not sell, transfer, exchange or otherwise dispose of any portion of the Collateral (other than any Accounts which are not Eligible Accounts or otherwise excluded from the Borrowing Base) except as expressly permitted by the Operative Documents.

(c)No Insurance.  The Borrower shall not obtain or carry insurance relating to the Accounts separate from that required by the Master Servicing Agreement, unless the Collateral Agent shall have the same rights with respect thereto as it has with respect to the insurance required by the Master Servicing Agreement.

(d)Other Business.  The Borrower shall not engage in any business or activity other than in connection with, or relating to, the issuance of the VFN or the preservation of the Collateral and the release of assets therefrom pursuant to this Loan Agreement, and the other Operative Documents to which the Borrower is a party.

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(e)Dissolution.  The Borrower shall not dissolve or liquidate in whole or in part.

(f)Liens.  The Borrower shall not (i) permit the validity or effectiveness of this Loan Agreement or the CCA Agreement to be impaired, or permit the lien of the CCA Agreement to be amended, hypothecated, subordinated, terminated or discharged, or permit any Person to be released from any covenants or obligations under this Loan Agreement or, (ii) except as may be expressly permitted by the Operative Documents, permit any lien, charge, security interest, mortgage or other encumbrance (other than the lien of the CCA Agreement) to be created on or extend to or otherwise arise upon or burden the Collateral or any part thereof or any interest therein or the Proceeds thereof, or (iii) except as permitted by the Operative Documents, permit the lien of the CCA Agreement not to constitute a valid and perfected first priority security interest in the Collateral.

(g)No Amendment.  The Borrower shall not amend the Trust Agreement without the consent of the Controlling Party.

(h)No Mergers, Etc.  The Borrower will not consolidate or merge with or into any other Person.

(i)Change of Name, Etc.  The Borrower will not change its name, identity, or structure or its chief executive office or the jurisdiction under which it has been organized, unless at least 10 days prior to the effective date of any such change the Borrower delivers to the Collateral Agent UCC financing statements, executed by the Borrower, necessary to reflect such change and to continue the perfection of the Collateral Agent’s (for the benefit of the Secured Parties) security interest in the Accounts.

(j)Borrowing Base Deficiency.  The Borrower shall at all times be in compliance with Section 2.6(b) hereof.

(k)Pledged Accounts.  The Borrower shall not move any Pledged Account from the institution at which they are maintained on the Closing Date, except as permitted in accordance with Section 2.8.

(l)Successor Master Servicer.  The Borrower shall not permit any change of master servicer, except in accordance with the Master Servicing Agreement.

(m)Eligible Originators.  The Borrower shall not make any request for a Loan hereunder unless all criteria set forth in the definition of “Eligible Originator” have been satisfied.

(n)No Debt.  The Borrower shall not incur any debt except as contemplated by the Operative Documents.

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ARTICLE 6

EVENTS OF DEFAULT AND FACILITY TERMINATION EVENTS

Section 6.1.Events of Default.  The occurrence of any one or more of the following events shall constitute an Event of Default:

(a)A default in the payment of any interest on the VFN at the applicable Discount rate when the same becomes due and payable;

(b)A default in the payment of any principal of the VFN in reduction of the Net Investment when due and payable;

(c)Any representation, warranty, certification, or statement made by the Borrower in this Loan Agreement or in any other document delivered pursuant hereto or other Operative Document shall prove to have been incorrect in any material respect when made or deemed made (other than any representation or warranty of the Borrower with respect to the Accounts or the eligibility thereof);

(d)Failure of the Borrower to pay or deposit any amounts (other than interest or principal due in respect of the VFN when required hereunder or under any other Operative Document and such default shall continue unremedied for five (5) Business Days;

(e)The default by the Borrower in the performance of any material covenant or undertaking (i) to be performed or observed under Sections 5.1(d), 5.2(b), (d), (e), (f), (g), or (h) or (ii) to be performed or observed by the Borrower under any other provision hereof (other than described in paragraph (b) of this Section 6.1) or under any other Operative Document and such default in the case of this clause (ii) shall continue for thirty (30) days;

(f)Any Event of Bankruptcy shall occur with respect to the Borrower;

(g)The Collateral Agent, for the benefit of the Secured Parties, shall, for any reason, fail to have a valid and first priority perfected security interest in the Collateral;

(h)There shall have occurred any material adverse change in the operations of the Borrower since the Closing Date which would have or reasonably could be expected to have a material adverse effect on the Secured Parties or any other event shall have occurred which materially and adversely affects the Borrower’s ability to perform under this Loan Agreement or the collectibility of the Accounts;

(i)(i) The amount on deposit in the Reserve Account fails to reach the Specified Reserve Account Requirements on or prior to the 15^th Remittance Date following the Closing Date or on or prior to the sixth Remittance Date following a Reserve Account Event; provided that (ii) for the period extending six (6) Remittance Dates following each Take-Out, there shall be no Event of Default under this clause (i) unless the amount on deposit in the Reserve Account shall fail to be equal to or greater than the sum of (A) the Scheduled Reserve Account Payment for such Remittance Date and (B) $1,000,000;

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(j)The Delinquency Ratio with respect to the Accounts owned by the Borrower averaged for any three consecutive Collection Periods exceeds 3.5%;

(k)A Borrowing Base Deficiency shall exist beyond the cure period set forth in Section 2.6(b) hereof;

(l)The Default Ratio with respect to the Accounts owned by the Borrower averaged for any three consecutive Collection Periods exceeds 6%;

(m)The Borrower shall become subject to an entity level tax or to registration as an investment company under the Investment Company Act; or

(n)The default by the Borrower in the performance of any material covenant or undertaking to be performed or observed under Section 5.1(a) hereof shall continue for ten (10) Business Days.

Section 6.2.Facility Termination Events.  The occurrence of any one or more of the following events shall constitute a Facility Termination Event:

(a)Any representation, warranty, certification, or statement made by the Depositor, any Eligible Originator or the Originator in any of the Operative Documents, shall prove to have been incorrect in any material respect when made or deemed made (other than any representation or warranty with respect to the Accounts or the eligibility thereof);

(b)Failure of the Originator, any Eligible Originator or the Depositor to pay or deposit any amounts when required hereunder or under any other Operative Document;

(c)The default by any Eligible Originator, the Originator or the Depositor, in the performance of any covenant or undertaking, (other than, with respect to the Depositor, in its capacity as Master Servicer) to be performed or observed under any Operative Document and such default continues unremedied for thirty (30) days;

(d)A Servicer Default or an event of default under the Subservicing Agreements shall have occurred;

(e)any Person shall institute steps to terminate any Pension Plan if the assets of such Pension Plan are insufficient to satisfy all of its benefit liabilities (as determined under Title IV of ERISA), or a contribution failure occurs with respect to any Pension Plan which is sufficient to give rise to a lien under Section 302(f) of ERISA;

(f)any material provision of this Loan Agreement or any other Operative Document to which the Originator, any Eligible Originator or the Depositor is a party shall cease to be in full force and effect or the Originator, any Eligible Originator or the Depositor shall so state in writing; or

(g)an Event of Default shall occur.

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Section 6.3.Remedies.

(a)If an Event of Default described in Section 6.1(f) hereof shall occur, then the entire unpaid principal amount of the VFN, together with accrued and unpaid interest thereon, shall automatically, without any notice, declaration or any other action become immediately due and payable.  If any other Event of Default shall occur and be continuing, then and in every such case the Controlling Party may declare the entire principal of and accrued interest on the VFN to be immediately due and payable and the Facility Termination Date to have occurred, by a notice in writing to the Borrower and the Agent, and upon such declaration the entire unpaid principal amount of the VFN, together with accrued and unpaid interest thereon, shall become immediately due and payable and the Facility Termination Date shall have occurred.  Upon the occurrence of an Event of Default, the Collateral Agent may, and if directed by the Controlling Party, shall, proceed to protect and enforce its rights and the rights of the Secured Parties, including its and their rights under the Operative Documents, and to enforce any other proper remedy or legal or equitable right vested in the Collateral Agent by this Loan Agreement, the CCA Agreement or any other Operative Document or by law, by such appropriate actions and proceedings as the Collateral Agent shall deem most effective or as so directed.  Upon the declaration of an Event of Default, the Controlling Party, in addition to all other rights and remedies it has under the Operative Documents, shall have all other rights and remedies provided under the UCC and all other applicable laws.  The Facility Termination Date shall be deemed to have occurred automatically upon the occurrence of any event described in clause (f) of Section 6.1 with respect to the Borrower.

(b)If a Facility Termination Event shall have occurred, the Controlling Party may declare the Facility Termination Date to have occurred and upon such declaration, the Facility Term shall terminate.

ARTICLE 7

INDEMNIFICATION; EXPENSES; RELATED MATTERS

Section 7.1.Indemnities by the Borrower.  Without limiting any other rights which the Indemnified Parties may have hereunder or under applicable Law, the Borrower hereby agrees to indemnify the Lenders and any commercial paper issuer that finances the Lenders, the Bank Investors, the Agent, the Managing Agents, the Surety Provider and their respective officers, directors, employees, counsel and other agents (collectively, “Indemnified Parties”) from and against any and all damages, losses, claims, liabilities, costs and expenses, including reasonable attorneys’ fees (which such attorneys may be employees of the Bank Investors, the Agent, the Managing Agents or the Lenders and any commercial paper issuer that finances the Lenders, as applicable) and disbursements (all of the foregoing being collectively referred to as “Indemnified Amounts”) awarded against or incurred by any of them in any action or proceeding between the Borrower) and any of the Indemnified Parties or between any of the Indemnified Parties and any third party or otherwise arising out of or as a result of this Loan Agreement, the other Operative Documents, the funding or maintenance, either directly or indirectly, by the Agent, the Managing Agents, the Lenders (including through any Program Support Provider) or any Bank Investor of the Net Investment or any of the other transactions contemplated hereby or thereby, excluding, however, (i) Indemnified Amounts to the extent resulting from gross negligence or willful misconduct on the part of such Indemnified Party, or (ii) recourse (except as otherwise specifically provided in this Agreement) for uncollectible Accounts.  Without limiting the

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generality of the foregoing, the Borrower shall indemnify each Indemnified Party for Indemnified Amounts relating to or resulting from:

(a)any representation or warranty made by the Borrower, under or in connection with this Loan Agreement, any of the other Operative Documents or any other information or report delivered by the Borrower pursuant hereto, or pursuant to any of the other Operative Documents which shall have been incomplete, false or incorrect in any respect when made or deemed made;

(b)the failure by the Borrower to comply with any applicable Law with respect to any Account, or the nonconformity of any Account with any such applicable Law;

(c)the failure to create and maintain a valid and perfected first priority security interest in favor of the Collateral Agent, for the benefit of the Secured Parties, in the Collateral, free and clear of any Adverse Claim;

(d)the failure to file or record, or any delay in filing or recording, financing statements, continuation statements, mortgages or other similar instruments or documents under the UCC of any applicable jurisdiction or other applicable laws with respect to any of the Affected Assets;

(e)any dispute, claim, offset or defense (other than discharge in bankruptcy) of the Obligor to the payment of any Account (including a defense based on such Account not being the legal, valid and binding obligation of such Obligor enforceable against it in accordance with its terms), or from any breach or alleged breach of any provision of the Accounts restricting assignment of any Accounts;

(f)any products liability claim or personal injury or property damage suit or other similar or related claim or action of whatever sort arising out of or in connection with merchandise or services which are the subject of any Account;

