Filed pursuant to
Rule 424(b) and (c)
with respect to
Reg. No. 33-59013

FIFTH PROSPECTUS SUPPLEMENT
dated August 26, 1997 to
PROSPECTUS dated September 17, 1996
of WALTER INDUSTRIES, INC.
Relating to 31,885,863
Shares of Common Stock

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K

--X-- Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended May 31, 1997
OR
-- -- Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NUMBER 000-20537

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.)

1500 NORTH DALE MABRY HIGHWAY 33607
TAMPA, FLORIDA (Zip Code)
(Address of principal executive offices)

Registrant's telephone number, including area code: (813) 871-4811

Securities registered pursuant to Section 12(b) of the Act:

NONE

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, PAR VALUE $.01

(Title of class)

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 -- --

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. --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 July 25, 1997 as
reported by NASDAQ National Market System, was approximately $359.7 million.

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 and 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes --X-- No -- --.

Number of shares of common stock outstanding as of July 25,
1997: 55,053,722

DOCUMENTS INCORPORATED BY REFERENCE

Applicable portions of the Proxy Statement for the 1997 Annual Meeting of
Stockholders of the Company to be held September 16, 1997 are incorporated by
reference in Part III of this Form 10-K.

PART I

ITEMS 1 AND 2. BUSINESS AND PROPERTIES

(a) Introduction

Walter Industries, Inc. (the "Company", or "Walter Industries") was
organized in August 1987 by a group of investors led by Kohlberg Kravis Roberts
& Co., LP ("KKR") for the purpose of acquiring Jim Walter Corporation, a Florida
corporation ("Original Jim Walter"), pursuant to a leveraged buyout (the "LBO").
Following its organization, the Company organized and acquired all of the
outstanding shares of capital stock of a group of direct and indirect wholly
owned subsidiaries, including Hillsborough Acquisition Corporation ("HAC"). On
September 18, 1987, HAC acquired approximately 95% of the outstanding shares of
common stock of Original Jim Walter pursuant to a cash tender offer (the "Tender
Offer"). On January 7, 1988, (i) Original Jim Walter merged (the "Merger") into
HAC (which changed its name to Jim Walter Corporation), (ii) HAC distributed
substantially all of its assets (principally excluding the stock of The Celotex
Corporation ("Celotex") and several other subsidiaries of Original Jim Walter)
to a parent corporation of HAC (which was merged into the Company on April 1,
1991) in redemption of all of the shares of capital stock of HAC owned by such
parent corporation, (iii) HAC merged into its other stockholder, another
indirect wholly owned subsidiary of the Company, and (iv) the surviving
corporation of such merger changed its name to Jim Walter Corporation
(hereinafter referred to as "J-II" or "Jim Walter Corporation").

Following the Merger and prior to the commencement of the Chapter 11 Cases
(as defined below), the Company undertook a program of corporate reorganizations
and asset dispositions, which were contemplated by all of the debt agreements
entered into in connection with the Tender Offer and the Merger. Pursuant to
this program, the Company restructured and/or disposed of certain of the
businesses of Original Jim Walter, including the disposition in April 1988 of
all of the stock of the parent corporation of J-II.

Also during this time, the Company and certain of its subsidiaries and
certain of their former and current directors and officers, stockholders and
other persons and entities which were parties to or beneficiaries of
indemnification agreements and other indemnification obligations of the Company
and its subsidiaries (the "Indemnitees") were named as co-defendants in lawsuits
(the "Veil Piercing Litigation") brought by or on behalf of thousands of persons
("Asbestos Claimants") claiming asbestos-related damages against Celotex
alleging, among other things, that (i) Original Jim Walter, its successors and
other entities, including the Company and certain of its subsidiaries, were
liable for all damages, including asbestos-related damages, caused by products
manufactured, sold and distributed by a predecessor of Celotex, by reason of
claims sounding in piercing the corporate veil, alter ego and related theories
("Veil Piercing Claims"), and (ii) the aforementioned distribution by HAC of
substantially all of its assets pursuant to the LBO constituted a fraudulent
conveyance.

