10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the year ended December 31, 2006

or

oTRANSITION 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	33607
(Address of principal executive offices)	(Zip Code)

(813) 871-4811

Registrant’s telephone number, including area code:

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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

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 x 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 x No o

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

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, 2006, the registrant’s most recently completed second fiscal quarter, as reported by the New York Stock Exchange, was approximately $2.51 billion.

Number of shares of common stock outstanding as of January 31, 2007:  51,959,977

Documents Incorporated by Reference

Applicable portions of the Proxy Statement for the Annual Meeting of Stockholders of the Company to be held April 25, 2007 are incorporated by reference in Part III of this Form 10-K.

PART I

Item 1. Description of Business and
Item 1A. Risk Factors

(a)  Narrative Description of Business

General

Walter Industries, Inc. (“the Company”), organized in 1987, is a diversified company that operates in five reportable segments: Natural Resources, Sloss, Financing, Homebuilding and Other. Through these operating segments, the Company offers a diversified line of products and services including coal and natural gas, furnace and foundry coke and slag fiber, mortgage financing, and home construction.

During the year ended December 31, 2006, the Company began reporting Sloss Industries Corporation (“Sloss”) as a separate segment due to its significance in relation to the Company’s continuing operations. Sloss was previously included in “Other.”  Sloss primarily manufactures and markets foundry and furnace coke, which are used by foundries and blast furnaces in the production of iron and steel products.

Our businesses may be grouped in the following broad categories:

Natural Resources and Sloss.   Our Natural Resources segment consists primarily of Jim Walter Resources, Inc. (‘‘JWR’’) and Kodiak Mining Company, LLC (“Kodiak”). In 2006 JWR produced 5.7 million tons of high quality coal, primarily for the metallurgical market. In addition, JWR owns 50% of Black Warrior Methane Corp., which extracts coalbed methane gas. JWR generated 7.7 billion cubic feet of natural gas in 2006. The Company owns a 51% interest in Kodiak, which operates an underground mine in Shelby County, Alabama designed primarily to produce steam coal. Sloss is a manufacturer of furnace and foundry coke and slag fiber.

Financing and Homebuilding.   Our Financing segment, which consists primarily of Mid-State Homes, Inc. (“MSH”) and Walter Mortgage Company (“WMC”), originates, purchases, services and securitizes non-conforming instalment notes and loans that are secured by mortgages and liens. The mortgage portfolio at December 31, 2006 was approximately $1.8 billion. Our Homebuilding segment includes Jim Walter Homes, Inc. (‘‘JWH’’), a leading on-your-lot homebuilder. JWH, which has a significant presence in the southeastern United States, provides mortgage financing for approximately 90% of the homes we build and sells these originated notes to MSH.

Other.   The Other segment includes the Company’s land subsidiaries and corporate expenses.

Recent Developments

Acquisition, Initial Public Offering and Spin-off of Mueller Water Products, Inc.

Acquisition

In October 2005, the Company acquired all of the outstanding common stock of Mueller Water Products, Inc. (“Mueller Water”) for $943.4 million and assumed approximately $1.1 billion of indebtedness at Mueller Water. In conjunction with the acquisition, the Company’s wholly owned subsidiary, United States Pipe and Foundry Company, LLC, (“U.S. Pipe”) was contributed to Mueller Water.

Also in October 2005, the Company announced its plan to undertake an initial public offering and a spin-off of Mueller Water to unlock shareholder value by creating a “pure play” water infrastructure company and a predominantly “pure play” coal company.

Initial public offering

In June 2006, Mueller Water completed its initial public offering (“IPO”) of 28.8 million shares of Series A common stock, at $16 per share (NYSE: MWA). The net proceeds of $428.9 million were used to

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repay a portion of Mueller Water’s existing debt. The Company did not receive any cash proceeds from the offering. In connection with the issuance of the Series A common stock, Mueller Water issued 85.8 million shares of Series B common stock to the Company in exchange for the Company’s one share held prior to the IPO.

Spin-off

On December 14, 2006, the Company distributed all of its 85.8 million shares of Mueller Water Series B common stock to its shareholders. The distribution took place in the form of a pro rata common stock dividend whereby each shareholder received 1.6524432  shares of Mueller Water Series B common stock for each share of Company common stock held on the record date (“the spin-off”). The spin-off was intended to be tax-free to the Company and to the shareholders of the Company for U.S. income tax purposes, except for any cash received in lieu of fractional shares.

The Company and Mueller Water are now independent and have separate public ownership, boards of directors and management. To facilitate Mueller Water’s separation from the Company, the Company and Mueller Water are providing certain services to each other during a transition period not to exceed one year from the spin-off date. Amounts previously reported in the Mueller Co., Anvil and U.S. Pipe segments, collectively “Mueller Water,” are presented in discontinued operations for all periods presented.

Debt and Equity Transactions

In addition to the stock dividend issued to shareholders in December 2006 relating to the spin-off of Mueller Water, significant changes to the Company’s debt and equity structure during 2006 include:

Common Stock Offering

In February 2006, the Company raised $168.7 million in net proceeds from a 2.645 million share common stock offering. Of these proceeds, $102.9 million was used to repay the term loan under the 2005 Walter Credit Agreement.

Conversion of Convertible Senior Subordinated Notes

During 2006, holders of approximately $174.2 million of the Company’s Convertible Senior Subordinated Notes surrendered these notes in exchange for 9.761 million shares of the Company’s common stock and $19.4 million of conversion inducement fees. At December 31, 2006, $0.8 million of these notes remain outstanding.

Issuance of Asset-Backed Notes

In November 2006, Mid-State Capital Corporation, an indirect subsidiary of the Company, completed its 2006-1 Trust private offering of $256.9 million in asset-backed notes. The notes mature in October 2040 and bear interest at a weighted average, fixed coupon rate of 6.28%. The net proceeds were used to repay borrowings under the Mid-State Trust IX and Mid-State Trust XIV mortgage warehouse facilities and provided $39.2 million of liquidity for the Company’s general corporate purposes.

Prepayment of Term Loan

In 2006, the Company repaid $200.2 million of its term loan under the 2005 Walter Credit Agreement using proceeds from the February 2006 common stock issuance and available cash flow.

Other Strategic Initiatives

As previously announced, the Company continues to evaluate strategic alternatives for its Financing and Homebuilding businesses.

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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 practical after filing or furnishing these reports to the Securities and Exchange Commission (“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 20 of “Notes to Consolidated Financial Statements” included herein.

(c)  Description of Business

Natural Resources

Jim Walter Resources, Inc.

The operations of Jim Walter Resources, Inc. (“JWR”) are conducted through its Mining Division, which mines and sells high quality metallurgical coal from two underground mines in Alabama, and its De-Gas Division, which extracts and sells natural gas from the coal seams owned or leased by JWR. In December 2006, mining operations ceased at Mine No. 5. The preparation plant at Mine No. 5 will remain operational and serve as the washer and shipping point for production associated with the Mine No. 7 East expansion project.

In 2004, the Company announced a project to expand production in an area called Mine No. 7 East. The new mine area will consist of one additional longwall unit and three continuous miner sections, providing incremental annual production capacity of approximately 2.7 million tons. The investment of approximately $175 million will result in longwall production beginning in early 2009. Capital expenditures through December 31, 2006 related to this expansion project amounted to $49.3 million and are expected to be approximately $74.0 million in 2007.

The Mining Division had net sales and revenues of $611.7 million, $493.5 million and $347.8 million in the years ended December 31, 2006, 2005 and 2004, respectively.

The Mining Division, headquartered in Brookwood, Alabama, currently has approximately 7.0 million tons of rated annual coal production capacity from its mines located in west central Alabama between the cities of Birmingham and Tuscaloosa. The Mining Division extracts coal primarily from Alabama’s Blue Creek seam, 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 that 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 four to six continuous miner sections in each mine for the development of mains and longwall panel entries. As noted above, the Company is investing in Mine No. 7 East such that the mine will operate two longwall mining systems. 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 and following the start of longwall operations for the Mine No. 7 East expansion in 2009.

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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’s coal is principally sold to a diversified base of offshore metallurgical coal customers. The division’s metallurgical coal is sold to customers in numerous markets throughout Europe, South America, Turkey and Africa. Most metallurgical coal sales are made under fixed price supply contracts, usually with a duration of one year, running principally from July through June. However, some sales of metallurgical coal can occur in the spot market as dictated by available JWR supply and market demand. During 2006, JWR’s two largest customers represented approximately 11.7% and 11.2% of the Mining Division’s sales, respectively. The Company believes that the loss of those 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 strong worldwide demand for metallurgical coal. Foreign sales accounted for approximately 95% of the Mining Division’s net sales during the year. Domestic sales include coal sold to Sloss.

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 ownership joint venture with El Paso Production Co., a subsidiary of El Paso Corporation.  JWR also operates a wholly owned low quality gas (“LQG”) facility.

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 415 wells producing approximately 13.8 billion cubic feet of natural gas in 2006. JWR generated 7.7 billion cubic feet in 2006, including 1.4 billion cubic feet from its LQG operations. The degasification operation has improved mining operations and safety by reducing methane gas levels in the mines, and has been a highly profitable operation. With the shutdown of Mine No. 5, gas production is expected to decline to approximately 6.8 to 7.1 billion cubic feet in 2007.

Kodiak Mining Company, LLC

Kodiak Mining Company, LLC (“Kodiak”) was established in 2005 to develop and operate an underground coal mine in Shelby County, Alabama. The mine has high BTU, low sulfur coal that can be sold into either the metallurgical or steam coal market. Total production is expected to reach approximately 0.7 million tons per year until the coal is exhausted or a new mining area is developed. Production began in 2006 and is expected to reach 0.4 million tons in 2007.

Sloss

Sloss is a manufacturing operation, founded in 1920 and headquartered in Birmingham, Alabama, which has three major product lines:  foundry coke, furnace coke and slag fiber. Foundry coke (approximately 130,000 tons per year) is marketed to ductile iron pipe plants and foundries producing castings, such as for the automotive and agricultural equipment industries. 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.

Financing

Within the Financing segment, MSH purchases and services instalment notes and mortgages originated by its affiliated homebuilder, JWH. WMC an indirect subsidiary of the Company, offers financing to JWH homebuyers that is secured by first lien mortgages and also purchases mortgage loans from third parties. WMC’s mortgage loans are also sold to MSH, but are serviced by WMC through a sub-servicing agreement with MSH. References to instalment notes include mortgage loans originated or purchased by WMC. Mortgage loans in the portfolio, before allowances, were approximately $213.9 million and $148.0 million at December 31, 2006 and 2005, respectively. At December 31, 2006, the Company held fixed (96%) and variable-rate (4%) instalment notes ranging from 5.3% to 13.7% annual

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percentage rate, without points or closing costs. See also Note 3 of “Notes to Consolidated Financial Statements” included herein for a description of the revenue recognition policies of Financing.

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 as well as the mortgage loans it acquires from WMC using various warehouse lines of credit. Historically, once a critical mass of assets have been accumulated, MSH securitizes the assets using a grantor trust, structured as a financing, which requires that the assets and liabilities be recorded on the balance sheet with no gain for tax purposes. These business trusts acquire the mortgage instalment notes and loans 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 in the trusts secure the borrowings of these trusts, and therefore these borrowings are non-recourse to the Company. For additional information on the notes, the trusts and their related borrowings, see Notes 8 and 14 of “Notes to Consolidated Financial Statements.”

At December 31, 2006, MSH’s portfolio was geographically distributed as follows:  Texas (32%), Mississippi (15%), Alabama (8%) and Florida and Louisiana, (each 6%). 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. WMC initiated a program to acquire mortgage loans in 2003 that meet the Company’s underwriting criteria. Loans are purchased from other mortgage companies, banks, thrifts, builders and other various sellers of first lien mortgages. During 2006, $103.8 million of mortgage loans were purchased by WMC from third parties. Activity at WMC since inception through December 31, 2006, includes 3,401 mortgages totaling approximately $321.6 million.

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 WMC or JWH. 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 workers’ compensation for Homebuilding.

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, on land owned by its customers, primarily in the southeastern United States where the weather generally permits year-round construction. JWH also provides financing on a significant portion of the homes sold. JWH, through its wholly owned subsidiary Crestline Homes, Inc., also manufactures and distributes modular (factory-built) homes. In 2007, JWH made the decision to exit the modular manufacturing business.

JWH historically has concentrated on the low- to moderately-priced segment of the housing market. JWH’s products consist of over 60 models ranging in size from approximately 800 to over 3,000 square feet. At December 31, 2006, JWH operated 81 branch offices located in 16 states. During 2006 JWH’s net sales, excluding modular unit shipments, are represented in the following states: Texas (21%); Florida (14%); Mississippi (12%); Louisiana (11%); Alabama (8%); South Carolina, North Carolina and Georgia, (each

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6%). Approximately 69% of the branch offices are located on land that is owned by JWH, with the balance located on leased land. Branch offices serve as “sales centers” that are designed to allow customers to view various model homes.

Historically, JWH has not owned or acquired land for home construction purposes and was not a land developer, which significantly limits the amount of required capital to operate the business. 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.

JWH builds homes which are constructed to varying degrees of interior completion. 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.

The following chart shows the unit sales volume of JWH and the percent of homes sold by category  for the years ended December 31, 2006, 2005 and 2004:

			Percent of Unit Sales
Year Ending December 31,	Units Built		Shell			Various Stages			90+% Complete			Modular
2006		3,047		4	%		9	%		75	%		12	%
2005		3,022		4	%		6	%		68	%		22	%
2004		3,251		6	%		7	%		71	%		16	%

During the years ended December 31, 2006, 2005 and 2004, the average net sales price of all homes sold was $90,000, $74,700 and $71,700, respectively.

The estimated backlog of stick-built homes to be constructed by JWH as of December 31, 2006 was 1,513, as compared to 2,053 at December 31, 2005. After the land is cleared and appropriate building permits are obtained, the time to construct a home averages between thirteen and twenty-one weeks.

Most homes sold by JWH are purchased with financing provided by JWH. Qualified customers may obtain financing on an instalment sale contract offered on a fixed-rate mortgage basis generally requiring no down payment and 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. When a home is financed by JWH, the Company does not obtain third party appraisals or title insurance. JWH offers credit terms for up to a maximum of 30 years, up to 100% of the purchase price of the home. During 2006, the stated annual percentage rates offered for new mortgage instalment notes ranged between 7.0% and 10.5%.

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 MSH, pursuant to an agreement between JWH and MSH.

Other

The Other segment includes the Company’s land subsidiaries and corporate expenses. 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.

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Seasonality

Certain of the businesses of the Company are subject to seasonal fluctuations to varying degrees. Sales at JWH are usually lowest in the winter months due to weather and the lower 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.

Competition

See “Risks Related to the Business—We face significant competition in the industries in which we operate and foreign competition is intense and could harm our sales, profitability and cash flows.”

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 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, 2006, 2005 and 2004, were less than 1% of the Company’s consolidated net sales and revenues.

Raw Materials and Labor

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 coal, electricity, lumber, other building materials and labor. See further discussion in “Risks Related to the Business—Shortages or price fluctuations in raw materials and labor could delay, or increase the cost of construction or production and adversely affect our results of operations.”

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 continuing operations for compliance of ongoing operations and for remediation of environmental conditions arising from past operations in the years ended December 31, 2006, 2005 and 2004 were approximately $4.9 million, $5.9 million and $5.2 million, respectively. 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.

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Environmental matters are more fully described in Note 18 of “Notes to Consolidated Financial Statements.”

Employees

As of December 31, 2006, the Company and its subsidiaries employed approximately 2,800 people, of whom approximately 1,400 were hourly workers and 1,400 were salaried employees. Unions represented approximately 1,200 employees under collective bargaining agreements, of which approximately 970 were covered by one contract with the United Mine Workers of America that expires on December 31, 2011.

Risk Related to the Business

Our business may suffer as a result of changes in general and local economic conditions and other factors beyond our control, which could depress demand for our products.

Certain of the industries in which we operate are cyclical and have experienced significant difficulties in the past. Our financial performance depends, in large part, on varying conditions in the markets we serve, which fluctuate in response to various factors beyond our control.

The prices at which JWR sells coal and natural gas are largely dependent on prevailing market prices for those products. We have experienced significant price fluctuations in our coal and natural gas businesses, and we expect that such fluctuations will continue. Demand for and, therefore, the price of, coal and natural gas are driven by a variety of factors such as availability, price, location and quality of competing sources of coal or natural gas, availability of alternative fuels or energy sources, government regulation and economic conditions. In addition, reductions in the demand for metallurgical coal are caused by reduced steel production by our customers, increases in the use of substitutes for steel (such as aluminum, composites or plastics) and the use of steel-making technologies that use less or no metallurgical coal. Demand for steam coal is primarily driven by the consumption patterns of the domestic electric power generation industry, which, in turn, is influenced by demand for electricity and technological developments. We estimate that a 10% decrease in the price of coal in 2006 would have resulted in a reduction in pre-tax income of $54 million. Demand for natural gas is also affected by storage levels of natural gas in North America and consumption patterns, which can be affected by weather conditions. We estimate that a 10% decrease in the price in natural gas in 2006 would have resulted in a reduction in pre-tax income of approximately $1.4 million in that year, which includes the benefit of hedges. Occasionally we utilize derivative commodity instruments to manage fluctuations in natural gas prices. Currently, we have hedged approximately 28% of our anticipated 2007 natural gas production at an average price of $8.85 per mmbtu.

Demand in the financing and homebuilding businesses is affected by changes in general and local economic conditions, such as interest rates, housing costs, migration patterns, employment levels, job growth and consumer confidence. An oversupply of alternatives to new homes, such as rental properties and used homes, could depress prices and reduce margins for the sale of new homes. Higher interest rates generally increase the cost of mortgage loans to customers and therefore reduce demand for new homes and mortgage loans. Almost all purchasers of our homes require mortgage financing for a substantial portion of the purchase price. In times of low interest rates and increased availability of mortgage funds, the volume of home sales by JWH may be expected to decrease as additional competition is able to enter the market. Recently, interest rates have been increasing from historically low levels. Lastly, weather conditions and natural disasters, such as the recent hurricanes in the southeastern United States, tornadoes, floods and fires, can harm the local homebuilding business. This risk is exacerbated by our concentration in a limited number of states.

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Our business is subject to risk of price increases and fluctuations and delay in the delivery of raw materials and purchased components.

Most of the industries in which we operate require significant amounts of raw materials and labor and, therefore, shortages or increased costs of raw materials and labor could adversely affect our business or results of operations.

Our homebuilding operations rely on the availability of lumber, drywall, cement and other building materials. The availability and market prices of these materials are influenced by various factors that are beyond our control. Shortages of, and price increases for, such materials have occurred in the past and may occur in the future. Further, if we are unable to secure a proper level of skilled labor for our homebuilding operations, we may be unable to build as many houses or build them as cost effectively, and our levels of revenue and net income may be reduced.

We face significant competition in the industries in which we operate and foreign competition is intense and could harm our sales, profitability and cash flows.

Our coal business faces competition from foreign producers that sell their coal in the export market and, therefore, fluctuations in exchange rates will affect the price for coal we produce. If our competitors’ currencies decline against the U.S. dollar or against our customers’ currencies, those competitors may be able to offer lower prices to our customers. Furthermore, if the currencies of our overseas customers were to significantly decline in value in comparison to the U.S. dollar, those customers may seek decreased prices for the coal we sell to them. Both of these factors could reduce our profitability or result in lower coal sales.

The homebuilding industry is highly competitive and fragmented. We compete in each of our markets with numerous national, regional and local builders. Some of these builders have greater financial resources, more established market positions and lower costs of capital, labor and material than we do. We compete for customers, raw materials and skilled subcontractors. We also compete with resales of existing homes and available rental housing. Our financing operations are subject to competition from third-party providers, many of which are substantially larger, may have a lower cost of funds or overhead than we do and may focus exclusively on providing such services.

Our revenues are seasonal due to weather conditions and the level of construction activity at different times of the year; we may not be able to generate revenues that are sufficient to cover our expenses during certain periods of the year.

The homebuilding industry is moderately seasonal, with lower production and lower revenues during the winter months. This seasonality in demand has resulted in fluctuations in our revenues and operating results. Because much of our overhead and expenses are fixed payments, seasonal trends can cause reductions in our overall profit margin and financial condition, especially during our slower periods.

We are exposed to increased risks of delinquencies, defaults and losses on mortgages and loans associated with our strategy of providing credit or loans to lower credit grade borrowers.

We specialize in originating, securitizing and servicing mortgage notes and loans (which we refer to as “mortgage assets”) to credit-impaired borrowers who are generally unable to qualify for loans from conventional mortgage sources due to loan size, credit characteristics or documentation standards. We are subject to various risks associated with the lower credit homeowners to whom we finance, including, but not limited to, the risk that these borrowers will not pay interest and principal when due, and that the value received from the sale of the borrower’s home in a repossession will not be sufficient to repay the borrower’s obligation to us. Delinquencies and defaults cause reductions in our interest income and our net income.

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If delinquency rates and losses are greater than we expect:

·the fair market value of the mortgage assets pledged as collateral for warehouse borrowings, and the value of our ownership interest in the securitizations, may decline;

·we may be unable to obtain financing or continue to securitize loans on attractive terms, or at all; or

·the allowances that we establish for losses on mortgage assets may be insufficient, which could depress our business, financial condition, liquidity and net income.

During economic slowdowns or recessions, mortgage and loan delinquencies and defaults generally increase. In addition, significant declines in market values of residences securing mortgages and loans reduce homeowners’ equity in their homes. The limited borrowing power of our customers increases the likelihood of delinquencies, defaults and credit losses on foreclosure. Many of our borrowers have limited access to consumer financing for a variety of reasons, including a relatively high level of debt service, lower credit scores, higher loan-to-value ratios of the mortgage assets, past credit write-offs, outstanding judgments or prior bankruptcies. As a result, the actual rate of delinquencies, repossessions and credit losses on our loans are often higher under adverse economic conditions than those experienced in the mortgage loan industry in general.

In addition, the rate of delinquencies may be higher after natural disasters or adverse weather conditions. For example, during the third quarter of 2005, Hurricane Katrina impacted several states where our mortgage asset portfolio had high concentrations of customers. As a result, our delinquency rate in those states increased substantially and we incurred a special $1.3 million provision for estimated losses on instalment notes that was anticipated as a result of Hurricane Katrina.

After a default by a borrower, we evaluate the cost effectiveness of repossessing the property. Such default may cause us to charge our allowances for credit losses on our loan portfolio. Any material decline in real estate values increases the loan-to-value ratios of our loans and the loans backing our mortgage related securities. This weakens collateral values and the amount, if any, obtained upon repossessions. If we must take losses on a mortgage or loan backing our mortgage related securities or loans that exceed our allowances, our financial condition, net income and cash flows could suffer.

We depend on short-term borrowings to fund our mortgage origination business which exposes us to liquidity risks.

We depend on short-term borrowings to warehouse instalment notes and mortgages that are originated by our homebuilding subsidiaries and WMC and purchased by MSH. Therefore, we rely on our ability to renew or replace our maturing short-term borrowings on a continuous basis. We currently have two committed warehouse facilities providing up to an aggregate of $350.0 million of liquidity by three lenders and one surety provider. If our lenders do not allow us to renew our borrowings or we cannot replace maturing borrowings on favorable terms or at all, we might have to sell our mortgage-related assets under adverse market conditions, or we might not be able to continue to originate mortgage assets, which would significantly harm our net income and may result in material losses.

We pay interest on our borrowings under our variable funding warehouse loan facilities at a floating rate based on short-term rates, and, therefore, increases in short-term interest rates will increase the cost of our facilities. In addition, if the regulatory capital requirements imposed on our lenders change, it may significantly increase the cost of the variable funding loan facilities. Increases in the cost of our facilities would reduce our profitability and may prevent us from continuing to originate instalment notes and mortgages.

The amount of financing we receive under our variable funding loan facilities is directly related to the lenders’ valuation of the mortgage assets that secure the outstanding borrowings. Our lenders have the ability to re-evaluate the market value of the mortgage assets that secure our outstanding borrowings under certain circumstances. In the event the lenders determine that the value of the mortgage assets has

11

decreased, they have the right to initiate a margin call. A margin call would require us to transfer additional instalment notes and mortgage loans to the lenders (without any advance of funds from the lenders for such transfer of mortgages) or to repay a portion of the outstanding borrowings. Any such margin call could cause our mortgage origination business, net income and liquidity to decline significantly.

Our strategy of securitizing our mortgage assets makes us dependent on the capital markets for liquidity and cash flow and exposes us to substantial risks.

We rely on our securitizations to generate cash for repayment of borrowings under our variable funding loan facilities, origination of new mortgage assets and general working capital purposes. We may not succeed in securitizing mortgage assets that we currently have outstanding under, and pledged to, our warehouse credit facilities or that we originate in the future. Our inability to continue to successfully securitize our mortgage assets on favorable terms would significantly impair our mortgage origination business and reduce our profitability.

Our ability to complete securitizations of our mortgage assets at favorable prices, or at all, depends on a number of factors, including:

·the historical performance of the portfolio of mortgage assets we originate;

·the ratings of our securities;

·the availability of credit enhancement on acceptable economic terms or at all;

·conditions in the capital markets generally and conditions in the mortgage asset-backed securities market specifically; and

·general economic conditions.

Significant increases in interest rates may reduce our ability to securitize our mortgage assets and could negatively impact our profitability and cash flow. The interest rates that we receive on our mortgage assets are fixed between 12 and 18 months before we complete a securitization. If interest rates increase significantly during this time, the net interest margin we realize would be impaired and reduce profitability and cash flow. In addition, we may be required to pledge additional collateral to meet over-collateralization requirements, which could decrease the value of our ownership interests and have a negative impact on our cash flow.

Our mortgage-backed and asset-backed securitizations require over-collateralization and credit enhancement, which may decrease our cash flow and net income.

Our securitizations typically have over-collateralization requirements that may decrease the value of our ownership interests in our securitizations and have a negative impact on our cash flow. Generally, if the mortgage assets of a securitization trust perform poorly, the over-collateralization feature of the securitization directs excess cash flow from the securitized pool of mortgage assets to the senior debt securities of the trust. During any period in which this happens we may not receive any cash distributions from such mortgage trust. In addition, the pool of mortgage assets of a securitization must meet certain performance tests based on delinquency levels, losses and other criteria in order for us to receive excess cash flow. If these performance tests, or significant terms regarding the calculation of such tests, are not satisfied, we would not be permitted to receive excess cash flow from the securitizations. Material variations in the rate or timing of our receipt of cash distributions from these mortgage assets may adversely affect our mortgage origination business and net income and may affect our overall financial condition.

Furthermore, all of our completed securitizations have used credit enhancement to improve the prices at which we issued our mortgage-backed and asset-backed notes. We currently expect that the credit enhancement for the senior tranches we issue in the future will be primarily in the form of subordination of certain tranches, financial guaranty insurance policies for the assets or both. The market for any

12

subordinate securities we issue could become temporarily illiquid or trade at steep discounts, thereby reducing the proceeds we receive from a securitization of mortgage assets. If we use financial guaranty insurance policies and the cost of these insurance policies increases, our net interest margin will be reduced. Such credit enhancement features may not be available at costs that would allow us to achieve profitable levels of net interest margin from the securitizations of our mortgage assets.

We may be subject to product liability or warranty claims that could require us to make significant payments.

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

We warrant our homebuilding products to be free of certain defects. As a homebuilder, we are subject in the ordinary course of our business to product liability and home warranty claims. Because of the long useful life of our products, it is possible that latent defects might not appear for several years. Any losses that result or are alleged to result from defects in our products, could subject us to claims for damages, including consequential damages. In addition, we could elect to replace our defective products and/or compensate our customers for damages caused by our defective products even in the absence of a formal claim for damages. The insurance that we maintain may not be available on terms acceptable to us in the future and such coverage may not be adequate for liabilities actually incurred. Any claims or expenses relating to defective products that result in liability exceeding our insurance coverage could raise costs and expenses or require us to accrue expenses or record accounting charges and reduce our net income. Further, claims of defects could result in adverse publicity against us, which could lower our sales and harm our business.

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

We are subject to a wide variety of laws and regulations concerning the protection of the environment and human health and safety, both with respect to the construction and operation of our mines and other facilities and with respect to remediating environmental conditions that may exist at our own and other properties. Certain of our facilities have been in operation for many years and, over time, we and predecessor operators of these facilities may have generated, used, handled and disposed of hazardous and other regulated wastes. Environmental liabilities could exist, including cleanup obligations at these or at other locations where materials from our operations were disposed of, which could result in future expenditures that cannot be currently quantified and which could reduce our profits. Failure to comply with any environmental, health or safety requirements could result in the assessment of damages, or imposition of penalties, suspension of production, a required upgrade or change to equipment, or processes or a cessation of operations at one or more of our facilities. Because these laws are complex, constantly changing and may be applied retroactively, there is a risk that these requirements, in particular as they change in the future, may impair our business, profitability and results of operations.

We may be required to conduct investigations and perform remedial activities that could require us to incur material costs in the future. Our operations involve the use of hazardous substances and the disposal of hazardous wastes. We may incur costs to manage these substances and wastes and may be subject to claims for damage for personal injury, property damages or damage to natural resources.

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Our homebuilding operations expose us to a variety of risks including liability for action of third parties.

We are exposed to a variety of risks associated with construction activities, including shortages of raw materials or labor, cost overruns, unforeseen environmental or engineering problems and natural disasters, any of which could delay construction and result in a substantial increase in our expenses. In addition, we contract with unaffiliated subcontractors to construct our homes. Although the timing and quality of our construction depends on the availability, skill and cost of these subcontractors, we are responsible for the performance of the entire contract, including work assigned to these subcontractors. Any construction delays or cost increases could harm our operating results, the impact of which may be further affected by our inability to raise sales prices.

Economic conditions in Texas, North Carolina, Mississippi, Alabama and Florida have a material impact on our profitability because we conduct a significant portion of our business in these markets.

We currently conduct a significant portion of our financing and homebuilding businesses in the Texas, North Carolina, Mississippi, Alabama and Florida markets. In the past, home prices and sales activities have declined from time to time and rates of loss and delinquency on mortgage assets have increased from time to time, driven primarily by weaker economic conditions in these markets. Furthermore, precarious economic and budget situations at the state government level may depress the market for our homes or hinder the ability of our customers to repay their obligations in areas in which we conduct the majority of our financing or homebuilding operations. Our concentration of homebuilding or mortgage assets in such markets may have a negative impact on our operating results.

Our failure to retain our current customers and renew our existing customer contracts could adversely affect our business.

A significant portion of the sales of our coal and methane gas are to long-term customers. The success of these businesses depends on our ability to retain our current clients, renew our existing customer contracts when required and solicit new customers. Our ability to do so generally depends on a variety of factors, including the quality and price of our products, our ability to market these products effectively and the level of competition we face.

If transportation for our coal becomes unavailable or uneconomic for our customers, our ability to sell coal could suffer.

Transportation costs represent a significant portion of the total cost of coal and, as a result, the cost of transportation is a critical factor in a customer’s purchasing decision. Increases in our transportation costs could make our coal less competitive with the same or alternative products from competitors with lower transportation costs.

We typically depend upon rail or barge to deliver coal to the port of Mobile, Alabama. While our coal customers typically arrange and pay for transportation from the port of Mobile to the point of use, disruption of any of these transportation services because of weather-related problems, strikes, lock-outs or other events could temporarily impair our ability to supply our products to our customers, thereby resulting in lost sales and reduced profitability. All of our mines are served by only one rail carrier, which increases our vulnerability to these risks, although our access to barge transportation partially mitigates that risk.

The government extensively regulates our mining operations, which imposes significant costs on us, and future regulations could increase those costs or limit our ability to produce coal.

Federal, state and local authorities regulate the coal mining industry with respect to matters such as employee health and safety, permitting and licensing requirements, air quality standards, water pollution, plant and wildlife protection, reclamation and restoration of mining properties after mining is completed, the discharge of materials into the environment, surface subsidence from underground mining, and the

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effects that mining has on groundwater quality and availability. In addition, we are subject to significant legislation mandating specified benefits for retired coal miners. Numerous governmental permits and approvals are required for mining operations. We are required to prepare and present to federal, state or local authorities data pertaining to the effect or impact that any proposed exploration for or production of coal may have upon the environment. Compliance with these regulations may be costly and time-consuming and may delay commencement or continuation of exploration or production operations. The possibility exists that new legislation and/or regulations and orders may be adopted that may have a material adverse effect on our mining operations, our cost structure and/or our customers’ ability to use coal. New legislation or administrative regulations (or judicial interpretations of existing laws and regulations), including proposals related to the protection of the environment that would further regulate and tax the coal industry, may also require us or our customers to change operations significantly or incur increased costs.

In addition, the United States and over 160 other nations are signatories to the 1992 Framework Convention on Climate Change, which is intended to limit emissions of greenhouse gases, such as carbon dioxide. In December 1997, in Kyoto, Japan, the signatories to the convention established a binding set of emission targets for developed nations. Although the specific emission targets vary from country to country, the United States would be required to reduce emissions to 93% of 1990 levels over a five-year budget period from 2008 through 2012. Although the United States has not ratified the emission targets and no comprehensive regulations focusing on U.S. greenhouse gas emissions are in place, these restrictions, whether through ratification of the emission targets or other efforts to stabilize or reduce greenhouse gas emissions, could adversely impact the price of and demand for coal.

Recent mining accidents involving fatalities in West Virginia, Kentucky and Mexico have received national attention and prompted responses at the state and federal level that have resulted in increased scrutiny of current safety practices and procedures in the mining industry. For example, on January 26, 2006, West Virginia passed a new law imposing stringent new mine safety and accident reporting requirements and increased civil and criminal penalties for violations of mine safety laws. Other states have proposed or passed similar bills and resolutions addressing mine safety practices. On January 25, 2006, an Alabama circuit judge ordered the Alabama governor and legislature to take action to ensure the safety of Alabama’s mine workers. In addition, several mine safety bills have been introduced in Congress that would mandate improvements in mine safety practices, increase or add civil and criminal penalties for non-compliance with such laws or regulations, and expand the scope of federal oversight, inspection and enforcement activities. On February 7, 2006, the federal Mine Safety and Health Administration (“MSHA”) announced the promulgation of new emergency rules on mine safety. These rules address mine safety, equipment, training and emergency reporting requirements. Unlike most MSHA rules, these emergency rules will become effective immediately upon their publication in the Federal Register. Implementing new procedures in order to ensure we comply with these new laws and regulations could adversely affect our results of operation and financial condition.

Coal mining is subject to inherent risks and is dependent upon many factors and conditions beyond our control, which may cause our profitability and our financial position to decline.

Coal mining is subject to inherent risks and is dependent upon a number of conditions beyond our control that can affect our costs and production schedules at particular mines. These risks and conditions include:

·unexpected equipment or maintenance problems;

·variations in geological conditions;

·natural disasters;

·underground mine floodings;

·excess water ingress;

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·environmental hazards;

·industrial accidents;

·explosions caused by the ignition of coal dust or other explosive materials at our mines sites; and

·fires caused by the spontaneous combustion of coal.

These risks and conditions could result in damage to or the destruction of mineral properties or production facilities, personal injury or death, environmental damage, delays in mining, monetary losses and legal liability. For example, an explosion and fire occurred in Mine No. 5 in September 2001. The accident caused extensive damage to the mine and resulted in the deaths of thirteen employees. Insurance coverage may not be available or sufficient to fully cover claims which may arise from these risks and conditions. We have also experienced adverse geological conditions in our mines, such as variations in coal seam thickness, variations in the competency and make-up of the roof strata, fault-related discontinuities in the coal seam and the potential for ingress of excessive amounts of methane gas or water. Such adverse conditions may increase our cost of sales and reduce our profitability, and may cause us to decide to close a mine. Any of these risks or conditions could have a negative impact on our profitability, the cash available from our operations and our financial position.

Our business may be harmed by work stoppages and other labor relations matters.

The majority of our employees within the Jim Walter Resources and Sloss businesses are unionized and we have a risk of work stoppages as the result of strike or lockout. The majority of employees of JWR are members of United Mine Workers of America (“UMWA”). Normally, our negotiations with the UMWA follow the national contract negotiated with the UMWA by the Bituminous Coal Operators Association. The collective bargaining agreement expires December 31, 2011. At our Sloss Industries subsidiary, our contract with the United Steelworkers of America expires December 6, 2010. We experienced an economic strike at Sloss at the end of 2001 that lasted eight months. Future work stoppages, labor union issues or labor disruptions at our key customers or service providers could impede our ability to produce and deliver our products, to receive critical equipment and supplies or to collect payment. This may increase our costs or impede our ability to operate one or more of our operations.

Our expenditures for postretirement benefit and pension obligations are significant and could be materially higher than we have predicted if our underlying assumptions prove to be incorrect.

We provide a range of benefits to our employees and retired employees, including pensions and postretirement healthcare. We record annual amounts relating to these plans based on calculations specified by generally accepted accounting principles, which include various actuarial assumptions. As of December 31, 2006, we estimate that our pension plans’ aggregate accumulated benefit obligation had a present value of approximately $175.2 million, and our fair value of plan assets was approximately $141.5 million. As of December 31, 2006, we estimate that our postretirement health care and life insurance plans’ aggregate accumulated benefit obligation would have had a present value of approximately $330.2 million, and such benefits are not required to be funded. In respect of the funding obligations for our plans, we must make minimum cash contributions on a quarterly basis. Our estimated minimum funding obligation relating to these plans in 2007 is $22.0 million. We have estimated these obligations based on assumptions described under the heading “Critical Accounting Policies and Estimates—Employee Benefits” in “Management’s Discussion and Analysis of Results of Operations and Financial Condition” and in the notes to our consolidated financial statements incorporated herein by reference. 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. If our assumptions do not materialize as expected, cash expenditures and costs that we incur could be materially higher. Moreover, regulatory changes could increase our obligations to provide these or additional benefits.

