This discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto of Walter Industries, Inc. and its subsidiaries, particularly Note 15 of "Notes to Condensed Consolidated Financial Statements," which describe the Company's net sales and revenues and operating income by operating segment.

RESULTS OF OPERATIONS

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

                                                  For the three months ended September 30, 2008
                             Natural
(in thousands)              Resources     Sloss      Financing     Homebuilding     Other      Cons Elims      Total
Net sales                    $ 267,496   $ 53,589    $    3,491    $      22,593   $  1,522    $    (9,535 ) $ 339,156
Interest income on
instalment notes                     -          -        46,243                -          -              -      46,243
Miscellaneous income             1,007        149           453              465        517              -       2,591

     Net sales and
     revenues                  268,503     53,738        50,187           23,058      2,039         (9,535 )   387,990
Cost of sales (exclusive
of depreciation)               146,263     35,586         1,570           19,183        211         (9,521 )   193,292
Interest expense(1)                  -          -        24,279                -          -              -      24,279
Depreciation                    12,847      1,048            73              582        236              -      14,786
Selling, general &
administrative                   6,693      2,627         8,572            9,560      7,938              -      35,390
Provision for losses on
instalment notes                     -          -         5,607                -          -              -       5,607
Postretirement benefits          7,280       (161 )        (112 )           (151 )     (261 )            -       6,595
Amortization of
intangibles                         67          -           235                -          -              -         302
Provision for estimated
hurricane insurance
losses                               -          -         3,853                -          -              -       3,853
Restructuring &
impairment charges                   -          -        10,895            6,485          -              -      17,380

     Operating income
     (loss)                  $  95,353   $ 14,638    $   (4,785 )  $     (12,601 ) $ (6,085 )  $       (14 )    86,506

     Other debt interest
     expense                                                                                                    (5,478 )

     Income before income
     taxes                                                                                                   $  81,028

                                                 For the three months ended September 30, 2007
                            Natural
(in thousands)             Resources     Sloss      Financing     Homebuilding     Other     Cons Elims      Total
Net sales                   $ 154,411   $ 34,337    $    3,347    $      57,521   $    491    $     (944 ) $ 249,163
Interest income on
instalment notes                    -          -        49,712                -          -             -      49,712
Miscellaneous income           11,079        134         1,045              539        534             -      13,331

    Net sales and
    revenues                  165,490     34,471        54,104           58,060      1,025          (944 )   312,206
Cost of sales (exclusive
of depreciation)              112,315     28,375         2,172           42,389        228          (944 )   184,535
Interest expense(1)                 -          -        29,996                -          -             -      29,996
Depreciation                    9,182        965           312            1,290        340             -      12,089
Selling, general &
administrative                  4,590      2,116         6,755           14,611      6,016             -      34,088
Provision for losses on
instalment notes                    -          -         3,366                -          -             -       3,366
Postretirement benefits         7,575       (216 )        (106 )           (148 )     (242 )           -       6,863
Amortization of
intangibles                        93          -           362                -          -             -         455

    Operating income
    (loss)                  $  31,735   $  3,231    $   11,247    $         (82 ) $ (5,317 )  $        -      40,814

    Other debt interest
    expense                                                                                                   (7,358 )

    Income before income
    taxes                                                                                                  $  33,456

The Company's net income for the three months ended September 30, 2008 was $55.0 million, or $0.97 per diluted share, which compares to $24.4 million, or $0.46 per diluted share, for the three months ended September 30, 2007.