On December 27, 1989, the Company and 31 of its subsidiaries each filed a
voluntary petition for reorganization under Chapter 11 ("Chapter 11") of the
United States Bankruptcy Code with the Bankruptcy Court for the Middle District
of Florida, Tampa Division (the "Bankruptcy Court"); one additional subsidiary
also filed a voluntary petition for reorganization under Chapter 11 with the
Bankruptcy Court on December 3, 1990 (all such voluntary petitions for
reorganization hereinafter referred to as the "Chapter 11 Cases"). Two other
subsidiaries, Cardem Insurance Co., Ltd. ("Cardem Insurance") and Jefferson
Warrior Railroad Company, Inc. did not file petitions for reorganization under
Chapter 11. The filing of the voluntary petitions resulted from a sequence of
events stemming primarily from an inability of the Company's interest reset
advisors to reset interest rates on approximately $624 million of outstanding
indebtedness, which indebtedness by its terms required that the interest rates
thereon be reset to the rate per annum such indebtedness should bear in order to
have a bid value of 101% of the principal amount thereof as of December 2, 1989.
The reset advisors' inability to reset the interest rates was primarily
attributable to two factors: (i) uncertainties arising from the then-pending
Veil Piercing Litigation,

including the possibility either that such litigation would lead to the
prohibition of further asset sales and debt repayment or that substantial new
asbestos-related claims might become assertible against the Company, which
uncertainties materially hindered the ability of the Company and its
subsidiaries to pursue a refinancing or sell assets to reduce debt, and (ii)
general turmoil in the high yield bond markets at such time, both of which
depressed the bid value of such indebtedness.

In January 1990, the Company and each of its subsidiaries which were party
to the Chapter 11 Cases filed a declaratory judgment action (the "Adversary
Proceeding") in the Bankruptcy Court against all known Asbestos Claimants who
had filed Veil Piercing Claims, Celotex and Jim Walter Corporation seeking a
declaration, among other things, that (i) the corporate veil between Celotex and
Original Jim Walter could not be pierced, (ii) the Company could not be held
liable for the asbestos-related liabilities of either Celotex or Jim Walter
Corporation on any grounds and (iii) the LBO could not be deemed a fraudulent
conveyance.

In October 1990, Celotex and one of its subsidiaries filed voluntary
petitions for reorganization under Chapter 11 with the Bankruptcy Court for the
Middle District of Florida, Tampa Division (the "Celotex Bankruptcy Court").

In January 1994, the indenture trustees for certain pre-LBO debentures of
Original Jim Walter assumed by the Company brought an action (the "Fraudulent
Conveyance Lawsuit") for the benefit of the Company's estate and its creditors,
which alleged that the issuance of debt in connection with the LBO constituted a
fraudulent conveyance under New York and Florida law. The plaintiffs sought to
avoid the obligations incurred by the Company and its subsidiaries in the LBO.

On March 17, 1995 (the "Effective Date"), the Company and its subsidiaries
emerged from bankruptcy 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"). At that time, pursuant to the Consensual Plan 50,494,313
shares of common stock were issued to certain former creditors and stockholders
of the Company and its subsidiaries and $490,000,000 aggregate principal amount
of the Company's 12.19% Series B Senior Notes Due 2000 (the "Senior Notes") were
issued to certain former creditors of the Company and its subsidiaries. The
Senior Notes were redeemed in full in January 1996. The plan of reorganization
originally proposed by certain creditors and committees (the "Creditors Plan")
provided that subordinated bondholders could elect to receive "Qualified
Securities" (cash and/or Senior Notes) in lieu of Common Stock of the Company.
The Plan of Reorganization confirmed by the Bankruptcy Court which technically
constituted a modification of the Creditors Plan kept in place the bondholders
election. Certain subordinated bondholders, however, were unable to provide
documentation evidencing their right to receive Qualified Securities within the
two year time frame prescribed by the Plan of Reorganization. As a result,
approximately 212,000 additional shares of Common Stock were issued in lieu of
Qualified Securities in fiscal 1997.