(g)the transfer of an interest in any Account other than an Eligible Account;

(h)the failure by the Borrower to comply with any term, provision or covenant contained in this Loan Agreement or any of the other Operative Documents to which it is a party or to perform any of its respective duties or obligations under the Accounts required to be paid by the Borrower;

(i)the existence of a Borrowing Base Deficiency;

(j)the failure of the Borrower to pay when due any taxes, including, without limitation, any sales, excise or personal property taxes payable in connection with any of the Accounts required to be paid by the Borrower;

(k)any repayment by any Indemnified Party of any amount previously distributed in reduction of Net Investment which such Indemnified Party believes in good faith is required to be made;

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(l)the commingling by the Borrower of Available Collections at any time with any other funds;

(m)any investigation, litigation or proceeding related to this Loan Agreement, any of the other Operative Documents, the use of proceeds of any Loan by the Borrower, the security interest in the Collateral, or any Affected Asset;

(n)any inability to obtain any judgment in or utilize the court or other adjudication system of, any state in which an Obligor may be located as a result of the failure of the Borrower to qualify to do business or file any notice of business activity report or any similar report;

(o)any attempt by any Person to void, rescind or set-aside any transfer by the Depositor to the Borrower of any Account or Related Security under statutory provisions or common law or equitable action, including any provision of the Bankruptcy Code or other insolvency law;

(p)any action taken by the Borrower in the enforcement or collection of any Account;

(q)any liability under the Georgia Fair Lending Act as in effect from October 1, 2002 through March 6, 2003; or

(r)any liability under the Home Ownership and Equity Protection Act of 1994, as amended, or similar federal state or local laws or regulations relating to “high cost” or “predatory” Accounts and otherwise unacceptable Accounts for secondary marketing transactions rated by the Rating Agencies.

Section 7.2.Indemnity for Taxes, Reserves and Expenses.

(a)If after the Closing Date, the adoption of any Law or bank regulatory guideline or any amendment or change in the administration, interpretation or application of any existing or future Law or bank regulatory guideline by any Governmental Authority charged with the administration, interpretation or application thereof, or the compliance with any directive of any Governmental Authority (in the case of any bank regulatory guideline, whether or not having the force of Law):

(i)shall subject any Indemnified Party (or its applicable lending office) to any tax, duty or other charge (other than Excluded Taxes, as defined below) with respect to this Loan Agreement, the other Operative Documents, the maintenance or financing of the Net Investment, or payments of amounts due hereunder, or shall change the basis of taxation of payments to any Indemnified Party of amounts payable in respect of this Loan Agreement, the other Operative Documents, the maintenance or financing of the Net Investment, or payments of amounts due hereunder or its obligation to advance funds hereunder, either directly or through a Program Support Agreement or the credit or liquidity support furnished by a Program Support Provider or otherwise in respect of this Loan Agreement, the other Operative Documents, the maintenance or financing of the Net Investment (except for changes in the rate of general corporate, franchise, net income

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or other income tax imposed on such Indemnified Party by the jurisdiction in which such Indemnified Party’s principal executive office is located);

(ii)shall impose, modify or deem applicable any reserve, special deposit or similar requirement (including any such requirement imposed by the Board of Governors of the Federal Reserve System) against assets of, deposits with or for the account of, or credit extended by, any Indemnified Party or shall impose on any Indemnified Party or on the United States market for certificates of deposit or the London interbank market any other condition affecting this Loan Agreement, the other Operative Documents, the maintenance or financing of the Net Investment, or payments of amounts due hereunder or its obligation to advance funds hereunder, either directly or through a Program Support Agreement or the credit or liquidity support provided by a Program Support Provider or otherwise in respect of this Loan Agreement, the other Operative Documents, the maintenance or financing of the Net Investment; or

(iii)imposes upon any Indemnified Party any other condition or expense (including any loss of margin, reasonable attorneys’ fees and expenses, and expenses of litigation or preparation therefor in contesting any of the foregoing) with respect to this Loan Agreement, the other Operative Documents, the maintenance or financing of the Affected Assets or Net Investment, or payments of amounts due hereunder or its obligation to advance funds, either directly or through a Program Support Agreement or the credit or liquidity support furnished by a Program Support Provider or otherwise in respect of this Loan Agreement, the other Operative Documents, the maintenance or financing of the Net Investment,

and the result of any of the foregoing is to increase the cost to or to reduce the amount of any sum received or receivable by such Indemnified Party with respect to this Loan Agreement, the other Operative Documents, the maintenance or financing of the Net Investment, the Accounts, the obligations hereunder, the funding of any Loans hereunder or through Program Support Agreement, by an amount deemed by such Indemnified Party to be material, then, within ten (10) days after demand by such Indemnified Party through the related Managing Agent, the Borrower shall pay to the related Managing Agent, for the benefit of such Indemnified Party, such additional amount or amounts as will compensate such Indemnified Party for such increased cost or reduction.

(b)If any Indemnified Party shall have determined that after the date hereof, the adoption of any applicable Law or bank regulatory guideline regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any Governmental Authority, or any request or directive regarding capital adequacy (in the case of any bank regulatory guideline, whether or not having the force of law) of any such Governmental Authority, has or would have the effect of reducing the rate of return on capital of such Indemnified Party (and in the case of the Lender, any Program Support Provider) (or its parent) as a consequence of such Indemnified Party’s obligations hereunder or with respect hereto to a level below that which such Indemnified Party (and in the case of the Lenders, any Program Support Provider) (or its parent) could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount deemed by such Indemnified Party to be material, then from time to time, within ten (10) days

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after demand by such Indemnified Party through the related Managing Agent, the Borrower shall pay to the related Managing Agent, for the benefit of such Indemnified Party, such additional amount or amounts as will compensate such Indemnified Party (and in the case of the Lenders, any Program Support Provider) (or its parent) for such reduction.  For the avoidance of doubt, any interpretation of Accounting Research Bulletin No. 51 by the Financial Accounting Standards Board shall constitute an adoption, change, request or directive subject to this Section 7.2(b).

(c)The Agent shall promptly notify the Borrower in writing of any event of which it has knowledge, occurring after the date hereof, which will entitle an Indemnified Party to compensation pursuant to this Section 7.2; provided that no failure to give or any delay in giving such notice (so long as such notice is given before the day which is one day and a year after the payment in full of all outstanding Commercial Paper of the Lenders or other Indebtedness of the Lenders) shall affect the Indemnified Party’s right to receive such compensation.  A notice by the Agent or the applicable Indemnified Party claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error.  In determining such amount, the Agent or any applicable Indemnified Party may use any reasonable averaging and attributing methods.  The Indemnified Party shall provide the Borrower with reasonably detailed calculations supporting such amounts.

(d)Anything in this Section 7.2 to the contrary notwithstanding, if any Lender enters into agreements for the acquisition of interests in receivables from one or more Other Transferors, such Lender shall allocate the liability for any amounts under this Section 7.2 which are in connection with a Program Support Agreement or the credit or liquidity support provided by a Program Support Provider (“Additional Costs”) to the Borrower and each Other Transferor; provided, however, that if such Additional Costs are attributable to the Borrower, the Originator, any Eligible Originator or the Master Servicer and not attributable to any Other Transferor, the Borrower shall be solely liable for such Additional Costs or if such Additional Costs are attributable to Other Transferors and not attributable to the Borrower, the Originator or the Master Servicer, such Other Transferors shall be solely liable for such Additional Costs.  The Lender shall provide the Borrower with written notice of any such Additional Costs accompanied by reasonably detailed calculations supporting such Additional Costs.

Section 7.3.Taxes.

(a)All payments and distributions made hereunder by the Borrower (the “payor”) to any Lender (directly or to a Program Support Provider), any Managing Agent, any Bank Investor or the Agent (each, a “recipient”) shall be made free and clear of and without deduction for any present or future income, excise, stamp or franchise taxes and any other taxes, fees, duties, withholdings or other charges of any nature whatsoever imposed by any taxing authority on any recipient (or any assignee of such parties) (such non-excluded items being called “Taxes”), but excluding franchise taxes and taxes imposed on or measured by the recipient’s net income or gross receipts (“Excluded Taxes”).  In the event that any withholding or deduction from any payment made by the payor hereunder is required in respect of any Taxes, then such payor shall:

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(i)pay directly to the relevant authority the full amount required to be so withheld or deducted;

(ii)promptly forward to each Managing Agent an official receipt or other documentation satisfactory to each Managing Agent evidencing such payment to such authority; and

(iii)pay to the recipient such additional amount or amounts as is necessary to ensure that the net amount actually received by the recipient will equal the full amount such recipient would have received had no such withholding or deduction been required.

Moreover, if any Taxes are directly asserted against any recipient with respect to any payment received by such recipient hereunder, the recipient may pay such Taxes and the payor will promptly pay such additional amounts (including any penalties, interest or expenses) as shall be necessary in order that the net amount received by the recipient after the payment of such Taxes (including any Taxes on such additional amount) shall equal the amount such recipient would have received had such Taxes not been asserted.

If the payor fails to pay any Taxes when due to the appropriate taxing authority or fails to remit to the recipient the required receipts or other required documentary evidence, the payor shall indemnify the recipient for any incremental Taxes, interest, or penalties that may become payable by any recipient as a result of any such failure.

(b)Each Lender, Bank Investor or Conduit Assignee that is not a United States Person (as such term is defined in Section 7701(a)(30) of the Code (a “US Person”)) for United States federal income tax purposes (a “Non-US Lender”) shall deliver or caused to be delivered to the Borrower and the Agent the following properly completed and duly executed documents;

(i)two complete and executed (x) U.S. Internal Revenue Forms W-8BEN (or any successor form thereto) with respect to an income tax treaty providing for a zero rate of withholding tax on interest, or (y) U.S. Internal Revenue Service Forms W-8ECI (or any successor form thereto); or

(ii)two complete and executed U.S. Internal Revenue Service Forms W-8BEN (or any successor form thereto), including all appropriate attachments, documenting the status of such Lender, Bank Investor or Conduit Assignee as a Non-U.S. Lender and (y) a Section 5.11 Certificate.

Such documents shall be delivered by each such Lender, Bank Investor or Conduit Assignee on or before the date it becomes a party to this Loan Agreement and on or before the date, if any, such Lender, Bank Investor or Conduit Assignee changes its applicable lending office by designating a different lending office (a “New Lending Office”).  In addition, each Lender, Bank Investor or Conduit Assignee shall deliver to cause to be delivered such Forms and /or Certificates promptly upon or before the expiration, obsolescence or invalidity of any document previously delivered by such Lender, Bank Investor or Conduit Assignee.  Notwithstanding any other provision of this Section 7.3(b), a Lender, Bank Investor or Conduit

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Assignee shall not be required to deliver any document pursuant to this Section 7.3(b) that such Lender, Bank Investor or Conduit Assignee is not legally able to deliver.

(c)The Borrower shall not be required to indemnify any Lender, Bank Investor or Conduit Assignee or to pay any additional amounts to any Lender, Bank Investor or Conduit Assignee in respect of any U.S. federal income or withholding tax pursuant to this section 7.3 to the extent that the obligation to withhold any amounts with respect to U.S. federal income tax existed on the date such Lender, Bank Investor or Conduit Assignee became a party to this Loan Agreement.

Section 7.4.Other Costs and Expenses; Breakage Costs.