In the three months ended September 30, 2008, the Company's results included a 24.3% increase in net sales and revenues and a 112.0% increase in operating income versus the same period in 2007. These results were led by the Company's core Natural Resources and Sloss businesses that generated combined revenues of $322.2 million, up 61.2% versus the same period in 2007, and combined operating income of $110.0 million, up 214.6% versus the same period in 2007. These increases were primarily the result of higher average metallurgical coal and coke pricing. Partially offsetting these favorable increases from Natural Resources and Sloss were decreases in net sales and revenues and operating income from the combined Homebuilding and Financing businesses. Revenues and operating income from these businesses declined due to fewer unit deliveries and an increase in the discount required to record originations of instalment notes receivable at estimated market value during the third quarter of 2008 at Homebuilding as well as lower prepayment-related interest income at Financing. Also contributing to the decrease in operating income was a $10.9 million goodwill impairment charge at Financing, $6.5 million of asset impairments and severance costs at Homebuilding and a $3.9 million provision for estimated hurricane-related insurance losses at Financing, resulting from Hurricanes Gustav and Ike. The impact of these factors on the combined operating income for these businesses was partially offset by lower interest expense at Financing as a result of the April 2008 repayment of all outstanding borrowings under its variable funding loan facilities ("warehouse facilities") as discussed in Note 10 of the "Notes to Condensed Consolidated Financial Statements."

Outlook and Strategic Initiatives

º •
º Approximately 1.1 million tons of metallurgical coal was sold in the third quarter of 2008 at the 2008-2009 contract year committed pricing ranging from $135 to $315 per metric ton FOB Port. Also in the third quarter of 2008, 0.3 million tons were sold at the 2007-2008 contract year committed pricing of $101 per ton, which concluded the Company's coal delivery commitments at that price. The Company has approximately 40% of its calendar year 2009 metallurgical coal production priced at a weighted average price of $225 per metric ton, leaving approximately 60% not yet priced and 100% is not yet priced for 2010.

º •
º Although the steel industry is experiencing a softening in global steel demand, the Company's fourth quarter shipments are proceeding as previously expected. The Company's metallurgical coal is used as a base coal by its customers. It is management's belief that, on weakening demand, lower quality coals will be the first ones dropped by customers and that the Company's very high-quality coking coal will still be in demand and will receive premium pricing as a result of customers focusing on value in use. However, further weakening of the steel market based on capacity reduction or demand could result in lower prices or in delays in shipments on current contracts.

º •
º The Mine No. 7 Southwest "A" panel's advance rates have been slower than anticipated as a result of higher than expected levels of methane gas. The panel is still expected to produce approximately 1.0 million tons of coal. However, approximately 350,000 tons of production originally planned for the third and fourth quarters of 2008 is now expected to be produced in the first quarter of 2009. Because of the reduced advanced rates, the Company has revised its 2008 metallurgical coal production estimate to a range of 6.4 million to 6.7 million tons. Total metallurgical coal production was 1.2 million tons in the third quarter of 2008 and incremental tonnage is expected in the fourth quarter of 2008, primarily associated with the Southwest "A" panel. The first longwall panel in the Mine No. 7 East expansion is anticipated to begin late in

º •
º Metallurgical coal sales are expected to range between 6.6 million to 6.7 million tons in 2008.

º •
º Coal production costs averaged $68.99 per ton and $57.42 per ton for the quarter ended September 30, 2008 and for the nine months ended September 30, 2008, respectively. With the anticipated increase in longwall tons versus continuous miner tons beginning in the fourth quarter of 2008, the Company expects a reduction of production costs in the fourth quarter of 2008 and through 2009 such that these costs will range between $50.00 and $55.00 per ton. This estimate is higher than the Company's previous estimate that ranged between $45.00 and $50.00 per ton for the full year as a result of rising raw material costs, such as energy and steel and lower than planned production in 2008. Rising cost for raw materials could negatively impact these new estimates.

º •
º Demurrage costs in the third quarter of 2008 totaling $5.2 million decreased by $1.8 million from the second quarter of 2008. The availability of Mine No. 7 coal due to increased production from Mine No. 7 East and expansion activities at the Port of Mobile should help to contain these costs in the future. In addition, the Company expects demurrage to decrease as a result of negotiated caps in demurrage costs in many of its 2008-2009 metallurgical coal contracts.