Also pursuant to the Consensual Plan (i) the Veil Piercing Claims, the Veil
Piercing Litigation and the Adversary Proceeding, among other things, were
settled after a ruling by the Bankruptcy Court (which was affirmed on appeal by
the United States District Court for the Middle District of Florida) finding in
favor of the Company on every claim asserted in the Adversary Proceeding and
(ii) the Fraudulent Conveyance Lawsuit was settled. This settlement of the Veil
Piercing Litigation (the "Veil Piercing Settlement") was entered into among the
Company, certain of its creditors, Celotex, Jim Walter Corporation and
representatives of the Asbestos Claimants and provided for the dismissal of all
the Veil Piercing Claims and the release of the Company, KKR, any and all of
their present and former parents, subsidiaries, stockholders, partners,
officers, directors and employees and certain other parties (collectively, the
"Released Parties") from all liabilities relating to the LBO or associated with
asbestos-related liabilities of Celotex or Jim Walter Corporation. The Veil
Piercing Settlement is embodied in the Consensual Plan. The Veil Piercing
Settlement, among other things, required Celotex, and certain other parties to
the Celotex bankruptcy proceedings, to propose and use their respective best
efforts to obtain confirmation of a plan of

reorganization for Celotex that included an injunction pursuant to Section
524(g) of the Bankruptcy Code ("Section 524(g)") or other similar injunctive
relief providing the same protection as a Section 524(g) injunction acceptable
to each of the Released Parties. Such injunctive relief provides the Company
with additional assurance that Veil Piercing Claims cannot be asserted in the
future against the Company.

On October 7, 1996, Celotex and various other parties in the Celotex
bankruptcy announced to the Celotex Bankruptcy Court that an agreement had been
reached between Asbestos Bodily Injury Claimants Committee and others (the
"Bodily Injury Plan") and the Asbestos Property Damage Claimants Committee (the
"Property Damage Plan") pursuant to which the Bodily Injury Plan proponents
agreed to file with the Celotex Bankruptcy Court a Modified Joint Plan of
Reorganization (the "Modified Plan") which would provide, among other things,
for revised treatment of asbestos property damage claims. In accordance with the
agreement the Modified Plan was filed with the Celotex Bankruptcy Court on
October 8, 1996 and superseded and replaced the Bodily Injury Plan and the
Property Damage Plan. The Modified Plan provides for a Section 524(g) injunction
as to all asbestos claimants.

The Modified Plan was approved by a vote of the Celotex creditors, and on
December 6, 1996 the Celotex Bankruptcy court entered an order confirming the
Modified Plan. The Modified Plan became effective as of May 30, 1997. See Note
12 to Consolidated Financial Statements--Litigation--Veil Piercing Suits on
pages F-19 and F-20 included herein.

(b) Industry Segments

The Company's industry segment information for the last three fiscal years
is included in Note 15 to Consolidated Financial Statements, on pages F-26
through F-28 included herein.

GENERAL

JIM WALTER HOMES

Jim Walter Homes, Inc. ("Jim Walter Homes") headquartered in the Walter
Industries building in Tampa, Florida, markets and supervises the construction
of detached, single-family residential homes, primarily in the Southern United
States where the weather permits year-round construction and provides mortgage
financing on such homes. Jim Walter Homes has concentrated on the low to
moderately priced segment of the housing market. Over 325,000 homes have been
completed by Jim Walter Homes and its predecessor since 1946.