(a)The Borrower agrees, upon receipt of a written invoice, to cause to be paid, and to save the Lenders, the Surety Provider, the Bank Investors, the Managing Agents and the Agent harmless against liability for the payment of, all reasonable out-of-pocket expenses (including reasonable attorneys’ fees and expenses, any filing fees and expenses incurred by officers or employees of any Lender, any Bank Investor, any Managing Agent and/or the Agent) or intangible, documentary or recording taxes incurred by or on behalf of any Lender, any Bank Investor, any Managing Agent or the Agent (i) in connection with the preparation, negotiation, execution and delivery of this Loan Agreement, the other Operative Documents and any documents or instruments delivered pursuant hereto and thereto and the transactions contemplated hereby or thereby (including the perfection or protection of the Collateral) and (ii) from time to time (A) relating to any amendments, waivers or consents under this Loan Agreement and the other Operative Documents, (B) arising in connection with any Lender’s, any Bank Investor’s, any Managing Agent’s, the Surety Provider’s or the Agent’s enforcement or preservation of rights (including the perfection and protection of the Collateral under the CCA Agreement and this Loan Agreement) or (C) arising in connection with any audit, dispute, disagreement, litigation or preparation for litigation involving this Loan Agreement or any of the other Operative Documents (all of such amounts, collectively, “Transaction Costs”).

(b)The Borrower shall pay the Lenders or Bank Investors, as applicable, on demand an Early Collection Fee due on account of the reduction of the Net Investment on a day prior to a Remittance Date.

(c)The Borrower shall pay each Managing Agent for the account of the related Lender and the Bank Investors, as applicable, on demand, such amount or amounts as shall compensate the Lenders and any Bank Investors for any loss, cost or reasonable expense incurred by the Lenders or Bank Investors (as reasonably determined by the Agent) as a result of any reduction of any portion of any Loan other than on the maturity date of the Commercial Paper (or other financing source) funding such portion of any Loan, such compensation to be (i) limited to an amount equal to any loss or expense suffered by the Lenders or the Bank Investors during the period from the date of receipt of such repayment to (but excluding) the maturity date of such Commercial Paper (or other financing source) and (ii) net of the income, if any, received by the recipient of such reductions from investing the proceeds of such reductions of such portion of any Loan.  The determination by the Managing Agents of the amount of any such loss or expense shall be set forth in a written notice to the Borrower in reasonable detail and shall be

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conclusive, absent manifest error and shall be accompanied by reasonably appropriate back-up materials with respect to such amounts.

Section 7.5.Payment.  All amounts required to be paid by the Borrower under this Article VII (other than legal fees to be paid on the Closing Date pursuant to Section 7.4(a)(i)) shall be paid from the funds specified in and in accordance with Section 4.1(d)(viii) and (x) of the CCA Agreement.

ARTICLE 8

MISCELLANEOUS

Section 8.1.Term of Agreement.  This Loan Agreement shall terminate following the Facility Termination Date when the Net Investment has been reduced to zero, all accrued Discount has been paid in full, all other amounts due under this Loan Agreement have been paid in full and all other Aggregate Unpaids have been paid in full; provided, however, that (i) the rights and remedies of the Surety Provider, the Agent, the Managing Agents, the Bank Investors or the Lenders with respect to any representation and warranty made or deemed to be made by Borrower pursuant to this Loan Agreement, (ii) the indemnification and payment provisions of Article VII and (iii) the agreement set forth in Sections 8.9, 8.10 and 8.11 hereof, shall be continuing and shall survive any termination of this Loan Agreement.

Section 8.2.Waivers; Amendments.

(a)No failure or delay on the part of the Agent, any Managing Agent, any Bank Investor, the Surety Provider or any Lender in exercising any power, right, or remedy under this Loan Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right, or remedy preclude any other further exercise thereof or the exercise of any other power, right, or remedy.  The rights and remedies herein provided shall be cumulative and nonexclusive of any rights or remedies provided by law.

(b)Any provision of this Loan Agreement may be amended or waived if, but only if, such amendment is in writing and is signed by the Borrower, the Surety Provider, the Agent, the Managing Agents, the Majority Investors and the Lenders; provided that no such amendment or waiver shall, unless signed by each Bank Investor directly affected thereby, (i) increase the Commitment of a Bank Investor, (ii) reduce the Net Investment or rate of Discount to accrue thereon or any fees or other amounts payable hereunder, (iii) postpone any date fixed for the payment of any scheduled distribution in respect of the Net Investment or Discount with respect thereto or any fees or other amounts payable hereunder or for termination of any Commitment, (iv) change the percentage of the Commitments of Bank Investors which shall be required for the Bank Investors or any of them to take any action under this Section or any other provision of this Loan Agreement, (v) release all or substantially all of the property with respect to which a security or ownership interest therein has been granted hereunder to the Agent or the Bank Investors or (vi) extend or permit the extension of the Scheduled Termination Date (it being understood that a waiver of an Event of Default shall not constitute an extension or increase in the Commitment of any Bank Investor); and provided, further, that the signature of the Borrower and the Depositor shall not be required for the effectiveness of any amendment

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which modifies the representations, warranties, covenants or responsibilities of the Master Servicer at any time when the Master Servicer is not the Depositor or any Affiliate of the Depositor or a successor Master Servicer is designated by the Agent pursuant to Section 7.1.  In the event the Agent requests a Bank Investor’s consent pursuant to the foregoing provisions and the Agent does not receive a consent (either positive or negative) from such Bank Investor within ten (10) Business Days of such Bank Investor’s receipt of such request, then such Bank Investor (and its percentage interest hereunder) shall be disregarded in determining whether the Agent shall have obtained sufficient consent hereunder.

Section 8.3.Notices.  Except as provided below, all communications and notices provided for hereunder shall be in writing (including facsimile or electronic transmission or similar writing) and shall be given to the other party at its address or facsimile number set forth below or at such other address or facsimile number as such party may here-after specify for the purposes of notice to such party.  Each such notice or other communication shall be effective (a) if given by facsimile, when such facsimile is transmitted to the facsimile number specified in this Section and confirmation is received, (b) if given by mail three Business Days following such posting, (c) if given by overnight courier, one (1) Business Day after deposit thereof with a national overnight courier service, or (d) if given by any other means, when received at the address specified in this Section 8.3, provided that a Borrowing Request shall only be effective upon receipt by the related Managing Agent.  However, anything in this Section 8.3 to the contrary notwithstanding, the Borrower hereby authorizes the Managing Agents, the Bank Investors and the Lenders to effect Loans and Rate Period selections and to make Eligible Investments based on telephonic notices made by any Person which the Agent in good faith believes to be acting on behalf of the Borrower.  The Borrower agrees to deliver promptly to each Managing Agent a written confirmation of each telephonic notice signed by an Authorized Officer of the Borrower.  However, the absence of such confirmation shall not affect the validity of such notice.  If the written confirmation differs in any material respect from the action taken by the Agent, the records of the Agent shall govern absent manifest error.

If to the Lenders:

YC SUSI Trust

Bank of America, N.A.

231 S. LaSalle Street, 16^th Floor

Chicago, Illinois  60697

Attention:  John Svolos, Global Structured Finance

Telephone:  (312) 828-6220

Telecopy:  (312) 453-3412

(with a copy to the related Managing Agent)

Atlantic Asset Securitization Corp.
Calyon New York Branch Building

1301 Avenue of the Americas

New York, New York 10019
Attention:  Matthew Croghan
Telephone:  (212) 261-7819
Telecopy:  (212) 459-3258

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(with a copy to the related Managing Agent)

If to the Borrower:

Mid-State Trust IX
c/o Wilmington Trust Company
1100 North Market Street
Wilmington, Delaware 19890
Attention:  Bruce L. Bisson
Telephone:  (302) 651-1000
Telecopy:  (302) 651-8882

Payment Information:

Bank of America, Dallas TX

ABA # : 111 000 012

Acct. Name: Mid-State Trust IX

Acct. #:  375 056 1634

Ref: Mid-State Trust IX / YC SUSI Trust

with a copy to:

Mid-State Homes, Inc.
4211 W. Boy Scout Boulevard
Tampa, Florida  33607
Attention:  General Counsel
Telephone:  (813) 871-4120
Telecopy:  (813) 871-4430

If to the Collateral Agent:

Wachovia Bank, National Association
401 South Tryon Street
12^th Floor
Charlotte, North Carolina 28288-1179
Attention:  Corporate Trust Group
Telephone:  (704) 383-9568
Telecopy:  (704) 383-6039

If to the Agent, Managing Agent or Bank Investor:

Bank of America, N.A.

231 S. LaSalle Street, 16^th Floor

Chicago, Illinois  60697

Attention:  John Svolos, Global Structured Finance

Telephone:  (312) 828-6220

Telecopy:  (312) 453-3412

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Payment Information:

Deutsche Bank, New York
as Trustee for YC SUSI Trust

ABA 021-001-033
Account No. 00-428-541

Ref:  Mid-State
Attention:  Orinthia Skeete

If to the Managing Agent or Bank Investor:

Calyon New York Branch

Calyon New York Branch Building

1301 Avenue of the Americas

New York, New York 10019
Attention:  Matthew Croghan
Telephone:  (212) 261-7819
Telecopy:  (212) 459-3258

Payment Information:

Calyon New York Branch
ABA 026-008-073
for the account of
Atlantic Asset Securitization Corp.
Account No. 01-25680-0001-00-001
Attention:  Elaine Constantine

If to the Surety Provider:

Ambac Assurance Corporation.
One State Street Plaza, 19^th Floor
New York, New York 10004
Attention: Structured Finance -Mortgage-Backed Securities
Telephone:  (212) 208-3387
Telecopy:  (212) 363-1459

Section 8.4.Governing Law; Submission to Jurisdiction; Integration.

(a)THIS LOAN AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.  THE BORROWER HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND OF ANY NEW YORK STATE COURT SITTING IN THE CITY OF NEW YORK FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS LOAN AGREEMENT, ANY OTHER OPERATIVE DOCUMENT OR

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THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. THE BORROWER HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.  NOTHING IN THIS SECTION 8.4 SHALL AFFECT THE RIGHT OF THE AGENT, THE MANAGING AGENTS, THE LENDERS, THE SURETY PROVIDER OR ANY BANK INVESTOR TO BRING ANY ACTION OR PROCEEDING AGAINST THE BORROWER, OR ANY OF ITS PROPERTY IN THE COURTS OF OTHER JURISDICTIONS.

(b)EACH OF THE PARTIES HERETO HEREBY WAIVES ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE, AMONG ANY OF THEM ARISING OUT OF, CONNECTED WITH, RELATING TO OR INCIDENTAL TO THE RELATIONSHIP BETWEEN THEM IN CONNECTION WITH THIS LOAN AGREEMENT OR THE OTHER OPERATIVE DOCUMENTS.

(c)This Loan Agreement contains the final and complete integration of all prior expressions by the parties hereto with respect to the subject matter hereof and shall constitute the entire Agreement among the parties hereto with respect to the subject matter hereof superseding all prior oral or written understandings.

Section 8.5.Severability; Counterparts.  This Loan Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same Agreement.  Any provisions of this Loan Agreement which are prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.  Delivery by facsimile of an executed signature page of this Loan Agreement shall be effective as delivery of an executed counterpart hereof.

Section 8.6.Successors and Assigns.