º •
º Freight costs on metallurgical coal sales are projected to average $13.00 to $14.00 per ton in 2008. Royalties are expected to average 5.0% to 5.5% of metallurgical coal revenues in 2008. Royalty expense in 2008 is lower than historical levels, as the incremental production from the Southwest "A" panel is on property owned by the Company. Royalty expenses in 2009 are expected to return to more normal levels and are expected to average 7.0 to 8.0%.

º •
º Production at Kodiak Mining decreased due to several unexpected adverse events during the third quarter of 2008. Tons produced since inception are lower than originally projected. Factors including lower yields, significant equipment downtime and adverse geological conditions have all contributed to the shortfall. The Company continues to evaluate the long-term viability of this venture.

º •
º Sloss posted operating income of $14.6 million on the strength of increased metallurgical coke prices. Sloss' pricing and production are expected to remain strong throughout the remainder of 2008. However, higher raw material costs may continue to marginally offset higher pricing over the remainder of 2008.

º •
º The Company continues to focus on growing its Natural Resources business internally and externally. Recent expansion activities include the following:

º •
º Internal growth is expected from the Mine No. 7 East expansion project. Metallurgical coal production is expected to increase nearly 50% over the next two years.

º •
º On July 31, 2008, the Board of Directors approved a plan to expand the Company's United Land subsidiary's surface mining operations by opening a new coal mine with 0.4 million tons of annual capacity. United Land's new mine, to be known as Flat Top Mine, is a 600-acre surface coal mine with reserves of approximately 2.3 million tons of steam and industrial coal on land owned by the Company. Development of the mine has begun and, because permits are already in place, coal production is expected to begin in mid- 2009 and is expected to be accretive to earnings in 2009. United Land will invest approximately $30.0 million to develop the mine, which will employ approximately 50 people, and will be located in Jefferson County, Alabama, 11 miles northwest of Birmingham.

º •
º The Company routinely evaluates potential new coal reserves and also explores for natural gas to supplement its existing businesses, both within close proximity and outside of its existing operations. While there are coal seams adjacent to Jim Walter Resources' mines that have substantially similar characteristics to the Company's existing coal products, there is no assurance that these coal seams would have economic viability. The Company is also exploring for additional sources of natural gas within coal beds and various shale strata at depths down to approximately 8,000 feet below the surface. Although natural gas is known to exist in many of these strata, there is no assurance that this exploration activity will result in commercially viable operations.

º •
º The Company continues to evaluate expansion opportunities, potential acquisitions and further investments in coal and natural gas.

Homebuilding and Financing

º •
º On September 30, 2008, the Company outlined its plans to separate its Financing business from the Company's core natural resources businesses. The Company plans to distribute 100% of its interest in JWH Holding Company, LLC ("JWH Holding Company"), a wholly-owned subsidiary of the Company and parent company of the entities included in the Financing and Homebuilding segments, to its shareholders. Prior to this distribution, Homebuilding will be sold or otherwise separated from JWH Holding Company and will not be part of the spin-off entity.

Also on September 30, 2008, as amended and restated on October 28, 2008, JWH Holding Company entered into a definitive agreement to merge with Hanover Capital Mortgage Holdings, Inc. ("Hanover"), a New Jersey-based real estate investment trust ("REIT"). The merger will occur immediately following the spin-off and the combined company will continue to operate as a publicly traded REIT following the merger. The new company will be named Walter Investment Management Corporation ("Walter Investment Management"), be headquartered in Tampa, Fla. and will have approximately 225 employees. The spin-off and merger are expected to be completed in early 2009. After the spin-off and merger, Walter's shareholders will own approximately 98.5% of Walter Investment Management's publicly traded common stock. Shareholders of Hanover will own the remaining 1.5%. Walter Investment Management plans to apply to list its shares on the American Stock Exchange.