Jim Walter Homes' products consist of more than 30 models of conventionally
built homes, built of wood on concrete foundations or wood pilings, and ranging
in size from approximately 640 to 2,200 square feet. Each home is completely
finished on the outside and is unfinished on the inside except for rough floors,
ceiling joists, partition studding and closet framing. The buyer may elect to
purchase optional interior components, including installation thereof, such as
plumbing and electrical materials, heating and air conditioning, wallboard,
interior doors, interior trim and floor finishing. A buyer selecting all options
receives a home considered to be "90% complete", excluding landscaping and
utility connections. Shell homes are those which are completely finished on the
outside with the inside containing only rough floors, ceiling joists, partition
studding and closet framing, but not interior wallboard, floor finishing,
plumbing, electrical wiring and fixtures, doors and cabinetry. The remaining
units are sold at varying "in-between"

stages of interior finishing. Jim Walter Homes builds all of its homes "on site"
and only after a building contract has been entered into and Jim Walter Homes is
satisfied that the customer has clear title to the land and the site is suitable
for building. The following chart shows the unit sales volume of Jim Walter
Homes and the percent of homes sold in the three stages of completion for fiscal
years ended May 31, 1997, 1996 and 1995.

PERCENT OF UNIT SALES
------------------------------------------------------------------

FISCAL YEAR ENDED MAY 31, UNITS BUILT SHELL VARIOUS STAGES 90% COMPLETE
- --------------------------------------------------------------- ------------- ----- ------------------- -----------------
1997......................................................... 3,900 10% 1% 89%
1996......................................................... 3,760 18 4 78
1995......................................................... 4,126 25 9 66

During the fiscal years 1997, 1996 and 1995 the average net sales price of a
home was $47,500, $42,300 and $40,200 respectively.

Jim Walter Homes backlog as of May 31, 1997 was 1,972 units compared to
1,957 units at May 31, 1996. The average time to construct a home ranges from
four to twelve weeks.

At fiscal 1997 year end, Jim Walter Homes operated 110 branch offices
located in 19 states (Alabama, Arizona, Arkansas, Florida, Georgia, Indiana,
Kentucky, Louisiana, Mississippi, Missouri, New Mexico, North Carolina, Ohio,
Oklahoma, South Carolina, Tennessee, Texas, Virginia and West Virginia). In
addition, Jim Walter Homes serves five adjoining states (Delaware, Illinois,
Kansas, Maryland and Pennsylvania). Accordingly, these operations are not
subject to significant concentrations of credit risks. Of such branch offices,
approximately 79% are owned, with the balance on leased land. Substantially all
of these branch offices serve as "display parks" which are designed to allow
customers to view actual models completed to the various stages of interior
finishing available. Jim Walter Homes does not own or acquire land for purposes
of its operations and is not a land developer. The actual construction of all
homes sold by Jim Walter Homes is done by local building contractors with their
own crews, pursuant to subcontracts executed in connection with each home, and
inspected by Jim Walter Homes' supervisory personnel. Jim Walter Homes maintains
32 regional warehouses near each of its district offices from which a portion of
the necessary building materials may be obtained; the balance of building
materials is purchased locally.

Approximately 96% of the homes Jim Walter Homes sells are purchased with
financing it arranges. Jim Walter Homes offers qualified customers a fixed
interest rate mortgage without requiring a down payment and does not charge
add-ons such as closing costs, points, credit service fees or private mortgage
insurance.

Jim Walter Homes offers credit terms for up to a maximum of 30 years,
usually for 100% of the purchase price of the home and currently carry an 8.5%
"annual percentage rate". In December 1995, Jim Walter Homes reduced its
financing rate from 10% to 8.5% for its "90% complete" homes on a trial basis
and in March 1996 began formally advertising the lower rate. Jim Walter Homes
extended the 8.5% financing rate to the remainder of its product line ("shell"
and homes sold at various "in between" stages of interior finishing) in the
fourth quarter of fiscal 1997. The 10% "annual percentage rate" had been in
effect since 1979.