(a)This Loan Agreement shall be binding on the parties hereto and the Surety Provider and their respective successors and assigns; provided, however, that the Borrower may not assign any of its rights or delegate any of its duties hereunder without the prior written consent of the Surety Provider and the Agent.  Except as set forth in clause (b) below, no provision of this Loan Agreement shall in any manner restrict the ability of any Lender or any Bank Investor to assign, participate, grant security interests in, or otherwise transfer any portion of its interest under the Operative Documents.

(b)Any Bank Investor may assign all or any portion of its Commitment and its interest in the Net Investment and its other rights and obligations hereunder to any Person with the written approval of a Managing Agent, on behalf of the related Lender, the Agent and, if

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such assignee is not an Affiliate of the related Managing Agent, the reasonable consent of the Borrower.  Such Person shall, upon the execution of the Assignment and Assumption Agreement referred to below, become a Bank Investor hereunder.  In connection with any such assignment, the assignor shall deliver to the assignee(s) an Assignment and Assumption Agreement, duly executed, assigning to such assignee a pro rata interest in such assignor’s Commitment and other obligations hereunder and in the Net Investment and other rights hereunder, and such assignor shall promptly execute and deliver all further instruments and documents, and take all further action, that the assignee may reasonably request, in order to protect, or more fully evidence the assignee’s right, title and interest in and to such interest and to enable the Agent, on behalf of such assignee, to exercise or enforce any rights hereunder and under the other Operative Documents to which such assignor is or, immediately prior to such assignment, was a party.  Upon any such assignment, (i) the assignee shall have all of the rights and obligations of the assignor hereunder and under the other Operative Documents to which such assignor is or, immediately prior to such assignment, was a party with respect to such assignor’s Commitment and interest in the Net Investment for all purposes of this Loan Agreement and under the other Operative Documents to which such assignor is or, immediately prior to such assignment, was a party and (ii) the assignor shall have no further obligations with respect to the portion of its Commitment which has been assigned and shall relinquish its rights with respect to the portion of its interest in the Net Investment which has been assigned for all purposes of this Loan Agreement and under the other Operative Documents to which such assignor is or, immediately prior to such assignment, was a party.  No such assignment shall be effective unless a fully executed copy of the related Assignment and Assumption Agreement shall be delivered to the Agent and the Borrower.  Upon execution, the Agent shall deliver a copy of the related Assignment and Assumption Agreement to the Collateral Agent.  All costs and expenses of the Agent incurred in connection with any assignment hereunder shall be borne by the Bank Investor and such assignee.  No Bank Investor shall assign any portion of its Commitment hereunder without also simultaneously assigning an equal portion of its interest in the Program Support Agreement to which it is a party or under which it has acquired a participation.

(c)By executing and delivering an Assignment and Assumption Agreement, the assignor and assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Assumption Agreement, the assignor makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Loan Agreement, the other Operative Documents or any other instrument or document furnished pursuant hereto or thereto or the execution, legality, validity, enforceability, genuineness, sufficiency or value or this Loan Agreement, the other Operative Documents or any such other instrument or document; (ii) the assignor makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower, any Eligible Originator, the Originator, the Depositor or the Master Servicer or the performance or observance by the Borrower, any Eligible Originator, the Originator, the Depositor or the Master Servicer of any of their respective obligations under this Loan Agreement, the other Operative Documents or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Loan Agreement, each other Operative Document and such other instruments, documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Assumption Agreement and to purchase such interest; (iv) such assignee will, independently and without reliance upon the Agent, or any of its Affiliates, or the

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assignor and based on such agreements, documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Loan Agreement and the other Operative Documents; (v) such assignee appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Loan Agreement, the other Operative Documents and any other instrument or document furnished pursuant hereto or thereto as are delegated to the Agent by the terms hereof or thereof, together with such powers as are reasonably incidental thereto and to enforce its respective rights and interests in and under this Loan Agreement, the other Operative Documents and the Affected Assets; (vi) such assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of this Loan Agreement and the other Operative Documents are required to be performed by it as the assignee of the assignor; and (vii) such assignee agrees that it will not institute against any Lender any proceeding of the type referred to in Section 8.10 prior to the date which is one year and one day after the payment in full of all Commercial Paper issued by the Lender.

Section 8.7.Waiver of Confidentiality.  The Borrower hereby consents to the disclosure of any non-public information with respect to it received by any Lender, the Surety Provider, the Agent, any Managing Agent or any Bank Investor (A) to any of any Lender, any nationally recognized rating agency rating a Lender’s commercial paper, the Surety Provider, the Agent, any Managing Agent, the Liquidity Provider, the Dealers, or the Credit Support Provider, any other Bank Investor, any dealer or placement agent of or depositary for a Lender’s Commercial Paper or any of such Person’s counsel or accountants in relation to this Loan Agreement or (B) to such other Persons in connection with the enforcement by any such Person of its rights hereunder or under any other Operative Document.  Such consent shall not extend to information concerning any Affiliate of the Borrower.

Section 8.8.Confidentiality Agreement.

(a)The Borrower hereby agrees that it will not disclose the contents of this Loan Agreement or any other proprietary or confidential information of any Lender, any Bank Investor, the Agent, any Managing Agent, the Surety Provider, the Collateral Agent, the Liquidity Provider or the Credit Support Provider to any other Person except (i) its auditors and attorneys, employees or financial advisors (other than any commercial bank), and any nationally recognized rating agency, provided such auditors, attorneys, employees, financial advisors, or rating agencies are informed of the highly confidential nature of such information or (ii) as otherwise required by applicable law or order of a court of competent jurisdiction.

(b)The Lenders, the Bank Investors, the Surety Provider, the Agent, the Managing Agents and the Collateral Agent each hereby agrees that it will not disclose the contents of this Loan Agreement or any other proprietary or confidential information of the Borrower or any Affiliate of the Borrower to any other Person except (i) its auditors and attorneys, employees or financial advisors (other than any commercial bank), and any nationally recognized rating agency, provided such auditors, attorneys, employees, financial advisors, or rating agencies are informed of the highly confidential nature of such information, (ii) as otherwise required by applicable law or order of a court of competent jurisdiction or (iii) as permitted pursuant to Section 8.7.

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(c)Notwithstanding anything herein to the contrary, except as reasonably necessary to comply with applicable securities laws, each party (and each employee, representative or other agent of each party) hereto may disclose to any and all persons, without limitation of any kind, any information with respect to the United States federal income “tax treatment” and “tax structure” (in each case, within the meaning of Treasury Regulation Section 1.6011-4) of the transactions contemplated hereby and all materials of any kind (including opinions or other tax analyses) that are provided to such parties (or their representatives) relating to such tax treatment and tax structure; provided that with respect to any document or similar item that in either case contains information concerning the tax treatment or tax structure of the transaction as well as other information, this sentence shall only apply to such portions of the document or similar item that relate to the United States federal income tax treatment or tax structure of the transactions contemplated hereby.

Section 8.9.Liability of Owner Trustee.  It is expressly understood and agreed by the parties hereto that (a) this Loan Agreement is executed and delivered by Wilmington Trust Company, not individually or personally but solely as Owner Trustee under the Trust Agreement, in the exercise of the powers and authority conferred and vested in it as the Owner Trustee, (b) each of the representations, undertakings and agreements herein made on the part of the Borrower is made and intended not as personal representations, undertakings and agreements by Wilmington Trust Company but is made and intended for the purpose for binding only the Borrower, (c) nothing herein contained shall be construed as creating any liability on Wilmington Trust Company, individually or personally, to perform any covenant either expressed or implied contained herein, all such liability, if any, being expressly waived by the other parties hereto and by any Person claiming by, through or under such parties and (d) under no circumstances shall Wilmington Trust Company be personally liable for the payment of any indebtedness or expenses of the Borrower or be liable for the breach or failure of any obligation, representation, warranty or covenant made or undertaken by the Borrower under this Loan Agreement.

Section 8.10.No Bankruptcy Petition Against the Lender.  The Borrower hereby covenants and agrees that, prior to the date which is one year and one day after the payment in full of all outstanding Commercial Paper or other indebtedness of the Lenders, it will not institute against, or join any other Person in instituting against, any Lender any bankruptcy, reorganization, arrangement, insolvency, or liquidation proceedings or other similar proceeding under the laws of the United States or any state of the United States.

Section 8.11.No Recourse Against Lender.  Notwithstanding anything to the contrary contained in this Loan Agreement, the obligations of the Lenders under this Loan Agreement and all other Operative Documents are solely the corporate obligations of the Lenders and shall be payable solely to the extent of funds received from the Borrower in accordance herewith or from any party to any Operative Document in accordance with the terms thereof in excess of funds necessary to pay matured and maturing Commercial Paper.

Section 8.12.Assignment by Lenders to Conduit Assignee.

(a)Without limiting Section 2.14 or 8.6 hereof, a Lender may, from time to time, with prior or concurrent notice to the Borrower and the Master Servicer, in one transaction

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or a series of transactions, assign all or a portion of the Net Investment and its rights and obligations under this Loan Agreement and any other Operative Documents to which it is a party to a Conduit Assignee.  Upon and to the extent of such assignment by a Lender to a Conduit Assignee, (i) such Conduit Assignee shall be the owner of the assigned portion of the Net Investment, (ii) the related administrator for such Conduit Assignee will act as the Managing Agent for such Conduit Assignee, with all corresponding rights and powers, express or implied, granted to the Managing Agents hereunder or under the other Operative Documents, (iii) such Conduit Assignee and its liquidity support provider(s) and credit support provider(s) and other related parties shall have the benefit of all the rights and protections provided to such Lender and its Program Support Provider(s) herein and in the other Operative Documents (including any limitation on recourse against such Conduit Assignee or related parties, any agreement not to file or join in the filing of a petition to commence an insolvency proceeding against such Conduit Assignee, and the right to assign to another Conduit Assignee as provided in this paragraph), (iv) such Conduit Assignee shall assume all (or the assigned or assumed portion) of such Lender’s obligations, if any, hereunder or any other Operative Document, and such Lender shall be released from such obligations, in each case to the extent of such assignment, and the obligations of such Lender and such Conduit Assignee shall be several and not joint, (v) all distributions in respect of the Net Investment shall be made to the applicable agent or Managing Agent, as applicable, on behalf of the related Lender and such Conduit Assignee on a pro rata basis according to their respective interests, (vi) the definition of the term “CP Rate” with respect to the portion of the Net Investment funded with commercial paper issued by the related Lender from time to time shall be determined in the manner set forth in the definition of “CP Rate” applicable to such Lender on the basis of the interest rate or discount applicable to commercial paper issued by such Conduit Assignee (rather than the Lender), (vii) the defined terms and other terms and provisions of this Loan Agreement and the other Operative Documents shall be interpreted in accordance with the foregoing, and (viii) if requested by the Agent or a Managing Agent with respect to the Conduit Assignee, the parties will execute and deliver such further agreements and documents and take such other actions as the Agent or such Managing Agent may reasonably request to evidence and give effect to the foregoing.  No assignment by a Lender to a Conduit Assignee of all or any portion of the Net Investment shall in any way diminish the related Bank Investors’ obligation under Section 2.3 to fund any Investment not funded by such Lender or such Conduit Assignee or to acquire from such Lender or such Conduit Assignee all or any portion of the Net Investment pursuant to Section 2.14.  The Agent shall promptly notify the Collateral Agent of any such assignment.