The transaction is subject to certain closing conditions including, but not limited to, approval of the merger by Hanover's shareholders, favorable rulings from the Internal Revenue Service, and the Securities and Exchange Commission declaring effective the required S-4 registration statement and associated proxy filings by Hanover. The Company will continue to consolidate its Financing segment until the date of the spin-off, at which time the historical results of operations of the Financing segment will be reported as discontinued operations.

º •
º During the quarter ended September 30, 2008, the Company recorded a charge of $10.9 million for the impairment of Financing's goodwill. As a result of the Company's plans to separate its Financing business discussed above, the Company analyzed goodwill for potential impairment. The fair value of the reporting unit was determined using a discounted cash flow approach. As a result, the carrying value exceeded the fair value and the implied value of goodwill was $0 as of

º •
º During the quarter ended September 30, 2008, Financing recorded a provision for estimated hurricane insurance losses of $3.9 million as a result of damages from Hurricanes Gustav and Ike that impacted the Company's market area.

º •
º On February 19, 2008, the Company announced a restructuring of JWH Holding Company, LLC, the Company's Financing and Homebuilding business. Thirty-six underperforming Jim Walter Homes sales centers have been closed as part of the restructuring. As a result, the Company recorded a restructuring charge of $6.8 million in the first quarter of 2008, in Homebuilding, of which $4.3 million related to impairments of long-lived assets, $1.7 million related to severance obligations due to a 25% reduction in workforce at Homebuilding and $0.8 million related to lease obligations of closed sales centers. This charge appears as restructuring and impairment charges in the statement of income. As a result of the restructuring, the Company expects an estimated $26.0 million to $28.0 million in annualized selling, general and administrative expense savings, much of which is expected to be realized in 2008. Approximately $14.6 million of cost savings have been realized through September 30, 2008.

º •
º In addition, during the three months ended September 30, 2008, Homebuilding recorded a charge of $6.5 million, of which $6.0 million related to impairment of long-lived assets and $0.5 million for severance costs. See further discussion in Note 6 of the "Notes to Condensed Consolidated Financial Statements."

º •
º In April 2008, the Company amended its 2005 Walter Credit Agreement, increasing the revolver portion of the agreement by $250.0 million to $475.0 million. Available funds of $214.8 million were used to repay principal, interest and fees and terminate the Mid-State Trust IX and Mid-State Trust XIV mortgage warehouse facilities, which were due to expire in July 2008 and October 2008, respectively. On April 30, 2008, the Company repaid all outstanding borrowings and terminated these facilities using proceeds from the amended 2005 Walter Credit Agreement, as discussed above. With the termination of the warehouse facilities, the Company no longer uses mortgage warehouse facilities or accesses the mortgage-backed securitization market.

º •
º In addition, after May 1, 2008, Walter Mortgage Company ("WMC") no longer provided financing to customers of Homebuilding. However, the backlog of homes with signed contracts and those which were under construction as of May 1, 2008 are being financed by WMC. As of September 30, 2008, an estimated 120 homes remain in the backlog, representing a total of approximately $11.4 million in value to be funded by WMC through the end of the first quarter of 2009. The Company will finance these WMC instalment notes receivable with operating cash flows or funds from borrowings under the increased revolving credit facility.

º •
º Homebuilding has transitioned to a third-party financing model including the use of government-sponsored loan programs. As a result of this transition, combined with the continuing sluggish housing market and credit liquidity crisis experienced in recent months in the United States, the Company expects Homebuilding unit deliveries during the remainder of 2008 to be lower than prior periods.

Other

º •
º In June 2008, the Company completed an offering of 3.2 million shares of its common stock, from which it received $280.4 million of net proceeds. The Company used these proceeds to

º •
º During the third quarter ended September 30, 2008, the Board of Directors approved an increase in the Company's regular quarterly dividend rate from $0.05 per common share to $0.10 per common share.

º •
º During the third quarter ended September 30, 2008, the Company repurchased 237,127 shares at an average price of $59.43 under its $25 million share repurchase program, and in October 2008, the Company repurchased 105,729 shares at an average price of $46.56 thereby fulfilling the program's authorized allotment.