To qualify for financing, a potential customer must provide information
concerning his or her monthly income and employment history as well as a legal
description of and evidence that the customer owns the land on which the home is
to be built. A customer's income and employment usually are verified through
telephone conversations with the customer's employer and by examining his or her
pay stubs, W2 forms or, if the customer is self-employed, income tax returns. An
applicant must have a minimum of one year's continuous employment or, if there
has been a change in employment, the new job must be in the same field of work.
Only a small percentage of secondary income (second jobs or part-time work) is
utilized in qualifying applicants. Ownership of the land is verified by
examining the title record. In addition, Jim Walter Homes' credit department
obtains a credit report. Jim Walter Homes does not use a point or grade

credit scoring system. Particular attention is paid to the credit information
for the most recent three to five years. Attention is also given to the
customer's total indebtedness and total other monthly payments on a judgmental
basis by the credit department. The customer's credit standing is considered
favorable if the employment history, income and credit report meet the
aforementioned criteria. If a favorable report is obtained and the required
monthly payment does not exceed 25% of the customer's monthly gross income, the
application usually is approved and a building or instalment sale contract is
executed, a title report is ordered and frequently a survey of the property is
made. Surveys are performed by independent registered surveyors when, in the
opinion of Jim Walter Homes, additional information beyond examination of the
title record is needed. Such additional information is primarily concerned with
verification of legal description, ownership of land and existence of any
encroachments. Jim Walter Homes does not obtain appraisals or title insurance.
Although consideration is given to the ratio of the amount financed to the
estimated value of the home and the land securing such amount, there is no
explicit appraisal-based loan-to-value test. However, there is a requirement
that the value of the lot on which the home is to be built, as estimated solely
on the basis of Jim Walter Homes' mortgage servicing division employees'
experience and knowledge, be at least equal to 10% of the cash selling price of
the home.

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

Prior to occupancy of the new home, the buyer must complete the utility
hook-ups and any of the other components not purchased from Jim Walter Homes,
arrange for the final building inspection and, if required, obtain a certificate
of occupancy. The costs to complete a new home depends on the stage of
completion of the home purchased and whether public water and sewer systems are
available or wells and septic tanks must be installed. Such costs could range
from $2,000-$3,000 to $30,000-$40,000.

Upon completion of construction of a new home to the agreed-upon percentage
of completion, Jim Walter Homes sells the building and instalment sale contract,
the note and the related mortgage, deed of trust or other security instrument to
Mid-State Homes, Inc. ("Mid-State Homes"), an indirect, wholly owned subsidiary
of the Company, in the ordinary course of business pursuant to an Agreement of
Purchase and Sale of Instalment Obligations and Servicing of Delinquent
Accounts. Pursuant to this agreement, Jim Walter Homes provides field servicing
on all delinquent payments, including collection of delinquent payments,
recommendations of foreclosure, foreclosure and resale of foreclosed properties.

The favorable financing offered by Jim Walter Homes normally has tended to
increase unit volume in times of high interest rates and limited availability of
mortgage financing funds. As a result, Jim Walter Homes' volume of home sales
has tended to be counter-cyclical to national home construction activity. Also,
in times of low interest rates and high availability of mortgage funds,
additional competition is able to enter the market.

The single-family residential housing industry is highly competitive. Jim
Walter Homes competes in each of its market areas on the basis of price, design,
finishing options and accessibility to financing with numerous home builders
ranging from regional and national firms to small local companies. Jim Walter
Homes also competes with manufactured housing. For the calendar year 1996, Jim
Walter Homes was the eleventh largest builder of detached single-family homes in
the United States after having been the eighth largest builder in 1995, the
sixth largest builder in 1994, the fifth largest builder in 1993 and the fourth
largest builder in 1992. However, because there are so many firms engaged in the
single-family homebuilding industry, Jim Walter Homes accounted for less than 1%
of all new detached for sale homes built in 1996.

In the three years ended May 31, 1997, 1996 and 1995, Jim Walter Homes' net
sales and revenues amounted to $185.7 million, $159.2 million and $165.8
million, respectively.

MID-STATE HOMES

Mid-State Homes, headquartered in the Walter Industries building in Tampa,
Florida, was established in 1958 to purchase mortgage instalment notes from Jim
Walter Homes on homes constructed and sold by Jim Walter Homes and to service
such mortgage instalment notes. Mid-State Trust II ("Trust II"), Mid-State Trust
III ("Trust III"), Mid-State Trust IV ("Trust IV"), Mid-State Trust V ("Trust
V") and Mid-State Trust VI ("Trust VI") are Delaware business trusts organized
by Mid-State Homes, which owns all of the beneficial interest in Trust III,
Trust IV, Trust V and Trust VI. Trust IV owns all of the beneficial interest in
Trust II.