(b)In the event that a Lender makes an assignment to a Conduit Assignee in accordance with clause (a) above, the Bank Investors: (i) if requested by Bank of America, shall terminate their participation in the applicable Program Support Agreement to the extent of such assignment, (ii) if requested by Bank of America, shall execute (either directly or through a participation agreement, as determined by the Managing Agents) the program support agreement related to such Conduit Assignee, to the extent of such assignment, the terms of which shall be substantially similar to those of the participation or other agreement entered into by such Bank Investor with respect to the applicable Program Support Agreement (or which shall be otherwise reasonably satisfactory to Bank of America and the Bank Investors), (iii) if requested by such Lender, shall enter into such agreements as requested by the Lender pursuant to which they shall be obligated to provide funding to the Conduit Assignee on substantially the same terms and conditions as is provided for in this Loan Agreement in respect of the Lender (or which

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agreements shall be otherwise reasonably satisfactory to the Lender and the Bank Investors), and (iv) shall take such actions as the Agent shall reasonably request in connection therewith.

Section 8.13.Assignment by a Lender to Program Support Provider.  The Borrower hereby agrees and consents to the assignment by any Lender from time to time of all or any part of its rights under, interest in and title to this Loan Agreement and the Net Investment to any Program Support Provider.

Section 8.14.Surety Provider Default.  Notwithstanding anything herein to the contrary, if a Surety Provider Default has occurred and is continuing, any provision giving the Surety Provider the right to consent, appoint, direct, approve of or take any action (or waive any right to take action) hereunder shall be inoperative and such rights shall be vested in the Agent; provided, however, that upon the cure of any such Surety Provider Default, such rights shall be reinstated.

Section 8.15.Subrogation and Cooperation. The Borrower, the Lenders and the Bank Investors acknowledge that (i) to the extent that the Surety Provider makes payments under the Surety Bond on account of amounts due on the VFN, the Surety Provider will be fully subrogated to the rights of the Lenders and/or the Bank Investors, as applicable, to the extent thereof, to receive such amounts and (ii) the Surety Provider shall be entitled to be paid such amounts but only from the source and in the manner provided herein and in the other Operative Documents for the payment of such amounts. Each of the Lenders and the Bank Investors shall cooperate in all respects with any reasonable request by the Surety Provider for action to preserve or enforce the Surety Provider’s rights or interest under this Loan Agreement and each of the other Operative Documents without limiting the rights of the Lenders and/or the Bank Investors as otherwise herein set forth, including, without limitation, a request to take any one or more of the following actions, in accordance with the terms of the CCA Agreement:

(i)institute proceedings for the collection of all amounts then payable on the VFN, or under this Loan Agreement in respect of the VFN and all amounts payable under the Operative Documents and to enforce any judgment obtained and collect from the Borrower moneys adjudged due;

(ii)sell the Collateral or any portion thereof or rights or interest therein, at one or more public or private sales called and conducted in any manner permitted by law;

(iii)file or record all assignments of Accounts that have not previously been recorded; and/or

(iv)exercise any remedies of a secured party under the UCC and take any appropriate action to protect and enforce the rights and remedies of the Surety Provider hereunder; provided, however that the actions described in clauses (i), (ii) and (iv) above may only be requested following the occurrence of an Event of Default.

Section 8.16.Benefits of Agreement.  The Surety Provider and its successors and assigns shall be third party beneficiaries to the provisions of this Loan Agreement entitled to enforce the provisions hereof.

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Section 8.17.Limitation on Payments.  Each party hereto acknowledges and agrees that (i) YC SUSI Trust is a Delaware statutory trust and that all obligations which YC SUSI Trust has or may in the future have to any party to this Agreement or any other party in respect of this Agreement or the other Operative Documents are obligations and liabilities solely of the series of the trust, as provided in Section 3806(b)(2) of Chapter 38 of Title 12 of the Delaware Code, 12 Del.Code §3801 et. seq., which has been designated to hold the VFN and to have the rights and obligations of a Lender under this Agreement and the other Operative Documents and not of the YC SUSI Trust generally and that any such obligations and liabilities may be satisfied solely from the assets of such series of the trust and (ii) Atlantic Asset Securitization Corp. is a Delaware corporation and that all obligations which Atlantic Asset Securitization Corp. has or may in the future have to any party to this Agreement or any other party in respect of this Agreement or the other Operative Documents are obligations and liabilities solely of Atlantic Asset Securitization Corp.

ARTICLE 9

THE AGENT

Section 9.1.Appointment and Authorization of Agent.  Each Bank Investor and each Lender hereby irrevocably appoints, designates and authorizes the Agent to take such action on its behalf under the provisions of this Loan Agreement and each other Operative Document and to exercise such powers and perform such duties as are expressly delegated to the Agent by the terms of this Loan Agreement and any other Operative Document, together with such other powers as are reasonably incidental thereto.  Notwithstanding any provision to the contrary contained elsewhere in this Loan Agreement or in any other Operative Document, the Agent shall not have any duties or responsibilities, except those expressly set forth in this Loan Agreement, nor shall the Agent have or be deemed to have any fiduciary relationship with any Lender or any Investor, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Loan Agreement or any other Operative Document or otherwise exist against the Agent.  Without limiting the generality of the foregoing sentence, the use of the term “agent” in this Loan Agreement with reference to the Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable Law.  Instead, such term is used merely as a matter of market custom, and is intended to create or reflect only an administrative relationship between independent contracting parties.

Section 9.2.Delegation of Duties.  The Agent may execute any of its duties under this Loan Agreement or any other Operative Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties.  The Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects with reasonable care.

Section 9.3.Liability of Agent.  No Agent-Related Person shall (a) be liable for any action taken or omitted to be taken by any of them under or in connection with this Loan Agreement or any other Operative Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct), or (ii) be responsible in any manner to any Investor for any recital, statement, representation or warranty made by the Borrower, any

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Eligible Originator, the Originator, the Depositor or the Master Servicer, or any officer thereof, contained in this Loan Agreement or in any other Operative Document, or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Loan Agreement or any other Operative Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Loan Agreement or any other Operative Document, or for any failure of the Borrower, any Eligible Originator, the Originator, the Depositor, the Master Servicer or any other party to any Operative Document to perform its obligations hereunder or thereunder.  No Agent-Related Person shall be under any obligation to any Lender or any Bank Investor to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Loan Agreement or any other Operative Document, or to inspect the properties, books or records of the Borrower, any Eligible Originator, the Originator, the Depositor or the Master Servicer or any of their respective Affiliates.

Section 9.4.Reliance by Agent.

(a)the Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to the Borrower, any Eligible Originator, the Originator, the Depositor and the Master Servicer), independent accountants and other experts selected by the Agent.  The Agent shall be fully justified in failing or refusing to take any action under this Loan Agreement or any other Operative Document unless it shall first receive such advice or concurrence of the Majority Investors as it deems appropriate and, if it so requests, it shall first be indemnified to its satisfaction by the Lenders and the Bank Investors against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action.  The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Loan Agreement or any other Operative Document in accordance with a request or consent of the Majority Investors or, if required hereunder, all Investors and such request and any action taken or failure to act pursuant thereto shall be binding upon all of the Investors.

(b)For purposes of determining compliance with the conditions specified in Article V, each Lender and each Bank Investor that has executed this Loan Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter either sent by the Agent to such Lender or such Bank Investor for consent, approval, acceptance or satisfaction, or required thereunder to be consented to or approved by or acceptable or satisfactory to such Lender or such Bank Investor.

Section 9.5.Notice of Potential Event of Default, Event of Default Facility, Termination Event or Servicer Default.  The Agent shall not be deemed to have knowledge or notice of the occurrence of a Potential Event of Default, an Event of Default, Facility Termination Event or a Servicer Default, unless the Agent has received written notice from a Lender, the Surety Provider, a Bank Investor or the Borrower referring to this Loan Agreement, describing such Potential Event of Default, an Event of Default, Facility Termination Event or Servicer Default and stating that such notice is a “Notice of Potential Event of Default,” “Notice

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of Event of Default”, “Notice of Facility Termination Date” or “Notice of Servicer Default,” as applicable.  The Agent will notify the Bank Investors and the Borrower of its receipt of any such notice.  The Agent shall (subject to Section 9.4) take such action with respect to such Potential Event of Default, Event of Default, Facility Termination Event or Servicer Default as may be requested by the Majority Investors, provided, however, that, unless and until the Agent shall have received any such request, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Potential Event of Default, Event of Default or Servicer Default as it shall deem advisable or in the best interest of the Lenders and the Bank Investors.

Section 9.6.Credit Decision; Disclosure of Information by the Agent.  Each Bank Investor and each Lender acknowledges that none of the Agent-Related Persons has made any representation or warranty to it, and that no act by the Agent hereinafter taken, including any consent to and acceptance of any assignment or review of the affairs of the Borrower, the Master Servicer, the Originator, any Eligible Originator, the Depositor or any of their respective Affiliates, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Bank Investor or any Lender as to any matter, including whether the Agent-Related Persons have disclosed material information in their possession.  Each Bank Investor and each Lender, including any Bank Investor by assignment, represents to the Agent that it has, independently and without reliance upon any Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of the Borrower, the Master Servicer, the Originator, each Eligible Originator, the Depositor or their respective Affiliates, and all applicable bank regulatory laws relating to the transactions contemplated hereby, and made its own decision to enter into this Loan Agreement and to extend credit to the Borrower hereunder.  Each Bank Investor and each Lender also represents that it shall, independently and without reliance upon any Agent-Related Person and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Loan Agreement and the other Operative Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of the Borrower, the Master Servicer, each Eligible Originator, the Depositor or the Originator.  Except for notices, reports and other documents expressly herein required to be furnished to the Bank Investors and the Lenders by the Agent herein, the Agent shall not have any duty or responsibility to provide any Investor with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of the Borrower, the Master Servicer, the Originator, each Eligible Originator, the Depositor or their respective Affiliates which may come into the possession of any of the Agent-Related Persons.

Section 9.7.Indemnification of the Agent.  Whether or not the transactions contemplated hereby are consummated, the Bank Investors shall indemnify upon demand each Agent-Related Person (to the extent not reimbursed by or on behalf of the Borrower and without limiting the obligation of the Borrower to do so), pro rata, and hold harmless each Agent-Related Person from and against any and all Indemnified Amounts incurred by it; provided, however, that no Bank Investor shall be liable for the payment to any Agent-Related Person of any portion of such Indemnified Amounts resulting from such Person’s gross negligence or willful

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misconduct; provided, however, that no action taken in accordance with the directions of the Majority Investors shall be deemed to constitute gross negligence or willful misconduct for purposes of this Section.  Without limitation of the foregoing, each Bank Investor shall reimburse the Agent upon demand for its ratable share of any costs or out-of-pocket expenses (including attorney’s fees) incurred by the Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Loan Agreement, any other Operative Document, or any document contemplated by or referred to herein, to the extent that the Agent is not reimbursed for such expenses by or on behalf of the Borrower.  The undertaking in this Section 9.7 shall survive payment of all Aggregate Unpaids and the resignation or replacement of the Agent.

Section 9.8.Agent in Individual Capacity.  Bank of America (and any successor acting as Agent) and its Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with any of the Borrower, the Originator, any Eligible Originator, the Depositor and the Master Servicer or any of their Subsidiaries or Affiliates as though Bank of America were not the Agent or a Bank Investor hereunder and without notice to or consent of the Lenders or the Bank Investors.  The Bank Investors acknowledge that, pursuant to such activities, Bank of America or its Affiliates may receive information regarding the Borrower, the Originator, the Master Servicer, each Eligible Originator, the Depositor or their respective Affiliates (including information that may be subject to confidentiality obligations in favor of such Person) and acknowledge that the Agent shall be under no obligation to provide such information to them.  With respect to its Commitment, Bank of America (and any successor acting as Agent) in its capacity as a Bank Investor hereunder shall have the same rights and powers under this Loan Agreement as any other Bank Investor and may exercise the same as though it were not the Agent or a Bank Investor, and the term “Bank Investor” or “Bank Investors” shall, unless the context otherwise indicates, include the Agent in its individual capacity.