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In addition, certain of our subsidiaries participate in multiemployer pension plan trusts established for union employees. Contributions to these funds could increase as a result of future collective bargaining with the UMWA, a shrinking contribution base as a result of the insolvency of other coal companies who currently contribute to these funds, lower than expected returns on pension fund assets, or other funding deficiencies. We have no current intention to withdraw from any multiemployer pension plan, but if we were to do so, under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), we would be liable for a proportionate share of the plan’s unfunded vested benefit liabilities upon our withdrawal. Through June 30, 2007, our withdrawal liability for the multiemployer pension plans amounts to $102.1 million.

We self-insure workers’ compensation and certain medical and disability benefits, and greater than expected claims could reduce our profitability.

We are self-insured for workers’ compensation benefits for work-related injuries. Workers’ compensation liabilities, including those related to claims incurred but not reported, are recorded principally using annual valuations based on discounted future expected payments using historical data of the division or combined insurance industry data when historical data is limited. In addition, JWR 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. We perform an annual evaluation of the overall black lung liabilities at the balance sheet date, using assumptions regarding rates of successful claims, discount factors, benefit increases and mortality rates, among others.

Based on the actuarially determined present value of workers’ compensation liabilities using a discount factor of 4.64% and 4.5% for 2006 and 2005, respectively, we have recorded liabilities of $33.5 million and $33.7 million as of December 31, 2006 and 2005, respectively. A one-percentage-point increase in the discount rate on the discounted claims liability at December 31, 2006 would decrease our liability by $0.2 million, while a one-percentage-point decrease in the discount rate would increase our liability by $0.2 million.

If the number or severity of claims for which we are self insured increases, or we are required to accrue or pay additional amounts because the claims prove to be more severe than our original assessment, our operating results could be reduced.

Restrictive covenants in our debt instruments may limit our ability to engage in certain transactions and may diminish our ability to make payments on our indebtedness.

Our debt instruments contain various covenants that limit our ability to engage in certain transactions. Our 2005 Credit Agreement requires the maintenance of specified financial ratios and the satisfaction of other financial condition tests. In addition, our debt instruments require us to provide regular financial information to our lenders. Such requirements generally may be satisfied by our timely filing with the SEC of annual and quarterly reports under the Exchange Act. Our ability to satisfy those financial ratios, tests or covenants can be affected by events beyond our control, and there is a risk that we will not meet those tests. A breach of any of these covenants could result in a default under our debt instruments. If an event of default were not remedied after the delivery of notice of default and lapse of any relevant grace period, the holders of our debt would be able to declare it immediately due and payable. Upon the occurrence of an event of default under our 2005 Credit Agreement, the respective lenders could also terminate all commitments to extend further credit. If we were unable to repay those amounts, such lenders could proceed against the collateral granted to them to secure the indebtedness under our senior credit facilities. We have pledged substantially all of our assets (including our intellectual property) as security under our 2005 Credit Agreement. If under our credit agreement the lenders accelerate the repayment of borrowings, we may not have sufficient assets to repay our senior credit facilities and our other indebtedness, which could negatively impact the value of our stock and our ability to continue as a going concern.

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We may be unsuccessful in identifying or integrating suitable acquisitions, which could impair our growth.

Our growth strategy is built upon organic growth and on taking advantage of opportunities to acquire complementary businesses. This strategy depends on the availability of acquisition candidates with businesses that can be successfully integrated into our existing business and that will provide us with complementary capabilities, products or services. However, we may be unable to identify targets that will be suitable for acquisition. In addition, if we identify a suitable acquisition candidate, our ability to successfully implement the acquisition will depend on a variety of factors, including our ability to finance the acquisition. Our ability to finance our acquisitions is subject to a number of factors, including the availability of adequate cash from operations or of acceptable financing terms and the terms of our debt instruments. In addition, there are many challenges to integrating acquired companies and businesses in our company, including eliminating redundant operations, facilities and systems, coordinating management and personnel, retaining key employees, managing different corporate cultures and achieving cost reductions and cross-selling opportunities. We may not be able to meet these challenges in the future.

We may have substantial additional federal tax liability for accounting adjustments related to our method of recognizing revenue on the sale of homes and interest on related instalment note receivables, as well as to federal income taxes allegedly owed.

The Internal Revenue Service has issued a Notice of Proposed Deficiency assessing additional tax of $82.2 million for the fiscal years ended May 31, 2000, December 31, 2000 and December 31, 2001. The proposed adjustments relate primarily to our method of recognizing revenue on the sale of homes and related interest on the instalment note receivables. In addition, a controversy exists with regard to federal income taxes allegedly owed by our consolidated group of companies for fiscal years 1980 through 1994. It is estimated that the amount of tax presently claimed by the Internal Revenue Service is approximately $34 million for issues currently in dispute in bankruptcy court. This amount is subject to interest and penalties. While we believe that our tax filing positions have substantial merit and intend to defend any tax claims asserted, we cannot offer any assurance that the Internal Revenue Service or a federal court will uphold our tax filing positions. Moreover, although we believe that we have sufficient accruals to address any such tax claims, including related interest and penalties, an adverse ruling, judgment or court order could impose significant financial liabilities in excess of our accruals, which could have an adverse effect on our financial condition and results of operations and could require a significant cash payment to settle the claims.

We may be required to satisfy certain indemnification obligations to Mueller Water or may not be able to collect on indemnification rights from Mueller Water.

In connection with the spin-off of Mueller Water on December 14, 2006, we entered into certain agreements with Mueller Water, including an income tax allocation agreement and a joint litigation agreement. Under the terms of those agreements, we and Mueller Water agreed to indemnify each other with respect to the indebtedness, liabilities and obligations that will be retained by our respective companies, including certain tax and litigation liabilities. These indemnification obligations could be significant. For example, to the extent that we or Mueller Water take any action that would be inconsistent with the treatment of the spin-off of Mueller Water as a tax-free transaction under Section 355 of the Internal Revenue Code, then any tax resulting from such actions is attributable to the acting company. The ability to satisfy these indemnities if called upon to do so will depend upon the future financial strength of each of our companies. We cannot determine whether we will have to indemnify Mueller Water for any substantial obligations after the distribution. We also cannot assure you that, if Mueller Water has to indemnify us for any substantial obligations, Mueller Water will have the ability to satisfy those obligations to us. If Mueller Water is unable to satisfy its obligations under its indemnity to us, we may have to satisfy those obligations.

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Natural disasters and adverse weather conditions could disrupt our businesses and adversely affect our results of operations.

The climates of many of the states in which we operate, including Mississippi, Alabama, Florida and Texas, where we have some of our larger operations, present increased risks of natural disaster and adverse weather. Natural disasters or adverse weather in the areas in which we build, finance or insure homes or have mining or manufacturing operations, or in nearby areas, have in the past, and may in the future, delay new home deliveries, increase costs by damaging inventories of homes and construction materials, reduce the availability of raw materials and skilled labor, lead to significant insurance claims, cause increases in delinquencies and defaults in our mortgage portfolio, limit access to our mines and factories, destroy or damage our inventory, reduce or eliminate certain modes of transporting our coal, increase volatility in the cost of raw materials and weaken the demand for new homes in affected areas, which could adversely affect our earnings. In addition, the rate of delinquencies may be higher after natural disasters or adverse weather conditions. For example, during the third quarter of 2005, Hurricane Katrina impacted several states where our mortgage asset portfolio had high concentrations of customers. As a result, our delinquency rate in those states increased substantially and we incurred a special $1.3 million provision for estimated losses on instalment notes that was anticipated as a result of Hurricane Katrina. The occurrence of large loss events due to natural disasters or adverse weather could reduce the insurance coverage available to us, increase the cost of our insurance premiums and weaken the financial condition of our insurers, thereby limiting our ability to mitigate any future losses we may incur from such events. Moreover, severe flooding, wind and water damage, forced evacuations, contamination, gas leaks, fire and environmental and other damage caused by natural disasters or adverse weather could lead to a general economic downturn, including increased prices for oil, gas and energy, loss of jobs, regional disruptions in travel, transportation and tourism and a decline in real-estate related investments, especially in the areas most directly damaged by the disaster or storm.

Item 1B. Unresolved Staff Comments

None

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Item 2. Description of Property

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

		Principal	Land	Square Footage
	Facility/Location	Products/Operations	Acreage	Leased	Owned
Natural Resources
Jim Walter Resources
Brookwood, AL		Administrative headquarters			42,000
Brookwood, AL		Central shop, supply center			131,100
		and training center
Brookwood, AL		Real estate	7,000
Brookwood, AL		Coal mines	30,400		460,600
Kodiak
Shelby County, AL		Mine support facilities			13,100
Shelby County, AL		Administrative headquarters			1,000
Shelby County, AL		Supply shop			98
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		Closed facility	2		10,000
Alexandria, IN		Closed facility	33		112,000
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
Other
Tampa, FL		Corporate headquarters		33,000

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Recoverable coal reserves assigned to currently operating mines were estimated to be approximately 136.3 million tons as of December 31, 2006.

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, 2006
(In Thousands of Tons)

							JWR’s
	Reserves (2)			Classifications (3)		Type (4)	Interest		Quality			Production(6)
						Steam (S)
						or
						Metallur-
Mining Property	Total (9)	Assigned	Unassigned	Measured	Indicated	gical (M)	Owned	Leased (5)	Ash	Sulf.	BTU/lb	2006	2005	2004
No. 4 Mine	60,569	60,569	—	57,058	3,510	S/M	—	60,569	9	.80	14,150	2,187	3,039	3,053
No. 5 Mine (8)	—	—	—	—	—	—	—	—				821	657	1,484
No. 7 Mine	75,726	75,726	—	62,950	12,776	S/M	2,473	73,253	9	.65	14,150	2,646	2,091	2,387
TOTAL (7)	136,295	136,295	—	120,008	16,286		2,473	133,822				5,654	5,787	6,924

(1)“Recoverable” reserves are defined as tons of mineable coal in the Blue Creek seam, 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 seam 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)The production year ends on December 31. Production includes “middling” coal.

(7)Additional properties that are currently not under lease are under review for possible leasing options.

(8)No. 5 Mine ceased operations December 2006.

(9)    Quality factors are on a “received basis,” which includes an estimate for moisture, which averaged 1.6% to 1.7% during 2006.

Item 3.  Legal Proceedings

See the section entitled “Environmental” in Description of Business and Notes 3 and 18 of “Notes to Consolidated Financial Statements” included herein.

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

None.

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PART II

Item 5.  Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities

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. Sales prices for the years ending December 31, 2006 and 2005 were adjusted for the Mueller Water spin-off using a conversion factor that was calculated as the per share sales price immediately preceding the spin-off divided by the per share sales price immediately following the spin-off. The historical sales prices were divided by this conversion factor to arrive at the adjusted sales prices. See Note 2 of “Notes to Consolidated Financial Statements” for further discussion of the spin-off.

	Year ended December 31, 2006
	High		Low
1st Fiscal quarter	$	35.21	$	25.66
2nd Fiscal quarter	36.40		23.37
3rd Fiscal quarter	28.78		21.97
4th Fiscal quarter	28.00		20.66

	Year ended  December 31, 2005
	High		Low
1st Fiscal quarter	$	23.54	$	15.66
2nd Fiscal quarter	24.73		17.21
3rd Fiscal quarter	25.18		20.55
4th Fiscal quarter	27.05		20.85

During the year ended December 31, 2006, the Company declared and paid to shareholders of record on March 17, June 9, September 15 and November 20 a dividend of $0.04 per share as of each of these dates. During the year ended December 31, 2005, the Company declared and paid to shareholders of record on February 18, May 12, August 12 and on November 11 a dividend of $0.04 per share. Covenants contained in certain of the debt instruments referred to in Note 14 of “Notes to Consolidated Financial Statements” may restrict the amount the Company can pay in cash dividends. Future dividends will be declared at the discretion of the board of directors and will depend on the Company’s future earnings, financial condition and other factors affecting dividend policy. Any declaration and payment of cash dividends on the Company’s Common Stock in excess of specified amounts will result in an adjustment of the conversion rate for the convertible notes. In the first quarter of 2007, the board of directors announced a 25% increase in the quarterly dividend to $0.05 per share.

In connection with the Company’s spin-off of Mueller Water, the Company declared and issued a stock dividend of its 85.8 million Series B shares held in Mueller Water to shareholders of record on December 6, 2006. Shareholders received 1.6524432 shares of Series B common stock of Mueller Water for each share of the Company’s Common Stock held.

As of February 15, 2007, there were 131 shareholders of record of the Common Stock.

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The following table sets forth certain information relating to the Company’s equity compensation plans as of December 31, 2006:

	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		1,563,178		$	20.81		2,587,253
1995 Long-term Incentive Stock Plan		526,960		$	7.67		—
1996 Employee Stock Purchase Plan		—		—			1,588,450

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.

During 2006, holders of $174.2 million of the Company’s Convertible Senior Subordinated Notes surrendered convertible notes in exchange for 9.761 million shares of the Company’s common stock and $19.4 million of conversion inducement fees.

Purchase of Equity Securities by the Company and Affiliated Purchasers

On July 21, 2003, the Company’s Board of Directors authorized an increase in the Common Stock Open Market share buyback program to $25.0 million. During 2004 and 2003 the Company acquired 6,959,000 and 2,529,000 shares, respectively, pursuant to the open market share repurchase program. No purchases were made in 2006. At December 31, 2006, $7.5 million remains available under this authorization.

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Item 6.  Selected Financial Data

The following data, insofar as it relates to each of the years ended December 31, 2006, 2005, 2004, 2003 and 2002 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 comprehensive income (loss) and statements of cash flows and the notes thereto as they relate to the Company’s continuing operations as of December 31, 2006. 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.

	Years ended December 31,2002
	2006		2005		2004			2003		2002
	(in thousands, except per share data)
Net sales and revenues	$	1,309,856	$	1,138,042	$	984,801		$	951,384	$	938,786
Income from continuing operations	$	145,584	$	34,351	$	50,534		$	11,278	$	38,316
Basic income per share from continuing operations	$	3.31	$	0.89	$	1.31		$	0.26	$	0.86
Number of shares used in calculation of basic income per share from continuing operations	44,030		38,485		38,582			43,026		44,318
Diluted income per share from continuing operations	$	2.86	$	0.78	$	1.16		$	0.26	$	0.86
Number of shares used in calculation of diluted income per share from continuing operations	52,078		49,209		46,255			43,364		44,726
Capital expenditures	$	101,055	$	114,518	$	29,979		$	37,890	$	39,440
Net property, plant and equipment	$	311,189	$	258,502	$	179,015		$	192,396	$	188,292
Total assets(1)	$	2,684,115	$	2,492,535	$	2,452,906		$	2,496,958	$	2,360,783
Debt:
Mortgage-backed/asset-backed notes	$	1,736,706	$	1,727,329	$	1,763,827		$	1,829,898	$	1,776,020
Corporate debt	$	248,706	$	448,875	$	—		$	113,754	$	308,900
Convertible senior subordinated notes	$	785	$	175,000	$	175,000		$	—	$	—
Quarterly cash dividend per common share	$	0.04	$	0.04	$	0.03	(2)	$	0.03	$	0.03

(1)   Excludes assets of discontinued operations.

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

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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 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 20 of “Notes to Consolidated Financial Statements” which presents net sales and revenues and operating income by reportable segment. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) 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.

Management believes the following discussion addresses the Company’s most critical accounting estimates, 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. These estimates are based upon management’s historical experience and on various other assumptions that the Company believes reasonable under the circumstances. Changes in estimates used in these and other items could have a material impact on our financial statements.

Revenue recognition

Revenue transactions involving the sale of homes, real estate, products and commodities are recorded when title to the goods is transferred. Interest income on instalment notes is recognized using the interest method. Instalment notes receivable are initially recorded at the discounted value of the future instalment note payments using an imputed interest rate which represents the estimated prevailing market rate of interest for credit of similar terms issued to customers with similar credit ratings to Homebuilding’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 the instalment notes receivable could affect the amount and timing of income recognition in each of these segments.

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.

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The allowance for losses on instalment notes receivable was $13.0 million at December 31, 2006 compared to $12.5 million at December 31, 2005. See Note 8 of “Notes to the Consolidated Financial Statements.” The following table shows information about the allowance for losses for the periods presented.

($ in thousands)	Allowance for Losses			As a % of Net Instalment Notes Receivable			Net Losses and Charge Offs Deducted from the Allowance			As a % of Net Instalment Notes Receivable
December 31, 2006		$	13,011		0.73	%		$	8,540		0.48	%
December 31, 2005		12,489			0.74			9,435			0.56
December 31, 2004		11,200			0.65			12,109			0.71

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

	December 31,
	2006			2005			2004
Total Number of Accounts Outstanding	40,991			43,178			46,785
Delinquencies as a Percent of
Number of Accounts Outstanding
31-60 Days	1.43		%	1.31		%	1.32		%
61-90 Days	0.55		%	0.62		%	0.59		%
91-Days or more	1.95		%	2.42		%	2.23		%
	3.93		%	4.35		%	4.14		%
Instalment Notes Receivable Outstanding(1)($in millions)	$	1,793		$	1,706		$	1,728
Delinquencies as a Percent of Amounts Outstanding(1)
31-60 Days	1.59		%	1.56		%	1.84		%
61-90 Days	0.65		%	0.69		%	0.62		%
91-Days or more	2.19		%	2.90		%	2.46		%
	4.43		%	5.15		%	4.92		%

(1)Based on gross instalment balances outstanding.

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

Inventory valuation

Inventories are periodically evaluated for indications of excess and obsolete exposure based upon anticipated usage, inventory turnover, inventory levels and ultimate product sales value. If necessary, an adjustment for losses related to inventory values is recognized. This evaluation of inventory values is based on management’s estimation of market conditions relating to both pricing and anticipated sales volumes for the Company’s products.

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 based on calculations specified by U.S. GAAP, which include various actuarial assumptions used in developing the required estimates including the following key factors:

·Discount rate

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·Salary growth

·Retirement rates

·Mortality rates

·Healthcare cost trends

·Expected return on plan assets

	Pension Benefits						Other Benefits
	December 31, 2006			December 31, 2005			December 31, 2006		December 31, 2005
Weighted average assumptions used to determine benefit obligations:
Discount rate		5.90	%		5.40	%	5.90	%		5.40	%
Rate of compensation increase		3.50	%		3.50	%	—			—
Weighted average assumptions used to determine net periodic cost:
Discount rate		5.40	%		6.00	%	5.40	%		6.00	%
Expected return on plan assets		8.90	%		8.90	%	—			—
Rate of compensation increase		3.50	%		3.50	%	—			—

Assumed healthcare cost trend rates:			Pre-65		Post-65
Healthcare cost trend rate assumed for the next year	—	—	8.60	%	9.40	%	9.00	%
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	—	—	2012		2012		2010

The discount rate used to determine pension and other post-retirement expense was increased to 5.90% for 2006 from 5.40% used in 2005. The rate of return on plan assets used to determine pension expense is 8.90% for both 2006 and 2005. The discount rate is based on a yield-curve approach which discounts each projected benefit obligation based cash flow of the liability stream at an interest rate specifically applicable to the timing of each respective liability stream cash flow. The model sums the present values of all of the cash flows and then calculates the equivalent weighted-average discount rate by imputing the single interest rate that equates the total present value with the stream of future cash flows. 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 healthcare 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 healthcare plans. A one-percentage-point change in the rate for each of these assumptions would have the following effects as of and for the year ended December 31, 2006 (in thousands):

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	1-Percentage Point Increase				1-Percentage Point Decrease
Healthcare cost trend:
Effect on total of service and interest cost components		$	3,425			$	(2,725	)
Effect on postretirement benefit obligation		42,335				(34,959		)
Discount rate:
Effect on postretirement service and interest cost components		114				(393		)
Effect on postretirement benefit obligation		(39,507		)		45,778
Effect on current year postretirement expense		(2,248		)		2,290
Effect on pension service and interest cost components		23				(92		)
Effect on pension benefit obligation		(19,670		)		23,768
Effect on current year pension expense		(1,556		)		1,829
Expected return on plan assets:
Effect on current year pension expense		(1,375		)		1,375
Rate of compensation increase:
Effect on pension service and interest cost components		451				(386		)
Effect on pension benefit obligation		3,419				(3,144		)
Effect on current year pension expense		861				(743		)

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 using assumptions regarding rates of successful claims, discount factors, benefit increases and mortality rates.

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. At December 31, 2006, a one-percentage-point increase in the discount rate on the discounted Black Lung liability would decrease the liability by $1.1 million, while a one-percentage-point decrease in the discount rate would increase the liability by $1.4 million.

For the workers’ compensation liability, 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. At December 31, 2006, a one-percentage-point increase in the discount rate on the discounted workers’ compensation liability would decrease the liability by $0.2 million, while a one-percentage-point decrease in the discount rate would increase the liability by $0.2 million.

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 liabilities to exceed the estimates, or that may require adjustments to the recorded liability balances in the future.

As discussed in Note 13 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 Company

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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.

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. Accruals for catastrophic uninsured losses at plant or mine facilities would be made on an ad hoc basis based on relevant facts and circumstances.

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.

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

Long-lived assets, including goodwill and 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 is 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.

Restructuring Charges

The Company occasionally records restructuring costs associated with manufacturing plant and mine closings and other exit activities. These costs are estimated by management based on factors such as projected timing and duration of transitions, the amount and timing of termination benefits and the amount and timing of related contract exit costs. During the restructuring process, management reviews the estimates of restructuring costs and adjusts them if necessary given current economic conditions.

DISCONTINUED OPERATIONS

As more fully discussed in Note 2 of “Notes to Consolidated Financial Statements,” the Company completed the spin-off of Mueller Water, which included the Mueller, U.S. Pipe and Anvil operating segments, on December 14, 2006. As such, the operating results, assets and liabilities, and cash flows of Mueller Water have been reported separately from the Company’s continuing operations as “discontinued operations” for all periods presented. Income (loss) from discontinued operations includes the net operating results of the Mueller Water business. There was no gain or loss recognized in the statement of operations relating to this transaction, and transaction costs were not significant.

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RESULTS OF CONTINUING OPERATIONS

2006 Summary Operating Results

	For the Year Ended December 31, 2006
	Natural															Cons
(in thousands)	Resources		Sloss			Financing			Homebuilding				Other			Elims			Total
Net sales	$	634,152	$	132,714		$	14,597			$	273,542		$	3,652		$	(11,946	)	$	1,046,711
Interest income on instalment notes	—		—			199,659				—			—			—			199,659
Miscellaneous income	45,428		319			5,295				2,299			11,435			(1,290		)	63,486
Net sales and revenues	679,580		133,033			219,551				275,841			15,087			(13,236		)	1,309,856
Cost of sales	370,002		112,454			6,738				223,630			3,304			(12,589		)	703,539
Interest expense(1)	—		—			118,743				—			—			—			118,743
Depreciation	27,004		3,623			1,387				5,385			1,618			—			39,017
Selling, general, & administrative	16,457		7,926			29,819				68,756			26,804			—			149,762
Provision for losses on instalment notes	—		—			9,062				—			—			—			9,062
Postretirement benefits	19,772		(680		)	(1,544		)		(3,224		)	(787		)	—			13,537
Amortization of intangibles	—		—			2,405							—			—			2,405
Credit for estimated hurricane insurance losses	—		—			(1,046		)		—			—			—			(1,046		)
Restructuring & impairment charges	—		1,639			—				3,409			—			—			5,048
Operating income (loss)	$	246,345	$	8,071		$	53,987			$	(22,115	)	$	(15,852	)	$	(647	)	$	269,789
Corporate debt interest and debt conversion expense																			(57,384		)
Income from continuing operations before income taxes																			$	212,405

(1)Excludes corporate debt interest and conversion expense.

Year Ended December 31, 2006 as Compared to the Year Ended December 31, 2005

Overview

The Company’s income from continuing operations for the year ended December 31, 2006 was $145.6 million, or $2.86 per diluted share, which compares to $34.4 million, or $0.78 per diluted share in the prior year period.

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

·Natural Resources’ average selling prices for coal increased 25.8% and natural gas prices increased 9.1%, reflecting the benefit of hedging. These increases were partially offset by lower sales volumes and higher mining costs, primarily at Mine No. 4, which resulted from unfavorable geological conditions. Additionally, the prior year included $21.9 million of idle mine costs due to a water ingress problem at Mine No. 5 and adverse geologic conditions in Mine No. 7, while 2006 results include miscellaneous income of $23.4 million relating to an insurance settlement for the 2005 Mine No. 5 water ingress problem.

·Financing results in the current period reflect an $11.1 million reduction in hurricane-related claims expense compared to the prior year period. Additionally, the provision for losses on the mortgage portfolio improved $1.7 million versus the prior year period.

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·Homebuilding had 20.5% higher average net selling prices, increased on-your-lot deliveries and improved gross margins, reflecting price increases and tighter cost controls. Reductions in selling, general and administrative expenses also contributed to improved results. Homebuilding recognized a $3.4 million property impairment charge in 2006 related to the modular homes division, while 2005 results include the complete impairment of Homebuilding’s goodwill of $63.2 million.

·Results in 2006 include $19.4 million of debt conversion expense to induce the conversion of $174.2 million of the Company’s Convertible Senior Subordinated Notes into 9.761 million shares of common stock.

·The Company’s 2006 effective tax rate was 31.9%, which reflects the benefit of Natural Resources’ depletion deductions, partially offset by the effect of non-deductible debt conversion expense.

Outlook and Strategic Initiatives

Natural Resources and Sloss

·The Company expects coal production to total between 6.5 million and 6.9 million tons in 2007, including approximately 400,000 tons from Kodiak.

·Production costs per ton are expected to be in the low-to-mid-$40-per-ton range, an improvement in performance that reflects higher planned volumes at Mines No. 4 and 7 and the elimination of higher cost coal from Mine No. 5. The performance improvement will be tempered by higher labor and employee benefits due to the recently renegotiated UMWA contract, which will increase expense by $15.0 million in 2007.

·The Company has approximately 2.3 million tons of metallurgical coal committed for sale in the first half of 2007 at a price of $115 per metric ton, FOB port of Mobile.

·The Company expects its natural gas business to sell between 6.8 to 7.1 billion cubic feet in 2007, which is a reduction from 2006 primarily due to the closure of Mine No. 5. Approximately 28% of anticipated 2007 natural gas sales has been hedged at an average price of $8.85 per mmbtu.

·The development and resulting longwall operation of the “Southwest A” panel in Mine No. 7 is expected to produce approximately 1.5 million tons of coal between 2007 and 2008. The Mine No. 7 East expansion remains on schedule to begin longwall production in early 2009 and is expected to produce an additional 2.7 million tons of coal annually.

·With respect to demand for metallurgical coal, the Company continues to see strength in steel pricing and demand among the majority of its core customers. In addition, many of the Company’s customers have significant expansion plans underway. Additionally, due to high ocean transportation rates out of Australia and Western Canada into Europe, the Company’s Blue Creek coal is becoming more cost competitive.

·At Kodiak, the Company is currently operating one continuous miner section and expects to add an additional continuous miner section after completion of the preparation plant at the end of the first quarter of 2007. The Company expects sales to begin in the second quarter of 2007 and expects Kodiak to contribute to earnings and cash flow during the second half of 2007.

Homebuilding and Financing

·Financing has delivered record low delinquencies and stable earnings and cash flows. The portfolio is considered to be insulated from re-adjusting ARM loans, rising defaults and slowing home appreciation. Over 96% of the portfolio is comprised of fixed rate mortgages, and the rural nature of the collateral and adherence to strict underwriting guidelines serves to limit losses. However, the Company expects a slight contraction in margins in 2007 due to rising interest rates on mortgage-backed debt securities.

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·Significant progress has been made to reduce the Homebuilding aged backlog, improve gross margins and reduce selling, general and administrative costs. On-your-lot unit completions of 2,700 to 3,000 are expected in 2007, with improving gross margin which will help drive Homebuilding to its goal of achieving profitability in 2007.

·Homebuilding continues to work toward reducing cycle times by expanding the use of alternative construction methodologies. In 2006, the Company announced plans to use its modular home division to achieve this objective. However, in 2007 the Company decided to exit the manufacture and distribution of modular homes due to the poor performance of this division. The modular homes business incurred an operating loss of approximately $8.0 million in 2006, excluding the $3.4 million impairment charge for certain of its long-lived assets.

·As previously announced, the Company continues to evaluate strategic alternatives for its Financing and Homebuilding businesses.

Consolidated Results of Continuing Operations

Net sales and revenues for the year ended December 31, 2006 were $1.3 billion. Revenues grew by $171.8 million, or 15.1% from $1.1 billion in the prior year. Increased revenues at Natural Resources, Homebuilding and Sloss were partially offset by decreased revenues at Financing. Natural Resources revenues increased primarily due to price increases for coal and natural gas and higher gas volumes, partially offset by decreased coal sales volumes. Homebuilding revenues increased due to higher average selling prices. Financing revenues declined primarily due to a declining yield in the portfolio and lower prepayment income, partially offset by an increase in the balance of the note portfolio.

Cost of sales, exclusive of depreciation, increased $70.7 million to $703.5 million and represented 67.2% of net sales in 2006 versus $632.8 million and 69.6% of net sales in the prior year. The margin percentage improvement in 2006 was primarily the result of improved margins at Homebuilding and Natural Resources.

Depreciation for the year ended December 31, 2006 was $39.0 million, an increase of $7.0 million compared to 2005. The increase is primarily due to higher capital expenditures at Natural Resources during the last two years.

Selling, general and administrative expenses of $149.8 million were 11.4% of net sales and revenues in 2006, compared to $154.5 million and 13.6% in 2005. The improvement is due to lower costs at Homebuilding resulting from focused efforts to reduce overhead expenses and due to lower corporate employee-related expenses.

Provision for losses on instalment notes was $9.1 million in 2006, compared to $10.7 million in 2005. Prior year included a $1.3 million charge for expected portfolio losses resulting from Hurricanes Katrina and Rita offset slightly by higher volume of resales in the current period in the Financing segment.

Postretirement benefits expense decreased to $13.5 million in 2006, compared to $14.4 million in 2005, primarily due to a $4.1 million curtailment gain resulting from the termination of benefits for certain current employees and those retirees who are eligible for Medicare of the Financing and Homebuilding segments. In 2007, the Company expects its postretirement benefits expense to be $25.4 million.

Interest expense for mortgage-backed and asset-backed notes decreased to $118.7 million in 2006, compared to $122.0 million in 2005 primarily due to lower average monthly debt balances and delayed warehouse borrowings resulting from a favorable cash position.

Interest expense on corporate debt increased $14.6 million to $38.0 million due to a higher average debt balance outstanding in 2006 resulting from the borrowings under the 2005 Walter Credit Agreement to finance the acquisition of Mueller Water in October 2005. Debt conversion expense of $19.4 million in 2006 was related to the conversion of approximately $174.2 million of the Company’s Convertible Senior Subordinated notes during the year. There were no conversions recognized in 2005.

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Restructuring and impairment charges were $5.0 million in 2006, a decrease of $58.4 million from 2005. The prior year included a $63.2 million goodwill impairment charge at Homebuilding. The current year expense includes a $3.4 million property impairment charge at Homebuilding and a $1.6 million impairment charge relating to Sloss’  chemical division, which was sold in November 2006.

The Company’s effective tax rate of 31.9% in 2006 differed from the Federal statutory rate primarily due to the favorable effect of Natural Resources’ percentage depletion deductions, partially offset by non-deductible debt conversion expenses. The Company’s effective tax rate of 51.7% in 2005 differed from the Federal statutory rate primarily due to the effect of the largely non-deductible $63.2 million goodwill impairment charge. See also Note 13 to “Notes to Consolidated Financial Statements.”

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

Segment Analysis

Natural Resources

Net sales and revenues were $679.6 million for the year ended December 31, 2006, an increase of $131.0 million from $548.6 million in 2005. The increase was primarily due to higher metallurgical coal and natural gas prices and increased natural gas volumes partially offset by decreased coal volumes. In addition, miscellaneous income in 2006 includes $23.4 million for the settlement of an insurance claim for the 2005 Mine No. 5 water ingress problem.

	For the year ended
	December 31,
	2006		2005
Average Coal Selling Price (per ton)	$	103.58	$	82.33
Tons of Coal Sold (in millions)	5.6		5.9
Average Natural Gas Selling Price (per MCF)	$	8.67	$	7.95
Billion Cubic Feet of Natural Gas Sold	7.7		6.9
Number of Natural Gas Wells	415		405

For the year ended 2006, Natural Resources’ operating income was $246.3 million, compared to operating income of $164.1 million in 2005. The increase in operating income in 2006 primarily resulted from the shift to higher margin metallurgical coal sales and increased margins from higher natural gas pricing, partially offset by higher freight costs and higher Mine No. 4 production costs per ton. Cost per ton increased at Mine No. 4 predominantly due to lower production volume relative to 2005 as a result of thin seam conditions and weak roof conditions encountered at the beginning of the current longwall panel, which began in April 2006. These conditions contributed to reduced longwall advance rates and difficulties with roof control. The longwall at Mine No. 4 has since experienced improved advance rates and is now achieving normal longwall advance rates. The increase in operating income in 2006 was also due to $23.4 million of income recognized for the settlement of an insurance claim for the 2005 Mine No. 5 water ingress problem, whereas 2005 included $21.9 million of idle mine costs primarily resulting from the water ingress.

As previously announced, the Company completed production at Mine No. 5 in December 2006. As of December 31, 2006 mining equipment has been recovered and the mine shafts are in the process of being sealed. Total expected costs to close the mine are $8.5 million. Approximately $6.6 million of the closure costs qualify as restructuring costs and were recorded prior to December 31, 2005. Other costs, primarily representing estimated workers’ compensation and other incremental costs related to the closure of the mine, will be charged to expense when incurred.

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Sloss

Net sales and revenues were $133.0 million for 2006, an increase of $4.0 million compared to 2005. Revenues increased in 2006 due to higher furnace coke volume and pricing, which increased 6.4% and 1.3%, respectively, over the prior year, partially offset by a 13.9% decline in shipments of foundry coke. Sloss’ operating income was $3.4 million lower than the previous year primarily due to an impairment charge of $1.6 million relating to the chemical division, which was sold in November 2006.

Financing

Net sales and revenues were $219.6 million in 2006, a decrease of $9.6 million from 2005. This decrease is attributable to a declining yield on the portfolio and lower prepayment-related interest income. Operating income was $54.0 million in 2006, compared to $46.0 million in 2005. Operating income increased primarily as a result of a $1.7 million decrease in the provision for losses on instalment notes. In addition, 2005 included a provision for estimated hurricane insurance losses of $10.0 million. Due to a relatively inactive hurricane season in 2006, there were no significant charges for excess catastrophic losses in Financing’s insurance business.

Delinquencies (the percentage of amounts outstanding over 30 days past due) were 4.4% at December 31, 2006, down from 5.2% at December 31, 2005. The improvement is primarily due to customer payment disruptions caused by the 2005 hurricanes which temporarily increased payment defaults in the prior year period. The calculation of delinquencies excludes from delinquent amounts those accounts that are in bankruptcy proceedings that are paying their mortgage payments in contractual compliance with bankruptcy court approved mortgage payment obligations.

Homebuilding

Net sales and revenues were $275.8 million in 2006, an increase of $49.0 million from 2005 as a result of higher average net selling prices and slightly higher overall deliveries as shown in the table below.

	For the year ended December 31,
	2006		2005
Homes Completed:
Stick-Built	2,663		2,361
Modular	384		661
	3,047		3,022
Average Net Selling Price:
Stick-Built	$	90,300	$	78,800
Modular	$	87,600	$	60,100

The operating loss was $22.1 million for 2006 compared to an operating loss of $103.9 million in 2005. Prior year results included a $63.2 million goodwill impairment charge. The improved performance in 2006 was due to higher average net selling prices and cost reduction activities, partially offset by a $3.4 million impairment charge for certain long-lived assets in the modular homes division.

Other

Net sales and revenues were $15.1 million for 2006 compared to $12.4 million in 2005. Land sales were $0.9 million better than 2005. Net general corporate expenses, principally included in selling, general and administrative expense, were $26.8 million for the year ended 2006 compared to $30.9 million for 2005 reflecting lower personnel related expenses and professional fees partially offset by an increase in bonus expense and stock-based compensation expense resulting from the January 1, 2006 adoption of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment.”

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2005 Summary Operating Results

	For the Year Ended December 31, 2005
	Natural															Cons
(in thousands)	Resources		Sloss			Financing			Homebuilding				Other			Elims			Total
Net sales	$	543,202	$	128,486		$	15,539			$	225,675		$	957		$	(5,162	)	$	908,697
Interest income on instalment notes	—		—			206,582				—			—			—			206,582
Miscellaneous income	5,375		549			7,035				1,121			11,397			(2,714		)	22,763
Net sales and revenues	548,577		129,035			229,156				226,796			12,354			(7,876		)	1,138,042
Cost of sales	332,883		105,314			7,122				190,859			1,795			(5,162		)	632,811
Interest expense(1)	—		—			122,005				—			—			—			122,005
Depreciation	20,855		3,859			1,403				4,966			893			—			31,976
Selling, general, & administrative	14,053		8,983			28,438				72,110			30,942			—			154,526
Provision for losses on instalment notes	—		—			10,724				—			—			—			10,724
Postretirement benefits	16,448		(563		)	(240		)		(468		)	(776		)	—			14,401
Amortization of intangibles	—		—			3,641				—			—			—			3,641
Provision for estimated hurricane insurance losses	—		—			10,044				—			—			—			10,044
Restructuring & impairment charges	235		—			—				63,210			—			—			63,445
Operating income (loss)	$	164,103	$	11,442		$	46,019			$	(103,881	)	$	(20,500	)	$	(2,714	)	$	94,469
Corporate debt interest expense																			(23,400		)
Income from continuing operations before income taxes																			$	71,069

(1)Excludes corporate debt interest expense.

Year Ended December 31, 2005 as Compared to the Year Ended December 31, 2004

Overview

The Company’s income from continuing operations for the year ended December 31, 2005 was $34.4 million or $0.78 per diluted share, which compares to $50.5 million, or $1.16 per diluted share in 2004.

Principal factors impacting income from continuing operations in the prior year results include:

·Natural Resources incurred $21.9 million of idle mine costs in 2005 due to a water ingress problem at Mine No. 5 and adverse geological conditions in Mine No. 7.

·A goodwill impairment charge of $63.2 million was recognized at Homebuilding during 2005.