In April 1988, Mid-State Homes sold to Trust II instalment notes and
mortgages which it had acquired from Jim Walter Homes through February 29, 1988
having a gross amount of approximately $3.376 billion and an aggregate
outstanding economic balance of approximately $1.750 billion pursuant to a
purchase and sales agreement, in exchange for a purchase price of $1.327
billion, representing the net cash proceeds from the public offering of $1.450
billion aggregate face amount of mortgage-backed notes ("Trust II
Mortgage-Backed Notes") of Trust II after paying the expenses associated with
the sale of such Trust II Mortgage-Backed Notes. The outstanding balance of such
Trust II Mortgage-Backed Notes at May 31, 1997 was $410.0 million At May 31,
1997, such Trust II instalment notes and mortgages had a gross book value of
$966.1 million and an economic balance of $609.2 million.

Under the Trust II indenture for the Trust II Mortgage-Backed Notes, if
certain criteria as to performance of the pledged instalment notes are met,
Trust II is allowed to make quarterly distributions of cash to Trust IV, its
sole beneficial owner, to the extent that cash collections on such instalment
notes exceed Trust II's cash expenditures for its operating expenses, interest
expense and mandatory debt payments on its mortgage-backed notes. In addition to
the performance-based distributions, the indenture permits distribution of
additional excess funds, if any, provided such distributions are consented to by
Financial Security Assurance Inc., a monoline property and casualty insurance
company and the guarantor of the Trust II Mortgage-Backed Notes. The guarantor
has not approved any additional distributions since the January 1, 1995
distribution and such excess funds ($79.7 million at May 31, 1997) remain on
deposit with Trust II.

On July 1, 1992, mortgage instalment notes having a gross amount of $638.1
million and an economic balance of $296.2 million were sold by Mid-State Homes
to Trust III in exchange for the net proceeds from the public issuance by Trust
III of $249.9 million of asset backed notes ("Trust III Asset Backed Notes").
Net proceeds were used to repay in full all outstanding indebtedness due under a
revolving credit facility, with the excess cash used to fund the ongoing
operations of the Company and its subsidiaries. The outstanding balance at May
31, 1997 of such Trust III Asset Backed Notes was $116.9 million. At May
31,1997, such Trust III instalment notes and mortgages had a gross book value of
$364.9 million and an economic balance of $195.5 million.

On March 16, 1995, mortgage instalment notes having a gross amount of $2.020
billion and an economic balance of $826.7 million were sold by Mid-State Homes
to Trust IV. In addition, on such date, Mid-State Homes sold its beneficial
interest in Trust II to Trust IV. Trust II had a total collateral value of
$910.5 million with $605.7 million of Trust II Mortgage-Backed Notes
outstanding. These sales were in exchange for the net proceeds from the public
issuance by Trust IV of $959.4 million of asset backed notes ("Trust IV Asset
Backed Notes"). The outstanding balance at May 31, 1997 of such Trust IV Asset
Backed Notes was $841.2 million. At May 31, 1997, such Trust IV instalment notes
and mortgages had a gross book value of $1.613 billion and an economic balance
of $704.5 million.