Section 9.9.Resignation of Agent.  The Agent may resign as Agent upon thirty (30) days’ notice to the Bank Investors and the Lenders.  If the Agent resigns under this Loan Agreement, the Majority Investors shall appoint, with the consent of the Borrower, which consent shall not unreasonably be withheld, from among the Bank Investors a successor agent for the Bank Investors.  If no successor agent is appointed prior to the effective date of the resignation of the Agent, the Agent may appoint, after consulting with the Bank Investors a successor agent from among the Bank Investors and, with the consent of the Borrower, which consent shall not unreasonably be withheld.  Upon the acceptance of its appointment as successor agent hereunder, such successor agent shall succeed to all the rights, powers and duties of the retiring Agent and the term “Agent” shall mean such successor agent and the retiring Agent’s appointment, powers and duties as Agent shall be terminated.  After any retiring Agent’s resignation hereunder as Agent, the provisions of this Section 9.9 and Sections 9.3 and 9.7 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was the Agent under this Loan Agreement.  If no successor agent has accepted appointment as Agent by the date which is thirty (30) days following a retiring Agent’s notice of resignation, the retiring Agent’s resignation shall nevertheless thereupon become effective and the Bank Investors shall

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perform all of the duties of the Agent hereunder until such time, if any, as the Majority Investors appoint a successor agent as provided for above.

Section 9.10.Payments by the Agent.  Unless specifically allocated to a Bank Investor pursuant to the terms of this Loan Agreement, all amounts received by the Agent on behalf of the Bank Investors shall be paid by the Agent to the Bank Investors (at their respective accounts specified in their respective Assignment and Assumption Agreements) pro rata in accordance with their respective outstanding funded portions of the Net Investment on the Business Day received by the Agent, unless such amounts are received after 12:00 noon on such Business Day, in which case the Agent shall use its reasonable efforts to pay such amounts to the Bank Investors on such Business Day, but, in any event, shall pay such amounts to the Bank Investors not later than the following Business Day.

Section 9.11.Notification by Agent.

(a)The Agent agrees, upon its receipt of notice of a Facility Termination Date described in clause (b), (d) or (e) of the definition thereof, to promptly notify the Borrower of any such occurrence; provided, however, that no failure to give or any delay in giving such notice shall affect the occurrence of the Facility Termination Date.

(b)The Agent agrees to provide a copy of the following notices, reports or certificates received by it under this Loan Agreement to the Surety Provider promptly upon receipt thereof:(i)acknowledgment copies of financing statements referred to in Section 4.2(e) hereof; and documents required pursuant to Section 4.2(f) hereof; and

(ii)any financial information required pursuant to Section 5.1(b) hereof.

ARTICLE 10

THE MANAGING AGENTS

Section 10.1.Appointment and Authorization of Managing Agents.  With respect to each applicable Group, each Bank Investor and the related Lender hereby irrevocably appoints, designates and authorizes the related Managing Agent to take such action on its behalf under the provisions of this Loan Agreement and each other Operative Document and to exercise such powers and perform such duties as are expressly delegated to such Managing Agent by the terms of this Loan Agreement and any other Operative Document, together with such other powers as are reasonably incidental thereto.  Notwithstanding any provision to the contrary contained elsewhere in this Loan Agreement or in any other Operative Document, such Managing Agent shall not have any duties or responsibilities, except those expressly set forth in this Loan Agreement, nor shall such Managing Agent have or be deemed to have any fiduciary relationship with the related Lender or any Investor, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Loan Agreement or any other Operative Document or otherwise exist against such Managing Agent.  Without limiting the generality of the foregoing sentence, the use of the term “agent” in this Loan Agreement with reference to such Managing Agent is not intended to connote any fiduciary or other implied (or express)

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obligations arising under agency doctrine of any applicable Law.  Instead, such term is used merely as a matter of market custom, and is intended to create or reflect only an administrative relationship between independent contracting parties.

Section 10.2.Delegation of Duties.  Each Managing Agent may execute any of its duties under this Loan Agreement or any other Operative Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties.  No Managing Agent shall be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects with reasonable care.

Section 10.3.Liability of Managing Agents.  No Agent-Related Person shall (a) be liable for any action taken or omitted to be taken by any of them under or in connection with this Loan Agreement or any other Operative Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct), or (ii) be responsible in any manner to any Investor for any recital, statement, representation or warranty made by the Borrower, any Eligible Originator, the Originator, the Depositor or the Master Servicer, or any officer thereof, contained in this Loan Agreement or in any other Operative Document, or in any certificate, report, statement or other document referred to or provided for in, or received by the Managing Agents under or in connection with, this Loan Agreement or any other Operative Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Loan Agreement or any other Operative Document, or for any failure of the Borrower, any Eligible Originator, the Originator, the Depositor, the Master Servicer or any other party to any Operative Document to perform its obligations hereunder or thereunder.  No Agent-Related Person shall be under any obligation to any Lender or any Bank Investor to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Loan Agreement or any other Operative Document, or to inspect the properties, books or records of the Borrower, any Eligible Originator, the Originator, the Depositor or the Master Servicer or any of their respective Affiliates.

Section 10.4.Reliance by Managing Agents.(a)Each Managing Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to the Borrower, any Eligible Originator, the Originator, the Depositor and the Master Servicer), independent accountants and other experts selected by the Managing Agents.  Each Managing Agent shall be fully justified in failing or refusing to take any action under this Loan Agreement or any other Operative Document unless it shall first receive such advice or concurrence of the Majority Investors as it deems appropriate and, if it so requests, it shall first be indemnified to its satisfaction by the Lenders and the Bank Investors against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action.  Each Managing Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Loan Agreement or any other Operative Document in accordance with a request or consent of the Majority Investors or, if required hereunder, all Investors and such request and any action taken or failure to act pursuant thereto shall be binding upon all of the Investors.(b)For purposes of determining compliance with the conditions specified in Article V, each Lender and each Bank Investor that has executed this

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Loan Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter either sent by the Managing Agents to such Lender or such Bank Investor for consent, approval, acceptance or satisfaction, or required thereunder to be consented to or approved by or acceptable or satisfactory to such Lender or such Bank Investor.

Section 10.5.Notice of Potential Event of Default, Event of Default Facility, Termination Event or Servicer Default.  No Managing Agent shall be deemed to have knowledge or notice of the occurrence of a Potential Event of Default, an Event of Default, Facility Termination Event or a Servicer Default, unless a Managing Agent has received written notice from a Lender, the Surety Provider, a Bank Investor or the Borrower referring to this Loan Agreement, describing such Potential Event of Default, an Event of Default, Facility Termination Event or Servicer Default and stating that such notice is a “Notice of Potential Event of Default,” “Notice of Event of Default”, “Notice of Facility Termination Date” or “Notice of Servicer Default,” as applicable.  Each Managing Agent will notify the Bank Investors and the Borrower of its receipt of any such notice.  Each Managing Agent shall (subject to Section 10.4) take such action with respect to such Potential Event of Default, Event of Default, Facility Termination Event or Servicer Default as may be requested by the Majority Investors, provided, however, that, unless and until a Managing Agent shall have received any such request, such Managing Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Potential Event of Default, Event of Default or Servicer Default as it shall deem advisable or in the best interest of the Lenders and the Bank Investors.

Section 10.6.Credit Decision; Disclosure of Information by the Managing Agents.  Each Bank Investor and each Lender acknowledges that none of the Agent-Related Persons has made any representation or warranty to it, and that no act by the Managing Agents hereinafter taken, including any consent to and acceptance of any assignment or review of the affairs of the Borrower, the Master Servicer, the Originator, any Eligible Originator, the Depositor or any of their respective Affiliates, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Bank Investor or any Lender as to any matter, including whether the Agent-Related Persons have disclosed material information in their possession.  Each Bank Investor and each Lender, including any Bank Investor by assignment, represents to the Managing Agents that it has, independently and without reliance upon any Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of the Borrower, the Master Servicer, the Originator, each Eligible Originator, the Depositor or their respective Affiliates, and all applicable bank regulatory laws relating to the transactions contemplated hereby, and made its own decision to enter into this Loan Agreement and to extend credit to the Borrower hereunder.  Each Bank Investor and each Lender also represents that it shall, independently and without reliance upon any Agent-Related Person and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Loan Agreement and the other Operative Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of the Borrower, the Master Servicer, each Eligible Originator, the Depositor or the Originator.  Except for notices, reports and other documents expressly herein required to be furnished to the Bank Investors and

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the Lenders by the Managing Agents herein, the Managing Agents shall not have any duty or responsibility to provide any Investor with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of the Borrower, the Master Servicer, the Originator, each Eligible Originator, the Depositor or their respective Affiliates which may come into the possession of any of the Agent-Related Persons.

Section 10.7.Indemnification of the Managing Agents.  Whether or not the transactions contemplated hereby are consummated, the Bank Investors shall indemnify upon demand each Agent-Related Person (to the extent not reimbursed by or on behalf of the Borrower and without limiting the obligation of the Borrower to do so), pro rata, and hold harmless each Agent-Related Person from and against any and all Indemnified Amounts incurred by it; provided, however, that no Bank Investor shall be liable for the payment to any Agent-Related Person of any portion of such Indemnified Amounts resulting from such Person’s gross negligence or willful misconduct; provided, however, that no action taken in accordance with the directions of the Majority Investors shall be deemed to constitute gross negligence or willful misconduct for purposes of this Section.  Without limitation of the foregoing, with respect to each Group, each Bank Investor shall reimburse the related Managing Agent upon demand for its ratable share of any costs or out-of-pocket expenses (including attorney’s fees) incurred by such Managing Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Loan Agreement, any other Operative Document, or any document contemplated by or referred to herein, to the extent that such Managing Agent is not reimbursed for such expenses by or on behalf of the Borrower.  The undertaking in this Section 10.7 shall survive payment of all Aggregate Unpaids and the resignation or replacement of the Managing Agents.

Section 10.8.Managing Agents in Individual Capacity.  Bank of America and Calyon (and any successors acting as Managing Agent) and their Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with any of the Borrower, the Originator, any Eligible Originator, the Depositor and the Master Servicer or any of their Subsidiaries or Affiliates as though Bank of America and Calyon were not the Managing Agents or Bank Investors hereunder and without notice to or consent of the Lenders or the Bank Investors.  The Bank Investors acknowledge that, pursuant to such activities, Bank of America and Calyon or their Affiliates may receive information regarding the Borrower, the Originator, the Master Servicer, each Eligible Originator, the Depositor or their respective Affiliates (including information that may be subject to confidentiality obligations in favor of such Person) and acknowledge that the Managing Agents shall be under no obligation to provide such information to them.  With respect to its Group’s Commitment, Bank of America and Calyon (and any successors acting as Managing Agent) in their capacities as Bank Investors hereunder shall have the same rights and powers under this Loan Agreement as any other Bank Investor and may exercise the same as though they were not a Managing Agent or a Bank Investor, and the term “Bank Investor” or “Bank Investors” shall, unless the context otherwise indicates, include the Managing Agents in its individual capacity.