·Financing results included a $10.0 million provision for estimated hurricane insurance losses in 2005, compared to $4.0 million in 2004.

·In 2005, the Company’s effective tax rate was 51.7%. The $63.2 million goodwill impairment charge was largely non-deductible for tax purposes. This compares with a 3.9% effective tax rate for 2004 when the Company recognized a favorable benefit of $11.4 million from the reversal of certain valuation allowances in addition to the favorable benefit from Natural Resources’ depletion deductions.

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Consolidated Results of Continuing Operations

Net sales and revenues for the year ended December 31, 2005 were $1.138 billion versus $0.985 billion for the year ended December 31, 2004, a 15.6% increase. Increased revenues at Natural Resources and Sloss were partially offset by decreased revenues at Homebuilding and Financing. Natural Resources revenues increased primarily due to price increases for coal and natural gas, partially offset by decreased coal and natural gas sales volumes. Homebuilding revenues decreased due to lower unit completions, partially offset by higher average selling prices. Financing revenues declined primarily due to a declining portfolio as a result of fewer note originations from the Homebuilding segment and lower prepayment-related interest income.

Cost of sales, exclusive of depreciation, of $632.8 million was 69.6% of net sales in 2005 versus $553.4 million, or 73.8% of net sales in 2004. The margin percentage improved as compared to 2004 because of increases in sales prices in Natural Resources and at Sloss, partially offset by higher lumber costs and job cost overruns in the Homebuilding segment. Natural Resources incurred $21.9 million of idle mine costs in 2005 due to a water ingress problem at Mine No. 5 and adverse geological conditions in Mine No. 7, both of which were resolved in the fourth quarter of 2005.

Selling, general and administrative expenses of $154.5 million were 13.6% of net sales and revenues in 2005 compared to $168.3 million, or 17.1% in 2004. Decreased selling, general and administrative expense were due to: (i) a decrease of $5.3 million at Homebuilding related primarily to lower advertising, construction overhead and legal fees; (ii) a decrease at Financing of $2.3 million, primarily due to lower property taxes and legal fees; and (iii) a decrease at Natural Resources of $3.2 million, primarily due to lower legal expenses incurred in 2005, since 2004 included legal expenses related to an accident at Mine No. 5.

Provision for losses on instalment notes decreased to $10.7 million in 2005, compared to $12.4 million in 2004 due to lower volume and improved recovery rates on sales of repossessed homes, partially offset by $1.3 million provided in 2005 due to estimated losses resulting from the effects of Hurricanes Katrina and Rita.

Postretirement benefits expense increased to $14.4 million in 2005, compared to $9.5 million in 2004, primarily due to a lower discount rate used to measure the liability and related actuarially-determined expenses recognized in 2005.

Interest expense for mortgage-backed and asset-backed notes decreased to $122.0 million in 2005, compared to $127.3 million in 2004 primarily due to a decline in the instalment note portfolio balance as a result of fewer note originations from the Homebuilding segment.

Interest expense on corporate debt increased $5.2 million to $23.4 million in 2005 due to indebtedness incurred to finance the Mueller Water acquisition.

The provision for estimated hurricane insurance losses was $10.0 million in 2005, compared to $4.0 million in 2004. The increase in estimated losses was due to both the severity of Hurricane Katrina and the resulting impact on Mississippi, which is a large market for insurance policies underwritten by the Financing segment.

Restructuring and impairment charges were $63.4 million in 2005 and included a $63.2 million goodwill impairment charge at Homebuilding and $0.2 million at Natural Resources due to a small impairment for a Mine No. 7 longwall shield, partially offset by slightly reduced Mine No. 5 shutdown costs.

The Company’s effective tax rate of 51.7% in 2005 differed from the Federal statutory rate primarily due to non-deductible goodwill charges, partially offset by the favorable effect of depletion deductions related to the Company’s mining operations. The Company’s effective tax rate of 3.9% in 2004 differed from the Federal statutory rate primarily due to a reversal of a valuation allowance provided for in

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previous years and due to the favorable effect of depletion deductions. See also Note 13 to “Notes to Consolidated Financial Statements.”

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

Segment Analysis

Natural Resources

Net sales and revenues were $548.6 million for the year ended December 31, 2005, an increase of $153.1 million from $395.5 million in 2004. The increase was primarily due to higher metallurgical coal and natural gas prices, partially offset by decreased coal and natural gas volumes.

	For the year ended
	December 31,
	2005		2004
Average Coal Selling Price (per ton)	$	82.33	$	53.00
Tons of Coal Sold (in millions)	5.9		6.5
Average Natural Gas Selling Price (per MCF)	$	7.95	$	6.08
Billion Cubic Feet of Natural Gas Sold	6.9		7.9
Number of Natural Gas Wells	405		399

The average natural gas selling prices as indicated in the table above for 2005 and 2004 include the effects of approximately $3.0 million of losses and $1.5 million of gains, respectively, on hedges of anticipated natural gas production and sales.

Strong performance at Natural Resources continued in 2005. Increased worldwide demand, particularly from China, for metallurgical coal as well as reduced supply, contributed to price increases in the world’s metallurgical coal markets. In 2005, Natural Resources produced 5.7 million tons of coal, which is 1.2 million tons lower than 2004 primarily due to a water ingress problem at Mine No. 5 that occurred during the second half of 2005 and adverse geological conditions in Mine No. 7. The water ingress problem at Mine No. 5 was rectified in the fourth quarter of 2005 and operations resumed to full capacity in December 2005, while new and much stronger longwall equipment was deployed at Mine No. 7 in the fourth quarter of 2005, which was specifically designed to alleviate continued unfavorable geological conditions at Mine No. 7.

For 2005, Natural Resources’ operating income was $164.1 million, compared to $69.7 million in 2004. The increase was due to higher metallurgical coal and natural gas sales prices and reduced legal expenses incurred versus the prior year, partially offset by lower metallurgical coal volumes and lower gas volumes and $21.9 million of idle mine costs in 2005 due to a water ingress problem at Mine No. 5 and adverse geological conditions in Mine No. 7, both of which were resolved in the fourth quarter of 2005.

In December 2004, the Company announced that it had approved a four-year capital investment program to increase coal production capacity at Mine No. 7. Capital expenditures through December 31, 2005 related to this expansion project amounted to $20.8 million.

In 2003, the Company announced that it expected to close Mine No. 5 in 2004. Due to an improvement in the metallurgical coal market, the Company extended its coal production plans for Mine No. 5 with a revised scheduled shutdown of late 2006 or early 2007. As a result of the temporary idling of Mine No. 5 and the increased manpower requirements related to an expansion program at Mine No. 7, the Company anticipated terminating fewer Mine No. 5 employees than previously estimated. As a result, the Company re-measured the restructuring liability, which resulted in a $0.6 million net reversal in 2005 of amounts previously charged to restructuring expense within the Natural Resources segment.

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Sloss

Net sales and revenues were $129.0 million for 2005, an increase of $26.0 million compared to 2004. Revenue increased in 2005 due to higher prices for furnace and foundry coke, which increased 45% and 49%, respectively, over the prior year, partially offset by a 16% decline in shipments of foundry coke. Sloss operating income was $4.6 million higher than the previous year due to the favorable effect of increased sales prices, partially offset by increased coal and other costs.

Financing

Net sales and revenues were $229.2 million in 2005, a decrease of $13.6 million from 2004. This decrease is attributable to a declining portfolio as a result of fewer note originations from the Homebuilding segment and lower prepayment-related interest income. Operating income was $46.0 million in 2005, compared to $54.8 million in 2004. The segment results declined primarily as a result of lower instalment note revenues on a declining portfolio, a $6.0 million incremental provision for estimated hurricane-related losses and a $1.3 million impact from incremental loan losses expected to result from customers in hurricane impacted areas.

Delinquencies (the percentage of amounts outstanding over 30 days past due) were 5.2% at December 31, 2005, up from 4.9% at December 31, 2004 primarily due to customer payment disruptions caused by the 2005 hurricanes. The calculation of delinquencies excludes from delinquent amounts those accounts that are in bankruptcy proceedings that are paying their mortgage payments in contractual compliance with bankruptcy court approved mortgage payment obligations.

Homebuilding

Net sales and revenues were $226.8 million during 2005, a decrease of $7.0 million, as a result of 7% fewer unit completions, partially offset by a 4% increase in average net selling prices. The higher average net selling prices reflect the increasing popularity of larger homes with more amenities as well as price increases to offset higher material costs. Partially offsetting these increases, the average selling prices of the Homebuilding segment’s modular product declined by an average of $3,900 per unit, reflecting the introduction of a new, lower-priced product line in the first half of 2005. This product line was discontinued in the fourth quarter of 2005 when it was determined that it would not achieve profitability objectives. The decline in unit completions from the prior year reflects weaker market conditions in the Company’s affordable-housing market segment compared to the broader homebuilding industry. The decline in unit completions was comprised of a 13.5% decline in stick-built units, partially offset by an increase of 140 modular unit completions.

	For the year ended
	December 31,
	2005		2004
Homes Completed:
Stick-Built	2,361		2,730
Modular	661		521
	3,022		3,251
Average Net Selling Price:
Stick-Built	$	78,800	$	73,000
Modular	$	60,100	$	64,000

The segment reported an operating loss of $103.9 million for the year ended December 31, 2005, compared to an operating loss of $33.3 million in the prior year. This decline was primarily due to a non-cash charge of $63.2 million in the fourth quarter of 2005 to write-off goodwill, as a result of the Company’s annual impairment testing. This write-off eliminated all of the Homebuilding segment’s goodwill from the Company’s consolidated balance sheet. This adjustment was necessary to properly

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reflect the fair value of Homebuilding, which has been generating losses during the last few years. Excluding the goodwill write-off, Homebuilding segment operating results declined by $7.4 million in 2005. This decline reflects lower unit completions and lower margins, partially offset by higher average selling prices and lower selling, general and administrative expenses compared to 2004. The decline in margins reflects costs in 2005 related to repairs and rework on aged units under construction. The decline in selling, general and administrative expenses in 2005 reflects lower overhead costs resulting from the closure of unprofitable model home parks between the third quarter of 2004 and second quarter of 2005 and lower advertising expenses.

Other

Net sales and revenues were $12.4 million for 2005 compared to $18.4 million in 2004. Land sales were $3.4 million better than 2004. Net general corporate expenses, principally included in selling, general and administrative expenses were $26.6 million in 2005 compared to $28.6 million in 2004. Corporate expenses declined due to lower medical costs ($3.9 million) and reduced internal and external audit services related to compliance with Sarbanes-Oxley 404 Act requirements ($2.9 million) partially offset by higher employee-related costs ($4.0 million).

FINANCIAL CONDITION

Cash and cash equivalents of continuing operations increased to $127.4 million at December 31, 2006 from $64.4 million at December 31, 2005, reflecting $181.2 million in cash flows provided by continuing operating activities, $98.5 million of cash flows used in investing activities of continuing operations and $90.0 million of cash flows used in financing activities of continuing operations. See additional discussion in the Statement of Cash Flows section that follows.

Restricted short-term investments of $90.0 million at December 31, 2006 decreased $34.5 million from December 31, 2005 due to the lower amount of pre-funding generated from the issuance of the 2006-1 Trust Asset Backed Notes as compared with the issuance of the 2005-1 Trust Asset Backed Notes and due to a decrease in prepayment speeds between the last quarter of 2006 compared to the same period in 2005.

Net receivables were $88.6 million at December 31, 2006, an increase of $14.0 million from December 31, 2005 primarily due to $18.4 million due from the Company’s insurance carrier for the settlement of claims associated with the 2005 water ingress problem at Mine No. 5.

Inventories were $108.9 million at December 31, 2006, a decrease of $13.3 million from December 31, 2005, primarily due to a reduction in the backlog of homes under construction at Homebuilding.

Prepaid expenses of $30.1 million at December 31, 2006 increased $8.7 million from December 31, 2005 primarily due to increased prepaid expenses at Natural Resources resulting from an increase in prepaid property insurance and due to the timing of and an increase in the amount of longwall move costs.

Property, plant and equipment was $311.2 million at December 31, 2006, an increase of $52.7 million over 2005 due in large part to capital expenditures at Natural Resources for the Mine No. 7 East expansion project.

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Corporate debt decreased $374.4 million reflecting the conversion of $174.2 million of convertible notes and $200.2 million repayment of the term loan facility.

Accumulated postretirement benefits obligation of $330.2 million increased $105.0 million from 2005 primarily as a result of the effect of the adoption of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.”

LIQUIDITY AND CAPITAL RESOURCES

Overview

The Company’s principal sources of short-term funding are existing cash balances, operating cash flows and borrowings under its revolving credit facility and warehouse lines of credit. The Company’s principal sources of long-term funding are its bank term loan and its financings under mortgage-backed/asset-backed notes. As of December 31, 2006, total debt has decreased by $365.0 million compared to December 31, 2005. See discussion below and Note 14 of “Notes to Consolidated Financial Statements.”

Cash inflows from the sales of goods at the Company’s Natural Resources and Sloss segments are generated in the normal course, generally within 90 days or less from the date of title transfer of the goods sold. At our Financing and Homebuilding segments, the majority of homes constructed and sold by Homebuilding are internally financed. JWH incurs construction costs to build the home, which are financed via internal Company resources, including existing cash balances, cash flows generated from operations or borrowings under credit facilities. When the home is completed, JWH tenders it to the customer. At this time, JWH recognizes the sale of the home and sells the instalment note contract to MSH which recognizes an increase in instalment notes receivable. No cash is generated from this intercompany transaction. MSH then borrows periodically under its warehouse facilities, typically at 80% of the face of the instalment note contract, using the instalment note contract as collateral. On a monthly basis, MSH pays interest and other funding costs under the warehouse facilities using collections from instalment notes receivable. Historically, once there is approximately $200-300 million of accumulated borrowings under the warehouse facilities, MSH will package the instalment notes and pledge them as collateral to complete a mortgage-backed/asset-backed securitized debt offering. MSH historically has received 95% of the face value of the instalment notes receivable. MSH uses proceeds from the securitization to pay off the warehouse facilities and any excess cash flow generated would be available for general corporate purposes.

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 for the next twelve to eighteen months. However, the Company’s operating cash flows and liquidity are significantly influenced by numerous factors, including the general economy and, in particular, prices of coal and natural gas, levels of construction activity, costs of raw materials and interest rates.

Mortgage-backed/Asset-backed Notes

At December 31, 2006, non-recourse mortgage-backed/asset-backed notes outstanding totaled $1.7 billion and consisted of eight issues of public debt and one issue of private debt providing financing for instalment notes receivable purchased by Mid-State Homes (“MSH”). Mortgage debt also includes outstanding borrowings, if any, under a $200.0 million and a $150.0 million Variable Funding Loan Agreement (“warehouse facilities”) providing temporary financing to MSH for its current purchases of instalment notes and mortgage loans from JWH and WMC. At December 31, 2006, there were no borrowings outstanding under these warehouse facilities, leaving a total of $350.0 million available for future borrowings.

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In November 2006, Mid-State Capital Corporation, a wholly owned subsidiary of the Company completed its 2006-1 Trust private offering of $256.9 million in asset-backed bonds with a single maturity date of October 2040 and with a weighted average, fixed interest coupon of 6.28%.

2005 Walter Credit Agreement

The 2005 Walter Credit Agreement is a secured obligation of the Company and substantially all of the wholly owned domestic subsidiaries of the Company. The 2005 Walter Term Loan requires quarterly principal payments of $0.6 million through October 3, 2012, at which time the remaining principal outstanding is due. The 2005 Walter Term Loan carries a floating interest rate of 175 basis points over LIBOR. At December 31, 2006, the balance outstanding on the term loan was $248.7 million and the weighted-average interest rate was 7.12%. The commitment fee on the unused portion of the 2005 Walter Revolving Credit Facility is 0.35% and the interest rate is a floating rate of 150 basis points over LIBOR. At December 31, 2006, there were no borrowings outstanding under the revolving credit facility, but the Company issued $62.5 million in letters of credit, reducing availability for borrowings to $162.5 million.

In February 2006, the Company sold 2.65 million shares of common stock for $168.7 million of net cash proceeds. Of these proceeds, $102.9 million was used to repay the term loan facility. In addition, during the year ended December 31, 2006, the Company repaid $22.3 million on the term loan facility on a mandatory basis and made $75.0 million of optional prepayments using available cash flow.

Convertible Senior Subordinated Notes

On April 20, 2004, the Company issued $175.0 million aggregate principal amount of 3.75% Convertible Senior Subordinated Notes due May 1, 2024 (the “convertible notes”). During 2006, holders of $174.2 million of the Company’s convertible notes surrendered their convertible notes in exchange for 9.761 million shares of the Company’s common stock and $19.4 million of conversion inducement fees.

At December 31, 2006, the $0.8 million remaining convertible notes outstanding are currently convertible into 84,000 shares of the Company’s common stock, as conversion conditions specified in the Indenture regarding market price have been satisfied.   Each $1,000 principal note may convert into 107.0241 shares of the Company’s common stock, which represents a conversion price of approximately $9.34 per share.

Statement of Cash Flows

Cash from continuing operations was approximately $127.4 million and $64.4 million at December 31, 2006 and December 31, 2005, respectively. Cash increased primarily due to cash flows generated from operations, partially reduced by cash flows used in investing and financing activities.

Cash flows provided by operating activities of continuing operations were $181.2 million in 2006 as compared to $251.3 million in 2005. The decrease year-over-year is primarily due to the increase in instalment note receivables. The 2005 cash flow benefited from higher prepayments as compared to 2006, primarily due to a more favorable interest rate market in 2005 which contributed to increased customer refinancing activity and thus, prepayments.

Cash flows used in investing activities of continuing operations in 2006 were $98.5 million as compared to $1.0 billion in 2005. The major cause of this change is the 2005 acquisition of Mueller Water for $867.0 million, net of cash acquired. Cash flows used in investing activities of continuing operations in 2006 included cash flows used to purchase property, plant and equipment ($101.1 million) and to purchase mortgage loans ($103.8 million). These cash outflows were partially offset by principal payments received on purchased loans totaling $46.0 million and cash inflows from restricted short term investments totaling $34.5 million.

Cash flows used in financing activities of continuing operations in 2006 were $90.0 million compared to cash flows provided by financing activities of $410.5 million in 2005. Financing activities in 2005 included

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$460.0 million of borrowings, primarily related to the acquisition of Mueller Water. Cash flows used in financing activities of continuing operations in 2006 included retirements of corporate debt ($200.2 million) and retirements of mortgage-back/asset-backed notes ($392.6 million), substantially offset by cash proceeds from the sale of the Company’s common stock ($168.7 million) and the issuance of mortgage-backed/asset-backed notes ($401.9 million). Cash used in financing activities in 2006 also includes $82.1 million of cash remaining on Mueller Water’s balance sheet at the time of the spin-off.

Capital expenditures totaled $101.1 million in the year ended December 31, 2006 related principally to the Mine No. 7 East expansion project and other mine development activities at Natural Resources. We estimate that capital expenditures for the year ending December 31, 2007 will approximate $125 million to $150 million. Of this amount, approximately $70 million to $80 million relates to the Mine No. 7 East expansion project. Actual expenditures in 2007 may be more or less than this amount, depending upon the level of earnings and cash flow, or expansion opportunities in certain markets.

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.

The following tables summarize the Company’s contractual obligations and commercial commitments as of December 31, 2006. The unconditional purchase obligations primarily represent commitments to purchase raw materials. This table does not include interest owed on these obligations. For the year ended December 31, 2006, the Company paid approximately $32.6 million of interest on corporate debt. For the year ending December 31, 2007, the Company estimates total cash interest payments related to corporate debt will be approximately $18.7 million.

Contractual obligations and commercial commitments:

			Payments Due by Period (in Thousands)
	Total		2007		2008		2009		2010		2011		Thereafter
Mortgage-backed/asset-backed debt(1)	$	1,736,706	$	250,751	$	210,726	$	181,097	$	164,897	$	147,042	$	782,193
Corporate debt(2)	248,706		2,519		2,519		2,519		2,519		2,519		236,111
Convertible senior subordinated notes	785		—		—		—		—		—		785
Operating leases	29,166		9,755		7,922		5,142		3,075		2,466		806
Unconditional purchase obligations	30,402		30,402		—		—		—		—		—
Total contractual cash obligations	$	2,045,765	293,427		221,167		188,758		170,491		152,027		$	1,019,895
Other long-term liabilities(3)			21,970		18,734		20,228		21,589		22,598
Total cash obligations			$	315,397	$	239,901	$	208,986	$	192,080	$	174,625

(1)The asset-backed note payments 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)In January 2007, the Company used $28.0 million of available cash to repay a portion of the term loan outstanding under the 2005 Walter Credit Agreement.

(3)Other long-term liabilities include pension and other post-retirement 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-retirement benefits are paid as incurred. Accordingly, amounts by period included in this schedule are estimates and primarily include estimated post-retirement benefits.

42

Available commitments under existing borrowing arrangements:

				Amounts of Commitment Expiration per Year
	Total
	Amounts			Less than		1 - 3			4-5		Over 5
(in thousands)	Committed			1 Year		Years			Years		Years
Trust IX Variable Funding Loan Facility		$	150,000	$	150,000		$	—	$	—		$	—
Trust XIV Variable Funding Loan Facility		200,000		200,000			—		—			—
Revolving Credit Facilities(1)		162,500		—			—		162,500			—
Total available commitments		$	512,500	$	350,000		$		$	162,500		$	—

(1)Includes a sub-facility for standby and commercial letters of credit of which $62.5 million was utilized at December 31, 2006.

Environmental, miscellaneous litigation and other commitments and contingencies:

See Note 18 of “Notes to Consolidated Financial Statements” for discussion of these matters not included in the tables above due to their contingent nature.

MARKET RISK

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

Interest rate risk

The Company’s primary interest rate risk exposures relate to the interest rates on its third-party indebtedness and the instalment notes receivable portfolio during the warehousing period and prepayments thereof.

On October 3, 2005, the Company entered into a credit agreement as more fully described in Note 14 of “Notes to Consolidated Financial Statements” with total credit facilities of $675.0 million and floating rate interest rates based on LIBOR plus a spread.

On November 1, 2005, the Company entered into an interest rate hedge agreement (“hedge”) with a notional value of $75 million, as more fully described in Note 14 of “Notes to Consolidated Financial Statements.”  The objective of the hedge is to protect the Company against rising LIBOR interest rates that would have a negative effect on the Company’s cash flows due to changes in interest payments on its 2005 Walter Credit Agreement. The structure of the hedge is a three-year collar contract with a floor of 4.25% and a cap of 5.69%. The collar agreement calls for the Company to make fixed rate payments over the term of the hedge when stated three-month LIBOR rates are below the floor and to receive payments from the counter-party when the three-month LIBOR rates are above the cap. It is anticipated that the hedge will be settled upon maturity, and will be accounted for as a cash flow hedge. The changes in the fair value of these swaps that take place through the date of maturity are recorded in accumulated other comprehensive income (loss).

On November 28, 2006, the Company entered into two interest rate hedge agreements each with a notional value of $25.0 million. On January 30, 2007 and February 14, 2007, the Company entered into two additional hedge agreements with notional values of $50.0 million and $35.0 million, respectively. The objective of these hedges is to protect against changes in the benchmark interest rate on the forecasted issuance of mortgage-backed bonds anticipated to be priced on or around April 1, 2008. The hedges will be settled on or before maturity and are being accounted for as a cash flow hedges. As such, changes in the fair value of the hedges that take place through the date of maturity are recorded in accumulated other comprehensive income (loss).

43

A ten percent decrease in interest rates from the December 31, 2006 and 2005 rates would result in an increase to annual pre-tax income from these financial instruments of approximately $1.8 million and $3.2 million, respectively, while a ten percent increase in rates would decrease annual pre-tax income approximately $1.4 million and $2.8 million, respectively.

The Company’s fixed-rate gross instalment notes receivables were $1.793 billion and fixed-rate mortgage-backed/asset-backed notes were $1.737 billion as of December 31, 2006. 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.

Commodity risks

The Company is exposed to commodity price risk on sales of natural gas. On an annual basis, the Company’s sales of natural gas approximates 6.8 million mmbtu (equivalent of 7.0 billion cubic feet).

The Company occasionally utilizes derivative commodity instruments to manage the exposure to changing natural gas prices. Such derivative instruments are structured as cash flow hedges and not for trading. During 2006 and 2005, the Company hedged approximately 42% and 32%, respectively, of its natural gas sales with swap contracts. These swap contracts effectively converted a portion of forecasted sales at floating-rate natural gas prices to a fixed-rate basis. These swap contracts resulted in cash inflows of $12.3 million in 2006 and cash outflows of $3.0 million in 2005, impacting net sales and revenues.

At December 31, 2006, swap contracts to hedge approximately 0.6 million mmbtu of anticipated natural gas sales in 2007 and at December 31, 2005, swap contracts to hedge approximately 4.5 million mmbtu of anticipated natural gas sales in 2006, were outstanding as more fully described in Note 19 of “Notes to Consolidated Financial Statements.” At December 31, 2006, a ten percent increase in the natural gas prices would result in a $0.4 million decrease in the fair value of the swap contracts outstanding. On February 8, 2007, the Company entered into an additional swap contract to hedge approximately 1.35 million mmbtu of anticipated natural gas sales in 2007.

NEW ACCOUNTING PRONOUNCEMENTS

In July 2006, the FASB issued Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes,” which provides the minimum recognition threshold that a tax provision must meet before being recognized in the financial statements. This interpretation also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures. FIN No. 48 applies to all tax positions related to income taxes subject to SFAS No. 109, “Accounting for Income Taxes.”  The Company estimates the adoption of this interpretation, which becomes effective January 1, 2007, will result in an adjustment to decrease the beginning retained earnings by approximately $5.0 million to $10.0 million.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which provides a definition of fair value, establishes a framework for measuring fair value and expands financial statement disclosure requirements. SFAS No. 157 requires companies to base fair values on what they would receive from a sale to a third party in the open market. The Company has not yet determined what impact, if any, the adoption of this statement, which becomes effective January 1, 2008, will have on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” which requires the Company to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in the balance sheet and to recognize changes in that funded status as a component of other

44

comprehensive income. See Note 15 for the impact of this guidance, which was effective December 31, 2006. In addition, SFAS No. 158 requires companies to measure plan assets and liabilities as of the fiscal year-end reporting date. The Company uses a September 30 measurement date and will be required to adopt this provision December 31, 2008. The Company has not yet determined what impact the adoption of this requirement of this statement will have on its consolidated financial statements.

In September 2006, the FASB issued FASB Staff Position No. AUG AIR-1, “Accounting for Planned Major Maintenance Activities” (“AUG AIR-1”), which provides guidance on which methods are allowed to properly account for planned major maintenance activities. The three accepted methods under AUG AIR-1 are direct expense, built-in overhaul, and deferral methods. The Company has not yet determined what impact the adoption of this statement, which becomes effective January 1, 2007, will have on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” which allows reporting entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to reduce volatility in reported earnings that result from measuring related assets and liabilities differently without having to apply complex hedge accounting provisions, using the guidance in SFAS No. 133 (as amended), “Accounting for Derivative Instruments and Hedging Activities.”  The Company has not yet determined what impact the adoption of this requirement, which becomes effective January 1, 2008, will have on its consolidated financial statements.

PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT

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

UNAUDITED INTERIM FINANCIAL INFORMATION:
(in thousands, except per share amounts)

	Quarter ended
Fiscal Year 2006(4)	March 31			June 30		September 30			December 31(1)
Net sales and revenues	$	322,175		$	329,159		$	341,695		$	316,827
Income from continuing operations	36,049			37,475			35,661			28,435
Income (loss) from discontinued operations	(750		)	26,486			27,584			7,429
Net income	$	35,299		$	63,961		$	63,245		$	35,864
Diluted income (loss) per share:(2)(3)
Income from continuing operations	$	0.73		$	0.74		$	0.70		$	0.55
Income from discontinued operations	(0.02		)	0.50			0.53			0.14
Net income	$	0.71		$	1.24		$	1.23		$	0.69

45

	Quarter ended
Fiscal Year 2005(4)	March 31		June 30		September 30			December 31(1)
Net sales and revenues	$	247,803	$	312,105		$	253,187		$	324,947
Income (loss) from continuing operations	16,551		33,739			14,269			(29,398		)
Income (loss) from discontinued operations	2,214		7,742			5,928			(43,999		)
Net income (loss)	$	18,765	$	41,481		$	20,197		$	(73,397	)
Diluted income (loss) per share: (2)(3)
Income (loss) from continuing operations	$	0.36	$	0.71		$	0.31		$	(0.75	)
Income (loss) from discontinued operations	0.05		0.16			0.12			(1.13		)
Net income (loss)	$	0.41	$	0.87		$	0.43		$	(1.88	)

(1)Results for the fourth quarter 2006 include $23.4 million of income related to the settlement of an insurance claim associated with a 2005 water ingress problem at Mine No. 5. The fourth quarter 2005 results include a $63.2 million goodwill impairment charge at Homebuilding.

(2)The sum of quarterly earnings per share amounts may be different than annual amounts as a result of the impact of variations in shares outstanding due to rounding differences.

(3)Dilutive earnings per share includes the dilutive effect of the Company’s convertible senior subordinated notes, issued April 2004.

(4)Amounts vary from previous Form 10-Q disclosures as a result of classifying Mueller Water as discontinued operations in connection with the December 14, 2006 spin-off.

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

Incorporated by reference to the 2007 Proxy Statement.

Item 9A.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of December 31, 2006, the Company’s management, including the Company’s vice chairman (principal executive officer) and chief financial officer (principal financial officer), evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”). These disclosure controls and procedures have been designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and regulations and that such information is accumulated and communicated to  the Company’s management, including its principal executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required financial disclosure. Based on this evaluation, the principal executive officer and chief financial officer have concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2006.

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)). Internal control over financial reporting is a

46

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 in the United States of America. 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 its 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.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Management has concluded that, as of December 31, 2006, the Company’s internal control over financial reporting was effective.

Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, has been audited by PricewaterhouseCoopers LLP, an independent registered certified public accounting firm, as stated in their report which appears herein.

Evaluation of Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the quarter ended December 31, 2006 that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

Item 9B. Other Information

None

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Part III

Item 10.Directors, Executive Officers and Corporate Governance

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
Victor P. Patrick	49	Vice Chairman, General Counsel and Secretary
Joseph J. Troy	43	Executive Vice President, Chief Financial Officer
Mark J. O’Brien	64	Chairman and Chief Executive Officer, JWH Holding Company, LLC
George R. Richmond	56	Chief Executive Officer of Jim Walter Resources, Inc.
Ronald E. McCaslin	59	President of Jim Walter Homes, Inc.
Charles E. Cauthen	48	Chief Financial Officer of JWH Holding Company, LLC and President of Mid-State Homes, Inc.
Miles C. Dearden	47	Senior Vice President, Treasurer
Lisa A. Honnold	39	Senior Vice President, Controller
Larry E. Williams	59	Senior Vice President, Human Resources

Our executive officers as of March 1, 2007 are listed below.

Victor P. Patrick was appointed Vice Chairman in August 2006 and has continued to serve as GeneralCounsel and Secretary since joining the Company in August 2002. Mr. Patrick was appointed as a Director of the Company in December 2006. 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 Executive Vice President, Chief Financial Officer in August 2006. Mr. Troy has also served as Senior Vice President—Financial Services, President of Mid-State Homes and Senior Vice President and Treasurer of the Company since 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.

Mark J. O’Brien was appointed Chairman and Chief Executive Officer of the Company’s JWH Holding Company, LLC (consisting of its Financing and Homebuilding businesses) in February 2006. Mr. O’Brien has also served as a member of the Company’s board of directors since June 2005. Previously, he was the Chief Executive Officer of Pulte Homes, Inc., where he served in various capacities for 21 years until his retirement in 2003.

George R. Richmond was appointed Chief Executive Officer of Jim Walter Resources in February 2006 and President and Chief Operating Officer of Jim Walter Resources in 1997. Mr. Richmond has held various positions at JWR since 1978. Mr. Richmond was appointed as a Director of the Company in December 2006.

Ronald E. McCaslin was appointed President of Jim Walter Homes, Inc. in October 2006. Mr. McCaslin previously served as president of Stratford Homes. Prior thereto, he was President and Chief Operating Officer for the manufacturing division of American Homestar. Additionally, he has held executive positions with Fleetwood Homes as well as with companies in the commercial appliance and equipment industry.

Charles E. Cauthen was appointed Chief Financial Officer of JWH Holding Company, LLC and President of Mid-State Homes, Inc. in November 2006. Prior thereto, he served as President of Jim Walter Homes since August 2005. Previously, he served the Company as Chief Operating Officer of Jim Walter Homes since February 2005 and Senior Vice President and Controller since November 2000. Prior thereto, he was Senior Vice President and Chief Financial Officer—Consumer Products Group, Bank of America, from 1999 to November 2000.

48

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.

Lisa A. Honnold was appointed Senior Vice President, Controller of the Company in March 2006. Ms. Honnold has served as Vice President of Corporate Accounting for the Company since December 2005. Prior to joining the Company, Ms. Honnold was Vice President, Corporate Controller of Catalina Marketing Corporation from December 2004 to November 2005, holding the previous title of Assistant Controller since November 2003. From 1996 to November 2003, Ms. Honnold held various positions with NACCO Industries, Inc., last serving as Manager of Financial Reporting and Analysis.

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.

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.

Additional Information

Additional information, as required in Item 10. “Directors and Executive Officers of the Registrant” are incorporated by reference to the Proxy Statement (the “2007 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.

Item 11.Executive Compensation

Incorporated by reference to the 2007 Proxy Statement.

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

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 2007 Proxy Statement.

Item 13.Certain Relationships and Related Transactions, and Director Independence

Incorporated by reference to the 2007 Proxy Statement.

Item 14.Principal Accounting Fees and Services

Incorporated by reference to the 2007 Proxy Statement.

Part IV

Item 15.Exhibits, Financial Statement Schedules

(a)(1)Financial Statements - See Index to Financial Statements on page F-1.

(2)Exhibits—See Item 15(b).

(b)Exhibits—See Index to Exhibits on pages E1—E-4.

49

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 1, 2007	/s/ JOSEPH J. TROY
	Joseph J. Troy, 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 1, 2007		/S/ VICTOR P. PATRICK
		Victor P. Patrick, Vice Chairman and Director, General Counsel and Secretary, Principal Executive Officer
March 1, 2007		/S/ HOWARD L. CLARK JR.
		Howard L. Clark, Jr., Director*
March 1, 2007		/S/ JERRY W. KOLB
		Jerry W. Kolb, Director*
March 1, 2007		/S/ PATRICK A. KRIEGSHAUSER
		Patrick A. Kriegshauser, Director*
March 1, 2007		/S/ JOSEPH B. LEONARD
		Joseph B. Leonard, Director*
March 1, 2007		/S/ MARK J. O’BRIEN
		Mark J. O’Brien, Director, Chairman and Chief Executive Officer, JWH Holding Company, LLC*
March 1, 2007		/S/ BERNARD G. RETHORE
		Bernard G. Rethore, Director*
March 1, 2007		/S/ GEORGE R. RICHMOND
		George R. Richmond, Director, President and Chief Executive Officer, Jim Walter Resources*
March 1, 2007		/S/ MICHAEL T. TOKARZ
		Michael T. Tokarz, Chairman*
March 1, 2007		/S/ LISA A. HONNOLD
		Lisa A. Honnold, Senior Vice President, Controller and Principal Accounting Officer
By:	S/ JOSEPH J. TROY
	Joseph J. Troy
	Attorney-in-Fact

50

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Walter Industries, Inc. and Subsidiaries
Report of Independent Registered Certified Public Accounting Firm	F-2
Consolidated Balance Sheets—December 31, 2006 and 2005	F-4
Consolidated Statements of Operations for Each of the Three Years in the Period Ended December 31, 2006	F-5
Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income (Loss) for Each of the Three Years in the Period Ended December 31, 2006	F-6
Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended December 31, 2006	F-7
Notes to Consolidated Financial Statements	F-9

F-1

Report of Independent Registered Certified Public Accounting Firm

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

We have completed integrated audits of Walter Industries, Inc.’s consolidated financial statements and of its internal control over financial reporting as of December 31, 2006 in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our 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, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 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 6 and Note 15 to the consolidated financial statements, the Company has changed the manner in which it accounts for share-based compensation and for defined benefit pension and other postretirement plans, respectively.

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, 2006 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, 2006, 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 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 control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

F-2

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 its 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.