On February 27, 1995, Mid-State Homes established Trust V, a business trust
in which Mid-State Homes owns all of the beneficial interest, to provide
temporary financing to Mid-State Homes for its

current purchases of instalment notes and mortgages from Jim Walter Homes. On
March 3, 1995, Trust V entered into the Mid-State Trust V Variable Funding Loan
Agreement (the "Trust Variable Funding Loan Agreement") with Enterprise Funding
Corporation, an affiliate of NationsBank NA, as lender, and NationsBank NA
(Carolinas), as Administrative Agent. The agreement provides for a three-year,
$500.0 million credit facility (subsequently reduced to $400.0 million on July
31, 1997) (the "Trust V Variable Funding Loan") secured by the instalment notes
and mortgages Trust V purchases from Mid-State Homes. It is contemplated that
the facility will be an evergreen three-year facility with periodic paydowns
from the proceeds of permanent financings similar to those done by Trusts II,
III, IV and VI. The facility currently matures on March 3, 2000. The outstanding
Trust V Variable Funding Loan balance at May 31, 1997 was $384.0 million. At May
31, 1997, the Trust V instalment notes and mortgages had a gross book value of
$1.310 billion and an economic balance of $509.1 million.

On June 11, 1997, Mid-State Homes purchased mortgage instalment notes from
Trust V having a gross amount of $1.196 billion and an economic balance of
$462.3 million. Mid-State Homes subsequently sold such mortgage instalment notes
to Trust VI, a business trust organized by Mid-State Homes which owns all of the
beneficial interest in Trust VI. These sales were in exchange for the net
proceeds from the public issuance of $439.2 million of asset backed notes
("Trust VI Asset Backed Notes"). The Trust VI Asset Backed Notes were issued in
four classes, bear interest at rates ranging from 7.34% to 7.79%, and have a
final maturity of July 1, 2035. Payments will be made quarterly on January 1,
April 1, July 1, and October 1 based on collections on the underlying
collateral, less amounts paid for interest on the notes and Trust VI expenses.
Net proceeds from the public offering were used primarily to pay down Trust V
indebtedness of $384.0 million.

The instalment notes sold by Mid-State Homes to Trusts II, III, IV, V and VI
are serviced by Mid-State Homes pursuant to servicing agreements entered into
with each trust. Mid-State Homes, in connection with such servicing agreements,
has entered into sub-servicing agreements with Jim Walter Homes to provide field
servicing such as collections, repossessions and resales.

The assets of Mid-State Trusts II, III, IV, and VI are not available to
satisfy claims of general creditors of Mid-State Homes or the Company and its
other subsidiaries. The liabilities of Mid-State Trusts II, III, IV and VI for
their publicly issued debt are to be satisfied solely from proceeds of the
underlying instalment notes and are non-recourse to Mid-State Homes and the
Company and its other subsidiaries.

The revenues of Mid-State Trusts II, III, IV, V and VI are required by
generally accepted accounting principles to be consolidated as part of Mid-State
Homes' revenues for financial statement purposes. In the three years ended May
31, 1997, 1996 and 1995 Mid-State Homes' revenues amounted to $249.4 million,
$248.8 million and $237.1 million, respectively.

JIM WALTER RESOURCES

The operations of Jim Walter Resources, Inc. ("Jim Walter Resources") are
conducted through its Mining Division, which mines and sells coal from four deep
shaft mines in Alabama, and its De-Gas Division, which extracts and sells
methane gas from the coal seams owned or leased by Jim Walter Resources.

MINING DIVISION

The Mining Division, headquartered in Brookwood, Alabama, has approximately
9.7 million tons of rated annual coal production capacity from four deep shaft
mines. These mines extract coal from Alabama's Blue Creek seam, which contains
high-quality metallurgical coal. This coal can be used as coking coal as well as
steam coal because it meets current environmental compliance specifications.
Blue Creek coal offers high coking strength with low coking pressure, low sulfur
and low-to-medium ash content with high BTU values. The mines are located in
west central Alabama between the cities of Birmingham and Tuscaloosa.

The majority of coal is mined using longwall extraction technology,
complemented by the more standard continuous mining method. By replacing more
traditional methods of underground mining with longwall technology, the Mining
Division has achieved greater production efficiency, improved safety, generated
superior coal recovery results and lowered production costs. There are
approximately 70 longwall mining systems in use in the United States, of which
the Mining Division currently operates seven. The Mining Division's normal
operating plan is a longwall/continuous miner ratio of about 75%/25%, which is
the sustainable long-term ratio.