Section 10.9.Resignation of Managing Agents.  Each Managing Agent may resign as Managing Agent upon thirty (30) days’ notice to the Bank Investors and the Lenders.  If a

54

Managing Agent resigns under this Loan Agreement, with respect to each Group, the Majority Investors shall appoint, with the consent of the Borrower, which consent shall not unreasonably be withheld, from among the Bank Investors a successor agent for the Bank Investors.  If no successor agent is appointed prior to the effective date of the resignation of a Managing Agent, such Managing Agent may appoint, after consulting with the related Bank Investors a successor agent from among such Bank Investors and, with the consent of the Borrower, which consent shall not unreasonably be withheld.  Upon the acceptance of its appointment as successor agent hereunder, such successor agent shall succeed to all the rights, powers and duties of the retiring Managing Agent and the term “Managing Agent” shall include such successor agent and the retiring Managing Agent’s appointment, powers and duties as Managing Agent shall be terminated.  After any retiring Managing Agent’s resignation hereunder as Managing Agent, the provisions of this Section 10.9 and Sections 10.3 and 10.7 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was a Managing Agent under this Loan Agreement.  If no successor agent has accepted appointment as a Managing Agent by the date which is thirty (30) days following a retiring Managing Agent’s notice of resignation, the retiring Managing Agent’s resignation shall nevertheless thereupon become effective and the related Bank Investors shall perform all of the duties of such Managing Agent hereunder until such time, if any, as the Majority Investors appoint a successor agent as provided for above.

Section 10.10.Payments by the Managing Agents.  Unless specifically allocated to a Bank Investor pursuant to the terms of this Loan Agreement, all amounts received by the Managing Agents on behalf of the related Bank Investors shall be paid by such Managing Agent to such Bank Investors (at their respective accounts specified in their respective Assignment and Assumption Agreements) pro rata in accordance with their respective outstanding funded portions of the Net Investment on the Business Day received by such Managing Agent, unless such amounts are received after 12:00 noon on such Business Day, in which case such Managing Agent shall use its reasonable efforts to pay such amounts to such Bank Investors on such Business Day, but, in any event, shall pay such amounts to such Bank Investors not later than the following Business Day.

55

IN WITNESS WHEREOF, the parties hereto have executed and delivered this Variable Funding Loan Agreement as of the date first written above.

YC SUSI TRUST,

  as a Lender

By: Bank of America, N.A.

as Managing Agent

By:

Name:

Title:

ATLANTIC ASSET SECURITIZATION
CORP.,

as a Lender

By: Calyon New York Branch, as Attorney-in-Fact

By:

Name:

Title:

By:

Name:

Title:

MID-STATE TRUST IX,

  as Borrower

By:     Wilmington Trust Company, not in its
individual capacity but solely as Owner Trustee

By:

Name:

Title:

WACHOVIA BANK, NATIONAL
ASSOCIATION,

  as Custodian/Collateral Agent

By:

Name:

Title:

BANK OF AMERICA, N.A.,

as Agent and a Managing Agent

By:

Name:

Title:

Group Commitment: $225,000,000

CALYON NEW YORK BRANCH,

as a Managing Agent

By:

Name:

Title:

By:

Name:

Title:

Group Commitment: $175,000,000

BANK OF AMERICA, N.A.,

as a Bank Investor

By:

Name:

Title:

CALYON NEW YORK BRANCH,

as a Bank Investor

By:

Name:

Title:

By:

Name:

Title:

2

EXHIBIT A

FORM OF VARIABLE FUNDING NOTE

New York, New York

[DATE]

FOR VALUE RECEIVED, the undersigned, MID-STATE TRUST IX, a Delaware business trust (the “Borrower”), promises to pay to the order of [APPLICABLE MANAGING AGENT] (the “Managing Agent” and the “Bank Investor”) for [YC SUSI Trust/ Atlantic Asset Securitization Corp.], (the “Lender”) and the Bank Investor, on the date specified in the Loan Agreement (as hereinafter defined), at the office of the Managing Agent, [Bank of America, Corporate Center, 10^th Floor, Charlotte, North Carolina, 28255 / Calyon New York Branch, Calyon New York Branch Building, 1301 Avenue of the Americas, New York, New York, 10019], in lawful money of the United States of America and in immediately available funds, the principal amount of [                                                     ($                 )], or, if less, the aggregate unpaid principal amount of all Loans made by the Lender or the Bank Investor to the Borrower pursuant to the Loan Agreement, and to pay interest at such office, in like money, from the date hereof on the unpaid principal amount of such Loans from time to time outstanding at the rates and on the dates specified in Sections 2.4 and 2.5 of the Loan Agreement and in the CCA Agreement.

The Managing Agent is authorized to record, on the schedules annexed hereto and made a part hereof or on other appropriate records of the Managing Agent , the date and the amount of each Loan made by the Lender or the Bank Investor, as applicable, each continuation thereof, the Rate Period and Rate Type for such Loan and the date and amount of each payment or prepayment of principal thereof.  Any such recordation shall constitute prima facie evidence of the accuracy of the information so recorded; provided that the failure of the Managing Agent to make any such recordation (or any error in such recordation) shall not affect the obligations of the Borrower hereunder or under the Loan Agreement in respect of the Loans.

This Variable Funding Note is one of the Variable Funding Notes referred to in the Amended and Restated Variable Funding Loan Agreement dated as of November 19, 2004 (as amended, supplemented, restated or otherwise modified and in effect from time to time, the “Loan Agreement”) among [APPLICABLE MANAGING AGENT], as Managing Agent, [the Agent] and Bank Investor, the Lender, the Borrower, Wachovia Bank, National Association, as Custodian/Collateral Agent and [OTHER LENDER AND MANAGING AGENT], and is entitled to the benefits thereof.  Capitalized terms used herein without definition have the meanings assigned to them in Annex A to the Loan Agreement.

This Variable Funding Note is subject to optional and mandatory prepayment as provided in the Loan Agreement and shall mature on the Stated Maturity Date.

Upon the occurrence of an Event of Default, the Controlling Party shall have all of the remedies specified in the Loan Agreement.  The Controlling Party and the Managing Agent each hereby waive presentment, demand, protest, and all notices of any kind.

THIS VARIABLE FUNDING NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

MID-STATE TRUST IX

By:    Wilmington Trust Company, not in its
individual capacity but solely as Owner Trustee

By:

Name:

Title:

Schedule 1 to

VARIABLE FUNDING NOTE

Date Principal
of
Loans Discount
on
Loans Prepayment
of
Loans Notation By

EXHIBIT B

[Form of Borrowing Request]

BORROWING REQUEST

MID-STATE TRUST IX (the “Borrower”), pursuant to Section 2.3 of the Amended and Restated Variable Funding Loan Agreement dated as of November 19, 2004 (as amended, modified, restated or supplemented from time to time, the “Loan Agreement”), hereby requests that [YC SUSI Trust] [Atlantic Asset Securitization Corp.] [the Bank Investors] make a Loan to it pursuant to the following instructions:

Loan Date:

Loan amount:                                      [including the principal amount of any Related Commercial Paper issued in amount in excess of the original requested Loan amount, subject to compliance with the provisions of Section 2.1(a) of the Loan Agreement]

Rate Period(s):

Rate Type(s):

Account to be credited:                                      [bank name]

ABA No.

Account No.

Reference No.

Please credit the above-mentioned account on the Loan Date.  Capitalized terms used herein have the meaning assigned to them in the Loan Agreement.

APB:$

AMV:$

Borrowing Base:$

The Borrower hereby certifies as of the date hereof that:

no Event of Default, Potential Event of Default, Potential Facility Termination Event or Facility Termination Event shall have occurred and the Loan to be made on such Loan Date will not result in any breach of any of the terms, conditions or provisions of, or constitute a default under any of the Operative Documents to which the Borrower is a party, or any indenture, mortgage, deed of trust or other agreement or instrument to which the Borrower is a party or by which it is bound, or any order of any Governmental Authority entered in any proceeding to which the Borrower is a party or by which it may

be bound or to which it may be subject, and all conditions precedent provided in Section 4.2 of the Loan Agreement relating to the Loan to be made on such Loan Date have been complied with;

the Borrower is the owner of and has good title to each Account, has not assigned any interest or participation in any such Account (or, if any such interest or participation has been assigned, it has been released) and has the right to Grant each such Account to the Collateral Agent, and no other Person has any lien on, security interest in or other rights to any such Account;

the Borrower has Granted to the Collateral Agent all of its right, title, and interest in and to each Account Granted to the Collateral Agent by it to secure the VFN and the amounts owed hereunder;

the information set forth in the Schedule of Accounts delivered to the Collateral Agent and the Agent is correct in all material respects;

no Material Adverse Effect shall have occurred in the affairs of the Borrower or the Master Servicer or the value of the Accounts since June 30, 2004, with respect to the first Loan made on or after the Closing Date, or the immediately preceding Loan Date, with respect to each Loan thereafter; and

the representations and warranties set forth in Section 3.1 of the Loan Agreement are true and correct on and as of the Loan Date for such Loan, both before and after giving effect to such Loan.

MID-STATE TRUST IX
By:	Wilmington Trust Company, not in its individual capacity but solely as Owner Trustee
By:
Title:

Dated:                                    , 20     

EXHIBIT C

FORM OF BORROWER’S COUNSEL OPINION

EXHIBIT D

FORM OF ASSIGNMENT AND ASSUMPTION AGREEMENT

Reference is made to the Amended and Restated Variable Funding Loan Agreement dated as of November 19, 2004 as it has been and may be amended or otherwise modified from time to time (as  so amended or modified, the “Agreement”) among YC SUSI Trust, as a lender (a ”Lender”), Atlantic Asset Securitization Corp., as a lender (a “Lender”), Mid-State Trust IX, as the borrower (the “Borrower”), Wachovia Bank, National Association, as the custodian/collateral agent (the “Custodian/Collateral Agent”),  Bank of America, National Association, as the agent, a managing agent and a bank investor (“Bank of America”) and Calyon New York Branch, as a managing agent and a bank investor (“Calyon).  Terms defined in the Agreement are used herein with the same meaning.

[                              ] (in its capacity as a bank investor, the “Assignor”) and [                              ] (the “Assignee”) agree as follows:

1.The Assignor hereby sells and assigns to the Assignee, without recourse and without representation and warranty, and the Assignee hereby purchases and assumes from the Assignor, an interest in and to all of the Assignor’s rights and obligations under the Agreement and the other Operative Documents.  Such interest expressed as a percentage of all rights and obligations of the Bank Investors, shall be equal to the percentage equivalent of a fraction, the numerator of which is $[                              ] and the denominator of which is the Facility Limit, or [        ]%.  After giving effect to such sale and assignment, the Assignee’s Commitment will be $[                         ], and the Assignee will not be required to fund hereunder an aggregate amount at any time outstanding in excess of such amount.

2.[In consideration of the payment of $[                         ], being [        ]% of the existing Net Investment [(there being no unpaid accrued Discount)], receipt of which payment is hereby acknowledged, the Assignor hereby assigns to the Agent for the account of the Assignee, and the Assignee hereby purchases from the Assignor, a [        ]% interest in and to all of the Assignor’s right, title and interest in and to the Net Investment.]  [include if an existing Net Investment is being assigned.]