/s/PricewaterhouseCoopers LLP

Tampa, Florida

February 28, 2007

F-3

WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)

	December 31,
	2006			2005
ASSETS
Cash and cash equivalents	$	127,370		$	64,436
Short-term investments, restricted	90,042			124,573
Instalment notes receivable, net of allowance of $13,011 and $12,489, respectively	1,779,697			1,693,922
Receivables, net	88,643			74,610
Inventories	108,871			122,146
Prepaid expenses	30,146			21,460
Property, plant and equipment, net	311,189			258,502
Other long-term assets	137,262			121,991
Goodwill	10,895			10,895
Assets of discontinued operations	—			2,911,369
	$	2,684,115		$	5,403,904
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	62,706		$	53,355
Accrued expenses	96,552			95,221
Debt:
Mortgage-backed/asset-backed notes	1,736,706			1,727,329
Corporate debt	249,491			623,875
Accrued interest	17,053			20,397
Accumulated postretirement benefits obligation	330,241			225,241
Other long-term liabilities	189,458			182,664
Liabilities of discontinued operations	—			2,187,206
Total liabilities	$	2,682,207		$	5,115,288
Commitments and Contingencies (Note 18)
Stockholders’ equity:
Common stock, $.01 par value per share:
Authorized—200,000,000 shares Issued—72,730,770 and 59,818,401 shares	728			598
Capital in excess of par value	757,699			1,210,751
Accumulated deficit	(398,564		)	(602,002		)
Treasury stock—20,771,902 shares, at cost	(259,317		)	(259,317		)
Accumulated other comprehensive loss	(98,638		)	(61,414		)
Total stockholders’ equity	1,908			288,616
	$	2,684,115		$	5,403,904

The accompanying notes are an integral part of the 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,
	2006			2005			2004
Net sales and revenues:
Net sales	$	1,046,711		$	908,697		$	749,878
Interest income on instalment notes	199,659			206,582			220,041
Miscellaneous	63,486			22,763			14,882
	1,309,856			1,138,042			984,801
Cost and expenses:
Cost of sales (exclusive of depreciation)	703,539			632,811			553,413
Depreciation	39,017			31,976			33,697
Selling, general and administrative	149,762			154,526			168,339
Provision for losses on instalment notes	9,062			10,724			12,402
Postretirement benefits	13,537			14,401			9,487
Interest expense—mortgage-backed/asset-backed notes	118,743			122,005			127,273
Interest expense—corporate debt	38,014			23,400			18,182
Amortization of intangibles	2,405			3,641			4,976
Restructuring and impairment charges	5,048			63,445			470
Provision (credit) for estimated hurricane insurance losses	(1,046		)	10,044			3,983
Debt conversion expense	19,370			—			—
	1,097,451			1,066,973			932,222
Income from continuing operations before income tax expense and minority interest	212,405			71,069			52,579
Income tax expense	67,821			36,718			2,045
Income from continuing operations before minority interest	144,584			34,351			50,534
Minority interest in net loss of affiliate	1,000			—			—
Income from continuing operations	145,584			34,351			50,534
Income (loss) from discontinued operations	52,785			(27,305		)	(617		)
Net income	$	198,369		$	7,046		$	49,917
Basic income per share:
Income from continuing operations	$	3.31		$	0.89		$	1.31
Income (loss) from discontinued operations	1.20			(0.71		)	(0.02		)
Net income	$	4.51		$	0.18		$	1.29
Diluted income per share:
Income from continuing operations	$	2.86		$	0.78		$	1.16
Income (loss) from discontinued operations	1.01			(0.55		)	(0.02		)
Net income	$	3.87		$	0.23		$	1.14

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

F-5

WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE YEARS ENDED DECEMBER 31, 2006
(in thousands)

	Total			Common Stock			Capital in Excess of Par Value			Comprehensive Income (Loss)				Accumulated Deficit				Treasury Stock			Accumulated Other Comprehensive Income (Loss)
Balance at December 31, 2003	$	276,610			$	557	$	1,150,442							$	(658,965	)	$	(164,018	)		$	(51,406	)
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 hedges	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				580		1,178,121								(609,048		)	(259,317		)		(51,109		)
Comprehensive loss:
Net income	7,046										$	7,046			7,046
Other comprehensive loss, net of tax:
Cumulative foreign currency translation adjustment	(113		)								(113		)									(113		)
Increase in additional pension liability	(9,573		)								(9,573		)									(9,573		)
Net unrealized loss on hedges	(619		)								(619		)									(619		)
Comprehensive loss											$	(3,259	)
Stock issued upon exercise of stock options	19,872				18		19,854
Tax benefit from the exercise of stock options	17,469						17,469
Dividends paid, $.16 per share	(6,145		)				(6,145		)
Stock-based compensation	1,452						1,452
Balance at December 31, 2005	288,616				598		1,210,751								(602,002		)	(259,317		)		(61,414		)
Adjustment to initially apply SEC SAB No. 108	5,069														5,069
Adjusted balance at December 31, 2005	293,685				598		1,210,751								(596,933		)	(259,317		)		(61,414		)
Comprehensive income:
Net income	198,369										$198,369				198,369
Other comprehensive income, net of tax:
Cumulative foreign currency translation adjustment	1,053										1,053											1,053
Decrease in additional pension liability	703										703											703
Net unrealized gain on hedges	4,113										4,113											4,113
Comprehensive income											$	204,238
Adjustment to initially apply FASB Statement No. 158	(74,513		)																			(74,513		)
Sale of common stock	168,680				26		168,654
Stock issued upon conversion of convertible notes	176,108				98		176,010
Gain on sale of investment in Mueller Water Products, Inc. through initial public offering	132,048						125,088															6,960
Stock dividend for spin-off of Mueller Water Products, Inc.	(919,933		)				(944,393		)													24,460
Stock issued upon exercise of stock options	4,735				6		4,729
Tax benefit on the exercise of stock options	8,310						8,310
Dividends paid, $.16 per share	(6,825		)				(6,825		)
Stock-based compensation	15,375						15,375
Balance at December 31, 2006	$	1,908			$	728	$	757,699							$	(398,564	)	$	(259,317	)		$	(98,638	)

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

F-6

WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

	For the years ended December 31,
	2006			2005			2004
OPERATING ACTIVITIES
Net income	$	198,369		$	7,046		$	49,917
Income (loss) from discontinued operations	(52,785		)	27,305			617
Income from continuing operations	145,584			34,351			50,534
Adjustments to reconcile income from continuing operations to net cash provided by operations:
Provision for losses on instalment notes receivable	9,062			10,724			12,402
Depreciation	39,017			31,975			33,697
Restructuring and impairment charges	5,048			64,062			—
Provision for (benefit from) deferred income taxes	13,639			19,357			(8,468		)
Other	14,341			30,302			17,905
Decrease (increase) in assets, net of effect of acquisition:
Receivables	(30,222		)	5,351			6,200
Inventories	13,275			(15,761		)	(8,402		)
Prepaid expenses	(4,784		)	(2,845		)	(13,276		)
Instalment notes receivable, net	(33,755		)	52,585			50,628
Increase (decrease) in liabilities, net of effect of acquisition:
Accounts payable	(1,040		)	16,488			(25,434		)
Accrued expenses	14,329			1,096			15,576
Accrued interest	(3,344		)	3,584			(306		)
Cash flows provided by operating activities	181,150			251,269			131,056
INVESTING ACTIVITIES
Acquisitions, net of cash acquired	10,500			(867,085		)	—
Purchases of loans	(103,823		)	(61,098		)	(40,229		)
Principal payments received on purchased loans	45,954			21,072			9,156
Additions to property, plant and equipment	(101,055		)	(114,518		)	(29,979		)
Cash proceeds from sale of property, plant and equipment	4,273			4,495			6,508
Decrease (increase) in short-term investments, restricted	34,531			(24,668		)	410
Other	11,159			109			2,124
Cash flows used in investing activities	(98,461		)	(1,041,693		)	(52,010		)
FINANCING ACTIVITIES
Issuance of mortgage-backed/asset-backed notes	401,876			393,463			409,517
Payments on mortgage-backed/asset-backed notes	(392,647		)	(429,004		)	(475,588		)
Proceeds from issuance of corporate debt	—			460,000			310,701
Retirement of corporate debt	(200,169		)	(11,125		)	(250,895		)
Sale of common stock	168,680			—			—
Cash spun-off with Mueller Water Products, Inc.	(82,145		)	—			—
Purchases of treasury stock	—			—			(95,299		)
Tax benefit on the exercise of employee stock options	8,310			—			—
Exercise of employee stock options	4,735			19,872			26,580
Other	1,372			(22,740		)	(12,969		)
Cash flows provided by (used in) financing activities	(89,988		)	410,466			(87,953		)
Cash flows used in continuing operations	(7,299		)	(379,958		)	(8,907		)
CASH FLOWS FROM DISCONTINUED OPERATIONS
Cash flows provided by operating activities	64,131			87,753			22,959
Cash flows used in investing activities	(80,249		)	(31,106		)	(27,110		)
Cash flows provided by financing activities	13,391			413,783			—
Cash flows provided by (used in) discontinued operations	(2,727		)	470,430			(4,151		)
Net increase (decrease) in cash and cash equivalents	$	(10,026	)	$	90,472		$	(13,058	)
Cash and cash equivalents at beginning of period	$	64,436		$	46,924		$	59,809
Add: Cash and cash equivalents of discontinued operations at beginning of period	72,960			—			173
Net increase (decrease) in cash and cash equivalents	(10,026		)	90,472			(13,058		)
Less: Cash and cash equivalents of discontinued operations at end of period	—			(72,960		)	—
Cash and cash equivalents at end of period	$	127,370		$	64,436		$	46,924

F-7

WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands)

SUPPLEMENTAL DISCLOSURES:
Interest paid	$	148,703	$	135,408		$	137,646
Income taxes paid (refunded), net	$	32,495	$	18,483		$	(466	)
Non-cash conversion of Senior Subordinated Convertible
Notes into common stock	$	174,215	$	—		$	—
Non-cash dividend to spin-off Mueller Water Products, Inc.	$	944,393	$	—		$	—
Investing Activities:
Acquisition of Mueller Water:
Fair value of assets acquired	$	—	$	2,539,833		$	—
Liabilities assumed	—		(1,596,448		)	—
Less: Cash acquired	—		(76,300		)	—
Net cash paid	$	—	$	867,085		$	—

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

F-8

WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—Organization

Walter Industries, Inc. (“Walter”), together with its consolidated subsidiaries (“the Company”), is a diversified company which operates in five reportable segments:  Natural Resources, Sloss, Financing, Homebuilding and Other, see Note 20. Through these operating segments, the Company offers a diversified line of products and services including coal and natural gas, furnace and foundry coke, slag fiber, mortgage financing and home construction. In the fourth quarter of 2006, the Company began reporting Sloss as a separate segment due to its significance in relation to all continuing operating segments. Prior to the fourth quarter Sloss was included in the Other segment. All prior year disclosures reflect this change.

NOTE 2—Discontinued Operations

Acquisition, Initial Public Offering and Spin-off of Mueller Water Products, Inc.

Acquisition

In October 2005, the Company acquired all of the outstanding common stock of Mueller Water Products, Inc. (“Mueller Water”) for $943.4 million and assumed approximately $1.1 billion of indebtedness at Mueller Water. In conjunction with the acquisition, the Company’s wholly owned subsidiary, United States Pipe and Foundry Company, LLC, (“U.S. Pipe”) was contributed to Mueller Water.

Also in October 2005, the Company announced its plan to undertake an initial public offering and spin-off of Mueller Water to unlock shareholder value by creating a “pure play” water infrastructure company and a predominantly “pure play” coal company.

Initial public offering

In June 2006, Mueller Water completed its initial public offering (“IPO”) of 28.8 million shares of Series A common stock, at $16 per share (NYSE: MWA). The net proceeds of $428.9 million were used to repay a portion of Mueller Water’s existing debt and the Company recognized a gain of $132.0 million on the sale of the 25.1% ownership interest which has been included in stockholders’ equity. In connection with the IPO, Mueller Water issued approximately 85.8 million shares of Series B common stock to the Company in exchange for the Company’s one share held prior to the IPO.

Spin-off

On December 14, 2006, the Company distributed all of its 85.8 million shares of Mueller Water Series B common stock to its shareholders. The distribution took place in the form of a pro rata common stock dividend whereby each shareholder received 1.6524432  shares of Mueller Water Series B common stock for each share of Company common stock held on the record date (“the spin-off”). The spin-off was intended to be tax-free to the Company and to the shareholders of the Company for U.S. income tax purposes, except for any cash received in lieu of fractional shares.

As a result of the distribution, the Company no longer has any ownership interest in Mueller Water. The Company and Mueller Water have entered into several agreements to facilitate the spin-off, including a Transition Services Agreement to provide certain services to each other, including tax, accounting, human resources and communication. The term of the services to be provided varies, but the Agreement is

F-9

expected to terminate one year from the spin-off date. The Company and Mueller Water entered into an Income Tax Allocation Agreement that sets forth the rights and obligations of the Company and Mueller Water with respect to taxes and other liabilities that could be imposed in the event of a determination by the Internal Revenue Service, upon audit, that the transaction is inconsistent with the tax-free status of the spin-off. Additionally, the Company and Mueller also entered into a Joint Litigation Agreement that allocates responsibilities for pending and future litigation and claims, allocates insurance coverages and third-party indemnification rights, where appropriate, and provides that each party should cooperate with each other regarding such litigation claims and rights on a going forward basis.

As a result of the spin-off, amounts previously reported in the Mueller Co., Anvil and U.S. Pipe segments (collectively, “Mueller Water”) are presented as discontinued operations for all periods presented.

The Company allocated certain corporate expenses, limited to specifically identified costs and other corporate shared services which supported segment operations to discontinued operations, in accordance with EITF 87-24, “Allocation of Interest to Discontinued Operations.”  These costs represent expenses that have historically been allocated to and recorded by the Company’s operating segments as selling, general and administrative expenses. The Company did not elect to allocate additional interest expense to discontinued operations in accordance with EITF 87-24.

Other Discontinued Operations Activity

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. Per the sales agreement for the divestiture of AIMCOR, the final sales price was subject to certain post-closing cash and net working capital adjustments. These adjustments are defined in the sales agreement and were subject to resolution and arbitration processes provided for in the agreement. As a result of this transaction, the Company recognized in 2003 a receivable for estimated net cash and working capital adjustments due to the Company. During 2006, the Company recognized a charge of $1.7 million, net of a tax benefit of $0.9 million, to reflect the net realizable value of the receivable of $11.3 million, which was collected in December  2006. This charge, as well as other legal and consulting costs resulting from the transaction, is included as a loss from discontinued operations in the consolidated statement of operations.

The table below presents the significant components of operating results included in income (loss) from discontinued operations for the years ended December 31, 2006, 2005 and 2004 (in thousands).

	For the years ended December 31,
	2006			2005			2004
Net sales and revenues	$	1,792,364		$	916,098		$	564,478
Income (loss) from discontinued operations before income tax expense and minority interest	$	111,145		$	(44,257	)	$	4,573
Income tax (expense) benefit	(46,216		)	16,952			(5,190		)
Minority interest in net income	(12,144		)	—			—
Income (loss) from discontinued operations	$	52,785		$	(27,305	)	$	(617	)

F-10

The assets and liabilities reflected as discontinued operations in the consolidated balance sheet as of December 31, 2005 are shown below (in thousands).

Cash and cash equivalents	$	72,960
Receivables, net	276,505
Inventory	429,147
Prepaid expenses	9,859
Property, plant and equipment, net	344,848
Other long-term assets	72,095
Identifiable intangibles, net	849,294
Goodwill	856,661
Total assets	$	2,911,369
Accounts payable	$	107,861
Accrued expenses	118,375
Accrued interest	12,222
Debt	1,548,578
Other long-term liabilities	400,170
Total liabilities	$	2,187,206

Accumulated other comprehensive loss associated with discontinued operations at December 31, 2005 was $34.0 million, including $32.9 million of minimum pension liability, $1.0 million of net unrealized loss on hedges and a $0.1 million of foreign currency translation loss.

NOTE 3—Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of all wholly and majority owned 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, 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, 2006, 32%, 15%, 8%, and 6%, (December 31, 2005, 31%, 15%, 9%, and 6%) are secured by homes located in the states of Texas, Mississippi, Alabama, and Florida and Louisiana (each 6%), respectively. The Company believes the potential for incurring material losses related to the concentration of these credit risks is remote.

The Company provides insurance to homeowners primarily in the southeastern United States and, due to the concentration in this area, is subject to risk of loss due to the threat of hurricanes and other natural disasters.

F-11

Revenue Recognition

The Company recognizes revenue based on the recognition criteria set forth in the Securities and Exchange Commission’s Staff Accounting Bulletin 104, “Revenue Recognition in Financial Statements.”

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. For coal shipments via ocean vessel, revenue 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 customer’s pipeline, at which time transfer of title occurs.

Miscellaneous income in 2006 includes $23.4 million related to the settlement of an insurance claim associated with a 2005 water ingress problem at Mine No. 5.

Sloss—For products shipped via rail or truck, revenue is recognized when the risk of loss and title transfers to the customer, generally at the point of shipment.

Financing—Within the Financing segment, Mid-State Homes, Inc. (“MSH”) purchases, securitizes and services instalment notes and mortgages originated by Jim Walter Homes (“JWH”) and Walter Mortgage Company (“WMC”). JWH offers financing to homebuyers and WMC originates and purchases loans that are 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 by JWH at the discounted value of the future instalment note payments using an imputed interest rate. The imputed interest rate used represents the estimated prevailing market rate of interest for credit of similar terms issued to customers with credit ratings similar 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) effect the amount of interest income due to the recognition of any remaining unamortized discounts or premiums arising from the note’s inception.

The interest income generated by both MSH and WMC is recognized using the interest method. The legal instruments used in each company allow for different fee structures to be charged to the customer, for example late fees and prepayment 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 purchases fixed and variable rate mortgage loans and 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.

F-12

The Financing segment sells homes and related real estate repossessed or foreclosed on 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 by the full accrual method where appropriate. However, the requirement for a minimum 5% initial cash investment 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.

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 resale 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. 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 generally made 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 when all of the following criteria are met:

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; and

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

Other—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.

F-13

Shipping and Handling

Costs to ship products to customers are included in cost of sales and amounts billed to customers, if any, to cover shipping and handling are included in net sales.

Cash and Cash Equivalents

Cash and cash equivalents include short-term deposits and highly liquid investments that have original maturities of three months or less, when purchased, 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 (i.e. book cash overdrafts) are included in accounts payable.

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 may be 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.

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. Additionally, the Company evaluates its inventory in terms of excess and obsolete exposures. This evaluation includes such factors as anticipated usage, inventory turnover, inventory levels and ultimate product sales value. Inventory cost includes an overhead component that can be affected by levels of production and actual costs incurred. Management periodically evaluates the effects of production levels and actual costs incurred on the costs capitalized as part of inventory cost.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost. Depreciation is recorded principally on the straight-line method over the estimated useful lives of the assets. 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 and are amortized over the estimated useful life of the system or software, which generally is 3 to 5 years beginning when site installations or module development is complete and ready for its intended use.

The Company applies Statement of Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations,” related to reclamation efforts for its Natural Resources segment. Under SFAS No. 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.

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The Company applies Financial Accounting Standards Board Interpretation (“FIN”) No. 47, “Accounting for Conditional Asset Retirement Obligations.”  The Company has certain legal obligations for asset retirements related to disposing of materials in the event of closure, abandonment or sale of certain of its facilities, primarily in the Sloss segment. A liability has not been recognized as of December 31, 2006 because the fair value of the obligation cannot be reasonably estimated. The Company cannot estimate the timing of recognition because it plans to operate the facilities that are subject to the asset retirement obligations for the foreseeable future. The Company would recognize a liability in the period in which sufficient information became available to reasonably estimate the liability’s fair value.

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 group over the remaining life in measuring whether or not the assets are recoverable, see Note 5.

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,
	2006		2005
Undiscounted aggregated estimated claims to be paid	$	39,952	$	40,359
Workers compensation liability recorded on a discounted basis	33,513		33,666

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, 2006 was 4.64%. A one-percentage-point increase in the discount rate on the discounted claims liability would decrease the liability by $0.2 million, while a one-percentage-point decrease in the discount rate would increase the liability by $0.2 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 5.7% and 5.4% for 2006 and 2005, respectively, recorded by the Company was $7.4 million and $7.2 million as of December 31, 2006 and 2005, 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 $1.1 million, while a one-percentage-point decrease in the discount rate would increase the liability by $1.4 million.

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Insurance Claims (Hurricane Losses)

Accruals for property-liability claims and claims expense are recognized when probable and reasonably estimable at 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.

The Company recorded a credit in 2006 and a provision in 2005 and 2004 for estimated hurricane insurance losses of $(1.0) million, $10.0 million and $4.0 million, net of expected reinsurance proceeds from unrelated insurance carriers, respectively. These estimates, recorded in the Financing segment, were for estimated claim losses as a result of damage from Hurricanes Katrina and Rita in 2005 and four hurricanes in 2004 that impacted the Company’s market area.

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 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 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.

Derivative Instruments and Hedging Activities

The Company enters into interest rate hedge agreements in accordance with the Company’s internal debt and interest rate risk management policy which is designed to mitigate risks related to floating rate financing agreements which are subject to changes in the market rate of interest. Also, the Company enters into interest rate hedge agreements designed to protect against the risk of rising interest rates on the forecasted amount of securitization debt to be issued to finance instalment notes and mortgage loans receivable of the Financing segment. Changes in the fair value of interest rate hedge agreements that are designated and effective as hedges are recorded in accumulated other comprehensive income (loss) (“OCI”). Deferred gains or losses are reclassified from OCI to the statement of operations in the same period as the underlying transactions are recorded and are recognized in the caption, interest expense. In addition, the settled amount of an interest rate hedge agreement that has been terminated prior to its original term continues to be deferred in OCI and is recognized in the statement of operations over the term of the underlying debt agreement designated as the hedged item. Changes in the fair value of interest rate hedge agreements that are not effective as hedges are recorded immediately in the statement of operations as interest expense.

To protect against the reduction in the 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 natural gas derivative contracts, generally either “swaps” or “collars”. The Company enters into natural gas derivatives 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 net sales and 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. Changes in the fair value of natural gas derivative agreements that are designated and effective as hedges are recorded in OCI. Deferred gains or losses are reclassified from

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OCI to the statement of operations in the same period as the underlying transactions are recorded and are recognized as miscellaneous income.

Interest rate hedge agreement and natural gas derivative contracts held by the Company have been designated as hedges of forecasted cash flows. The Company does not currently hold any non-derivative instruments designated as hedges or any derivatives designated as fair value hedges. In addition, the Company does not enter into derivative financial instruments for speculative or trading purposes. Derivative contracts are entered into only with counterparties that management considers credit-worthy.

Cash flows from hedging activities are reported in the statement of cash flows in the same classification as the hedged item, generally as a component of cash flows from operations.

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. See Note 18 for additional discussion of environmental matters.

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, see Note 17.

Reclassifications

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

Adoption of SEC Staff Accounting Bulletin (“SAB”) No. 108

In September 2006, the SEC staff issued SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.”  SAB No. 108 was issued in order to eliminate the diversity of practice surrounding how public companies quantify financial statement misstatements.

In SAB No. 108, the SEC staff established an approach that requires quantification of financial statement misstatements based on the effects of the misstatements on each of the company’s financial statements and the related financial statement disclosures. This approach is commonly referred to as a “dual approach” because it requires quantification of errors under two methods—one method which focuses primarily on the impact of a misstatement on the income statement and another method which focuses primarily on the effect of correcting the period-end balance sheet.

SAB No. 108 permits existing public companies to initially apply its provisions either by (i) restating prior financial statements as if the “dual approach” had always been used or (ii) recording the cumulative effect of initially applying the “dual approach” as adjustments to the carrying values of assets and liabilities as of January 1, 2006 with an offsetting adjustment recorded to the opening balance of retained earnings (accumulated deficit). The Company has applied the provisions of SAB No. 108 using the cumulative effect transition method as of January 1, 2006 to correct errors in previous financial statements which had been considered immaterial, both individually and in the aggregate.

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The following table summarizes the effects, up to January 1, 2006, of applying the guidance in SAB No. 108 (in thousands):

					Period in which the
					Misstatement Originated
	Adjustment				For the years ended								Cumulative
	Recorded as of				December 31,								Prior to
	January 1, 2006				2005				2004				January 1, 2004
(1) Black lung net asset		$	1,868			$	(303	)		$	125			$	2,046
(2) Survivor benefits accrual		1,055				—				—				1,055
(3) Accrued interest income methodology		3,213				(531		)		(574		)		4,318
(4) Escrow balance		875				19				97				759
(5) OPEB asset		(316		)		30				30				(376		)
Net tax effects of above items		(1,626		)		188				175				(1,989		)
Increase to beginning accumulated deficit		$	5,069			$	(597	)		$	(147	)		$	5,813

(1)     Black Lung Net Asset

In previous years, assets were set aside in a trust fund to satisfy potential Black Lung obligations of JWR’s Mine No. 4.  Since prior to 2003, it has been the Company’s practice to exclude both the trust fund assets and the related Black Lung obligation of Mine No. 4 from recognition on the Company’s financial statements. Changes to the net overfunded position were not material to the income statement.

(2) Survivor Benefits Accrual

Prior to 2003, the Company recorded a separate accrual for certain survivor medical benefits at JWR and the balance in this accrual has not changed. The Company determined that these obligations are appropriately captured in the measurement of the liability for other postretirement benefits (“OPEB”), which is recognized separately from this accrual. As such it was determined that this additional accrual was not required.

(3)  Accrued Interest Income Methodology

In 2003, the Company determined that for those instalment notes Financing acquired prior to January 1, 2003, interest income applicable to delinquent instalments was not accrued until the account became delinquent for more than 30 days. Interest income was recognized when the instalment note became delinquent for 31 days and continued to be accrued after that until such delinquency was cured or until 90 days, at which time the accrued interest income was reversed in full. In 2003, a decision was made to continue this methodology for instalment notes acquired prior to January 1, 2003 because the effect on the statement of operations in any particular year had been and would continue to be immaterial. Since 2003, the Company has been calculating interest income as soon as the instrument becomes delinquent for those instalment notes acquired subsequent to January 1, 2003. The Company believes that this is the appropriate income recognition methodology since it has a history of collecting interest on delinquent accounts that are cured prior to becoming 90-days delinquent. As such, the Company has corrected the interest income recognition methodology for pre-January 1, 2003 instalment note accounts as of January 1, 2006.

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(4) Escrow Balance

In previous years, the Company’s formerly owned subsidiary, U.S. Pipe, contributed funds which are held in escrow for the eventual funding of U.S. Pipe’s landfill clean-up. Although this asset retirement obligation had been appropriately recognized by U.S. Pipe, this restricted asset and its related interest income had not previously been recognized in the financial statements. Both the asset and related retirement obligation are included on the balance sheet of U.S. Pipe, which was spun-off on December 14, 2006.

(5) OPEB Asset

Prior to 2003, Sloss recognized an asset, netted against restructuring liabilities, relating to the effect of the curtailment of post-retirement medical obligations resulting from the termination of certain employees. At that time, Sloss began, and has continued, amortizing the asset. Since the actuary appropriately incorporates the obligations of these former employees in its assumptions, and the Company has historically recognized an expense and obligation in accordance with the actuary’s report, it is not necessary for Sloss to have this additional OPEB asset and expense recorded.

NOTE 4—Consolidated Statements of Cash Flows

The Company has revised its consolidated statement of cash flows for the years ended December 31, 2005 and 2004 to reflect the net increase or decrease in Financing’s instalment note receivable balance relating to the portfolio of assets originated by Homebuilding as an element in determining cash flows from operating activities. Previously, this item was reported in investing activities. The previous cash flow treatment followed the Company’s principal lines of business reporting; however, on a consolidated basis, there is no cash flow resulting from Financing’s purchase of instalment notes from Homebuilding. Financing’s purchases of loans from third parties, as well as the principal portion of cash collections on those loans, remain in investing activities.

Prior amounts reported have been revised as follows (in thousands):

	For the years ended December 31,
	Previous Presentation						Change						As Revised
	2005			2004			2005			2004			2005			2004
Instalment notes receivable, net	$	—		$	—		$	52,585		$	50,628		$	52,585		$	50,628
Net cash provided by operating activities	198,684			80,428			52,585			50,628			251,269			131,056
Purchases of loans	(422,861		)	(455,242		)	361,763			415,013			(61,098		)	(40,229		)
Principal payments received on purchased loans	455,420			474,797			(434,348		)	(465,641		)	21,072			9,156
Net cash provided by investing activities	(989,108		)	(1,382		)	(52,585		)	(50,628		)	(1,041,693		)	(52,010		)

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NOTE 5—Restructuring, Impairment and Other Charges

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

	For the years ended December 31,
	2006			2005			2004
JWR Mine No. 5 shutdown		$	—	$	(618	)		$	470
JWR Mine No. 7 longwall shield impairment		—		853				—
Homebuilding goodwill impairment		—		63,210				—
Homebuilding property impairment		3,409		—				—
Sloss chemical division impairment		1,639		—				—
Total restructuring and impairment charges		$	5,048	$	63,445			$	470

In the fourth quarter of 2006, the Company recorded a property impairment charge of $3.4 million related to Homebuilding’s modular home division. There was an indication of impairment due to lower than expected operating performance in the fourth quarter of 2006 that is not expected to change significantly in the near future. The Company determined the fair value of the long-lived assets using a probability-weighted discounted cash flow. Subsequent to December 31, 2006, primarily as a result of the poor fourth quarter 2006 performance, the Company has decided to exit the modular home manufacturing and distribution business.

During 2006, the Company recorded impairment charges totaling $1.6 million relating to Sloss’ chemical division. These assets were sold in November 2006.

The Company recorded a $63.2 million goodwill impairment in 2005 to eliminate the goodwill of the Homebuilding segment, see Note 12.

In 2005, the Company recognized an impairment charge of $0.9 million at its Natural Resources segment as a result of adverse geologic conditions in Mine No. 7, which caused damage to certain underground longwall mining equipment that was not economically viable to repair. The equipment was abandoned in January 2006.

In 2003, the Company announced that it expected to close Mine No. 5 in 2004. Due to an improvement in the metallurgical coal market, the Company extended its coal production plans for Mine No. 5 with a revised scheduled shutdown of late 2006 or early 2007. Mine No. 5 shut down in 2006; mining equipment has been recovered and the mine shafts are in the process of being sealed. Total expected costs to close the mine are $8.5 million. Approximately $6.6 million of the closure costs qualify as restructuring costs and have been recorded by the Company. Other costs, primarily representing estimated worker’s compensation and other incremental costs related to the closure of the mine, will be charged to expense when incurred.

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

	For the years ended December 31,
	2006			2005			2004
Beginning balance	$	621		$	1,588		$	1,145
Restructuring expenses accrued	590			1,478			2,136
Restructuring payments	(209		)	(997		)	(27		)
Other	316			—			—
Reversal of prior accruals	—			(1,448		)	(1,666		)
Ending balance	$	1,318		$	621		$	1,588

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NOTE 6—Stock-Based Compensation Plans

As of January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”) which requires the Company to value and record, as compensation expense, stock awards granted to employees under a fair value based method. Prior to January 1, 2006, the Company accounted for stock awards granted to employees under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. As a result, no compensation expense was previously recognized for stock options granted to employees because all stock options granted had exercise prices equal to the market value of the Company’s stock at the date of the grant, while compensation expense associated with restricted stock unit grants was being recognized over the vesting period of the grant.

SFAS 123(R) applies to new awards and to awards modified, repurchased or canceled after January 1, 2006. The Company utilizes the modified prospective application method for stock options and restricted stock units granted prior to January 1, 2006, which requires the Company to record compensation expense beginning January 1, 2006 for the unvested portion of those stock awards. This compensation expense is charged to the statement of operations with a corresponding credit to capital in excess of par value. In addition, the Company is required, upon adoption, to calculate the pool of income tax benefits that were previously recorded in capital in excess of par value and are available to absorb future income tax benefit deficiencies that can result from the exercise or maturity of stock awards. The Company has elected to calculate this pool under the alternative transition method provided for in FASB Staff Position No. 123 (R)-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards.” Additionally, the Company is required to reflect the benefits of tax deductions in excess of recognized compensation cost as an operating cash outflow and a financing cash inflow. The Company uses the Black-Scholes option pricing model to value its stock option grants and estimates forfeitures in calculating the expense related to stock-based compensation.

The effect of accounting for stock options in accordance with SFAS 123(R) on the financial performance of the Company for the year ended December 31, 2006 was as follows (in thousands, except per share data):

Decrease in income from continuing operations before income taxes	$	5,055
Decrease in income from continuing operations	3,276
Decrease in net income	2,829
Cash outflow from operating activities	8,310
Cash inflow from financing activities	8,310
Decrease in basic income per share	0.06
Decrease in diluted income per share	0.05

F-21

In accordance with the modified prospective transition method, the Company’s consolidated financial statements for periods ended prior to January 1, 2006 have not been restated to reflect, and do not include, the impact of SFAS 123(R). Had compensation cost for the Company’s option plans for the years ended December 31, 2005 and 2004 been determined based on the fair value at the grant dates as prescribed by SFAS 123(R), the Company’s net income and net income per share on a pro forma basis would have been (in thousands, except per share data):

	For the years ended December 31,
	2005(1)			2004(1)
Net income, as reported	$	7,046		$	49,917
Add: Stock-based compensation expense included in reported net income, net of related tax effects	944			456
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects	(2,449		)	(3,041		)
Pro forma net income	$	5,541		$	47,322
Net income per share:
Basic—as reported	$	0.18		$	1.29
Basic—pro forma	0.14			1.23
Diluted—as reported	0.23			1.14
Diluted—pro forma	0.11			1.09

(1)Includes amounts related to discontinued operations.

The preceding pro forma results were calculated using the Black Scholes option-pricing model. Weighted average assumptions used for stock compensation awards granted in the following prior year periods were:

	For the years ended December 31,
	2005			2004
Risk free interest rate		4.10	%		4.99	%
Dividend yield		0.40	%		1.00	%
Expected life (years)		5.8			6.9
Volatility		40.36	%		39.83	%

Equity Award Plans

The stockholders of the Company approved the 2002 Long-Term Incentive Award Plan (the “2002 Plan”),  under which an aggregate of 3.9 million, as restated to reflect the modification for the Mueller Water spin-off, shares of the Company’s common stock have been reserved for grant and issuance of incentive and non-qualified stock options, stock appreciation rights and stock awards.

Under the Long-Term Incentive Stock Plan approved by stockholders in October 1995 (the “1995 Plan”) and amended in September 1997, an aggregate of 6.0 million 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.  However, the 1995 Plan expired in 2005 and, therefore, no further grants will be issued under this plan.

Under both plans (collectively, the “Equity Award Plans”), an option becomes exercisable at such times and in such installments as set by the Compensation Committee of the Board of Directors (generally,

F-22

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.

Under both plans, the Company may issue restricted stock units. The Company has issued restricted stock units which fully vest after seven years of continuous employment. Generally, these units are subject to accelerated vesting if the stock price of the Company reaches certain pre-established targets within certain time periods after issuance.

In connection with the spin-off of Mueller Water, and in accordance with the anti-dilution provisions contained within the Equity Award Plans, the Company modified the equity awards outstanding at December 14, 2006, the spin-off date. The modifications were structured to maintain the intrinsic value for the employee. All equity awards in the Company’s stock held by employees of or employees transferring to Mueller Water were cancelled and replaced by equity awards in Mueller Water stock. Similarly, all equity awards held by employees remaining with the Company were cancelled and replaced by new equity awards with similar terms such that the intrinsic value immediately after the spin-off was the same as the intrinsic value immediately prior to the spin-off. There were no modifications to any other terms of the awards. These modifications did not yield any incremental compensation cost under FAS 123(R).

For the years ended December 31, 2006, 2005 and 2004, the Company recorded stock-based compensation expense related to equity awards of Walter Industries, Inc. in its continuing operations of approximately $8.1 million, $1.3 million and 0.7 million, respectively, These amounts are included in selling, general and administrative expenses and have been allocated to the reportable segments. The total income tax benefits in the Company’s continuing operations recognized in the statements of operations for share-based compensation arrangements were $2.9 million, $0.5 million and $0.3 million for such years, respectively.

A summary of activity related to stock options under the Equity Award Plans during the year ended December 31, 2006, including awards applicable to discontinued operations, is presented below:

	Shares		Weighted Average Exercise Price			Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value ($000)
Outstanding at December 31, 2005(1)	1,708,649			$	8.13
Granted(1)	1,184,513			28.74
Exercised(1)	(862,665	)		5.76
Cancelled(2)	(290,660	)		21.99
Outstanding at December 31, 2006(3)	1,739,837			$	21.02		8.30		$	10,488
Exercisable at December 31, 2006(3)	416,639			$	7.12		5.62		$	8,305

(1)Restated to reflect the impact of modification made in connection with the Mueller Water spin-off and includes options outstanding that were subsequently cancelled and converted to Mueller Water equity, see (2).

(2)Includes awards cancelled and converted to Mueller Water equity awards.

(3)Reflects the impact of modification made in connection with the Mueller Water spin-off and is applicable only to continuing operations.

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Weighted average assumptions used to determine the grant-date fair value of options granted under the Equity Award Plans during the year ended December 31, 2006 were:

	For the year ended
	December 31, 2006
Risk free interest rate		4.67	%
Dividend yield		0.30	%
Expected life (years)		5.20
Volatility		36.76	%
Forfeiture rate		4.50	%

The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant with a term equal to the expected life. The expected dividend yield is based on the Company’s estimated annual dividend payout at grant date. The expected term of the options represents the period of time the options are expected to be outstanding. Expected volatility is based on historical volatility of the Company’s share price for the expected term of the options.

A summary of activity related to restricted stock units under the Equity Award Plans during the year ended December 31, 2006, including awards applicable to discontinued operations, is as follows:

	Shares		Weighted Average Remaining Contractual Term (in Years)		Aggregate Intrinsic Value ($000)
Outstanding at December 31, 2005(1)	493,360
Granted(1)	224,848
Vested(1)	(113,214	)
Cancelled(2)	(254,693	)
Outstanding at December 31, 2006(3)	350,301			2.47		$	9,476

(1)Restated to reflect the impact of modification made in connection with the Mueller Water spin-off and includes restricted stock units outstanding that were subsequently cancelled and converted to Mueller Water equity, see (2).

(2)Includes awards cancelled and converted to Mueller Water equity awards.

(3)Reflects the impact of modification made in connection with the Mueller Water spin-off and is applicable only to continuing operations.

The weighted-average grant-date fair value of stock options and restricted stock units granted during the year ended December 31, 2006 was $11.48 and $32.85, respectively. The total amount of cash received from exercise of stock options was $4.7 million for the year ended December 31, 2006. The total intrinsic value of stock awards exercised or converted during the year ended 2006 was approximately $26.4 million. As of December 31, 2006, there was approximately $10.9 million of unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Equity Award Plans; that cost is to be recognized over a weighted average period of 2.3 years.

Subsidiary Equity Award

In 2006, the Board of Directors granted a special equity award to certain executives of the Financing and Homebuilding businesses whereby the employees received non-qualified options in JWH Holding Company, LLC to acquire the equivalent of 11.25% of the total combined designated equity of the Financing and Homebuilding businesses. The exercise price of these options was fair value at date of grant.

F-24

These options will vest over a three-year period and expire in ten years. None of the options were forfeited or exercisable as of December 31, 2006.

The Company calculated the fair value of these options awards using the Black-Scholes model and recognized $2.9 million of compensation expense in 2006. Assumptions used to determine the grant-date fair value of these options were:

Risk free interest rate	4.62	%
Dividend yield	0.00	%
Expected life (years)	3.0
Volatility	41.85	%
Forfeiture rate	0.00	%

As of December 31, 2006, there was $3.7 million of unrecognized compensation cost that is expected to be recognized over 2.25 years.