º •
º On September 26, 2008, the Board of Directors approved a new $50.0 million share repurchase program, which is intended to replace the previously authorized $25 million share repurchase program. Repurchases will be made based on liquidity, market conditions and alternative opportunities to invest in and grow the Company's core businesses. Through November 6, 2008, the Company has repurchased 1,184,243 shares at an average price of $35.32 under its $50.0 million share repurchase program.

Summary of Third Quarter Consolidated Results of Operations

Net sales and revenues for the three months ended September 30, 2008 were $388.0 million, an increase of $75.8 million, or 24.3% from $312.2 million in the same period in 2007. This increase in revenues was primarily driven by higher metallurgical coal and coke pricing, partially offset by declines in unit deliveries at Homebuilding, a $3.8 million increase in the discount charge on instalment notes receivable originated during the third quarter of 2008 and lower Financing prepayment income.

Cost of sales, exclusive of depreciation, increased $8.8 million to $193.3 million and represented 57.0% of net sales for the three months ended September 30, 2008 versus $184.5 million or 74.1% of net sales for the same period in 2007. The increase in costs primarily results from increased production costs at Natural Resources as well as increased material costs at Sloss. These increases were partially offset by lower costs at Homebuilding resulting from fewer unit deliveries. The decrease in cost of sales as a percentage of net sales in 2008 as compared to 2007 results primarily from increased sales pricing, which outpaced cost increases at Natural Resources and Sloss.

Depreciation for the three months ended September 30, 2008 was $14.8 million, an increase of $2.7 million compared to the same period in 2007. The increase was primarily due to the Company's continued investment in the expansion of and replacement of equipment at Natural Resources' mining operations.

Interest expense on mortgage-backed notes was $24.3 million for the three months ended September 30, 2008, down $5.7 million compared to the same period in 2007. This decrease was due to a reduction in the weighted average borrowings outstanding for the three months ended September 30, 2008 as compared to the same period in 2007 resulting from the pay-off and termination of the warehouse facilities in April 2008 totaling $214.0 million, as well as due to normal repayments on the other securitized notes. The weighted average interest rate for the three months ended September 30, 2008 was also slightly lower as compared to the same period in 2007.

Provision for estimated hurricane insurance losses reflects a $3.9 million provision recorded during the quarter for hurricane-related losses due to Hurricanes Gustav and Ike.

Restructuring charges of $17.4 million in the three months ended September 30, 2008 includes a charge of $6.5 million at Homebuilding, of which $6.0 million related to the impairment of long-lived assets and $0.5 million for severance costs, as well as a charge of $10.9 million for the impairment of

Financing's goodwill. For a further discussion, see Note 6 of "Notes to Condensed Consolidated Financial Statements."

Interest expense on other debt decreased $1.9 million to $5.5 million for the three months ended September 30, 2008, primarily as a result of a reduction in both the weighted average borrowings for the period and the weighted average interest rate.

The Company's effective tax rate for the three months ended September 30, 2008 and 2007 was 32.1% and 27.2%, respectively. The effective tax rate for the three months ended September 30, 2008 includes the effect of a $10.9 million nondeductible goodwill impairment charge. Excluding the impact of this item, the effective tax rate for the quarter would have been 28.3%, comparable to the same period in 2007. Both the 2008 and 2007 effective tax rates differ from the Federal statutory rate primarily due to the benefits from percentage depletion and domestic production deductions.

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

Segment Analysis

Natural Resources, which include the operations of Jim Walter Resources, Kodiak Mining, TRI, Taft and United Land, reported revenues of $268.5 million in the third quarter of 2008, an increase of $103.0 million from the same period last year. The increase in revenues was primarily due to an 81.5% increase in selling prices for metallurgical coal, as compared to the same period in 2007. Additionally, there was an increase in sales from Kodiak Mining and the addition of TRI and Taft sales in 2008. Statistics presented in the following table relate to Jim Walter Resources only.

. . .