3.The Assignor (i) represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any Adverse Claim; (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Agreement, any other Operative Document or any other instrument or document furnished pursuant thereto or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Agreement, any other Operative Document or any other instrument or document furnished pursuant thereto; and (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of any of the Borrower, any Eligible Originator, the Originator, the Depositor, the Master Servicer or the performance or observance by any of the Borrower, any Eligible Originator, the Originator, the Depositor or the Master Servicer of any of its obligations under the Agreement, any other Operative Document, or any instrument or document furnished pursuant thereto.

4.The Assignee (i) confirms that it has received a copy of the Agreement, each other Operative Document and such other instruments, documents and information as deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Assumption Agreement (the “Assignment”) and to purchase such interest; (ii) agrees that it will, independently and without reliance upon the Agent, any of its Affiliates, the Assignor or any other Bank Investor and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Agreement and any other Operative Document; (iii) appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers and discretion under the Agreement and the other Operative Documents as are delegated to the Agent by the terms thereof, together with such powers and discretion as are reasonably incidental thereto and to enforce its respective rights and interests in and under the Agreement, the other Operative Documents and the Affected Assets; (iv) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Agreement are required to be performed by it as a Bank Investor; and (v) specifies as its address for notices and its account for payments the office and account set forth beneath its name on the signature pages hereof; and (vi) agrees that it will not institute against the Lender any proceeding of the type referred to in Section 8.10 of the Agreement prior to the date which is one year and one day after the payment in full of all Commercial Paper issued by the Lender.

5.The effective date for this Assignment shall be [                        ], 20[    ] (the ”Effective Date”).  Following the execution of this Assignment and the consent of each Managing Agent, on behalf of the Lenders, the Agent and the Borrower, this Assignment will be delivered to the Agent for acceptance and subsequent delivery to the Collateral Agent.

6.Upon such acceptance and delivery to the Collateral Agent and as of the  Effective Date:

(a)the Assignee shall be a party to the Agreement and, to the extent provided in this  Assignment, have the rights and obligations of a Bank Investor thereunder;

(b)the Assignor shall, to the extent provided in this Assignment, relinquish its rights and be released from its obligations under the Agreement;

(c)the Agent shall make all payments under the Agreement in respect of the interest assigned hereby (including, without limitation, all payments in respect of such interest in Net Investment, Discount and fees) to the Assignee;

(d)the Assignor and Assignee shall make all appropriate adjustments in payments under the Agreement for periods prior to the Effective Date directly between themselves; and

(e)[the Agreement and the other Operative Documents, including this Assignment, will be amended or will be amended and restated as of the Effective Date to (among other things) cause [                        ] to become a lender under the Agreement.]

3

Thereafter, the Assignee will hold the [        ]% interest in and to all of the Assignor’s right, title and interest in and to the Net Investment purchased from the Assignor hereunder as agent for itself as a Bank Investor and for [                        ] as a lender under the Agreement.

7.THIS ASSIGNMENT SHALL BE GOVERNED BY AND SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK (WITHOUT REFERENCE TO THE CONFLICTS OF LAW PRINCIPLES THEREOF OTHER THAN SECTION 5-1401 OF NEW YORK’S GENERAL OBLIGATIONS LAW).

8.This Assignment contains the final and complete integration of all prior expressions by the parties hereto with respect to the subject matter hereof and shall constitute the entire agreement among the parties hereto with respect to the subject matter hereof superseding all prior oral or written understandings.

9.If any one or more of the covenants, agreements, provisions or terms of this Assignment shall for any reason whatsoever be held invalid, then such covenants, agreements, provisions, or terms shall be deemed severable from the remaining covenants, agreements, provisions, or terms of this Assignment and shall in no way affect the validity or enforceability of the other provisions of this Assignment.

10.This Assignment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement.

11.Delivery by facsimile of an executed counterpart of the signature page to this Assignment shall be effective as delivery of an executed counterpart hereof.

12.This Assignment shall be binding on the parties hereto and their respective successors and assigns.

The parties hereto have caused this Assignment and Assumption Agreement to be executed by their respective officers thereunto duly authorized as of the Effective Date.

[                                ], as Assignor
By:
	Name:
	Title:
[                                ], as Assignee
By:
	Name:
	Title:

Acknowledged and Agreed:
YC SUSI TRUST, as a Lender
By:	Bank of America, National
	Association, as Managing Agent
	By:
		Name:
		Title:
ATLANTIC ASSET SECURITIZATION CORP., as a Lender
By:	Calyon New York Branch, as Managing Agent
	By:
		Name:
		Title:
	By:
		Name:
		Title:
BANK OF AMERICA, NATIONAL
ASSOCIATION, as Agent
By:
	Name:
	Title:

MID-STATE TRUST IX, as Borrower
By:	Wilmington Trust Company, not in its
	individual capacity but solely as Owner Trustee
	By:
		Name:
		Title:

EX-21

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EXHIBIT 21

LIST OF THE SUBSIDIARIES OF THE COMPANY
(Jurisdiction of incorporation as noted in parenthesis)

        The direct and indirect subsidiaries of Walter Industries, Inc. are:

1.

Homes Holdings Corporation (DE)

a.

Jim Walter Homes, Inc. (FL) (a subsidiary of Homes Holdings Corporation)

i.

Walter Home Improvement, Inc. (FL) (a subsidiary of Jim Walter Homes, Inc.)

ii.

Neatherlin Homes, Inc. (TX) (a subsidiary of Jim Walter Homes, Inc.)

iii.

Dream Homes USA, Inc. TX (a subsidiary of Jim Walter Homes, Inc.)

iv.

Dream Homes, Inc. (TX) (subsidiary of Jim Walter Homes, Inc.)

v.

Crestline Homes, Inc. (NC) (a subsidiary of Jim Walter Homes, Inc.)

2.

V Manufacturing Company (formerly known as Vestal Manufacturing Company) (DE)

3.

Sloss Industries Corporation (DE)

4.

SP Machine Inc. (formerly Southern Precision Corporation) (DE)

5.

Mid-State Holdings Corporation (DE)

a.

Mid-State Homes, Inc. (FL) (a subsidiary of Mid-State Holdings Corporation)

i.

Mid-State Trust IV (a business trust of which 100% of the beneficial interest in the trust is held by Mid-State Homes, Inc.)

ii.

Mid-State Trust VI (a business trust of which 100% of the beneficial interest in the trust is held by Mid-State Homes, Inc.)

iii.

Mid-State Trust VII (a business trust of which 100% of the beneficial interest in the trust is held by Mid-State Homes, Inc.)

iv.

Mid-State Trust VIII (a business trust of which 100% of the beneficial interest in the trust is held by Mid-State Homes, Inc.)

v.

Mid-State Trust IX (a business trust of which 100% of the beneficial interest in the trust is held by Mid-State Homes, Inc.)

vi.

Mid-State Trust X (a statutory trust of which 100% of the beneficial interest in the trust is held by Mid-State Homes, Inc.)

vii.

Mid-State Trust XI (a statutory trust of which 100% of the beneficial interest in the trust is held by Mid-State Homes, Inc.)

b.

Mid-State Capital Corporation (a subsidiary of Mid-State Holdings Corporation) (DE)

i.

Mid-State Capital Corporation 2004-1 Trust (a statutory trust of which 100% of the beneficial interest in the trust is held by Mid-State Capital Corporation.

6.

United States Pipe and Foundry Company, Inc. (AL)

7.

Jefferson Warrior Railroad Company, Inc. (AL)

8.

Jim Walter Computer Services, Inc. (DE)

9.

Land Holdings Corporation (DE)

a.

Walter Land Company (DE) (a subsidiary of Land Holdings Corporation)

10.

J.W.I. Holdings Corporation (DE)

a.

J.W. Walter, Inc. (DE) (a subsidiary of J.W.I. Holdings Corporation)

11.

Hamer Properties, Inc. (WV)

12.

Best Insurors, Inc. (FL)

13.

Cardem Insurance Co., Ltd. (Bermuda)

14.

Coast to Coast Advertising, Inc. (FL)

15.

United Land Corporation (DE)

16.

Dixie Building Supplies, Inc. (FL)

17.

Jim Walter Resources, Inc. (AL)

a.

Black Warrior Transmission Corp. (50% owned by Jim Walter Resources, Inc.)

b.

Black Warrior Methane Corp. (50% owned by Jim Walter Resources, Inc.)

18.

Walter Mortgage Company (DE)

19.

Walter Services of Alabama, Inc. (AL)

        The names of particular subsidiaries may have been omitted if the unnamed subsidiaries, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary as of December 31, 2004.

2

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LIST OF THE SUBSIDIARIES OF THE COMPANY (Jurisdiction of incorporation as noted in parenthesis)

EX-23

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EXHIBIT 23

CONSENT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM

        We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-02095) of Walter Industries, Inc. and its subsidiaries of our reports dated March 15, 2005 relating to the financial statements, financial statement schedules, management's assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which appear in this Form 10-K.

PricewaterhouseCoopers LLP
Tampa, Florida
March 15, 2005

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CONSENT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM

EX-24

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EXHIBIT 24

POWER OF ATTORNEY TO SIGN ANNUAL REPORT

        KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints William F. Ohrt and Charles E. Cauthen, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her in his or her name, place and stead, in any and all capacities, to sign the name of such person in the capacity indicated below opposite the name of each person to the Annual Report for the fiscal year ended December 31, 2004 of Walter Industries, Inc. on Form 10-K and any and all amendments thereto and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

        This Power of Attorney has been signed this 17^th day of February, 2005.

/s/  DONALD N. BOYCE Director

/s/  SIMON E. BROWN Director

/s/  HOWARD L. CLARK, JR. Director

/s/  PERRY GOLKIN Director

/s/  JERRY W. KOLB Director

/s/  BERNARD G. RETHORE Director

/s/  NEIL A. SPRINGER Director

/s/  MICHAEL T. TOKARZ Director

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POWER OF ATTORNEY TO SIGN ANNUAL REPORT

EX-31.1

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EXHIBIT 31.1

Walter Industries, Inc.
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
CERTIFICATION OF PERIODIC REPORT

I, Don DeFosset, certify that:

1.

I have reviewed this annual report on Form 10-K of Walter Industries, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 16, 2005

/s/  DON DEFOSSET Don DeFosset
Chief Executive Officer

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EX-31.2

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EXHIBIT 31.2

Walter Industries, Inc.
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
CERTIFICATION OF PERIODIC REPORT

I, William F. Ohrt, certify that:

1.

I have reviewed this annual report on Form 10-K of Walter Industries, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 16, 2005

/s/  WILLIAM F. OHRT William F. Ohrt
Chief Financial Officer

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EX-32.1

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EXHIBIT 32.1

Walter Industries, Inc.
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
18 U.S.C. Section 1350

        In connection with the accompanying Annual Report of Walter Industries, Inc. (the "Company") on Form 10-K for the fiscal year ended December 31, 2004 (the "Report"), I, Don DeFosset, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)

The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and



(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 16, 2005

/s/  DON DEFOSSET Don DeFosset
Chief Executive Officer

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Walter Industries, Inc. Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 18 U.S.C. Section 1350

EX-32.2

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EXHIBIT 32.2

Walter Industries, Inc.
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
18 U.S.C. Section 1350

        In connection with the accompanying Annual Report of Walter Industries, Inc. (the "Company") on Form 10-K for the fiscal year ended December 31, 2004 (the "Report"), I, William F. Ohrt, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)

The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and



(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 16, 2005

/s/  WILLIAM F. OHRT William F. Ohrt
Chief Financial Officer

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Walter Industries, Inc. Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 18 U.S.C. Section 1350