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 shares of the Company’s common stock for the accounts of the participants. The total number of shares that may be purchased under the plan is 3.5 million. Total shares purchased under the plan during the years ended December 31, 2006, 2005 and 2004 were approximately 35,000, 43,000 and 122,000, respectively, and the Company’s contributions recognized as expense were approximately $0.3 million, $0.4 million and $0.3 million, respectively, during such years.

NOTE 7—Restricted Short-Term Investments

Restricted short-term investments at December 31, 2006 and 2005 include (i) temporary investments primarily in commercial paper or money market accounts with maturities less than 90 days from collections on instalment notes receivable owned by various Mid-State Trusts (the “Trusts”) ($84.0 million and $118.2 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 ($6.0 million and $6.4 million, respectively).

NOTE 8—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 WMC by providing land and home financing for JWH customers and by re-financing MSH customers. WMC also purchases loans from third parties, including mortgage companies and other homebuilders. These receivables require periodic payments, over periods of 10 to 30 years, and are secured by first mortgages or similar security instruments. The credit terms offered by JWH 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 (96%) and variable-rate (4%) instalment notes ranging from 5.3% to 13.7% annual percentage rate, without points or closing costs. Origination costs are deferred and amortized over the average life of the note portfolio.

F-25

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

	December 31,
	2006			2005
Instalment notes receivable	$	1,578,760		$	1,558,383
Mortgage loans	213,948			148,028
Less: Allowance for losses	(13,011		)	(12,489		)
Instalment notes receivable, net	$	1,779,697		$	1,693,922

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

	For the years ended December 31,
	2006			2005			2004
Balance at beginning of year	$	12,489		$	11,200		$	10,907
Provisions charged to income	9,062			10,724			12,402
Charge-offs, net of recoveries	(8,540		)	(9,435		)	(12,109		)
Balance at end of year	$	13,011		$	12,489		$	11,200

Charge-offs on instalment notes and mortgage loans 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 and Mid-State Capital Corporation have created a number of business trusts for the purpose of purchasing instalment notes from JWH and mortgage loans from WMC with the net proceeds from the issuance of mortgage backed notes or asset-backed notes. MSH and Mid-State Capital Corporation directly or indirectly own 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.

NOTE 9—Receivables

Receivables are summarized as follows (in thousands):

	December 31,
	2006			2005
Trade receivables	$	48,973		$	41,191
Other receivables	42,374			34,403
Less: Allowance for losses	(2,704		)	(984		)
Receivables, net	$	88,643		$	74,610

Other receivables at December 31, 2006 includes $18.4 million due from the Company’s insurance carrier for the settlement of claims associated with a 2005 water ingress problem at Mine No. 5. Other receivables at December 31, 2005 include $13.8 million of estimated cash and net working capital adjustment claims related to the sale of AIMCOR, see Note 2,  $8.9 million of coal excise tax refund claims and $1.1 million due from the agent handling the proceeds from the exercise of stock options.

F-26

NOTE 10—Inventories

Inventories are summarized as follows (in thousands):

	December 31,
	2006		2005
Finished goods	$	35,623	$	35,468
Goods in process	26,136		33,527
Raw materials and supplies	17,698		22,541
Repossessed houses held for resale	29,414		30,610
Total inventories	$	108,871	$	122,146

NOTE 11—Property, Plant and Equipment

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

	December 31,
	2006			2005
Land and minerals	$	72,950		$	73,705
Land improvements	19,790			19,539
Buildings and leasehold improvements	71,331			69,786
Mine development costs	15,677			13,657
Machinery and equipment	300,875			230,728
Construction in progress	75,613			73,708
Total	556,236			481,123
Less: Accumulated depreciation	(245,047		)	(222,621		)
Net	$	311,189		$	258,502

NOTE 12—Goodwill

Goodwill is not amortized, but instead is reviewed for impairment on an annual basis on January 1, or more frequently if significant events occur that indicate that impairment could exist. The fair value of each of the Company’s reporting units is determined using valuation models and expected future cash flow projections related to each reporting unit, which is 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.

The changes in the carrying amount of goodwill by reportable segment for 2006, 2005 and 2004 are as follows (in thousands):

	Homebuilding				Financing			Total
Balance as of January 1, 2004		$	63,210			$	10,895	$	74,105
Activity		—				—		—
Balance as of December 31, 2004		63,210				10,895		74,105
Impairment charge		(63,210		)		—		(63,210		)
Balance as of December 31, 2005		—				10,895		10,895
Activity		—				—		—
Balance as of December 31, 2006		$	—			$	10,895	$	10,895

In 2006, 2005 and 2004, the Company used a discounted cash flow approach in performing its annual impairment testing. As a result of this annual testing, the Company recorded an impairment charge of $63.2 million to reduce the goodwill of the Homebuilding segment to zero in 2005. This impairment charge

F-27

was driven by significantly lower than expected operating results of the Homebuilding segment during the fourth quarter of 2005 which in turn led to reduced future cash flow expectations versus those forecasted in the prior year.

NOTE 13—Income Taxes

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

	For the years ended December 31,
	2006								2005								2004
	Current			Deferred			Total		Current			Deferred			Total		Current			Deferred				Total
Federal		$	46,571		$	7,938	$	54,509		$	11,433		$	15,187	$	26,620		$	10,026		$	8,906		$	18,932
State and local		7,611			5,701		13,312			5,928			4,170		10,098			487			(17,374		)	(16,887		)
Total		$	54,182		$	13,639	$	67,821		$	17,361		$	19,357	$	36,718		$	10,513		$	(8,468	)	$	2,045

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,
	2006		2005		2004
Statutory tax rate	35.0	%	35.0	%	35.0	%
Effect of:
State and local income tax	4.0		4.6		0.7
Non-deductible goodwill impairment	—		30.4		—
Foreign sales benefit	(2.2	)	(6.0	)	(0.7	)
Excess depletion benefit	(6.8	)	(17.9	)	(13.4	)
Non-deductible debt conversion expense	3.1		—		—
Change in valuation allowances	0.1		4.7		(21.7	)
Other	(1.3)		0.9		4.0
Effective tax rate	31.9	%	51.7	%	3.9	%

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

	December 31,
	2006			2005
Deferred tax assets:
Allowance for losses	$	5,854		$	4,942
Inventories	1,881			1,270
Net operating loss/capital loss/credit carryforwards	8,191			25,612
Accrued expenses	30,413			39,650
Postretirement benefits other than pensions	95,570			86,868
Pensions	52,086			11,650
	193,995			169,992
Less: valuation allowance	(6,708		)	(7,128		)
Total deferred tax assets	187,287			162,864
Deferred tax liabilities:
Interest income on instalment notes	(86,258		)	(107,163		)
Depreciation and amortization	(37,275		)	(33,453		)
Total deferred tax liabilities	(123,533		)	(140,616		)
Net deferred tax assets of continuing operations	$	63,754		$	22,248

F-28

A summary of activity in the valuation allowance for deferred tax assets is shown below (in thousands):

	For the years ended December 31,
	2006			2005		2004
Balance at beginning of period	$	7,128		$	3,780	$	15,200
Additions charged to tax provision	—			3,348		—
Reductions	(420		)	—		(11,420		)
Balance at end of period	$	6,708		$	7,128	$	3,780

The change in valuation allowances recorded as a component of income tax expense at December 31, 2006, consists primarily of $0.4 million of state tax benefits true-up at Homebuilding for which the Company believes it is more likely than not that the deferred tax asset will be realized.

The Company has net operating loss carryforwards for Alabama state income taxes at Natural Resources and Sloss of approximately $40.5 million that expire beginning in 2009. The annual utilization of the loss carryforward is limited due to a 2004 change in ownership, but the Company believes that the losses will be utilized within the carryforward period due to expected profitability of operations and tax planning strategies. Homebuilding has net operating loss carryforwards for state income tax purposes for which a valuation allowance previously has been established that are significantly limited and may expire before utilization. If certain changes in ownership of the Company occur in the future, utilization of the net carryforwards and credits may be further limited.

On February 20, 2006, the IRS completed its audit of the Company’s Federal income tax returns and issued a 30-day letter proposing tax deficiencies in the amount of $82.2 million for the years ended May 31, 2000, December 31, 2000 and December 31, 2001. The issues in the 30-day letter relate primarily to the Company’s method of recognizing revenue on the sale of homes and related interest on the instalment notes receivable. The items at issue relate primarily to the timing of revenue recognition and consequently, should the IRS prevail on its positions, the Company’s financial exposure is limited to interest and penalties.

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

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

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

F-29

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

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

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

NOTE 14—Debt

Debt consisted of the following (in thousands):

					Weighted Average Stated			Estimated
	December 31,				Interest Rate			Final
	2006		2005		At December 31, 2006			Maturity
Mortgage-Backed/Asset Backed Notes:
Trust IV Asset Backed Notes	$	207,812	$	256,100		8.33	%		2030
Trust VI Asset Backed Notes	153,233		171,937			7.42	%		2035
Trust VII Asset Backed Notes	127,847		142,968			6.34	%		2036
Trust VIII Asset Backed Notes	152,352		180,919			7.79	%		2038
Trust IX Variable Funding Loan	—		—			Various			2007
Trust X Asset Backed Notes	228,449		258,076			6.30	%		2036
Trust XI Asset Backed Notes	198,499		224,736			5.51	%		2038
Trust XIV Variable Funding Loan	—		—			Various			2007
2004-1 Trust Asset Backed Notes	200,890		228,797			6.64	%		2037
2005-1 Trust Asset Backed Notes	218,486		263,796			6.15	%		2040
2006-1 Trust Asset Backed Notes	249,138		—			6.28	%		2040
	1,736,706		1,727,329
Corporate debt:
2005 Walter Credit Agreement–Term Loan	248,706		448,875			7.12	%		2012
Convertible Senior Subordinated Notes	785		175,000			3.75	%		2024
	249,491		623,875
Total	$	1,986,197	$	2,351,204

The Company’s debt repayment schedule, excluding interest, as of December 31, 2006 is as follows (in thousands):

	Payments Due
	2007		2008		2009		2010		2011		Thereafter
Mortgage-backed/asset-backed notes	$	250,751	$	210,726	$	181,097	$	164,897	$	147,042	$	782,193
Term loan(1)	2,519		2,519		2,519		2,519		2,519		236,111
Convertible Senior Subordinated Notes	—		—		—		—		—		785
	$	253,270	$	213,245	$	183,616	$	167,416	$	149,561	$	1,019,089

(1)In January 2007, the Company used $28.0 million of available cash to repay a portion of the term loan outstanding under the 2005 Walter Credit Agreement.

F-30

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

The Trusts, beneficially owned by Mid-State and Mid-State Capital Corporation, indirect subsidiaries of the Company, are the depositors under the Company’s outstanding mortgage-backed and asset-backed notes (the “trust notes”), which consist of eight series of public offerings, one private offering, a $200.0 million and a $150.0 million Variable Funding Loan Agreement (the “variable funding loan facilities”). These borrowings provide financing for instalment notes receivable and mortgage assets purchased by Mid-State. These instalment notes receivable and mortgage assets are deposited into the Trusts. Upon deposit, these instalment notes and mortgage assets become assets of the Trusts and are not available to satisfy claims of general creditors of the Company. The trust notes and the variable funding loan facilities are to be satisfied solely from the proceeds of the underlying instalment notes receivable and mortgages and are non-recourse to the Company.

In November 2006, Mid-State Capital Corporation completed its 2006-1 Trust private offering of $256.9 million in asset-backed notes. The notes mature October 2040 and bear interest at a weighted average, fixed interest coupon of 6.28%. The net proceeds were used to repay borrowings under the Mid-State Trust IX and Mid-State Trust XIV mortgage variable funding loan facilities and provided $39.2 million of liquidity for the Company’s general corporate purposes.

The variable funding loan facilities contain covenants that, among other things, restrict the ability of the borrower Trust to dispose of assets, engage in other businesses, create liens, engage in mergers or consolidations and otherwise restrict corporate activities. In addition, under certain circumstances, if the value of the mortgage assets securing the facilities has decreased, the lenders under the variable funding loan facilities have the right to require the Trust to transfer additional mortgages to the lender or to repay a portion of the outstanding borrowings. Events of default under the variable funding loan facilities include customary events of default as well as asset quality tests. The borrower Trust’s failure to comply with the covenants in the variable funding loan facilities 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.

2005 Walter Credit Agreement

On October 3, 2005, Walter Industries entered into a $675.0 million credit agreement (“2005 Walter Credit Agreement”) which includes (1) an amortizing term loan facility in an initial aggregate principal amount of $450.0 million, $248.7 million of which was outstanding as of December 31, 2006, and (2) a $225.0 million revolving credit facility, which provides for loans and letters of credit. As of December 31, 2006, the Company had issued $62.5 million in letters of credit, which reduced availability for borrowings under the revolving credit facility to $162.5 million. As of December 31, 2006, there were no borrowings outstanding under the revolving credit facility. The revolving credit facility will terminate in 2010, and the term loan will mature in 2012.

Loans as of December 31, 2006 bear interest at the Company’s option, at LIBOR plus 150 basis points or the alternate base rate plus 50 basis points for borrowings under the revolving credit facility; and LIBOR plus 175 basis points or the alternate base rate plus 75 basis points for the term loan. In addition, the Company pays quarterly commitment fees at a rate equal to 0.35% per year on the unused portion of the revolving credit facility and pays a letter of credit fee.

The term loan is subject to mandatory prepayment with the net cash proceeds from the sale of property, incurrence of debt, issuances of equity securities and excess cash flow, subject to specified exceptions and limitations. All of the Company’s direct and indirect domestic restricted subsidiaries, as defined, are guarantors of the 2005 Walter Credit Agreement. The Company’s obligations are secured by substantially all of the Company’s and guarantors’ real, personal and intellectual property, and the Company’s ownership interest in the guarantors.

F-31

The 2005 Walter Credit Agreement contains customary negative covenants and restrictions on the Company’s ability to engage in specified activities, including, but not limited to, as defined, limitations on other indebtedness, liens, investments and guarantees; restrictions on dividends and redemptions of capital stock and prepayments and redemptions of debt; limitations on capital expenditures; and restrictions on mergers and acquisitions, sales of assets, sale and leaseback transactions and transactions with affiliates. The 2005 Walter Credit Agreement also contains financial covenants requiring the Company to maintain a maximum consolidated leverage ratio, a maximum consolidated senior secured leverage ratio and a minimum fixed charge coverage ratio.

In February 2006, the Company sold 2.65 million shares of common stock for $168.7 million of net cash proceeds. Of these proceeds, $102.9 million was used to repay the term loan facility. In addition, during 2006, the Company repaid $22.3 million on the term loan facility on a mandatory basis and made $75.0 million of optional prepayments using available cash flow. As a result of these term loan prepayments, $1.1 million of unamortized debt expense was charged to interest expense during 2006.

Convertible Notes

In 2004, the Company issued $175.0 million aggregate principal amount of 3.75% Convertible Senior Subordinated Notes due May 1, 2024 (the “convertible notes”). During 2006, holders of approximately $174.2 million of the Company’s convertible notes surrendered their convertible notes in exchange for 9.761 million shares of the Company’s common stock and $19.4 million of conversion inducement fees.

At December 31, 2006, the $0.8 million remaining convertible notes outstanding are currently convertible into 84,000 shares of the Company’s common stock, as conversion conditions specified in the Indenture regarding market price have been satisfied.   Each $1,000 principal note may convert into 107.0241 shares of the Company’s common stock, which represents a conversion price of approximately $9.34 per share.

In 2006, a tax benefit of $6.4 million was recognized as a direct increase to stockholders’ equity related to the convertible notes.

Interest Rate Hedge Agreements

On November 28, 2006, the Company entered into two interest rate hedge agreements each with a notional value of $25.0 million. On January 30, 2007 and February 14, 2007, the Company entered into two additional hedge agreements with notional values of $50.0 million and $35.0 million, respectively. The objective of these hedges is to protect against changes in the benchmark interest rate on the forecasted issuance of mortgage-backed bonds anticipated to be priced on or around April 1, 2008. The hedges will be settled on or before maturity and are being accounted for as a cash flow hedges. As such, changes in the fair value of the hedges that take place through the date of maturity are recorded in accumulated other comprehensive income (loss).

F-32

On November 1, 2005, the Company entered into an interest rate hedge agreement with a notional value of $75.0 million. The objective of the hedge is to protect the Company against rising LIBOR interest rates that would have a negative effect on the Company’s cash flows due to changes in interest payments on its 2005 Walter Credit Agreement. The structure of the hedge is a three-year collar contract with a floor of 4.25% and a cap of 5.69%. The collar agreement calls for the Company to make fixed rate payments over the term of the hedge when stated three-month LIBOR rates are below the floor and to receive payments from the counter-party when the three-month LIBOR is above the cap. It is anticipated that the hedge will be settled upon maturity and is being accounted for as a cash flow hedge. As such, changes in the fair value of the hedge that take place through the date of maturity are recorded in accumulated other comprehensive income (loss).

The fair value of interest rate hedges outstanding at December 31, 2006 and 2005 was an asset of $0.4 million and a liability of $0.1 million, respectively. During 2006 and 2005, the Company recorded an unrealized gain of $0.2 million and an unrealized loss of $0.1 million, respectively, net of tax, from its interest rate hedge agreements, in accumulated other comprehensive income (loss).

NOTE 15—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, 2006, 2005 and 2004 was $8.1 million, $6.8 million and $8.6 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.

In 2006, the Company also provides certain postretirement benefits other than pensions, primarily healthcare, to eligible retirees. The Company’s postretirement benefit plans are not funded. New salaried employees have been ineligible 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. In 2006, the Company terminated benefits for certain employees of Financing and Homebuilding that had not reached a certain number of years of continuous service and/or age. Those employees will no longer be eligible to earn postretirement healthcare benefits. In addition, retiree medical coverage was terminated for those retirees who are eligible for Medicare. As a result, the Financing and Homebuilding segments recognized a net curtailment gain of $4.1 million in 2006.

F-33

In 2006, the Company adopted SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” which requires the Company to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in the balance sheet and to recognize changes in that funded status as a component of other comprehensive income. The Company uses a September 30 measurement date for all of its pension and postretirement benefit plans. The amounts recognized for such plans are as follows:

	Pension Benefits								Other Benefits
	December 31,				December 31,				December 31,				December 31,
	2006				2005				2006				2005
	(in thousands)
Accumulated benefit obligation		$	175,218			$	173,237			$	334,513			$	284,584
Change in projected benefit obligation:
Benefit obligation at beginning of year		$	180,073			$	163,509			$	284,584			$	250,999
Service cost		3,745				2,862				2,122				1,241
Interest cost		9,465				9,564				14,925				14,644
Amendments		—				438				—				99
Actuarial loss		7,501				13,447				54,048				31,483
Net curtailment gain		—				—				(4,793		)		—
Benefits paid		(11,341		)		(9,747		)		(16,373		)		(13,882		)
Benefit obligation at end of year		$	189,443			$	180,073			$	334,513			$	284,584
Change in plan assets:
Fair value of plan assets at beginning of year		$	132,850			$	127,107			$	—			$	—
Actual gain on plan assets		13,301				13,996				—				—
Employer contributions		6,668				1,494				16,373				13,882
Benefits paid		(11,341		)		(9,747		)		(16,373		)		(13,882		)
Fair value of plan assets at end of year		$	141,478			$	132,850			$	—			$	—
Funded (unfunded) status of the plan		$	(47,965	)		$	(47,223	)		$	(334,513	)		$	(284,584	)
Unrecognized net actuarial loss		*				56,343				*				78,348
Unrecognized prior service cost		*				2,991				*				(23,966		)
Unrecognized net transition obligation		*				—				*				—
Post-measurement date contributions		—				—				4,272				4,961
Net amount recognized		$	(47,965	)		$	12,111			$	(330,241	)		$	(225,241	)
Amounts recognized in the consolidated balance sheet:
Other long-term liabilities		$	(47,965	)		$	(48,811	)		$	—			$	—
Accumulated postretirement benefits obligation		—				—				(330,241		)		(225,241		)
Prepaid benefit cost		*				13,245				—				—
Intangible assets		*				3,018				—				—
Accumulated other comprehensive income, continuing operations		*				44,659				—				—
Net amount recognized		$	(47,965	)		$	12,111			$	(330,241	)		$	(225,241	)
Amounts recognized in accumulated other comprehensive income:
Prior service cost (credit)		$	2,576			$	*			$	(19,964	)		$	*
Net actuarial loss		57,702				*				129,450				*
Net amount recognized, pre-tax		$	60,278			$	*			$	109,486			$	*

*Not applicable due to change in accounting standard.

F-34

The incremental effect of applying SFAS No. 158 on individual line items in the balance sheet as of December 31, 2006 is as follows (in thousands):

	Before Application of SFAS 158				Total SFAS 158 Effect				After Application of SFAS 158
Other long-term assets		$	139,853			$	(2,591	)		$	137,262
Total Assets		2,686,706				(2,591		)		2,684,115
Net deferred income tax asset (see Note 13)		11,937				51,817				63,754
Other long-term liabilities		175,205				14,253				189,458
Accumulated postretirement benefits obligation		220,755				109,486				330,241
Total Liabilities		2,754,129				71,922				2,682,207
Stockholder’s equity—accumulated other comprehensive income (loss), net of tax		(24,125		)		(74,513		)		(98,638		)
Total stockholders’ equity		76,421				(74,513		)		1,908

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,
	2006			2005			2004			2006			2005			2004
Components of net periodic benefit cost:
Service cost	$	3,745		$	2,862		$	3,245		$	2,122		$	1,241		$	1,387
Interest cost	9,465			9,564			9,517			14,925			14,644			13,329
Expected return on plan assets	(11,385		)	(10,905		)	(10,420		)	—			—			—
Amortization of transition amount	—			—			—			—			—			—
Amortization of prior service cost	415			384			435			(4,402		)	(4,359		)	(4,072		)
Amortization of net loss (gain)	4,226			3,312			3,228			4,953			2,875			(1,307		)
Curtailment settlement (gain) loss	—			—			1,133			(4,061		)	—			150
Net periodic benefit cost for continuing operations	6,466			5,217			7,138			13,537			14,401			9,487
Discontinued operations periodic benefit cost (income)	—			8,651			8,392			—			(1,456		)	(1,347		)
Net periodic benefit cost	$	6,466		$	13,868		$	15,530		$	13,537		$	12,945		$	8,140

The estimated portion of net prior service cost and net actuarial loss remaining in accumulated other comprehensive income that is expected to be recognized as a component of net periodic benefit cost in 2007 are as follows (in thousands):

	Pension Benefits			Other Benefits
Prior service cost		$	415		$	(4,257	)
Net actuarial loss		4,572			7,372
Net amount to be recognized		$	4,987		$	3,115

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A summary key of assumptions used is as follows:

	Pension Benefits						Other Benefits
	December 31,						December 31,
	2006		2005		2004		2006		2005		2004
Weighted average assumptions used to determine benefit obligations:
Discount rate	5.90	%	5.40	%	6.00	%	5.90	%	5.40	%	6.00	%
Rate of compensation increase	3.50	%	3.50	%	3.50	%	—		—		—
Weighted average assumptions used to determine net periodic cost:
Discount rate	5.40	%	6.00	%	6.35	%	5.40	%	6.00	%	6.35	%
Expected return on plan assets	8.90	%	8.90	%	8.90	%	—		—		—
Rate of compensation increase	3.50	%	3.50	%	3.50	%	—		—		—

Assumed health care cost trend rates at December 31:				Pre-65		Post-65
Health care cost trend rate assumed for next year	—	—		8.60	%	9.40	%	9.00	%	10.00	%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)	—	—		5.00	%	5.00	%	5.00	%	5.00	%
Year that the rate reaches the ultimate trend rate	—	—	—	2012		2012		2010		2009

The discount rate is based on a yield-curve approach which discounts each projected benefit obligation based cash flow of the liability stream at an interest rate specifically applicable to the timing of each respective liability stream cash flow. The model sums the present values of all of the cash flows and then calculates the equivalent weighted-average discount rate by imputing the single interest rate that equates the total present value with the stream of future cash flows.

The yield curve used is a hypothetical Aa spot yield-curve represented by a series of 60 individual semi-annual discount rates from one-half to thirty years. Each discount rate in the curve was determined by creating a hypothetical zero coupon bond derived by bootstrapping. Bootstrapping is a technique used by bond analysts to derive the yield of hypothetical zero coupon bonds from coupon bonds. It assumes that the value of any individual Aa coupon security should equal the value of a package of zero coupon Aa securities that duplicates the coupon bond’s cash flow. It is an iterative calculation that determines the discount rate which equates the cash flows of each semi-annual coupon bond with a hypothetical zero coupon bond based on the actual coupon bond price quotations for each semi-annual maturity cell and equal weighting of the highest yielding (yield to maturity) quartile of bonds in five distinct maturity groups. Each bond was a Aa rated, non-callable bond with at least $150 million par outstanding.

The expected return on pension assets is based on the long-term actual average rate of return on the Plans’ pension assets and projected returns using asset mix forecasts and historical return data.

The Company’s pension plans’ weighted-average asset allocations at September 30, 2006 and 2005, by asset category, are as follows:

	2006			2005
Asset Category:
Equity securities		69	%		69	%
Debt securities		30	%		30	%
Other		1	%		1	%
Total		100	%		100	%

The plan assets of the pension plans are 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

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risk. Risk tolerance is established through 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, 2006 the Trust’s strategic asset allocation was as follows:

	Strategic			Tactical
Asset Class	Allocation			Range
Total Equity		70	%	65-70%
Large Capitalization Stocks		45	%	40-50%
Mid Capitalization Stocks		10	%	8-12%
International Stocks		15	%	12-18%
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 healthcare 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 healthcare plans. A one-percentage-point change in the trend rate for these assumptions would have the following effects (in thousands):

	1-Percentage				1-Percentage
	Point Increase				Point Decrease
Health care cost trend:
Effect on total of service and interest cost components		$	3,425			$	(2,725	)
Effect on postretirement benefit obligation		42,335				(34,959		)
Discount rate:
Effect on postretirement service and interest cost components		114				(393		)
Effect on postretirement benefit obligation		(39,507		)		45,778
Effect on current year postretirement benefits expense		(2,248		)		2,290
Effect on pension service and interest cost components		23				(92		)
Effect on pension benefit obligation		(19,670		)		23,768
Effect on current year pension expense		(1,556		)		1,829
Expected return on plan assets:
Effect on current year pension expense		(1,375		)		1,375
Rate of compensation increase:
Effect on pension service and interest cost components		451				(386		)
Effect on pension benefit obligation		3,419				(3,144		)
Effect on current year pension expense		861				(743		)

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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 Company received a $0.6 million reimbursement benefit for the Medicare Part D subsidy in 2006. The effect of the subsidy on the measurement of net periodic postretirement benefit cost for 2005 and 2004 was zero.

The Company’s minimum pension plan funding requirement for 2007 is $4.7 million. In January 2007, the Company contributed $7.0 million, fulfilling its funding requirement. The Company also expects to pay $17.3 million in benefits related to its other post-retirement healthcare plan in 2007 for benefit payments. The following estimated benefit payments from the plans, 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
2007	$	10,270		$	18,018		$	748
2008	10,970			19,523			789
2009	12,798			21,050			822
2010	11,444			22,440			851
2011	12,054			23,453			855
Years 2012-2016	70,560			129,256			4,298

Under the labor contract with the United Mine Workers of America, Jim Walter Resources makes payments into multi-employer pension plan trusts established for union employees. Under ERISA, an employer is liable for a proportionate part of the plans’ unfunded vested benefits liabilities upon its withdrawal from the plan. ERISA imposes certain liabilities on contributors to multi-employer pension plans in the event of a contributor’s withdrawal from the plan. The Company does not have any intention to withdraw from the plan. Through June 30, 2007, the calculation of the Company’s withdrawal liability amounts to $102.1 million.

The Company and certain of its subsidiaries maintain profit sharing and 401(k) plans. The total cost of these plans in 2006, 2005 and 2004 was $2.4 million, $2.2 million and $2.0 million, respectively.

NOTE 16—Stockholders’ Equity

In 2003, the Company’s Board of Directors authorized an increase in the Common Stock Open Market share buyback program to $25.0 million. During 2004, the Company acquired 6.959 million shares pursuant to the open market share repurchase program. At December 31, 2006, $7.5 million remains available under this authorization.

In April 2004, the Company purchased 4.961 million shares of its common stock for approximately $63.0 million, of which 3.961 million shares costing $50.0 million were purchased from certain affiliates of Kohlberg, Kravis, Roberts and Co. (“KKR”). In October 2004, the Company purchased 2.0 million 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 8.0 million remaining shares of the Company’s common stock. Following the offering, KKR did not own any shares of the Company’s common stock.

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NOTE 17—Net Income (Loss) Per Share

A reconciliation of the basic and diluted net income (loss) per share computations for the years ended December 31, 2006, 2005 and 2004 are as follows (in thousands, except per share data):

	For the years ended December 31,
	2006				2005						2004
	Basic		Diluted		Basic			Diluted			Basic			Diluted
Numerator:
Income from continuing operations	$	145,584	$	145,584	$	34,351		$	34,351		$	50,534		$	50,534
Effect of dilutive securities:
Interest related to 3.75% convertible senior subordinated notes, net of tax (a)	—		3,385		—			4,266			—			3,021
	$	145,584	$	148,969	$	34,351		$	38,617		$	50,534		$	53,555
Income (loss) from discontinued operations	$	52,785	$	52,785	$	(27,305	)	$	(27,305	)	$	(617	)	$	(617	)
Denominator:
Average number of common shares outstanding	44,030		44,030		38,485			38,485			38,582			38,582
Effect of dilutive securities:
Stock options (b)	—		642		—			919			—			885
3.75% convertible senior subordinated notes (a)	—		7,406		—			9,805			—			6,788
	44,030		52,078		38,485			49,209			38,582			46,255
Income from continuing operations	$	3.31	$	2.86	$	0.89		$	0.78		$	1.31		$	1.16
Income (loss) from discontinued operations	1.20		1.01		(0.71		)	(0.55		)	(0.02		)	(0.02		)
Net income (loss) per share	$	4.51	$	3.87	$	0.18		$	0.23		$	1.29		$	1.14

(a)Represents the interest, net of tax, and shares issuable upon conversion related to the Company’s contingent convertible senior subordinated notes.

(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. Stock options outstanding of 408,238, 14,468 and 180,250 for the years ended December 31, 2006, 2005 and 2004, respectively, were excluded from the calculation above because their effect would have been anti-dilutive.

NOTE 18—Commitments and Contingencies

Income Tax Litigation

The Company is currently engaged in litigation with regard to Federal income tax disputes; see Note 13 for a more complete explanation.

Environmental Matters

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

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

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

Sloss was named in a suit (Adkins v. Sloss, et al. in Circuit Court, Wayne County, West Virginia; Civil Action No. 04-C261) that was the lead case of 13 suits filed in Wayne County, WV, over the spill of “light oil” from a railcar loaded at the Sloss facility. In 2006, the Company recognized a liability of $1.0 million for the estimated settlement of this matter. Sloss has settled with the plaintiffs in this case for an amount that was not material to the Company’s financial statements.

Sloss Industries entered into a decree order in 1989 relative to a Resource Conservation Recovery Act (“RCRA”) compliance program mandated by the EPA. A RCRA Facility Investigation (“RFI”) Work Plan was prepared which proposed investigative tasks to assess the presence of contamination at the Sloss facility. The Work Plan was approved in 1994 and the Phase I investigations were conducted and completed between 1995 and 1999. Phase II investigations for the Chemical Plant/Coke Plant and Biological Treatment Facility and Sewers/Land Disposal Areas were performed in 2000 and 2001 and are substantially complete. At the end of 2004, EPA re-directed Sloss’ RFI efforts toward completion of the Environmental Indicator (“EI”) determinations for the Current Human Exposures. This EI effort was completed to assist EPA in meeting goals set by the Government Performance Results Act (“GPRA”) for RCRA by 2005. Sloss implemented the approved EI Sampling Plan in April 2005. EPA approved/finalized the EI determinations for Sloss’ Birmingham facility in September 2005. In an effort to refocus the RFI, EPA has now provided technical comments on the Phase II RFI report and the report recently submitted as part of the EI effort. A Phase III work plan has been submitted to the EPA during the first quarter of 2007.

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

Miscellaneous Litigation

Drummond Company, Inc. filed suit in state court in Tuscaloosa County, Alabama on October 29, 2001, against the Company and several of its subsidiaries (Drummond Company, Inc. v. Walter Industries, Inc., et al., Case No. CV 2002-0673). Drummond claimed that it was entitled to exclusive surface mining rights on certain lands owned by United Land Corporation, a wholly owned subsidiary of the Company. The Company filed a counterclaim seeking injunctive relief, substantial actual damages and punitive damages against Drummond based on fraud. The Company and its subsidiaries were granted summary judgment on all of Drummond’s claims on March 29, 2005. A jury trial denied United Land Corporation’s counter-claim on April 8, 2005. Drummond and the Company appealed the trial court’s decision and in December 2006 the Alabama Supreme Court ruled in favor of the Company and the case has been sent back to the trial court for further proceedings to determine the Company’s damages. Drummond’s claims do not affect the underground mining operations of Jim Walter Resources.

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On November 29, 2006, the Company reached a settlement with Oxbow Carbon and Minerals LLC resolving all outstanding disputes in respect of the sale by the Company to Oxbow of the Corporation’s former AIMCOR subsidiary, see Note 2.

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.

Commitments and Contingencies—Other

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

Operating Leases and Purchase Obligations

The Company accounts for operating leases in accordance with SFAS 13, “Accounting for Leases,” which includes guidance for 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 $11.8 million, $11.9 million and $15.8 million for the years ended December 31, 2006, 2005 and 2004, respectively. Future minimum payments under non-cancelable operating leases and purchase obligations as of December 31, 2006 are (in thousands):

	Operating			Purchase
	Leases			Obligations
2007		$	9,755		$	30,402
2008		7,922			—
2009		5,142			—
2010		3,075			—
2011		2,466			—
Thereafter		806			—

NOTE 19—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 $2.0 billion for each period ended at December 31, 2006 and 2005, 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 is very sensitive to changes in interest rates.

Debt—The estimated fair value of mortgage-backed/asset-backed notes approximated $1.8 billion for each period ended at December 31, 2006 and 2005, based on current yields for comparable debt issues or

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prices for actual transactions. The value of mortgage-backed debt obligations is very sensitive to changes in interest rates.

The estimated 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 approximates book value at December 31, 2006 and was estimated to be $496.3 million at December 31, 2005. The estimated fair value of the Company’s term loan approximates book value at December 31, 2006 and 2005.

Interest rate hedges—Interest rate hedges are discussed in more detail in Note 14.

Commodity hedges—At December 31, 2006, the Company had one contract outstanding to hedge 0.6 million mmbtus or 35% of anticipated sales in the first quarter of 2007 at a price of $10.54, scheduled to expire in the first quarter 2007. The fair value of this contract at December 31, 2006 was an asset of $2.6 million. At December 31, 2005, the Company had three contracts outstanding to hedge 1.6 million mmbtus or 92% of anticipated production in the first quarter of 2006 at a weighted average price of $9.64, scheduled to expire in the first quarter of 2006. The fair value of these contracts at December 31, 2005 was a liability of $0.8 million. As of December 31, 2006, the Company recorded a net unrealized gain from these natural gas hedging instruments of $1.7 million, net of tax, as a component of other comprehensive income compared to a net unrealized loss of $0.5 million, net of tax, at December 31, 2005.

On February 8, 2007, the Company entered into a swap contract to hedge 1.35 mmbtus million or approximately 26% of anticipated sales for the last three quarters of 2007 at a price of $8.10. These hedges are scheduled to expire December 31, 2007.

NOTE 20—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:  Natural Resources, Sloss, Homebuilding, Financing and Other. The Natural Resources segment is comprised of coal mining and methane gas operations. Sloss manufactures foundry and furnace coke and slag fiber.   The Financing segment provides mortgage financing on homes constructed by the Homebuilding segment and purchases mortgages originated by others. Homebuilding markets and supervises the construction of detached, single-family residential homes, primarily in the southeastern United States. The Other segment includes 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 segments.

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

	For the years ended December 31,
	2006		2005		2004
Sales and revenues:
Natural Resources	$	679,580	$	548,577	$	395,532
Sloss	133,033		129,035		102,974
Natural Resources and Sloss	812,613		677,612		498,506
Financing	219,551		229,156		242,777
Homebuilding	275,841		226,796		233,755
Financing and Homebuilding Group	495,392		455,952		476,532
Other	15,087		12,354		18,427
Consolidating eliminations	(13,236)		(7,876)		(8,664)
Sales and revenues (a)(b)	$	1,309,856	$	1,138,042	$	984,801
Segment operating income (loss) (c)(d):
Natural Resources	$	246,345	$	164,103	$	69,702
Sloss	8,071		11,442		6,845
Natural Resources and Sloss	254,416		175,545		76,547
Financing (e)	53,987		46,019		54,838
Homebuilding	(22,115)		(103,881)		(33,347)
Financing and Homebuilding Group	31,872		(57,862)		21,491
Other	(15,852)		(20,500)		(28,045)
Consolidating eliminations	(647)		(2,714)		768
Segment operating income (loss)	269,789		94,469		70,761
Less corporate debt interest and debt conversion costs	(57,384)		(23,400)		(18,182)
Income (loss) from continuing operations before income tax (expense) benefit and minority interest	212,405		71,069		52,579
Income tax (expense) benefit	(67,821)		(36,718)		(2,045)
Income from continuing operations before minority interest	$	144,584	$	34,351	$	50,534
Depreciation:
Natural Resources	$	27,004	$	20,855	$	22,464
Sloss	3,623		3,859		3,794
Natural Resources and Sloss	30,627		24,714		26,258
Financing	1,387		1,403		1,471
Homebuilding	5,385		4,966		4,792
Financing and Homebuilding Group	6,772		6,369		6,263
Other	1,618		893		1,176
Total	$	39,017	$	31,976	$	33,697
Gross capital expenditures:
Natural Resources	$	86,305	$	94,301	$	21,733
Sloss	7,761		7,314		4,329
Natural Resources and Sloss	94,066		101,615		26,062
Financing	295		206		924
Homebuilding	5,669		8,921		2,647
Financing and Homebuilding Group	5,964		9,127		3,571
Other	1,025		3,776		346

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Total	$	101,055	$	114,518	$	29,979
Identifiable assets:
Natural Resources	$	480,065	$	317,297	$	235,726
Sloss	57,686		69,981		60,410
Natural Resources and Sloss	537,751		387,278		296,136
Financing	1,940,103		1,796,377		1,790,663
Homebuilding	81,715		85,680		148,212
Financing and Homebuilding Group	2,021,818		1,882,057		1,938,875
Other	124,546		223,200		217,895
Assets of discontinued operations	—		2,911,369		463,580
Total	$	2,684,115	$	5,403,904	$	2,916,486

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

(b)Export sales were $551.9 million, $371.7 million and $212.2 million in the years ended December 31, 2006, 2005 and 2004, respectively. Export sales to Brazil were 14.2%, 9.3% and 5.9% of consolidated net sales and revenues for 2006, 2005 and 2004, respectively.

(c)Operating income amounts include amortization of intangibles. The Company recorded approximately $2.4 million, $3.6 million and $5.0 million of amortization expense related to the Financing segment for the years ended December 31, 2006, 2005 and 2004, respectively.

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

	For the years ended December 31,
	2006			2005			2004
Natural Resources	$	19,772		$	16,448		$	10,896
Sloss	(680		)	(563		)	(401		)
Financing	(1,544		)	(240		)	(207		)
Homebuilding	(3,224		)	(468		)	(465		)
Other	(787		)	(776		)	(336		)
	$	13,537		$	14,401		$	9,487

(e)Operating income amounts for the Financing segment include interest expense on the mortgage-backed/asset-backed notes of $118.7 million, $122.0 million and $127.3 million for the years ended December 31, 2006, 2005 and 2004, respectively.

NOTE 21—Related Party Transactions

The Company owns a 50% interest in the joint venture Black Warrior Methane (“BWM”), which is accounted for under the proportionate consolidation method. The Company has granted the rights to produce and sell methane gas from its coal mines to BWM. The Company also supplies labor and equipment to BWM and charges the joint venture for such costs on a monthly basis. The total of these charges for 2006, 2005 and 2004 were $2.1 million, $2.6 million and $2.2 million, respectively.

In 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, Chairman of the Company’s Board of Directors, is the chairman and investment manager of MVC Capital, an investment fund that

F-44

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.

See Note 16 for a discussion of transactions with KKR.

NOTE 22—Accounting Pronouncements Not Yet Adopted

In July 2006 the FASB issued FIN No. 48, “Accounting for Uncertainty in Income Taxes,” which provides the minimum recognition threshold that a tax provision must meet before being recognized in the financial statements. This interpretation also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures. FIN No. 48 applies to all tax positions related to income taxes subject to SFAS No. 109, “Accounting for Income Taxes.”  The Company estimates the adoption of this interpretation, which becomes effective January 1, 2007, will result in an adjustment to decrease the beginning retained earnings by approximately $5.0 million to $10.0 million.

In September 2006 the FASB issued SFAS No. 157, “Fair Value Measurements,” which provides a definition of fair value, establishes a framework for measuring fair value and expands financial statement disclosure requirements. SFAS No. 157 requires companies to base fair values on what they would receive from a sale to a third party in the open market. The Company has not yet determined what impact, if any, the adoption of this statement, which becomes effective January 1, 2008, will have on its consolidated financial statements.

In September 2006 the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” which requires the Company to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in the balance sheet and to recognize changes in that funded status as a component of other comprehensive income. See Note 15 for the impact of this guidance, which was effective December 31, 2006. In addition, SFAS No. 158 requires companies to measure plan assets and liabilities as of the fiscal year-end reporting date. The Company uses a September 30 measurement date and will be required to adopt this provision December 31, 2008. The Company has not yet determined what impact the adoption of this requirement of this statement will have on its consolidated financial statements.

In September 2006 the FASB issued FASB Staff Position No. AUG AIR-1, “Accounting for Planned Major Maintenance Activities (“AUG AIR-1”), which provides guidance on which methods are allowed to properly account for planned major maintenance activities. The three accepted methods under AUG AIR-1 are direct expense, built-in overhaul, and deferral methods. The Company has not yet determined what impact the adoption of this statement, which becomes effective January 1, 2007, will have on its consolidated financial statements.

In February 2007 the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” which allows reporting entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to reduce volatility in reported earnings that result from measuring related assets and liabilities differently without having to apply complex hedge accounting provisions, using the guidance in SFAS No. 133 (as amended), “Accounting for Derivative Instruments and Hedging Activities.”  The Company has not yet determined what impact the adoption of this requirement, which becomes effective January 1, 2008, will have on its consolidated financial statements.

F-45

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) (7)
10.1*	—	Director and Officer Indemnification Agreement, dated as of March 3, 1995, among the Company and the Indemnitee parties thereto (8)
10.2*	—	Walter Industries, Inc. Executive Change-in-Control Severance Agreement (9)
10.3*	—	Walter Industries Executive Deferred Compensation and Supplemental Retirement Plan (9)
10.4*	—	Walter Industries, Inc. Directors’ Deferred Fee Plan (10)
10.5*	—	Walter Industries, Inc. Supplemental Pension Plan (9)
10.6*	—	Walter Industries, Inc. Executive Incentive Plan (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 (9)
10.10*	—	Non-Statutory Stock Option Agreement (9)
10.11	—	Walter Credit Agreement dated as of October 3, 2005 among Walter Industries, Inc. as borrower, Bank of America, N.A., as Administrative Agent, Morgan Stanley Senior Funding, Inc, as Syndication Agent and SunTrust Bank, BNP Paribas and Calyon New York Branch, as co-documentation agents and the other lenders named therein (14)

E-1

10.11.1	—	Amendment No. 1 to Credit Agreement dated as of January 24, 2006 (15)
10.11.2	—	Amendment No. 2 to Credit Agreement dated as of February 14, 2006 (16)
10.11.3	—	Amendment No. 3 to Credit Agreement dated as of September 14, 2006
10.12	—	Second Amended and Restated Variable Funding Loan Agreement, dated as of June 15, 2006, among YC SUSI Trust, Atlantic Asset Securitization LLC, Mid-State Trust IX, Treasury Bank, a Division of Countrywide Bank, N.A., The Bank of New York, Bank of America, N.A. and Calyon New York Branch
10.13	—	Amended and Restated Variable Funding Loan Agreement dated as of June 15, 2006, among Three Pillars Funding, LLC, Mid-State Trust XIV, Treasury Bank, a Division of Countrywide Bank, N.A., The Bank of New York, SunTrust Capital Markets, Inc. and SunTrust Bank.
10.13.1	—	Amendment No. 1 to Amended and Restated Variable Funding Loan Agreement dated as of November 27, 2006, among Three Pillars Funding, LLC, Mid-State Trust XIV, Treasury Bank, a Division of Countrywide Bank, N.A., The Bank of New York and SunTrust Capital Markets, Inc. and SunTrust Bank
10.14*	—	Agreement dated as of July 24, 2002, between the Company and Victor Patrick (10)
10.15*	—	Agreement dated as of October 31, 2000, between the Company and Joseph J. Troy (17)
10.16*	—	Agreement dated as of September 9, 2005, between the Company and Gregory Hyland (18)
10.16.1*	—	Agreement dated as of March 2, 2006, between the Company and Gregory Hyland (19)
10.16.2*	—	Agreement dated December 14, 2006, between the Company and Gregory Hyland (20)
10.17*	—	Agreement dated as of March 2, 2006, between the Homes Group and Mark O’Brien (19)
10.18*	—	Agreement, dated as of December 28, 2000, between the Company and William F. Ohrt (21)
10.19*	—	Agreement dated March 13, 2006, between the Company and George R. Richmond (22)
10.20*	—	Agreement dated as of January 23, 2006, between Mueller Water Products, Inc. and Dale Smith (15)
10.21*	—	Agreement dated as of June 17, 2005, between Mueller Group, LLC and Thomas Fish (23)
10.22*	—	Agreement dated as of November 2, 2006, between the Homes Group and Charles E. Cauthen
10.23*	—	JWH Holding Company, LLC Economic Profit Plan
12.1	—	Ratio of Earnings to Fixed Charges
16.1	—	Letter of PricewaterhouseCoopers LLP (24)

E-2

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.

(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 November 7, 2005.

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

(8) 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.

(9) This Exhibit is incorporated by reference to Form 10-K filed by the Company with the Commission on March 16, 2005.

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

(11) This Exhibit is incorporated by reference to Appendix A to the Company's Proxy Statement, dated March 31, 2006, filed by the Company with the Commission on March 31, 2006.

(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.

E-3

(14) This Exhibit is incorporated by reference to Form 8-K filed by the Company with the Commission on October 5, 2005.

(15) This Exhibit is incorporated by reference to Form 8-K filed by the Company with the Commission on January 27, 2006.

(16) This Exhibit is incorporated by reference to Form 8-K filed by the Company with the Commission on February 21, 2006.

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

(18) This Exhibit is incorporated by reference to Form 8-K filed by the Company with the Commission on September 12, 2005.

(19) This Exhibit is incorporated by reference to Form 8-K filed by the Company with the Commission on March 3, 2006.

(20) This Exhibit is incorporated by reference to Form 8-K filed by the Company with the Commission on December 20, 2006.

(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 16, 2006.

(23) This Exhibit is incorporated by reference to Form 10-K filed by Mueller Water Products, Inc. with the Commission on December 19, 2005.

(24) This Exhibit is incorporated by reference to Form 8-K filed by the Company with the Commission on January 3, 2007.

E-4

EX-10.11.3

Exhibit 10.11.3

AMENDMENT NO. 3 TO CREDIT AGREEMENT

This Amendment No. 3 to Credit Agreement (this “Agreement”) dated as of September 14th, 2006, is made by and among WALTER INDUSTRIES, INC., a Delaware corporation (the “Borrower”), BANK OF AMERICA, N.A., a national banking association organized and existing under the laws of the United States (“Bank of America”), in its capacity as administrative agent for the Lenders (as defined in the Credit Agreement (as defined below)) (in such capacity, the “Administrative Agent”), and each of the Lenders signatory hereto, and each of the Guarantors (as defined in the Credit Agreement) signatory hereto.

W I T N E S S E T H:

WHEREAS, the Borrower, the Administrative Agent and the Lenders have entered into that certain Credit Agreement dated as of October 3, 2005 (as amended by Amendment No. 1 to Credit Agreement dated as of January 24, 2006, as further amended by Amendment No. 2 to Credit Agreement and Waiver dated as of February 14, 2006, as hereby amended and as from time to time hereafter further amended, modified, supplemented, restated, or amended and restated, the “Credit Agreement”; the capitalized terms used in this Agreement not otherwise defined herein shall have the respective meanings given thereto in the Credit Agreement), pursuant to which the Lenders have made available to the Borrower a term loan facility and a revolving credit facility, including a letter of credit facility and a swing line facility; and

WHEREAS, each of the Guarantors has entered into a Guaranty pursuant to which it has guaranteed certain or all of the obligations of the Borrower under the Credit Agreement and the other Loan Documents; and

WHEREAS, the Borrower has requested that the Administrative Agent and the Lenders agree to amend certain terms of the Credit Agreement, which the Administrative Agent and the Lenders party hereto are willing to do on the terms and conditions contained in this Agreement; and

NOW, THEREFORE, in consideration of the premises and further valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:

1.             Amendments to Credit Agreement.  Subject to the terms and conditions set forth herein, the Credit Agreement is hereby amended as follows:

(a)           Section 8.02(p) is hereby amended by deleting the reference to “$20,000,000” contained therein and replacing it with “$27,000,000” in lieu thereof.

(b)           Section 8.12(d) is hereby amended by deleting the proviso following the table in such section and replacing it with the following in lieu thereof:

“provided, however, that so long as no Default has occurred and is

continuing or would result from such expenditure, (i) up to $15,000,000 of any amount set forth above other than the amount for 2006, if not expended in the fiscal year for which it is permitted above, may be carried over for expenditure in the next following fiscal year and (ii) up to $25,000,000 of the amount available but not used in 2006 may be carried over for expenditure in 2007.”

2.             Effectiveness; Conditions Precedent.  The effectiveness of this Agreement and the amendments to the Credit Agreement provided in Paragraph 1 hereof are subject to the satisfaction of each the following conditions precedent:

(a)           The Administrative Agent shall have received each of the following documents or instruments in form and substance reasonably acceptable to the Administrative Agent:

(i)            counterparts of this Agreement, duly executed by the Borrower, the Administrative Agent, each Guarantor and the Required Lenders, which counterparts may be delivered by telefacsimile or other electronic means, but such delivery will be promptly followed by the delivery of four (4) original signature pages by each Person party hereto unless waived by the Administrative Agent; and

(ii)           such other assurances, certificates, documents, consents or opinions as the Administrative Agent reasonably may require.

(b)           All fees and expenses payable to the Administrative Agent and the Lenders (including the reasonable fees and expenses of counsel to the Administrative Agent) shall have been paid in full (without prejudice to final settling of accounts for such fees and expenses).

3.             Consent of the Guarantors.  Each Guarantor hereby consents, acknowledges and agrees to the amendments and other matters set forth herein and hereby confirms and ratifies in all respects the Guaranty to which such Guarantor is a party  (including without limitation the continuation of such Guarantor’s payment and performance obligations thereunder upon and after the effectiveness of this Agreement and the amendments contemplated hereby) and the enforceability of such Guaranty against such Guarantor in accordance with its terms.

4.             Representations and Warranties.  In order to induce the Administrative Agent and the Lenders to enter into this Agreement, the Borrower represents and warrants to the Administrative Agent and the Lenders as follows:

(a)           The representations and warranties made by the Borrower in Article VI of the Credit Agreement and in each of the other Loan Documents to which it is a party are true and correct in all material respects on and as of the date hereof, except to the extent that such representations and warranties expressly relate to an earlier date;

(b)           The Persons appearing as Guarantors on the signature pages to this Agreement constitute all Persons who are required to be Guarantors pursuant to the terms of the Credit Agreement and the other Loan Documents, including without limitation all

Persons who became Subsidiaries or were otherwise required to become Guarantors after the Closing Date, and each of such Persons has become and remains a party to a Guaranty as a Guarantor;

(c)           This Agreement has been duly authorized, executed and delivered by the Borrower and Guarantors party hereto and constitutes a legal, valid and binding obligation of such parties; and

(d)           After giving effect to this Agreement, no Default or Event of Default has occurred and is continuing.

5.             Entire Agreement.  This Agreement, together with all the Loan Documents (collectively, the “Relevant Documents”), sets forth the entire understanding and agreement of the parties hereto in relation to the subject matter hereof and supersedes any prior negotiations and agreements among the parties relating to such subject matter.  No promise, condition, representation or warranty, express or implied, not set forth in the Relevant Documents shall bind any party hereto, and no such party has relied on any such promise, condition, representation or warranty.  Each of the parties hereto acknowledges that, except as otherwise expressly stated in the Relevant Documents, no representations, warranties or commitments, express or implied, have been made by any party to the other in relation to the subject matter hereof or thereof.  None of the terms or conditions of this Agreement may be changed, modified, waived or canceled orally or otherwise, except in writing and in accordance with Section 11.01 of the Credit Agreement.

6.             Full Force and Effect of Agreement.  Except as hereby specifically amended, modified or supplemented, the Credit Agreement and all other Loan Documents are hereby confirmed and ratified in all respects and shall be and remain in full force and effect according to their respective terms.

7.             Counterparts.  This Agreement may be executed in any number of counterparts, each of which shall be deemed an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument.  Delivery of an executed counterpart of a signature page of this Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement.

8.             Governing Law.  This Agreement shall in all respects be governed by, and construed in accordance with, the laws of the State of New York applicable to contracts executed and to be performed entirely within such State, and shall be further subject to the provisions of Sections 11.14 and 11.15 of the Credit Agreement.

9.             Enforceability.  Should any one or more of the provisions of this Agreement be determined to be illegal or unenforceable as to one or more of the parties hereto, all other provisions nevertheless shall remain effective and binding on the parties hereto.

10.           References.  All references in any of the Loan Documents to the “Credit Agreement” shall mean the Credit Agreement, as amended hereby.

11.           Successors and Assigns.  This Agreement shall be binding upon and inure to the benefit of the Borrower, the Administrative Agent and each of the Guarantors and Lenders, and their respective successors, legal representatives, and assignees to the extent such assignees are permitted assignees as provided in Section 11.06 of the Credit Agreement.

[Signature pages omitted]

EX-10.12

Exhbit 10.12

EXECUTION COPY

SECOND AMENDED AND RESTATED VARIABLE FUNDING LOAN AGREEMENT

dated as of June 15, 2006

among

YC SUSI TRUST,
(successor by assignment from Enterprise Funding Corporation)

a Lender,

ATLANTIC ASSET SECURITIZATION LLC,

a Lender,

MID-STATE TRUST IX,

the Borrower,

TREASURY BANK,
A DIVISION OF COUNTRYWIDE BANK, N.A.,

the Custodian,

THE BANK OF NEW YORK,

as Trustee

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

		Page
ARTICLE 1
GENERAL
Section 1.1.	Certain Defined Terms	2
Section 1.2.	Other Terms	2
Section 1.3.	Computation of Time Periods	3
ARTICLE 2
AMOUNT AND TERMS OF COMMITMENT
Section 2.1.	Revolving Credit Facility	3
Section 2.2.	[Reserved]	4
Section 2.3.	Loan Requests	4
Section 2.4.	Determination of Discount and Rate Periods	6
Section 2.5.	Payment of Principal, Interest and Other Amounts	8
Section 2.6.	Mandatory and Optional Prepayments	9
Section 2.7.	Proceeds	10
Section 2.8.	Pledged Accounts	10
Section 2.9.	Payments and Computations, Etc	11
Section 2.10.	Reports	11
Section 2.11.	[Reserved]	11
Section 2.12.	Sharing of Payments, Etc	11
Section 2.13.	Right of Setoff	12
Section 2.14.	Assignment by Lenders to Bank Investors	12
Section 2.15.	Downgrade of Bank Investor	13
Section 2.16.	Non-Renewing Bank Investors	15
Section 2.17.	Commitment Renewal Request	16
Section 2.18.	Interest Rate Protection Agreements	17
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
Section 3.1.	Representations and Warranties of the Borrower	17
Section 3.2.	Reaffirmation of Representations and Warranties by the Borrower	19
ARTICLE 4
CONDITIONS PRECEDENT
Section 4.1.	Conditions to Effectiveness	20
Section 4.2.	Conditions to Each Loan	22

ARTICLE 5
COVENANTS
Section 5.1.	Affirmative Covenants of Borrower	24
Section 5.2.	Negative Covenants of Borrower	27
ARTICLE 6
EVENTS OF DEFAULT AND FACILITY TERMINATION EVENTS
Section 6.1.	Events of Default	28
Section 6.2.	Facility Termination Events	29
Section 6.3.	Remedies	30
ARTICLE 7
INDEMNIFICATION; EXPENSES; RELATED MATTERS
Section 7.1.	Indemnities by the Borrower	31
Section 7.2.	Indemnity for Taxes, Reserves and Expenses	33
Section 7.3.	Taxes	35
Section 7.4.	Other Costs and Expenses; Breakage Costs	36
Section 7.5.	Payment	37
ARTICLE 8
MISCELLANEOUS
Section 8.1.	Term of Agreement	37
Section 8.2.	Waivers; Amendments	38
Section 8.3.	Notices	38
Section 8.4.	Governing Law; Submission to Jurisdiction; Integration	41
Section 8.5.	Severability; Counterparts	42
Section 8.6.	Successors and Assigns	42
Section 8.7.	Waiver of Confidentiality	44
Section 8.8.	Confidentiality Agreement	44
Section 8.9.	Liability of Owner Trustee	45
Section 8.10.	No Bankruptcy Petition Against the Lender	45
Section 8.11.	No Recourse Against Lender	45
Section 8.12.	Assignment by Lenders to Conduit Assignee	45
Section 8.13.	Assignment by a Lender to Program Support Provider	46
Section 8.14.	Surety Provider Default	46
Section 8.15.	Subrogation and Cooperation	47
Section 8.16.	Benefits of Agreement	47
Section 8.17.	Limitation on Payments	47
ARTICLE 9
THE AGENT
Section 9.1.	Appointment and Authorization of Agent	48
Section 9.2.	Delegation of Duties	48

Section 9.3.	Liability of Agent	48
Section 9.4.	Reliance by Agent	49
Section 9.5.	Notice of Potential Event of Default, Event of Default Facility, Termination Event or Servicer Default	49
Section 9.6.	Credit Decision; Disclosure of Information by the Agent	50
Section 9.7.	Indemnification of the Agent	50
Section 9.8.	Agent in Individual Capacity	51
Section 9.9.	Resignation of Agent	51
Section 9.10.	Payments by the Agent	51
Section 9.11.	Notification by Agent	52
Section 9.12.	Limited Waiver	52
ARTICLE 10
THE MANAGING AGENTS
Section 10.1.	Appointment and Authorization of Managing Agents	53
Section 10.2.	Delegation of Duties	53
Section 10.3.	Liability of Managing Agents	53
Section 10.4.	Reliance by Managing Agents	54
Section 10.5.	Notice of Potential Event of Default, Event of Default Facility, Termination Event or Servicer Default	54
Section 10.6.	Credit Decision; Disclosure of Information by the Managing Agents	54
Section 10.7.	Indemnification of the Managing Agents	55
Section 10.8.	Managing Agents in Individual Capacity	56
Section 10.9.	Resignation of Managing Agents	56
Section 10.10.	Payments by the Managing Agents	56
Annex A - Second Amended and Restated Definitions		Annex A
Exhibit A - Form of Variable Funding Note		A-1
Exhibit B - Form of Borrowing Request		B-1
Exhibit C - Form of Borrower’s Counsel Opinion		C-1
Exhibit D - Form of Assignment and Assumption Agreement		D-1

SECOND AMENDED AND RESTATED VARIABLE FUNDING LOAN AGREEMENT

SECOND AMENDED AND RESTATED VARIABLE FUNDING LOAN AGREEMENT (this “Loan Agreement”), dated as of June 15, 2006, 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 LLC, a Delaware limited liability company (together with its successors and assigns, a “Lender”), MID-STATE TRUST IX, a Delaware business trust, as borrower (the “Borrower”), TREASURY BANK, A DIVISION OF COUNTRYWIDE BANK, N.A., as custodian (the “Custodian”), THE BANK OF NEW YORK, a New York banking institution, as trustee (the “Trustee”), 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 was established pursuant to the Trust Agreement dated as of February 5, 2001, as amended or modified from time to time, including the Amended and Restated Trust Agreement dated as of the date hereof;

WHEREAS, the Lenders, the Borrower, the Managing Agents and Wachovia Bank, National Association, as custodian/collateral agent are parties to that certain Variable Funding Loan Agreement, dated as of November 19, 2004 (the “Existing Loan Agreement”);

WHEREAS, Wachovia Bank, National Association has resigned its role as custodian and collateral agent pursuant to the provisions of the Custodian/Trustee Agreement dated as of the date hereof (the “CTA Agreement”) and Treasury Bank has accepted its appointment as custodian thereunder and The Bank of New York has accepted its appointment as trustee thereunder;

WHEREAS, on the Closing Date, and from time to time pursuant to the Amended and Restated 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 Amended and Restated 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 CTA 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 Trustee for the benefit of the Secured Parties and to take such other steps as set forth in the CTA Agreement

to create and perfect a first lien in all such rights in favor of the Trustee, 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, it is the intent of the parties hereto that the execution and delivery of this Loan Agreement, made for the purposes described in these Preliminary Statements, not effectuate a novation of Borrower’s obligations outstanding under the Existing Loan Agreement, but rather a substitution of certain of the terms governing the payment and performance of such indebtedness;

WHEREAS, subject to the terms and conditions set forth herein, the Bank Investors are willing to make the Loans to the Borrower;

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; and

WHEREAS, Wachovia Bank, National Association served as custodian and collateral agent pursuant to the Amended and Restated Custodian/Collateral Agent Agreement, dated November 19, 2004.

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 that the Existing Loan Agreement is hereby amended and restated in its entirety 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.”

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) 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 (ii) 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 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 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 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.

(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 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 CTA Agreement.  Without limiting the foregoing, the Borrower will cause to be delivered to the Trustee all amounts on deposit in the Holding Account when and as required by the Master Servicing Agreement for application as provided in the CTA 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 CTA Agreement to the parties entitled thereto in accordance with the terms hereof and in the manner and order of priority provided in the CTA 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 Trustee, 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 CTA 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 CTA 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 CTA Agreement.

(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 Trustee 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 CTA 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 CTA 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 CTA 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 CTA 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.

(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. 261619) at the Trustee in the name of the Trustee (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. 261620) at the Trustee in the name of the Trustee (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. 8900624205) at the Account Bank on behalf of the Master Servicer (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. 8900624191) 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 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 CTA 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 CTA 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.

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 Trustee in accordance with Section 4.1(d) of the CTA 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 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 CTA 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 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 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 any 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 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 CTA 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 CTA 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.

Section 2.18.          Interest Rate Protection Agreements.  The Borrower agrees that (i) from and after the occurrence of an Interest Rate Protection Date, it shall provide to the Agent for the benefit of the Lenders and the Bank Investors promptly, and in any event not later than three (3) Business Days after such Interest Rate Protection Date, an Interest Rate Protection Agreement approved by each Managing Agent and (ii) prior to the execution of any Interest Rate Protection Agreement at any other time, it shall provide a copy of the proposed Interest Rate Protection Agreement to the Agent for approval by each Managing Agent.  Any such Interest Rate Protection Agreement shall be provided and maintained at the Borrower’s sole cost and expense from funds other than Collections.

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 Trustee, 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 Trustee 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 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 Custodian.

(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, 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, the Trustee 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 Trustee;

(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;

(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, the Trustee 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 CTA 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 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, the Trustee and the Surety Provider shall have received an opinion of counsel to each of the Custodian and the Trustee covering certain corporate and enforceability matters, in form and substance satisfactory to the Agent and the Surety Provider;

(j)            each Managing Agent, the Agent and the Trustee shall have received an opinion of the Vice President and Assistant General Counsel to the Surety Provider covering certain corporate and enforceability matters, 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 Trustee 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 or participation has been assigned, it has been released) and has the right to Grant each such Account to the Trustee, 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 Trustee all of its right, title, and interest in and to each Account Granted to the Trustee by it to secure the VFN and the amounts owed hereunder;

(iv)          the information set forth in the Schedule of Accounts delivered to the Custodian, the Trustee 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 Custodian within the time periods specified in Section 3.1 of the CTA 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 CTA 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, the Trustee and the Custodian 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 Trustee created by the CTA 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;

(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 $125,000,000, 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 31st 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.

(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.

(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, the Trustee, the Custodian, 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 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 CTA 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 Trustee 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.

(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 CTA Agreement to be impaired, or permit the lien of the CTA 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 CTA 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 CTA 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 Trustee UCC financing statements, executed by the Borrower, necessary to reflect such change and to continue the perfection of the Trustee’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.

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 Trustee, 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 15th 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;

(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.

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 Trustee 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 Trustee by this Loan Agreement, the CTA Agreement or any other Operative Document or by law, by such appropriate actions and proceedings as the Trustee 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 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 Trustee, 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;

(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 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 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:

(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 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 CTA 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 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 CTA 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 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.
214 N. Tryon Street
Charlotte, North Carolina  28255
Attention:  Margaux Lucas
Telephone:  (704) 387-7778
Telecopy:  (704) 409-0594

(with a copy to the related Managing Agent)

Atlantic Asset Securitization LLC
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

(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 Trustee:

The Bank of New York
101 Barclay Street, 8 West
New York, New York 10286
Attention:  Corporate Trust Administration - Mid-State Trust IX
Telephone:  (212) 815-6140
Telecopy:  (212) 815-3986

If to the Custodian:

Treasury Bank, a division of Countrywide Bank, N.A.
4100 E. Los Angeles Ave.
Simi Valley, CA 93063
Attention:  Teresita Que
Telephone:  (805) 577-6028
Telecopy:  (805) 577-6069

If to the Agent, Managing Agent or Bank Investor:

Bank of America, N.A.
214 North Tryon Street
Charlotte, NC  28255
Attention: Margaux Lucas
Telephone:  (704) 387-7778
Telecopy:  (704) 409-0594

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 LLC
Account No. 01-25680-0001-00-001
Attention:  Elaine Constantine

If to the Surety Provider:

Ambac Assurance Corporation.
One State Street Plaza, 19th 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 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 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 Trustee.  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 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 Trustee, the Custodian, 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, the Trustee and the Custodian 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 obtained solely due to its participation in the transactions connected to this Loan Agreement 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.

(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 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 Trustee 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 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 CTA 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.

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 LLC is a

Delaware limited liability company and that all obligations which Atlantic Asset Securitization LLC 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 LLC.

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 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 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 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

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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 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

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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.

Section 9.12.          Limited Waiver.

(a)           (a)           Pursuant to Section 6.1(e) of the Loan Agreement, an Event of Default shall occur upon the default by the Borrower in the performance of any material covenant or undertaking  to be performed or observed by the Borrower under any provision of the Loan Agreement.  The Borrower hereby informs the Agent, the Surety Provider and each Managing Agent of the failure to comply with the requirement of Section 5.1(l)(i) that the Borrower shall furnish to the Agent, the Surety Provider and each Management Agent copies of the form of each proposed amendment to the Trust Agreement, the Master Servicing Agreement or the Subservicing Agreement at least sixty (60) days prior to the proposed date of adoption of any such proposed amendment (the “Sixty Day Notice Event”).  The Borrower hereby requests that the Agent, the Surety Provider and each Managing Agent waive any Event of Default occurring as a result of such Sixty Day Notice Event.  Subject to the following, the Agent, the Surety Provider and each Managing Agent hereby waives such Event of Default.

(b)           Other than as provided in subsection (a) above, each of the Agent, the Surety Provider and Managing Agents has not waived, is not by this Section 9.12 waiving, and has no intention of waiving, any Event of Default which may be continuing on the date hereof  and, other than as provided in this Section 9.12, each of the Agent, the Surety Provider and the Managing Agents has not agreed to forbear with respect to any of its rights or remedies concerning any Event of Default which may have occurred or are continuing as of the date hereof or which may occur after the date hereof.  Each of the Agent, the Surety Provider and Managing Agents reserves the right, in its sole discretion, to exercise any or all of its rights and remedies under this Loan Agreement and the other Transaction Documents as a result of any other Event of Default (other than as described herein) which may be continuing on the date hereof or any Event of Default which may occur after the date hereof, and each of the Agent, the Surety Provider and Managing Agents has not waived any of such rights or remedies, and

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nothing in this Loan Agreement, and no delay on its part in exercising any such rights or remedies, should, or shall, be construed as a waiver of any such rights or remedies.

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) 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

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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.  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 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

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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 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.

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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 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

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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.

[remainder of page intentionally left blank]

[Signature pages omitted]

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EX-10.13

EXHIBIT 10.13
EXECUTION VERSION

AMENDED AND RESTATED
VARIABLE FUNDING LOAN AGREEMENT

[THREE PILLARS]

dated as of June 15, 2006

among

THREE PILLARS FUNDING LLC,

the Lender,

MID-STATE TRUST XIV,

the Borrower,

TREASURY BANK,
A DIVISION OF COUNTRYWIDE BANK, N.A.,

the Custodian,

THE BANK OF NEW YORK,

as Trustee,

SUNTRUST CAPITAL MARKETS, INC.,

as the Agent, the Administrative Trustee and SunTrust Bank, as a Bank Investor

TABLE OF CONTENTS

		Page
	ARTICLE 1 GENERAL
Section 1.1.	Certain Defined Terms	2
Section 1.2.	Other Terms	2
Section 1.3.	Computation of Time Periods	3
	ARTICLE 2 AMOUNT AND TERMS OF COMMITMENT
Section 2.1.	Revolving Credit Facility.	3
Section 2.2.	Loan Requests.	3
Section 2.3.	Determination of Discount and Rate Periods.	5
Section 2.4.	Payment of Principal, Interest and Other Amounts.	8
Section 2.5.	Breach of Representation or Warranty	8
Section 2.6.	Mandatory and Optional Prepayments.	8
Section 2.7.	Proceeds	9
Section 2.8.	Pledged Accounts.	9
Section 2.9.	Payments and Computations, Etc.	10
Section 2.10.	Reports	11
Section 2.11.	Sharing of Payments, Etc	11
Section 2.12.	Right of Setoff	11
Section 2.13.	Assignment by Lender to Bank Investors.	11
Section 2.14.	Downgrade of Bank Investor.	12
Section 2.15.	Non-Renewing Bank Investors.	14
Section 2.16.	Commitment Renewal Request.	16
Section 2.17.	Interest Rate Protection Agreements.	16
	ARTICLE 3 REPRESENTATIONS AND WARRANTIES
Section 3.1.	Representations and Warranties of the Borrower	16
Section 3.2.	Reaffirmation of Representations and Warranties by the Borrower	19
	ARTICLE 4 CONDITIONS PRECEDENT
Section 4.1.	Conditions to Effectiveness	19
Section 4.2.	Conditions to Each Loan	19

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	ARTICLE 5 COVENANTS
Section 5.1.	Affirmative Covenants of Borrower	21
Section 5.2.	Negative Covenants of Borrower	24
	ARTICLE 6 EVENTS OF DEFAULT AND FACILITY TERMINATION EVENTS
Section 6.1.	Events of Default	26
Section 6.2.	Facility Termination Events	27
Section 6.3.	Remedies	28
	ARTICLE 7 INDEMNIFICATION; EXPENSES; RELATED MATTERS
Section 7.1.	Indemnities by the Borrower	28
Section 7.2.	Indemnity for Taxes, Reserves and Expenses	30
Section 7.3.	Taxes	33
Section 7.4.	Other Costs and Expenses; Breakage Costs	36
Section 7.5.	Payment	37
	ARTICLE 8 MISCELLANEOUS
Section 8.1.	Term of Agreement	37
Section 8.2.	Waivers; Amendments	37
Section 8.3.	Notices	38
Section 8.4.	Governing Law; Submission to Jurisdiction; Integration	40
Section 8.5.	Severability; Counterparts	41
Section 8.6.	Successors and Assigns	41
Section 8.7.	Waiver of Confidentiality	43
Section 8.8.	Confidentiality Agreement	43
Section 8.9.	Liability of Owner Trustee	43
Section 8.10.	No Bankruptcy Petition Against the Lender	44
Section 8.11.	No Recourse Against Lender	44
Section 8.12.	Assignment by Lender to Conduit Assignee	44
Section 8.13.	Assignment by Lender to Program Support Provider	45
	ARTICLE 9 THE AGENT
Section 9.1.	Appointment and Authorization of Agent	45
Section 9.2.	Delegation of Duties	46
Section 9.3.	Liability of Agent	46
Section 9.4.	Reliance by Agent	46
Section 9.5.	Notice of Potential Event of Default, Event of Default Facility, Termination Event or Servicer Default	47

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Section 9.6.	Credit Decision; Disclosure of Information by the Agent	47
Section 9.7.	Indemnification of the Agent	48
Section 9.8.	Agent in Individual Capacity	48
Section 9.9.	Resignation of Agent	49
Section 9.10.	Payments by the Agent	49
Section 9.11.	Notification by Agent	49
Section 9.12.	Limited Waiver	49
Exhibit A - Form of Variable Funding Note		Exhibit A-1
Exhibit B - Form of Borrowing Request		Exhibit B-1
Annex A - Definitions		A-1

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AMENDED AND RESTATED VARIABLE FUNDING LOAN AGREEMENT

[THREE PILLARS]

AMENDED AND RESTATED VARIABLE FUNDING LOAN AGREEMENT (this “Loan Agreement”), dated as of June 15, 2006, by and among THREE PILLARS FUNDING LLC, a Delaware limited liability company (together with its successors and assigns, the “Lender”), MID-STATE TRUST XIV, a Delaware statutory trust, as borrower (the “Borrower”), TREASURY BANK, A DIVISION OF COUNTRYWIDE BANK, N.A., as custodian (the “Custodian”), THE BANK OF NEW YORK, a New York banking institution, as trustee (the “Trustee”) and SUNTRUST CAPITAL MARKETS, INC., a Tennessee corporation, as agent and administrative trustee (in such capacities, the “Agent” and “Administrative Trustee”), and SUNTRUST BANK, as a bank investor (in such capacity, a “Bank Investor”).

PRELIMINARY STATEMENTS

WHEREAS, the Borrower was established pursuant to the Trust Agreement dated as of February 3, 2005, as amended or modified from time to time, including the Amended and Restated Trust Agreement dated as of the date hereof;

WHEREAS, the Lender, the Borrower, the Agent and Wachovia Bank, National Association, as custodian/collateral agent are parties to that certain Variable Funding Loan Agreement, dated as of February 4, 2005 (the “Existing Loan Agreement”);

WHEREAS, Wachovia Bank, National Association has resigned its role as custodian and collateral agent pursuant to the provisions of the Custodian/Trustee Agreement, dated as of the date hereof (the “CTA Agreement”), and Treasury Bank has accepted its appointment as custodian thereunder and The Bank of New York has accepted its appointment as trustee thereunder.

WHEREAS, on the Closing Date, and from time to time pursuant to the Amended and Restated 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 Amended and Restated 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 CTA Agreement and as collateral security for its obligations under this Loan Agreement and the Variable Funding Note, 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, the Back-up 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 Trustee for the benefit of the Secured Parties and to take such other steps

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as set forth in the CTA Agreement to create and perfect a first lien in all such rights in favor of the Trustee, for the benefit of the Secured Parties;

WHEREAS, the Borrower has requested that the Lender 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 a Variable Funding Note, the proceeds of which will be used to purchase the Accounts;

WHEREAS, it is the intent of the parties hereto that the execution and delivery of this Loan Agreement, made for the purposes described in these Preliminary Statements, not effectuate a novation of Borrower’s obligations outstanding under the Existing Loan Agreement, but rather a substitution of certain of the terms governing the payment and performance of such indebtedness;

WHEREAS, Wachovia Bank, National Association served as custodian and collateral agent pursuant to the Custodian/Collateral Agent Agreement, dated February 4, 2005; and

WHEREAS, subject to the terms and conditions set forth herein, the Bank Investors are willing to make the Loans to the Borrower;

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 that the Existing Loan Agreement is hereby amended and restated in its entirety 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

2

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.”

ARTICLE 2

AMOUNT AND TERMS OF COMMITMENT

Section 2.1.            Revolving Credit Facility.

(a)           Subject to the terms and conditions hereof, on the Closing Date, and thereafter from time to time until the Facility Termination Date, upon the request of the Borrower in accordance with Section 2.2 hereof, the Lender may, in its sole discretion, or the Bank Investors shall, make loans to the Borrower (each, a “Loan”) from time to time as permitted by this Loan Agreement in an aggregate amount outstanding at any time not to exceed the Maximum Net Investment; provided, however, that in no event shall the Lender or 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.

(b)           Variable Funding Note.  The Loans shall be evidenced by a promissory note of the Borrower, substantially in the form of Exhibit A hereto (the “VFN” or “Variable Funding Note”), payable to the order of the Agent for the account of the Lender or Bank Investors, as applicable.  The 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.  The 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 2.4 and Section 2.6 hereof.

Section 2.2.            Loan Requests.

(a)           Notice.  Prior to the Facility Termination Date, the Borrower may request Loans on any Business Day by delivering to the 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

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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 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); provided; however, that from and after the Interest Rate Protection Date, the amount of each Loan shall be the greater of (i) $1,000,000 (and integral multiples of $100,000 in excess thereof) and (ii) the minimum amount, if any, required under the Interest Rate Protection Agreement; provided, that 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 2.3 and (d) whether the request is to the Lender or the Bank Investors.  Each Borrowing Request shall be irrevocable and binding on the Borrower and the Borrower shall indemnify the Lender, the Bank Investors and the Agent against any loss, cost or expense incurred by the Lender, any Bank Investor 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, cost or expense incurred by the Lender, the Bank Investors or the Agent, either directly or through any Program Support Agreement, by reason of the liquidation or reemployment of funds acquired by the Lender, the Bank Investors, the Agent or the 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 Lender to fund such borrowing.

(b)           Lender Acceptance or Rejection.  The Agent will promptly notify the Lender of the Agent’s receipt of any Borrowing Request.  If the Borrowing Request is received prior to the Lender Investment Termination Date, the Lender, in its sole discretion, shall instruct the Agent to accept or reject such Borrowing Request by notice given to the Borrower and the Agent by telephone or facsimile by no later than the close of business on the Business Day the Lender receives any such Borrowing Request.

(c)           Bank Investor’s Commitment.  At no time will the Lender have any obligation to fund a Loan.  Subject to the conditions set forth herein, at all times on and after the Lender Investment Termination Date and prior to the Facility Termination Date, all Loans shall be made by the Bank Investors.  At any time when the Lender has rejected a request for a Loan, the Agent shall so notify the Bank Investors 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 2.2(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 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.

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(d)           Payment of Loans.  On any Loan Date, the Lender or each Bank Investor, as the case may be, shall remit its share of the aggregate amount of such Loan (determined pursuant to Section 2.2(b) and (c) hereof) to the account of the Agent specified therefore from time to time by the Agent by notice to such Persons by wire transfer of same day funds. Following the Agent’s receipt of funds from the Lender or Bank Investors as aforesaid, the 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)           Defaulting Bank Investor.  If, by 2:00 p.m. (New York City time) on any Loan Date, 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 2.2(d) or any Assignment Amount payable by it pursuant to Section 2.13(a) (the aggregate amount not so made available to the Agent being herein called in either case the “Loan Deficit”), then the 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 the 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 the 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 Agent, for the account of the 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 Assignment Date until the date such Defaulting Bank Investor shall pay its portion of such remaining Loan Deficit in full to the Lender.

Section 2.3.            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 2.3.  At any time, each Tranche shall have only one Rate Period and one Rate Type.  In addition, at any time when the Net Investment is not divided into more than one portion, “Tranche” means 100% of the Net Investment.

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(ii)The Borrower shall give the 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 the 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) the 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 Lender, the Agent, the Administrative Trustee or the Bank Investors.

(iii)The Lender confirms that 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 the Agent may determine, from time to time, in its sole 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.

(b)           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 the Agent, and Discount with respect thereto shall be calculated by reference to the Alternate Rate.

(c)           Offshore Rate Protection; Illegality.

(i)If the Agent is unable to obtain on a timely basis the information necessary to determine the Offshore Rate for any proposed Rate Period, then

(A)          the Agent shall forthwith notify the Lender or the Bank Investors, as applicable, and the Borrower that the Offshore Rate cannot be determined for such Rate Period, and

(B)           while such circumstances exist, the Agent shall not allocate any Tranches with respect to Loans made during such period or reallocate any

6

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 Lender or any of the Bank Investors on behalf of which the Agent holds any Tranche notifies the 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) the Agent shall forthwith so notify the Borrower, the Lender and the Bank Investors and (B) upon such notice and thereafter while such circumstances exist, the Agent shall not 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 Lender or any of the Bank Investors, as applicable, shall notify the Agent 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 the 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 the 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 the Lender or such Bank Investor, as applicable, to 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 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

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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.

Section 2.4.            Payment of Principal, Interest and Other Amounts.

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 Fee Letter, the VFN and the CTA Agreement.  Without limiting the foregoing, the Borrower will cause to be delivered to the Trustee all amounts on deposit in the Holding Account when and as required by the Master Servicing Agreement for application as provided in the CTA 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 Fee Letter, the VFN and the CTA Agreement to the parties entitled thereto in accordance with the terms hereof and in the manner and order of priority provided in the CTA Agreement.

Section 2.5.            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 Trustee, 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 CTA 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 CTA 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)(vii) of the CTA Agreement.

(b)           Prior to the Facility Termination Date, upon the occurrence of a Borrowing Base Deficiency, the Borrower shall either: (i) within three (3) Business Days (the “Deficiency Cure Period”) deliver or cause to be delivered additional Eligible Accounts to the Trustee 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

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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 CTA 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 CTA Agreement, which may be used by the Borrower for such purpose.

(c)           The Borrower shall have the right on any date, upon written notice to the 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, except for Available Collections otherwise distributable to the Borrower pursuant to Section 4.1(d) of the CTA Agreement, which may be used by the Borrower for such purpose.

(d)           The Agent agrees that amounts paid to the Agent from amounts deposited in the Principal Payment Account pursuant to the provisions of the CTA Agreement shall be applied 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 Agent, in its sole discretion (except with respect to amounts deposited prior to the Facility Termination Date pursuant to Section 2.6(c) 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 the Agent from the Principal Payment Account.

(e)           The entire principal balance of the VFN shall be due and payable on the 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 Trustee shall establish, on or prior to the Closing Date, an Eligible Bank Account (No. 261621) at the Trustee in the name of the Trustee (the “Collection Account”), bearing a designation clearly indicating that the funds deposited therein are held for the benefit of the Secured Parties.

(b)           The Trustee shall establish, on or prior to the Closing Date, an Eligible Bank Account (No. 261622) at the Trustee in the name of the Trustee (the “Reserve Account”) bearing a designation clearly indicating that the funds deposited therein are for the benefit of the Secured Parties.

(c)           The Trustee shall establish, on or prior to the Closing Day, an Eligible Bank Account (No. 8900624213) at the Account Bank for the benefit of the Master Servicer (the

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“Holding Account”) bearing a designation clearly indicating that the funds deposited therein are for the benefit of the Secured Parties.

(d)           The Trustee shall establish, on or prior to the Closing Date, an Eligible Bank Account (No. 8900624183) at the Agent in the name of the Lender (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 Account or the Holding Account shall no longer be an Eligible Bank Account, then the Borrower shall, within ten (10) Business Days (or such longer period, not to exceed thirty (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 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 the 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, the Borrower shall calculate and deliver to the Agent the APB, AMV and the Borrowing Base (each, a “Borrowing Base Report”), using in the case of the AMV, the Market Discount Rate supplied by the Agent.  Neither the Lender, any Bank Investor 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 CTA 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 Agent, on behalf of the 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 Agent.  The Borrower shall, to the extent permitted by Law, pay to the Agent, for the benefit of the Lender 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 4.1(d) of the CTA 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 Agent of amounts payable by the Borrower hereunder shall be binding upon the Borrower absent manifest error.

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Section 2.10.          Reports.  On each Determination Date, the Borrower shall cause the Master Servicer to provide to the Agent (a) the Master Servicing 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 Agent may reasonably request.

Section 2.11.          Sharing of Payments, Etc.  If the 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 Fee Letter, Section 2.15(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 Lender 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.

Section 2.12.          Right of Setoff.  Without in any way limiting the provisions of Section 2.11, each of the Agent, the 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 Agent, the Lender or such Bank Investor to, or for the account of, the Borrower.  The Agent shall cause any amounts so set-off to be deposited in the Collection Account, for application by the Trustee in accordance with Section 4.1(d) of the CTA Agreement.

Section 2.13.          Assignment by Lender to Bank Investors.

(a)           Assignment Amounts.  At any time on or prior to the Scheduled Termination Date, if the Administrative Trustee on behalf of the Lender so elects, by written notice to the Agent, the Borrower hereby irrevocably requests and directs that the Lender assign, and the Lender does hereby assign, effective on the Assignment Date referred to below, all or such portions as may be elected by the Lender of its interest in the Net Investment at such time to the Bank Investors pursuant to this Section 2.13 and the Borrower hereby agrees to pay the amounts described in this Section 2.13; provided, however, that unless such assignment is an assignment of all of the Lender’s interest in the Net Investment in whole on or after the Lender Investment Termination Date, no such assignment shall take place pursuant to this Section 2.13 if a Borrowing Base Deficiency shall then exist; and provided, further, that no such assignment

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shall take place pursuant to this Section 2.13 at a time when an Event of Bankruptcy with respect to the Lender exists.  No further documentation or action on the part of the 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 Administrative Trustee on behalf of the 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 Lender in immediately available funds to an account designated by the 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 the Lender to the Bank Investors on or after the Lender Investment Termination Date as contemplated hereunder, the Lender shall cease to make any additional Loans hereunder.  At all times prior to the Lender Investment Termination Date, nothing herein shall prevent the Lender from making a subsequent Loan hereunder, in its sole discretion, following any assignment pursuant to this Section 2.13 or from making more than one assignment pursuant to this Section 2.13.

(b)           Bank Investor’s Obligation to Pay Certain Amounts; Additional Assignment Amount.  The Bank Investors shall pay to the Agent, in accordance with their Pro Rata Shares, for the account of the Lender, in connection with any assignment by the Lender to the Bank Investors pursuant to this Section 2.13 an aggregate amount equal to 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)           Administration of Agreement after Assignment from Lender to Bank Investors following the Lender Investment Termination Date.  After any assignment in whole by the Lender to the Bank Investors pursuant to this Section 2.13 at any time on or after the Lender Investment Termination Date (and the payment of all amounts owing to the Lender in connection therewith), all rights of the Administrative Trustee set forth herein shall be given to the Agent on behalf of the Bank Investors instead of the Administrative Trustee.

(d)           Recovery of Net Investment.  In the event that the aggregate of the Assignment Amounts paid by the Bank Investors pursuant to this Section 2.13 on any Assignment Date occurring on or after the Lender Investment Termination Date is less than the Net Investment of the 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 CTA Agreement exceed the aggregate of the unrecovered Assignment Amounts and Net Investment funded by the Bank Investors, such excess shall be remitted by the Agent to the Lender rather than to such Bank Investors.

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Section 2.14.          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-1” or “P-1” 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-1” or “P-1” from S&P or Moody’s, respectively, and which shall not be so rated with negative credit implications and which is acceptable to the Lender, the 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-2” or “P-2”, 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 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-1” or “P-1”, from S&P or Moody’s, respectively, and which shall not be so rated with negative credit implications and which is acceptable to the Lender, the 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”), the Administrative Trustee on behalf of the 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 Agent an amount equal to such Bank Investor’s unused Commitment (a “Downgrade Draw”) for deposit by the Agent into an account, in the name of the Agent (a “Downgrade Collateral Account”), which shall be in satisfaction of such Bank Investor’s obligations to make Loans and to pay its Assignment Amount upon an assignment from the Lender in accordance with Section 2.13; provided, however, that if, during the Required Downgrade Assignment Period, such Bank Investor delivers a written notice to the 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 Agent such notice, then such Bank Investor shall, within one (1) Business Day after the Required Downgrade Assignment Period, deliver to the Agent a direct pay irrevocable letter of credit in favor of the 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 Lender and the Agent.  Such letter of credit shall provide that the 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 the Agent.

(b)           Application of Funds in Downgrade Collateral Account.  If any Bank Investor shall be required pursuant to Section 2.14(a) to fund a Downgrade Draw, then the 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 2.13 and to any purchase price payable by such Bank Investor pursuant to Section 2.15(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

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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 2.14, 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 2.15(b) pursuant to the first sentence of this Section 2.14.  The amount on deposit in such Downgrade Collateral Account shall be invested by the Agent in Eligible Investments and such Eligible Investments shall be selected by the Agent in its sole discretion.  The 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 the 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 (1) 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 Lender 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 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 Agent with confirmation that such Bank Investor shall have short-term debt ratings of at least “A-1” or “P-1” 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 2.15 to which such Bank Investor does not consent, but only after giving effect to any required purchase pursuant to Section 2.15(b)).  Nothing in this Section 2.14 shall affect or diminish in any way any such downgraded Bank Investor’s Commitment to the Borrower or the 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 2.14, 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 2.14(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 Agent may apply monies in such downgrade collateral account in the manner described in Section 2.15(b) as if such downgrade collateral account were a Downgrade Collateral Account.

Section 2.15.          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 thirty (30) days of the Borrower’s request, but in any event, no later than twenty (20) days prior to the then current Scheduled Termination Date, the Borrower may arrange for an

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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 and the Agent 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 product of (x) the Facility Limit, minus the Net Investment, multiplied by (y) 1.02, 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 thirty (30) days after the Borrower’s request (but in any event, no later than twenty (20) days 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 2.15 and the Borrower 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 2.13, 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 CTA 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 CTA 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

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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 2.16.          Commitment Renewal Request.

Except in the case of an early renewal as agreed upon by the Borrower and the Agent, the Borrower may, not earlier than one hundred twenty (120) days or later than sixty (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 thirty (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.

Section 2.17.          Interest Rate Protection Agreements.

Borrower agrees that (i) from and after the occurrence of an Interest Rate Protection Date, it shall provide to the Agent for the benefit of the Lender and the Bank Investors promptly, and in any event not later than three (3) Business Days after such Interest Rate Protection Date, an Interest Rate Protection Agreement and (ii) prior to the execution of any Interest Rate Protection Agreement at any other time, it shall provide a copy of the proposed Interest Rate Protection Agreement to the Agent for approval.  Any such Interest Rate Protection Agreement shall be provided and maintained at the Borrower’s sole cost and expense from funds other than Collections.

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 statutory 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 Documents 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,

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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 created or 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 and timely 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 Trustee, 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 Trustee 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 Lender, any Bank Investor, the Agent or the Administrative Trustee for purposes of or in connection with this Loan Agreement or any transactions contemplated hereby is, and all such information hereafter furnished by the Borrower to the Lender, any Bank Investor, the Agent or the Administrative Trustee will be, true and accurate in every material respect on the date such information is stated or certified.

(g)           Tax Status.  The Borrower has timely filed all tax returns (federal, state, and local) required to be filed and has timely 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 Custodian.

(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

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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, any Obligor, the Depositor, the Originator or any 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 Fees withdrawn pursuant to Section 2.15 of the Master Servicing Agreement) on the Accounts to be purchased with the proceeds of a Loan due after the applicable Cut-Off Date and received more than three (3) 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 (3) Business Days prior to the Loan Date, will have been  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 Administrative Trustee under this Loan Agreement shall be deemed a representation and warranty by the Borrower.

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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 date hereof, the Agent shall have received the following documents, each of which shall be in a form and substance acceptable to each of them, or the following actions shall have occurred:

(a)           the Agent, the Custodian and the Trustee shall have received an Opinion of Counsel to each of the Custodian and the Trustee, in form and substance satisfactory to the Agent;

(b)           (i) the Agent, the Custodian and the Trustee shall have received this Loan Agreement, the BAT Agreement, the DAT Agreement, the Master Servicing Agreement, the Back-up Servicing Agreement, the Subservicing Agreement and the CTA Agreement, duly executed by the parties thereto; and

(c)           the Agent shall have received such other approvals, documents, instruments, certificates and opinions as it 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)           the Agent shall have received an Officers’ Certificate 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

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(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 Trustee, 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 Trustee all of its right, title, and interest in and to each Account Granted to the Trustee by it to secure the VFN and the amounts owed hereunder;

(iv)the information set forth in the Schedule of Accounts delivered to the Custodian, the Trustee and the Agent is correct in all material respects;

(v)(A) no Material Adverse Effect shall have occurred in the affairs of (I) the Borrower since the date of its formation or (II) the Master Servicer since April 1, 2004 and (B) no material adverse change has occurred in the value of any Account since the date of origination of such Account; 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 Custodian within the time periods specified in Section 3.1 of the CTA 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 (3) 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 Master Servicer may deliver a trust receipt pursuant to Section 3.2 of the CTA Agreement;

(c)           the Borrower shall have delivered a Borrowing Request to the Agent pursuant to Section 2.2 hereof;

(d)           the Agent, the Custodian and the Trustee shall have received the Schedule of Accounts relating to the Accounts to be purchased with the proceeds of such Loan;

(e)           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 Trustee created by the CTA 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

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have received evidence of such filings, notifications, consents and recordings satisfactory in form and substance to the Agent;

(f)            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 sixty (60) days or more as of the last day of any month preceding the Borrowing Date;

(l)            no more than 10% of the Accounts to be purchased by the Borrower may be in arrears for 30-59 days as of the last day of any month preceding such Borrowing Date;

(m)          if the Interest Rate Protection Date has occurred, the Borrower has delivered to the Agent an Interest Rate Protection Agreement;

(n)           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

(o)           on such date, the weighed average FICO score of all Eligible Accounts, after giving effect to all Eligible Accounts to be added on such date, shall be greater than 530.

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:

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(a)           Agreed Upon Procedures Report.  Prior to the date one year from the Closing Date and on each anniversary thereafter beginning in calendar year 2006, the Borrower shall deliver to the Agent, at its expense, 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.

(b)           Other Information.  The Borrower shall deliver to 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 the Agent may from time to time reasonably request.

(c)           Compliance Certificate.  The Borrower shall deliver to the Agent within ninety (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 (2) 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 the Agent 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 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 Back-up 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 statutory 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 the Agent from time to time such information with respect to the Accounts as the

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Agent 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.

(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 the Agent 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, the Agent 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 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 Custodian, the Trustee and the Agent copies of the form of each proposed amendment to the Trust Agreement, the Master Servicing Agreement, the Back-up Servicing Agreement or the Subservicing Agreement at least sixty (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.

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(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 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 (2) 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 the Agent.

(o)           Due Diligence Review.  Prior to February 4th of each calendar year, the Borrower shall complete, at its expense, a Due Diligence Review 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 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 CTA 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 Trustee shall have the same rights with respect thereto as it has with respect to the insurance required by the Master Servicing Agreement.

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(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.

(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 CTA Agreement to be impaired, or permit the lien of the CTA 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 created or permitted by the Operative Documents, permit any lien, charge, security interest, mortgage or other encumbrance (other than the lien of the CTA 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 CTA 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 ten (10) days prior to the effective date of any such change the Borrower delivers to the Trustee UCC financing statements, executed by the Borrower, necessary to reflect such change and to continue the perfection of the Trustee’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 it is maintained on the Closing Date, except as permitted in accordance with Section 2.8.

(l)            Successor Master Servicer and Back-up Servicer.  The Borrower shall not permit any change of master servicer or back-up servicer, except in accordance with the Master Servicing Agreement or the Back-up Servicing Agreement, as applicable.

(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.

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(n)           No Debt.  The Borrower shall not incur any debt except as contemplated by the Operative Documents.

(o)           Amendments.  Neither the Borrower nor the Master Servicer will amend, modify, supplement restate or replace any of the Trust Agreement, the Master Servicing Agreement, the Backup Servicing Agreement or the Subservicing Agreement or any provision of any of the foregoing without the prior written consent of the Agent.

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 Trustee, for the benefit of the Secured Parties, shall 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;

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(i)            The amount on deposit in the Reserve Account fails to reach the Specified Reserve Account Requirements on or prior to the fifteenth (15th) Remittance Date following the Closing Date or on or prior to the sixth (6th) Remittance Date following a Reserve Account Event; provided that 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;

(j)            The Delinquency Ratio with respect to the Accounts owned by the Borrower averaged for any three (3) 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 (3) 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; and

(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;

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(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.

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 Trustee 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 Trustee by this Loan Agreement, the CTA Agreement or any other Operative Document or by law, by such appropriate actions and proceedings as the Trustee 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 Lender and any commercial paper issuer that finances the Lender, the Bank Investors, the Agent, the Administrative Trustee 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 Lender and any commercial paper issuer that finances the Lender or the Administrative Trustee, as applicable) and disbursements (all of the foregoing being collectively referred to as “Indemnified

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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 Lender (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 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 Trustee, 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)            reserved;

(g)           reserved;

(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;

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(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;

(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 market 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

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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 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,

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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 Agent, the Borrower shall pay to the 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 Lender, 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 after demand by such Indemnified Party through the Agent, the Borrower shall pay to the 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 Lender, 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 Lender or other Indebtedness of the Lender) 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 the Lender enters into agreements for the acquisition of interests in receivables from one or more Other Transferors, the 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, the Master Servicer or the Back-up 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

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Originator, the Master Servicer or the Back-up 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)           Any and all payments by the Borrower under or in respect of this Loan Agreement or any other related document to which the Borrower is a party shall be made free and clear of, and without deduction or withholding for or on account of, any and all present or future income, excise, stamp, or franchise taxes and any other taxes, levies, fees, duties, imposts, deductions, charges or withholdings, and all liabilities (including penalties, interest and additions to tax) with respect thereto, whether now or hereafter imposed, levied, collected, withheld or assessed by any taxation authority or other Governmental Authority (collectively, “Taxes”), unless required by law.  If the Borrower shall be required under any applicable law to deduct or withhold any Taxes from or in respect of any sum payable under or in respect of this Loan Agreement or any of the other related documents to an Indemnified Party, then the Borrower shall:

(i) make all such deductions and withholdings in respect of the Taxes;

(ii) pay directly to the relevant Government Authority the full amount required to be deducted or withheld in respect of such Taxes in accordance with applicable law; and

(iii) pay to the applicable Indemnified Party such additional amount or amounts as necessary to ensure that the net amount actually received by the recipient will equal the full amount such Indemnified Party would have received had no withholding or deduction for Taxes other than Excluded Taxes been required (including deductions and withholdings applicable to additional sums payable under this Section 7.3(a)).

For purposes of this Loan Agreement, “Excluded Taxes” shall mean franchise taxes, branch profits taxes and taxes imposed on or measured by the Indemnified Party’s net income or gross receipts.

Moreover, if any Taxes are directly asserted against any Indemnified Party with respect to any payment received by such Indemnified Party hereunder, the Indemnified Party may pay such Taxes and the Borrower will promptly pay such additional amounts (including any related penalties, interest or expenses) as shall be necessary in order that the net amount received by the Indemnified Party after the payment of such Taxes (including any Taxes on such additional amount) shall equal the amount such Indemnified Party would have received had such Taxes not been asserted.

If the Borrower fails to pay any Taxes when due to the appropriate taxing authority or fails to remit to the applicable Indemnified Party the required receipts or other required documentary evidence, the Borrower shall indemnify the applicable Indemnified Party for any incremental Taxes, interest, or penalties that may become payable by any Indemnified Party as a result of any such failure.

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(b)           In addition, the Borrower hereby agrees to pay any present or future stamp, recording, documentary, excise, property or similar taxes, charges or levies that arise from any payment made under or in respect of this Loan Agreement or any other related documents or from the execution, delivery or registration of, any performance under, or otherwise with respect to, this Loan Agreement or any other related documents (collectively, “Other Taxes”).

(c)           The Borrower hereby agrees to indemnify the applicable Indemnified Parties for, and to hold the applicable Indemnified Parties harmless against, the full amount of Taxes and Other Taxes, and the full amount of Taxes of any kind imposed by any jurisdiction on amounts payable under this Section 7.3, imposed on or paid by such Indemnified Party, as the case may be, and any liability (including penalties, additions to tax, interest and expenses) arising therefrom or with respect thereto.  The indemnity by the Borrower provided for in this Section 7.3 shall apply and be made whether or not the Taxes or Other Taxes for which indemnification hereunder is sought have been correctly or legally asserted.  Amounts payable by the Borrower under the indemnity set forth in this Section 7.3 shall be paid within 30 days from the date on which the applicable Indemnified Party makes written demand therefore.

(d)           Within 30 days after the date of any payment of Taxes or Other Taxes, the Borrower (or any Person making such payment on behalf of Borrower) shall furnish to the applicable Indemnified Party a certified copy of the original official receipt evidencing payment thereof.

(e)           Each Indemnified Party that either (i) 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 or (ii) whose name does not include “Incorporated,” “Inc.,” “Corporation,” “Corp.” “P.C.,” “insurance company’” or “assurance company” (each, a “Non-Exempt Party”) shall deliver or caused to be delivered to the Borrower and the Agent the following properly completed and duly executed documents;

(i)two properly completed and executed (x) U.S. Internal Revenue Forms W-8BEN (or any successor forms thereto) with respect to an income tax treaty providing for a reduced or a zero rate of withholding tax on interest, or (y) U.S. Internal Revenue Service Forms W-8ECI (or any successor forms thereto);

(ii)(x) two properly completed and executed U.S. Internal Revenue Service Forms W-8BEN (or any successor forms thereto), including all appropriate attachments, documenting the status of such Indemnified Party as a Non-U.S. Person or (y) a properly completed and executed U.S. Internal Revenue Service Form W-8IMY (with all appropriate attachments) (or any successor forms thereto);

(iii)two properly completed and executed (x) Internal Revenue Service Forms W-9 (or any successor forms thereto), including all appropriate attachments or (y) if such Non-Exempt Party is disregarded for federal income tax purposes, the documents that would be required by clause (i), (ii), (iii), or (iv) with respect to its

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beneficial owner if such beneficial owner were the applicable Indemnified Party; or

(iv)two properly completed and executed (x) Internal Revenue Service Forms W-8IMY (or any successor forms thereto) (including all required documents and attachments) and (y) without duplication, with respect to each of its beneficial owners and the beneficial owners of such beneficial owners looking through chains of owners to individuals or entities that are treated as corporations for U.S. federal income tax purposes (all such owners, “beneficial owners”), the documents that would be required by clause (i), (ii), (iii), and/or (iv) with respect to each such beneficial owner if such beneficial owner were the applicable Indemnified Party; provided, however, that no such documents will be required with respect to a beneficial owner to the extent the actual Indemnified Party is determined to be in compliance with the requirements for certification on behalf of its beneficial owner as may be provided in applicable U.S. Treasury Regulations, or the requirements of this clause (iv) are otherwise determined to be unnecessary, all such determinations under this clause (iv) to be made in the reasonable discretion of Borrower.

Such documents shall be delivered by each Indemnified Party on or before the date it becomes a party to this Loan Agreement and on or before the date, if any, such Indemnified Party changes its Applicable Lending Office by designating a different lending office.  In addition, each Indemnified Party 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 Indemnified Party.  Notwithstanding any other provision of this Section 7.3, no Indemnified Party shall be required to deliver any document pursuant to this Section 7.3 that such Indemnified Party is not legally able to deliver.

(f)            For any period with respect to which any Indemnified Party has failed to provide the Borrower with the appropriate form, certificate or other document described in Section 7.3(e) (other than (i) if such failure is due to a change in any applicable law, or in the interpretation or application thereof, occurring after the date on which a form, certificate or other document originally was required to be provided, (ii) if such form, certificate or other document otherwise is not required under Section 7.3(e) or (iii) if it is legally inadvisable or otherwise commercially disadvantageous for such Indemnified Party to deliver such form, certificate or other document), such Indemnified Party shall not be entitled to payment or indemnification under Section 7.3(a), (b) or (c) with respect to Taxes imposed by the United States by reason of such failure. Should an Indemnified Party become subject to Taxes because of its failure to deliver a form, certificate or other document required by Section 7.3(e), the Borrower shall take such steps as such Indemnified Party shall reasonably request to assist such Indemnified Party in recovering such Taxes.

(g)           The Lender hereby agrees that, upon the occurrence of any circumstances entitling such Lender to additional amounts pursuant to this Section 7.3, such Lender shall use reasonable efforts (consistent with its internal policy and legal and regulatory restrictions), at the

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sole expense of the Borrower, to designate a different Applicable Lending Office if the making of such a change would avoid the need for, or materially reduce the amount of, any such additional amounts that may thereafter accrue and would not be, in the sole judgment of such Lender, legally advisable or commercially or otherwise disadvantageous to such Lender in any respect.

(h)           An applicable Indemnified Party shall take all reasonable actions (consistent with its internal policy and legal and regulatory restrictions) requested by Borrower to assist Borrower, as the case may be, at the sole expense of Borrower, to recover from the relevant taxation authority or other Governmental Authority any Taxes in respect of which amounts were paid by Borrower pursuant to Section 7.3(a), (b) or (c).  However, the applicable Indemnified Party will not be required to take any action that would not be, in the sole judgment of such Indemnified Party, legally advisable, or would be commercially or otherwise disadvantageous to such Indemnified Party in any respect, and in no event shall such Indemnified Party be required to disclose any tax returns or any other information that, in the sole judgment of such Indemnified Party, is confidential.

(i)            The Borrower shall not be required to indemnify any Indemnified Party or to pay any additional amounts to any Indemnified Party 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 Indemnified Party became a party to this Loan Agreement (unless such withholding would not occur if the forms and/or certificates in Section 7.3(e) were provided) or is incurred because of the merger or consolidation of the applicable Indemnified Party, after which such merger or consolidation the applicable Indemnified Party no longer exists.

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 Lender, the Bank Investors 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 the Lender, any Bank Investor and/or the Agent) or intangible, documentary or recording taxes incurred by or on behalf of the Lender, any Bank Investor 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 the Lender’s, any Bank Investor’s or the Agent’s enforcement or preservation of rights (including the perfection and protection of the Collateral under the CTA 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 Lender or the 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.

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(c)           The Borrower shall pay the Agent for the account of the 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 Lender 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 Lender 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 Agent 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 conclusive, absent manifest error and shall be accompanied by reasonably appropriate back-up materials with respect to such amounts.

(d)           The Lender, or its agent, shall maintain a register (the “Register”) on which it will record the Lender’s rights hereunder, and each Assignment and Assumption Agreement.  The Register shall include the names and addresses of the Lender (including all assignees and successors) and the percentage or portion of such rights and obligations assigned.

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 (ix) of the CTA 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 Agent, the Administrative Trustee, the Bank Investors or the Lender 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, the Administrative Trustee, any Bank Investor or the 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.

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(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 Agent, the Majority Investors and the Lender; 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).  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 (3) 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 Agent.  However, anything in this Section 8.3 to the contrary notwithstanding, the Borrower hereby authorizes the Agent, the Bank Investors and the Lender 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 the 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 Lender:

Three Pillars Funding LLC

303 Peachtree Street, 24th Floor
Atlanta, Georgia 30308

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Attention:  Robert S. Ashcom
Telephone:  (404)532-0304
Telecopy:  (404)813-5000

(with a copy to the Administrative Trustee)

If to the Borrower:

Mid-State Trust XIV
c/o Wilmington Trust Company, Owner Trustee
1100 North Market Street
Wilmington, Delaware 19890-1600
Attention:  Corporate Trust Administration
Telephone:  (302)651-1000
Telecopy:  (302)636-4140

Payment Information:

Bank:  Wachovia
ABA # :  063000021
Acct. Name: Mid-State Trust XIV
Acct. #:  2050000577196
Ref: Mid-State Trust XIV / Three Pillars Funding LLC

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 Trustee:

The Bank of New York
101 Barclay Street, 8 West
New York, New York 10286
Attention:  Corporate Trust Administration - Mid-State XIV
Telephone:  (212)815-6140
Telecopy: (212)815-3986

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If to the Custodian:

Treasury Bank, a division of Countrywide Bank N.A.
4100 E. Los Angeles Avenue
Simi Valley, California 93063
Attention:              Teresita Que
Telephone:            (805) 577-6028
Facsimile:               (805) 577-6069

If to the Agent, Administrative Trustee or Bank Investor:

SunTrust Capital Markets, Inc.
303 Peachtree Street
Mail Code 3950
Atlanta, Georgia  30308
Attention:  Asset Surveillance
Telephone:  (404) 658-4568
Telecopy:  (404) 813-5000
E-mail:  TPFC.AssetManagement@suntrust.com

Payment Information:

Bank: SunTrust Banks

ABA# 061000104

Acct# 8800171236

Acct. Name: Three Pillars Funding LLC

Attn: Janice Taylor

Reference: Mid-State Trust XIV

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 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 ADMINISTRATIVE TRUSTEE, THE LENDER OR ANY BANK INVESTOR TO BRING ANY ACTION OR

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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 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 Agent.  Except as set forth in clause (b) below, no provision of this Loan Agreement shall in any manner restrict the ability of the 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 the Administrative Trustee, on behalf of the Lender, the Agent and, if such assignee is not an Affiliate of the 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

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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 Trustee.  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, the Back-up Servicer or the Master Servicer or the performance or observance by the Borrower, any Eligible Originator, the Originator, the Depositor, the Master Servicer or the Back-up 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 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

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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 the 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 the Lender, the Agent, any Bank Investor or the Administrative Trustee (A) to any of the Lender, any nationally recognized rating agency rating the Lender’s commercial paper, the Agent, the Liquidity Provider, the Dealers, or the Credit Support Provider, any other Bank Investor, any dealer or placement agent of or depositary for the 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 the Lender, any Bank Investor, the Agent, the Custodian, the Trustee, the Administrative Trustee, 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 Lender, the Bank Investors, the Agent, the Custodian, the Trustee and the Administrative Trustee 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 obtained solely due to its participation in the transactions governed by this Loan Agreement and the Operative Documents 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.

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

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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 (1) year and one (1) day after the payment in full of all outstanding Commercial Paper or other indebtedness of the Lender, it will not institute against, or join any other Person in instituting against, the 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 Lender under this Loan Agreement and all other Operative Documents are solely the corporate obligations of the Lender 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 Lender to Conduit Assignee.

(a)           Without limiting Section 2.13 or 8.6 hereof, the Lender may, from time to time, with prior or concurrent notice to the Borrower and the Master Servicer, in one transaction 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 the 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 Administrative Trustee for such Conduit Assignee, with all corresponding rights and powers, express or implied, granted to the Administrative Trustee 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 the 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 the Lender’s obligations, if any, hereunder or any other Operative Document, and the Lender shall be released from such obligations, in each case to the extent of such assignment, and the obligations of the 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 Administrative Trustee, as applicable, on behalf of the 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

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issued by the Lender from time to time shall be determined in the manner set forth in the definition of “CP Rate” applicable to the 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 Administrative Trustee 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 Administrative Trustee may reasonably request to evidence and give effect to the foregoing.  No assignment by the 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 the Lender or such Conduit Assignee or to acquire from the Lender or such Conduit Assignee all or any portion of the Net Investment pursuant to Section 2.13.  The Agent shall promptly notify the Trustee of any such assignment.

(b)           In the event that the Lender makes an assignment to a Conduit Assignee in accordance with clause (a) above, the Bank Investors: (i) if requested by the Agent, shall terminate their participation in the applicable Program Support Agreement to the extent of such assignment, (ii) if requested by the Agent, shall execute (either directly or through a participation agreement, as determined by the Administrative Trustee) 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 SunTrust Capital Markets, Inc. and the Bank Investors), (iii) if requested by the 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 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 Lender to Program Support Provider.  The Borrower hereby agrees and consents to the assignment by the 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.

ARTICLE 9

THE AGENT

Section 9.1.            Appointment and Authorization of Agent.  Each Bank Investor and the 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

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Agreement, nor shall the Agent have or be deemed to have any fiduciary relationship with the 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 Eligible Originator, the Originator, the Depositor, the Master Servicer or the Back-up 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 the Back-up 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 the 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, the Master Servicer, the Back-up 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, the Master Servicer and the Back-up 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

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satisfaction by the Lender 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, the 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 the 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 the 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 the Lender, 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.  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 Lender and the Bank Investors.

Section 9.6.            Credit Decision; Disclosure of Information by the Agent.  Each Bank Investor and the 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 Back-up 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 the Lender as to any matter, including whether the Agent-Related Persons have disclosed material information in their possession.  Each Bank Investor and the Lender, including any Bank Investor by assignment, represents to the Agent that it has, independently and without reliance upon any

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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 Back-up 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 the 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, the Back-up 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 Lender 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 Back-up 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 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.  SunTrust Capital Markets, Inc. (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, the Master Servicer and the Back-up Servicer or any of their Subsidiaries or Affiliates as though SunTrust Capital Markets, Inc. were not the Agent or a Bank Investor hereunder and without notice to or consent of the Lender or the Bank Investors.  The Bank Investors acknowledge that, pursuant to such activities, SunTrust Capital Markets, Inc. 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, SunTrust Capital Markets, Inc. (and any successor acting as Agent) in its capacity as a Bank Investor hereunder shall have the same rights and powers

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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 Borrower, the Bank Investors and the Lender.  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 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 (New York City time) 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.

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.

Section 9.12.          Limited Waiver.

(a)           Pursuant to Section 6.1(e) of the Loan Agreement, an Event of Default shall occur upon the default by the Borrower in the performance of any material covenant or undertaking  to be performed or observed by the Borrower under any provision of the Loan Agreement.  The Borrower hereby inform the Agent of the failure to comply with the requirement of Section 5.1(l)(i) that the Borrower shall furnish to the Trustee and the Agent

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copies of the form of each proposed amendment to the Trust Agreement, the Master Servicing Agreement, the Back-up Servicing Agreement or the Subservicing Agreement at least sixty (60) days prior to the proposed date of adoption of any such proposed amendment (the “Sixty Day Notice Event”).  The Borrower hereby requests that the Agent waive any Event of Default occurring as a result of such Sixty Day Notice Event.  Subject to the following, the Agent hereby waives such Event of Default.

(b)           Other than as provided in subsection (a) above, the Agent has not waived, is not by this Section 9.12 waiving, and has no intention of waiving, any Event of Default which may be continuing on the date hereof  and, other than as provided in this Section 9.12, the Agent has not agreed to forbear with respect to any of its rights or remedies concerning any Event of Default which may have occurred or are continuing as of the date hereof or which may occur after the date hereof.  The Agent reserves the right, in its sole discretion, to exercise any or all of its rights and remedies under this Loan Agreement and the other Transaction Documents as a result of any other Event of Default (other than as described herein) which may be continuing on the date hereof or any Event of Default which may occur after the date hereof, and Agent has not waived any of such rights or remedies, and nothing in this Loan Agreement, and no delay on its part in exercising any such rights or remedies, should, or shall, be construed as a waiver of any such rights or remedies

[remainder of page intentionally left blank]

[Signature pages omitted]

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EX-10.13.1

Exhibit 10.13.1

AMENDMENT NO. 1 TO
AMENDED AND RESTATED
VARIABLE FUNDING LOAN AGREEMENT

[Mid-State Trust XIV]

THIS AMENDMENT NO. 1 TO AMENDED AND RESTATED VARIABLE FUNDING LOAN AGREEMENT, dated as of November 27, 2006 (this “Amendment”), is entered into by and among THREE PILLARS FUNDING, LLC, a Delaware limited liability company (together with its successors and assigns, the “Lender”), MID-STATE TRUST XIV, a Delaware statutory trust, as borrower (the “Borrower”), TREASURY BANK, a division of Countrywide Bank, N.A., a national banking association, as custodian (the “Custodian”), THE BANK OF NEW YORK, an New York banking corporation, as trustee (the “Trustee”) and SUNTRUST CAPITAL MARKETS, INC., a Tennessee corporation, as agent and administrative trustee (in such capacities, the “Agent” and “Administrative Trustee”), and SUNTRUST BANK, as a bank investor (in such capacity, the “Bank Investor”).  Capitalized terms used and not otherwise defined herein are used as defined in the Agreement (as defined below and amended hereby).

WHEREAS, the Lender, the Borrower, the Custodian, the Trustee, the Agent, the Administrative Trustee and the Bank Investor have entered into that certain Amended and Restated Variable Funding Loan Agreement, dated as of June 15, 2006 (as amended, restated, supplemented or otherwise modified to the date hereof, the “Agreement”);

WHEREAS, the Lender, the Borrower, the Custodian, the Trustee, the Agent, the Administrative Trustee and the Bank Investor desire to amend the Agreement in certain respects as hereinafter set forth;

NOW THEREFORE, in consideration of the premises and the other mutual covenants contained herein, the parties hereto agree as follows:

SECTION 1.           Amendments.

(a)           Section 4.2 of the Agreement is hereby amended as follows:  (i) by deleting the word “and” at the end of subsection (n), (ii) by replacing the period (.) at the end of subsection (o) with the following :  “; and” and (iii) adding a new subsection (p) as follows:

(p)           if the Loan to be made on such date is the first Loan following a Take-Out, the Borrower shall deposit or cause to be deposited $1,000,000 in the Reserve Account in immediately available funds by wire transfer on such date.

(b)           Section 6.1(i) of the Agreement is hereby replaced with the following:

(i)            The amount on deposit in the Reserve Account fails, on any Remittance Date on or after the fifteenth (15th) Remittance Date following the Closing Date or on or after the sixth (6th) Remittance Date following a Reserve Account Event, to equal at least the Specified Reserve Account Requirement for such Remittance Date; provided that for any 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; provided further however, that during any time following a Take-Out and prior to the date the first Loan after such Take-Out is made hereunder, there shall be no Event of Default under this clause (i) if the amount on deposit in the Reserve Account shall be less than the amounts previously specified in this clause (i), including if such amount is zero;

(c)           Annex A to the Agreement is hereby amended by:

(i)            deleting the definition of “AMV” in its entirety and substituting in lieu thereof the following new definition:

“AMV” means aggregate Market Value calculated as follows:

AMV = {AMV(n) x 80%} + {AMV(r) x 65%} + {AMV(a) x 80%} + {AMV(ar) x 55%}

AMV(a) = aggregate Market Value for Eligible Accounts owned by the Borrower relating to New Home Sales Accounts that are Adjustable Rate Accounts

AMV(n) = aggregate Market Value for Eligible Accounts owned by the Borrower relating to New Home Sales Accounts that are Fixed Rate Accounts

AMV(r) = aggregate Market Value for Eligible Accounts owned by the Borrower relating to Resale Accounts that are Fixed Rate Accounts

AMV(ar) = aggregate Market Value for Eligible Accounts owned by the Borrower relating to Resale Accounts that are Adjustable Rate Accounts.

(ii)           deleting the definition of “APB” in its entirety and substituting in lieu thereof the following new definition:

“APB” means the aggregate Principal Balance calculated as follows:

APB = {APB(n) x 80%} + {APB(r) x 65%} + {APB(a) x 80%} + {APB(ar) x 55%}

APB(a) = aggregate Principal Balance of Eligible Accounts owned by the Borrower relating to New Home Sales Accounts that are Adjustable Rate Accounts

APB(n) = aggregate Principal Balance of Eligible Accounts owned by the Borrower relating to New Home Sales Accounts that are Fixed Rate Accounts

APB(r) = aggregate Principal Balance of Eligible Accounts owned by the Borrower relating to Resale Accounts that are Fixed Rate Accounts

APB(ar) = aggregate Principal Balance of Eligible Accounts owned by the Borrower relating to Resale Accounts that are Adjustable Rate Accounts.

(iii)          deleting the definition of “Scheduled Reserve Account Payment” in its entirety and substituting in lieu thereof the following new definition:

“Scheduled Reserve Account Payment” means, (x) on any Remittance Date other than a Remittance Date described in clause (y) below and on the Facility Termination Date, 50% of the Available Collections remaining after Available Collections are applied pursuant to clauses (i) through (iii) of Section 4.1(d) of the CTA Agreement; provided, however, if after the fifteenth (15th) Remittance Date following the Closing Date but prior to a Take-Out or after the sixth (6th) Remittance Date following the most recent Take-Out, the Reserve Account Balance is below the Specified Reserve Account Requirement for three consecutive Collection Periods or following the occurrence of a Reserve Account Event, the Scheduled Reserve Account Payment shall mean 100% of the Available Collections remaining after application pursuant to such clauses (i) through (v) of Section 4.1(d) of the CTA Agreement and (y) on any Remittance Date after a Take-Out has occurred and on which no Loans are outstanding as of the close of business on such Remittance Date, zero.”

(iv)          deleting the definition of “Scheduled Termination Date” in its entirety and substituting in lieu thereof the following new definition:

“Scheduled Termination Date” means November 26, 2007, or such later date to which the Scheduled Termination Date may be extended by the Agent, the Borrower and some or all of the Bank Investors, each in its sole discretion, pursuant to Section 2.15 of the Loan Agreement.

(v)           deleting the definition of “Specified Reserve Account Requirement” in its entirety and substituting in lieu thereof the following new definition:

“Specified Reserve Account Requirement” means, (x) with respect to any Remittance Date other than a Remittance Date described in clause (y) below and on the Facility Termination Date, the product of 2% and the Net Investment as of the last day of the related Collection Period (after giving effect to any Loans made on such date and any reductions in the Net Investment made on such date); provided, however, that following the occurrence of a Reserve Account Event, and for so long as such Reserve Account Event is continuing, the Specified Reserve Account Requirement shall be equal to the product of 4% and the Net Investment as of the last day of the related Collection Period (after giving effect to any Loans made on such date and any reductions of the Net Investment made on such date) and (y) with respect to any Remittance Date after a Take-Out has occurred and on which no Loans are outstanding as of the close of business on such Remittance Date, zero.

SECTION 2.           Effectiveness and Effect.

This Amendment shall become effective as of the date (the “Effective Date”) that each of the following conditions precedent shall have been satisfied:

(a)   (i) This Amendment, (ii) Amendment No. 1 to the Custodian/Trustee Agreement, dated as of the date hereof, and (iii) Amendment No. 3 to the Liquidity Asset Purchase Agreement, dated as of the date hereof, shall have been executed and delivered by a duly authorized officer of each party thereto.

(b)   The Borrower shall be in compliance with each of its covenants set forth herein and each of the Operative Documents to which it is a party.

(c)   No event has occurred which constitutes a Facility Termination Event or a Potential Facility Termination Event and the Facility Termination Date shall not have occurred.

SECTION 3.           Reference to and Effect on the Agreement and the Related Documents.

(a)   Upon the effectiveness of this Amendment, (i) the Borrower hereby reaffirms all representations and warranties made by it in Article III of the Agreement (as amended hereby) and agrees that all such representations and warranties shall be deemed to have been restated as of the effective date of this Amendment, (ii) the Borrower hereby represents and warrants that no Facility Termination Event or Potential Facility Termination Event shall have occurred and be continuing and (iii) each reference in the Agreement to “this Agreement”, “hereunder”, “hereof”, “herein” or words of like import shall mean and be, and any references to the Agreement in any other document, instrument or agreement executed and/or delivered in connection with the Agreement shall mean and be, a reference to the Agreement as amended hereby.

(b)   The Borrower hereby agrees that in addition to any costs otherwise required to be paid pursuant to the Operative Documents, the Borrower shall pay the reasonable legal fees and

out-of pocket expenses of each of the Custodian’s, the Trustee’s and the Administrative Trustee’s counsel, and all audit fees and due diligence costs incurred by the Administrative Trustee in connection with the consummation of this Amendment.

SECTION 4.           Governing Law.

THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.

SECTION 5.           Severability.

Each provision of this Amendment shall be severable from every other provision of this Amendment for the purpose of determining the legal enforceability of any provision hereof, and the unenforceability of one or more provisions of this Amendment in one jurisdiction shall not have the effect of rendering such provision or provisions unenforceable in any other jurisdiction.

SECTION 6.           Counterparts.

This Amendment may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument.  Delivery of an executed counterpart of a signature page by facsimile shall be effective as delivery of a manually executed counterpart of this Amendment.

[remainder of page intentionally left blank]

[Signature pages omitted]

EX-10.22

Exhibit 10.22

November 2, 2006

Mr. Charles E. Cauthen
1105 Valladolid de Avila
Tampa, FL 33613

Dear Charles:

Confirming our recent discussions, we are pleased that you have accepted our position as Chief Financial Officer of the Homes Group (“the Company”) and President of Mid-State Homes, Inc. effective November 13, 2006. The following outlines the terms of your employment. This document supersedes all previous agreements you had with the Company or any of its affiliates and includes an updated Change in Control Agreement dated October, 2006.  These documents will be final and binding on the date you sign.

1.You will serve as Chief Financial Officer of the Homes Group and President of Mid-State Homes, Inc. reporting to the Chief Executive Officer of the Homes Group. You will be responsible for the management of all financial matters affecting the Company, including financial reporting, balance sheet management, capital structure, strategic issues and working with the corporate accounting department of Walter Industries, Inc.  You will also manage the P&L of the Financial Services Group including its growth and return objectives.

2.Your compensation package will be as follows:

(a)Your annualized base salary will be increased from $300,440 to $325,000 per year effective January 1, 2007 and your salary and performance will be reviewed annually consistent with the practices of the Company.

(b)You will participate in the Executive Incentive Plan (EIP) as established by the Company.  For the 2006 fiscal year, you will continue to participate in the Walter Industries, Inc. EIP with a bonus target of 60% of your base salary to a maximum of 2 times target.  Your bonus will be calculated

using the performance of Jim Walter Homes from January 1, 2006 through August 15, 2006, then using the performance of the Homes Group (combined Jim Walter Homes and Financial Services Group) for the period August 16, 2006 through December 31, 2006. The amount of your incentive will fluctuate based upon actual performance under the performance metrics associated with the EIP. In situations other than those described in section 3 of this agreement, a bonus will not be paid or payable in the event you are not employed by the Company on the date the bonus is paid.  Please note that participation in the Employee Stock Purchase Plan is a requirement of the Walter Industries’ EIP.

(c)  You will be eligible for the Walter Industries, Inc. annual long-term incentive program.  In addition, you will receive a one-time grant of non-qualified stock options on the equivalent of 2.5% of the total combined equity of the Homes Group (or another vehicle that will deliver equivalent value). The strike price of these options will be equal to the strike price used in the equity grant for the CEO of the Homes Group pursuant to his agreement of March 2, 2006. These options will vest at the rate of 1/3 per year commencing on 03/02/07, 03/02/08, and 03/02/09 respectively. The options will be evidenced by an option agreement and option plan, which are substantially equivalent to the form of plan and agreement currently used by Walter Industries, Inc., with such revisions as are necessary to conform to this agreement.  Except as provided below, these options will expire ten years from the grant date.  The options will vest on any change in control of the Homes Group.  A spin-off or other transaction separating the Homes Group from Walter Industries, Inc. shall not be considered a change in control and in the case of such a transaction your options and this agreement will continue in full force and effect.  In the event of your termination by the Homes Group for Cause or your voluntary termination of employment other than for a reason specified in the next sentence, your unvested options will expire immediately and you will have 90 days to exercise any options which are vested on the date your employment terminates.  In the event of your termination by the Homes Group for any other reason, your resignation because of a significant diminution in pay or responsibilities, your normal retirement after the third anniversary of the date of this agreement, your resignation because of the Homes Group’s or Walter Industries’ material breach of this agreement which is not cured within a reasonable period after notice, or your death, your options will accelerate and fully vest on the date of termination and you will have two years after termination to exercise your vested options.  If you have vested options at any time when there is no public market for the common stock of the Homes Group and you notify the Homes Group of your intention to exercise such options, the per share price of the common stock of the Homes Group shall be calculated by reference to a valuation of the Homes Group as a going concern conducted by a mutually agreeable, experienced valuation firm of national reputation. The Homes Group shall not be

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required to conduct more than one such valuation in any calendar year. Following receipt of such valuation, the Homes Group shall, upon your request, pay you an amount in cash equal to the difference between the price of the common stock as so calculated and the strike price of the options you wish to exercise upon your surrender of such options to the Homes Group.

(d)You will receive a vehicle allowance of $1,500 per month, subject to usual withholding taxes.

(e)You will receive the benefits generally applicable to senior executives of the Company in the location in which you are primarily based, as well as the following additional benefits:

·Reimbursement for all reasonable and customary business-related travel and entertainment expenses in accordance with the terms of the policy generally applicable to the executives in the location in which you are primarily based, as it may change from time to time.

·Participation in the group life and health insurance benefit programs, generally applicable to executives employed in the location in which you are primarily based, in accordance with their terms, as they may change from time to time.

·Participation in the Company’s retirement plan, generally applicable to salaried employees in the location in which you are primarily based, as it may change from time to time and in accordance with its terms.

·Participation in the Employee Stock Purchase Plan, generally applicable to salaried employees in the location in which you are primarily based and as it may change from time to time and in accordance with its terms.

·Eligibility for 30 days of annual vacation to be used each year in accordance with policy generally applicable to executives employed in the location in which you are primarily based, as it may change from time to time.

3.In the event of your involuntary termination, other than for “Cause” (defined below), in the event of your Constructive Termination (also defined below), or if you are required to relocate more than 50 miles from the current headquarters location in Tampa, Florida, in each case, other than as a result of death or disability, you will be entitled to (i) payment of base salary for 18 months, (ii) payment of the target amount of your cash bonus (including your vehicle allowance) for 18 months, and (iii) continued participation in benefits until the earlier of the 18-month anniversary of the termination date or until you are

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eligible to receive comparable benefits from subsequent employment. The COBRA election period will not commence until the expiration of that 18-month period. Payment must be in accordance with all government regulations e.g. IRC 409A.

4.You agree that all inventions, improvements, trade secrets, reports, manuals, computer programs, systems, tapes and other ideas and materials developed or invented by you during the period of your employment with the Company, either solely or in collaboration with others, which relate to the actual or anticipated business or research of the Company, which result from or are suggested by any work you may do for the Company, or which result from use of the Company’s premises or the Company’s or its customers’ property (collectively, the “Developments”) shall be the sole and exclusive property of the Company.  You hereby assign to the Company your entire right and interest in any Developments and will hereafter execute any documents in connection therewith that the Company may reasonably request.  This section does not apply to any inventions that you made prior to your employment by the Company or any of its predecessors or affiliates, or to any inventions that you develop entirely on your own time without using any of the Company’s equipment, supplies, facilities or the Company’s or its customers’ confidential information and which do not relate to the Company’s business, anticipated research and developments or the work you have performed for the Company.

5.Non-Compete/Non-Solicit. It is understood and agreed that the nature and methods employed in the Company’s business are such that you will have substantial relationships with specific businesses and personnel, prospective and existing, vendors, contractors, customers, and employees of the Company that result in the creation of customer goodwill.  Therefore, following the termination of employment under this agreement for any reason that results in the payment of severance and continuing for a period of eighteen (18) months from the date of such termination, so long as the Company or any affiliate, successor or assigns thereof carries on the name or like business within the Restricted Area (defined below), including the states that the Company operates in as of the date of your separation, you shall not, directly or indirectly, for yourself or on behalf of, or in conjunction with, any other person, persons, company, partnership, corporation, business entity or otherwise:

(a)Call upon, solicit, write, direct, divert, influence, or accept business (either directly or indirectly) with respect to any account or customer or prospective customer of the Company or any corporation controlling, controlled by, under common control with, or otherwise related to Company, including but not limited to any other affiliated companies; or

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(b)Hire away any independent contractors or personnel of Company and/or entice any such persons to leave the employ of Company or its affiliated entities without the prior written consent of Company.

Notwithstanding the foregoing, following the termination of employment under this agreement for any reason and continuing for a period of eighteen (18) months from the date of such termination, you shall not, directly or indirectly, for yourself or on behalf of, or in conjunction with, any other person, persons, company, partnership, corporation, business entity or otherwise, hire away any independent contractors or personnel of Employer and/or entice any such persons to leave the employ of Employer or its affiliated entities without the prior written consent of Company.

6.Non-Disparagement.  Except as may be legally required following the termination of employment under this agreement for any reason and continuing for so long as the Company or any affiliate, successor or assigns thereof carries on the name or like business within the Restricted Area, neither you nor the company shall not, directly or indirectly, for themselves or on behalf of, or in conjunction with, any other person, persons, company, partnership, corporation, business entity or otherwise:

(a)Make any statements or announcements or permit anyone to make any public statements or announcements concerning your termination with Company, or

(b)Make any statements that are inflammatory, detrimental, slanderous, or negative in any way to the interests of you or the Company or its affiliated entities.

7.As an inducement to the Company to make this offer to you, you represent and warrant that you are not a party to any agreement or obligation for personal services and that there exists no impediment or restraint, contractual or otherwise on your power, right or ability to accept this offer and to perform the duties and obligations specified herein.

8.You acknowledge and agree that you will respect and safeguard the Company’s property, trade secrets and confidential information.  You acknowledge that the Company’s electronic communication systems (such as email and voicemail) are maintained to assist in the conduct of the Company’s business and that such systems and data exchanged or stored thereon are Company property.  In the event that you leave the employ of the Company, you will not disclose any trade secrets or confidential information you acquired while an employee of the Company to any other person or entity, including without limitation, a subsequent employer, or use such information in any manner.

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9.Definitions:

 “Cause” shall mean: (a) a willful and continued material failure to act in accordance with the reasonable instructions of the CEO of the Homes Group, (b) conviction of a felony arising from any act of fraud, embezzlement or willful dishonesty in relation to the business or affairs of the Company or any other felonious conduct on your part that is demonstrably detrimental to the best interests of the Company or any subsidiary or affiliate, (c) being repeatedly under the influence of illegal drugs or alcohol while performing your duties, or (d) commission of any other willful act that is demonstrably injurious to the financial condition or business reputation of the Company or any subsidiary or affiliate. However, no act or failure to act on your part shall be deemed “willful” unless done, or omitted to be done, by you not in good faith and without reasonable belief that the action or omission was in the best interests of the Company.

“Constructive Termination” shall mean, without your written consent: (a) a material failure of the Company to comply with the provisions of this agreement, (b) a material diminution of your position (including status, offices, title and reporting relationships), duties or responsibilities, (c) any purported termination of your employment other than for Cause, or (d) the failure of a successor corporation to assume the Company’s obligations under this agreement.

For purposes of this agreement, a significant diminution in pay or responsibility shall not have occurred if: (i) the amount of your bonus fluctuates due to performance considerations under the EIP or other Company incentive plan applicable to you and in effect from time to time or (ii) you are transferred to a position of comparable responsibility and compensation with the Homes Group, as long as you retain the position of Chief Financial Officer and report to the  Chief Executive Officer.

“Restricted Area” shall mean in the homebuilding and financing industries that we compete at the time of your separation, unless management approves an exception.

 10.    As discussed, the Company desires to have you, as a senior executive of the Company, make a meaningful investment in the Company. If and when the Homes Group spins-off from Walter Industries, you have committed to invest at least $100,000 in the Company’s common stock within two years after the date of the spin-off.

11.In the event that any portion of any 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 you, in cash, an additional payment in an amount sufficient to cover the full cost of any excise tax and all of your additional federal, state, and local income, excise, and employment taxes

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that arise on this additional payment (cumulatively, the Full Gross-Up Payment), such that you are in the same after-tax position as if you had not been subject to the excise tax. For this purpose, you shall be deemed to be in the highest marginal rate of federal, state, and local income taxes in the state and locality of your residence on the date of your termination. This payment shall be made as soon as possible following the date of your 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.

12.It is agreed and understood that this offer letter, if and when accepted, shall constitute our entire agreement with respect to the subject matter herein and shall supersede all prior agreements, discussions, understandings and proposals (written or oral) relating to your employment with the Jim Walter Homes, the Homes Group and related business units.

Charles, your signature below confirms your acceptance of this employment agreement. Please sign one of the enclosed copies and return it to me in the envelope provided.

Very truly yours,

/s/ Mark O’Brien

Mark O’Brien

Chief Executive Officer of the Homes Group

MO: lac
Enclosures

Agreed and Accepted

/s/ Charles E. Cauthen

Charles E. Cauthen

Date

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EX-10.23

EXHIBIT 10.23

JWH Holding Company, LLC

Economic Profit Plan Document

Approved as of December 20, 2006

I.              The Plan

The JWH Holding Company, LLC Economic Profit Plan (EPP) is intended to stimulate and reinforce executive actions that support and assure the attainment of key corporate objectives.  The Plan facilitates these objectives by providing executive employees the opportunity to earn additional cash compensation if the Company attains its financial and operating objectives during the plan year and the employee attains required individual performance levels.

II.            Definitions

1.Base Salary means an Employee’s annual base salary rate but exclusive of commission, overrides, incentive and other cash and non-cash payments, as of the end of the Plan Year.

2.Board means the Board of Directors of the Company, as it is constituted from time to time.

3.Change in Control applies to those executives who have a change in control provision in their employment agreement.

4.Company means JWH Holding Company, LLC and its wholly owned business units.

5.Committee means the Compensation Committee of the Board of Directors for Walter Industries, Inc., as it is constituted from time to time.

6.Cost of Capital means the overall costs of combined debt and equity capital used to finance operations.  The cost of capital is determined by the return that is required by investors to compensate them for their risk.  For purposes of the economic profit plan, the cost of capital will be calculated as the weighted average sum of the cost of equity and the cost of debt (excluding any asset-backed debt or intercompany debt) as determined annually by the Committee.

7.Employee or Employees means an Employee or Employees of the Company or its business units.

8.Employee means any regular, full-time salaried employee (including any officer) of the Company.

9.Incentive Pool means the fund created in accordance with Section VII of the Plan.

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10.Individual Performance Goal means the performance goals and their measures that are designated for all Participants or individual Participants so that, if each is attained at 100%, the Participant could receive the Target Incentive Opportunity for such Participant.

11.Officer means an executive officer of the Company, any Subsidiary President and any Subsidiary Vice-President who reports directly to the Subsidiary President or who serves on the Subsidiary Executive Committee.

12.Participant or Participants means an Employee or Employees of the Company, as more fully described in Section IV, who are specifically designated in writing as being eligible to participate in the Plan.

13.Plan means the Company’s Economic Profit Plan, as it may be modified from time to time.

14.Plan Year means the calendar year unless the Company designates a different fiscal year, in which case the Plan Year will be the Company’s fiscal year.

15.Subsidiary means a wholly owned subsidiary of the Company that has been declared by the Committee to be eligible to participate in the Plan.

16.Subsidiary Employee or Employees means an Employee or Employees of a Subsidiary.

17.Target Incentive Opportunity means additional cash compensation, expressed as a percent of base salary, or equivalent that may be recommended as an incentive award if all targets are attained at 100%.  The actual amount of compensation could increase or decrease as more fully described in Section VIII.

III.           Administration

1.The Plan shall be administered by the Committee.

2.The Committee shall have sole and complete authority to make awards under the Plan from funds authorized by the Board and to adopt, alter and repeal such administrative rules, guidelines and practices governing the operation of the Plan, as it shall deem advisable from time to time, and to interpret the terms and provisions of the Plan.

A majority of the Committee shall constitute a quorum, and the acts of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by a majority of the Committee without a meeting, shall be the acts of the Committee.

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3.Nothing in the Plan or plan document and no representations by the Company shall be construed as creating a contract, oral or written, that guarantees employment of an individual for any period of time nor is there created any entitlement to receive an incentive payment except as determined by the Committee.  The decisions and determinations of the Committee shall be final and binding on all Participants.

IV.           Eligible Participants

1.The following Employees of the Company are eligible to participate in the Plan.

a.             Officer Group

·              Executive Officers of the Company

·              Subsidiary Presidents

·Subsidiary Vice-Presidents who report directly to the Subsidiary   President or serve on the Subsidiary Executive Committee

b.             Corporate and Subsidiary Staff Group

·Corporate and Subsidiary Employees who hold positions that are equal to or greater than salary grade 9, or the equivalent, under the Company’s job evaluation program.

·Other positions designated by the CEO of the Company and approved by the Committee, e.g. top division sales and construction positions, branch managers.

2.Unless specifically approved by the Committee, e.g. Homes sales contests, participants in the Plan may not take part in any other cash incentive or bonus plan that is sponsored by the Company.

V.            Performance Goals

1.The Company’s EPP Bonus Pool

As soon as practicable at or near the beginning of the Plan Year, the Committee will establish the cost of capital.  The Committee will have the sole power and authority to review and adjust the cost of capital during the Plan Year because of unanticipated events, including, but not limited to, windfall gains, disposal of significant assets, catastrophes and other nonrecurring events.  The funding above the cost of capital is utilized 100% to fund up to the target incentive opportunity, and then the excess funding is shared between the Company and participants on a ratio established for each pool (branch manager, division, homes corporate, FSG corporate or JWH Holding Company) on an uncapped basis.  A percent of the

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JWH Holding Company economic profit is used to fund a discretionary pool for use throughout JWH Holding Company by the Executive Committee.

2.Individual Performance Goals (IPG) — Employees’ target incentive opportunities are adjusted based on their results relative to their IPGs.

As soon as practicable at or near the beginning of the Plan Year, each Participant and the Participant’s manager will establish three Individual Performance Goals for each participant.  The Participant and the manager will assign relative weights to each goal so that the sum of all weighting factors is equal to 1.0.  The goals will be reviewed and approved by the next level of executive management.

Individual Performance Goals will focus on key executive actions and accomplishments within the executive’s area of responsibility that support the Company’s key objectives.  The goals, in order to be effective, must be specific and measurable, to the greatest extent possible.  Examples of Individual Performance Goals for the appropriate line managers will generally relate to capital expenditures, working capital, return on net assets, productivity enhancement or specific projects related to the Employee’s area of responsibility.

A Participant’s manager shall have the authority, with the written approval of the next level of executive management, to review and adjust the Individual Performance Goals during the Plan Year because of unanticipated events, including, but not limited to, windfall gains, disposal of significant assets, catastrophes and other nonrecurring events.

VI.           Target Incentive Opportunity

1.Participants in the Plan will have Target Incentive Opportunities, as determined by the Committee or in accordance with the Company’s compensation policies, for each participant as of the beginning of the Plan Year.

2.A Target Incentive Opportunity represents the amount of additional cash compensation that will be recommended for payment if all the Company and Individual Performance Targets are attained at 100%.

3.Actual payments may decrease from Target Incentive Opportunity depending on actual performance compared to Individual Performance Goals and final determination by the Committee.  The funding above target is shared by the Company with the employees.  The maximum award is uncapped based on the difference between the Cost of Capital and Return on Invested Capital factored for Individual Performance Goal attainment as determined by Company compensation policies.  The JWH Holding Company’s Human Resources Department must approve changes to salary grade.

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VII.         Incentive Pool

At the beginning of each Plan Year, the Company will establish an Incentive Pool derived from the aggregate of the Base Salaries of the Participants times their Target Incentive Opportunity.  During the course of the year the Company may adjust the size of the Incentive Fund to reflect projected year-end performance, participant changes and resulting year-end incentive payments.

VIII.        Incentive Awards

1.A Participant’s incentive award will be calculated by the sum of the following components:

a.Corporate performance for return on invested capital versus cost of capital to fund the pool.

b.Individual performance versus individual performance goals to generate the participant’s share of the pool.

2.The Committee shall set the cost of capital at the beginning of the Plan Year, which will remain the same for the Plan Year unless changed by the Committee.

3.The Committee shall approve the target incentive opportunities for employees at the beginning of the Plan Year.

4.The Participant’s manager shall recommend at the beginning of the Plan Year, criteria to measure individual performance goals, which criteria shall be approved by the next level of executive management.

5.Minimum Individual Performance Required.

Performance Appraisal Rating: A Participant who is rated “Needs Development” under the Company’s performance appraisal program is not eligible for an incentive payment until performance improves to meet acceptable standards.  A Participant, who is not rated due to being new in the position, is eligible for an incentive payment as long as he is progressing satisfactorily towards expected standards and is meeting the other requirements of the Plan.

6.Minimum Financial Performance Required

a.No incentive payments will be paid if actual return on invested capital is less than the cost of capital for any pool.

b.             Individual performance will be used to adjust payments from target.

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c.If a business unit generates economic profit, it can receive a pool payment even though JWH Holding Company does not earn an economic profit.

7.Incentive awards may not be paid until the completion of the Company’s audited financial statements corresponding to the Plan Year and the approval of the Company’s Audit Committee has been received.

8.The calculated awards will be recommended for payment to the Committee.  The committee will not use discretion to increase the size of the award.

IX.           Method of Payment

1.Each incentive award, once approved, may be paid to the Participant on the next payroll cycle, less required withholdings, or by separate check.

2.Pro rata payments.

a.A Participant must be an Employee at the time the bonus is paid in order to receive an incentive payment under the Plan.  A Participant whose employment is terminated before the end of the Plan Year will not be eligible for an incentive award for that Plan Year unless the termination was the result of death, disability or retirement under a Company sponsored retirement plan, in which case, a pro rata payment at target may be recommended providing the Participant worked at least three months during the Plan Year. The Plan defines “retirement” as the termination of the EPP participant’s employment with the Company and its subsidiaries other than for cause and either a) on or after the date on which the employee attains the age of 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).”

b.Participants who are hired, transferred or promoted into an eligible position may be recommended for a pro rata payment, based on their time in the eligible position, as long as they have worked in that position at least three months during the Plan Year.  Individual Performance Goals must be established for the new position at the time of hire, transfer or promotion.

c.Participants who are promoted or transferred from one incentive position to another incentive position will receive a pro rata payment based on the period of time they were in each position.  Any pro rata payment from Subsidiary Performance will be measured and apportioned at the end of the Plan Year.  Individual Performance Goals must be set and measured for the period in each position.

6

d.If there is a qualifying termination following a change in control of the Company or subsidiary, a pro rata portion of the target amount is paid out.

X.            Effective Date and Duration

1.The Plan shall be effective January 1, 2007.

2.The Committee may discontinue the Plan, in whole or in part, at any time, or may, from time to time, amend the Plan in any respect that the Committee may deem to be advisable.

7

EX-12.1

Exhibit 12.1

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

($ in thousands)

	Fiscal years ended December 31,
	2006			2005			2004			2003			2002
Income (loss) from continuing operations,before taxes and minority interest	$	212,405		$	71,069		$	52,579		$	(12,745	)	$	47,380
Fixed charges:
Total interest including amortization of debt discount and issue costs and amounts capitalized	$	157,278		$	145,467		$	145,521		$	151,568		$	153,169
Rentals	3,932			3,969			5,274			3,517			3,018
Total fixed charges	$	161,210		$	149,436		$	150,795		$	155,085		$	156,187
Earnings before income or loss from equity earnings plus fixed charges less capitalized interest	$	373,002		$	220,552		$	203,469		$	142,528		$	203,486
Ratio of earnings to fixed charges (a)	2.3		x	1.5		x	1.3		x	—			1.3		x

(a) Due to losses during the fiscal year ended December 31, 2003, the ratio coverage for that period was less

than 1:1. The coverage deficiency was $26.6 million.

EX-21

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.     Blue Creek Coal Sales, Inc. (AL)

2.     Hamer Properties, Inc. (WV)

3.     JWH Holding Company, LLC (DE)

a.      Best Insurors, Inc. (FL) (a subsidiary of JWH Holding Company, LLC)

b.      Cardem Insurance Co., Ltd. (Bermuda) (a subsidiary of JWH Holding Company, LLC)

c.      Coast to Coast Advertising, Inc. (FL) (a subsidiary of JWH Holding Company, LLC)

d.      Dixie Building Supplies, Inc. (FL) (a subsidiary of JWH Holding Company, LLC)

e.      Jim Walter Homes, Inc. (FL) (a subsidiary of JWH Holding Company, LLC)

i.       Crestline Homes, Inc. (NC) (a subsidiary of Jim Walter Homes, Inc.)

ii.     Dream Homes, Inc. (TX) (subsidiary of Jim Walter Homes, Inc.)

iii.    Dream Homes USA, Inc. (TX) (a subsidiary of Jim Walter Homes, Inc.)

iv.     Jim Walter Homes of Arkansas, Inc. (AR) (a subsidiary of Jim Walter Homes, Inc.

v.      Jim Walter Homes of Tennessee, Inc. (DE) (a subsidiary of Jim Walter Homes, Inc.

vi.     Neatherlin Homes, Inc. (TX) (a subsidiary of Jim Walter Homes, Inc.)

vii.   Walter Home Improvement, Inc. (FL) (a subsidiary of Jim Walter Homes, Inc.)

f.       Mid-State Homes, Inc. (FL) (a subsidiary of JWH Holding Company, LLC)

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.)

viii.Mid-State Trust XIV (a statutory trust of which 100% of the beneficial interest in the trust is held by Mid-State Homes, Inc.)

ix.Mid-State Capital Corporation (DE) (a subsidiary of Mid-State Homes, Inc.)

1.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.)

2.Mid-State Capital Corporation 2005-1 Trust (a statutory trust of which 100% of the beneficial interest in the trust is held by Mid-State Capital Corporation.)

3.Mid-State Capital Corporation 2006-1 Trust (a statutory trust of which 100% of the beneficial interest in the trust is held by Mid-State Capital Corporation.)

g.      Walter Mortgage Company (DE) (a subsidiary of JWH Holding Company, LLC)

h.      Walter Mortgage Servicing, Inc. (FL) (a subsidiary of JWH Holding Company, LLC)

4.     J.W.I. Holdings Corporation (DE)

a.      J.W. Walter, Inc. (DE) (a subsidiary of J.W.I. Holdings Corporation)

5.     Jefferson Warrior Railroad Company, Inc. (AL)

6.     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.)

7.     Land Holdings Corporation (DE)

a.      Walter Land Company (DE) (a subsidiary of Land Holdings Corporation)

8.     Sloss Industries Corporation (DE)

9.     SP Machine Inc. (DE) (formerly Southern Precision Corporation)

10.   United Land Corporation (DE)

a.United Land Corporation owns 51% of the interest in Kodiak Mining Company, LLC, a Delaware limited liability company

11.   V Manufacturing Company (DE) (formerly known as Vestal Manufacturing Company)

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, 2006.

EX-23

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 report dated February 28, 2007 relating to the financial statements, 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.

/s/ PricewaterhouseCoopers LLP

Tampa, Florida

February 28, 2007

EX-24

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 Joseph J. Troy and Lisa A. Honnold, 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, 2006 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 agent, 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 agent, or his 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 27th day of February, 2007.

/s/ Howard L. Clark, Jr.

Director

/s/ Jerry W. Kolb

Director

/s/ Patrick A. Kriegshauser

Director

/s/ Joseph B. Leonard

Director

/s/ Mark J. O’Brien

Director

/s/ Bernard G. Rethore

Director

/s/ George R. Richmond

Director

/s/ Michael T. Tokarz

Chairman

EX-31.1

EXHIBIT 31.1

Walter Industries, Inc.
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
CERTIFICATION OF PERIODIC REPORT

I, Victor P. Patrick, 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 1, 2007

/s/ Victor P. Patrick

Victor P. Patrick

Vice Chairman, General Counsel and Secretary (Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

Walter Industries, Inc.
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
CERTIFICATION OF PERIODIC REPORT

I, Joseph J. Troy, 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 1, 2007

/s/ Joseph J. Troy

Joseph J. Troy

Chief Financial Officer

EX-32.1

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, 2006 (the “Report”), I, Victor P. Patrick, Vice Chairman, General Counsel and Secretary 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 1, 2007

/s/ Victor P. Patrick

Victor P. Patrick

Vice Chairman, General Counsel and Secretary (Principal Executive Officer)

EX-32.2

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, 2006 (the “Report”), I, Joseph J. Troy, 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 1, 2007

/s/ Joseph J. Troy

Joseph J. Troy

Chief Financial Officer