Recoverable reserves were estimated to be approximately 233 million tons as
of May 31, 1997, of which 208 million tons relate to the four Blue Creek Mines.
A summary of reserves is as follows:

ESTIMATED RECOVERABLE(1) COAL RESERVES AS OF MAY 31, 1997
(IN THOUSANDS OF TONS)

TYPE (4)
--------- JIM WALTER
STEAM (S) RESOURCES'
RESERVES(2) CLASSIFICATIONS(3) OR INTEREST
------------------------------ -------------------- METALLUR- -----------------
MINING PROPERTY TOTAL ASSIGNED UNASSIGNED MEASURED INDICATED GICAL(M) OWNED LEASED(5)
- ------------------------- ------- -------- ---------- -------- --------- --------- ------ ---------

No. 3 Mine............... 57,877 57,877 -- 42,192 15,685 S/M 1,440 56,437
No. 4 Mine............... 69,133 69,133 -- 46,945 22,188 S/M 5,696 63,437
No. 5 Mine............... 24,056 24,056 -- 20,111 3,945 S/M 22,081 1,975
No. 7 Mine............... 56,661 56,661 -- 44,337 12,324 S/M 19,257 37,404
------- -------- ---------- -------- --------- ------ ---------
207,727 207,727 -- 153,585 54,142 48,474 159,253
Bessie (8)............... 24,919 -- 24,919 14,880 10,039 -- 658 24,261
------- -------- ---------- -------- --------- ------ ---------
TOTAL.................... 232,646 207,727 24,919 168,465 64,181 49,132 183,514
------- -------- ---------- -------- --------- ------ ---------
------- -------- ---------- -------- --------- ------ ---------

QUALITY(6) PRODUCTION(7)
-------------------- -------------------
MINING PROPERTY ASH SULF. BTU/LB 1997 1996 1995
- ------------------------- ---- ----- ------ ----- ----- -----

No. 3 Mine............... 8.2 0.56 14,469 2,198 2,084 1,730
No. 4 Mine............... 9.4 0.69 14,240 2,129 2,542 2,448
No. 5 Mine............... 8.8 0.66 14,334 801 893 948
No. 7 Mine............... 8.0 0.65 14,499 2,513 2,347 2,501
----- ----- -----
7,641 7,866 7,627
Bessie (8)............... 11.0 1.30 13,655 -- -- --
----- ----- -----
TOTAL.................... 7,641 7,866 7,627
----- ----- -----
----- ----- -----

- ------------------------

(1) "Recoverable" reserves are defined as tons of mineable coal in the Blue
Creek and Mary Lee seams which can be extracted and marketed after deduction
for coal to be left in pillars, etc. and adjusted for reasonable preparation
and handling losses.

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

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

(4) All of the coal in the Blue Creek and Mary Lee seams is suitable for
metallurgical purposes although, for marketing reasons, some is sold as
compliance steam coal.

(5) The leases are either 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) Values shown are weighted averages of all reserves and are calculated on a
dry basis. Bessie Mine reserves are equivalent to preparation at a 1.60
specific gravity, whereas the others are at a 1.40 specific gravity.

(7) Production for 1997, 1996 and 1995 is for the fiscal years ended May 31.

(8) The Bessie Mine was closed in August 1988.

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

The facilities of the Mining Division are summarized as follows:

FACILITY LOCATION SQ. FOOTAGE
- --------------------------------------------- ------------------ ----------------

Administrative headquarters.................. Brookwood, AL 41,500
Central shop, supply center and
training center............................ Brookwood, AL 128,400

CURRENT
OPERATING MINES LOCATION RATED CAPACITY
- --------------------------------------------- ------------------ ----------------

Blue Creek No. 3............................. Adger, AL 2,600,000 tons
Blue Creek No. 4............................. Brookwood, AL 2,700,000 tons
Blue Creek No. 5............................. Brookwood, AL 1,800,000 tons
Blue Creek No. 7............................. Brookwood, AL 2,600,000 tons

Of the Mining Division's approximately 9.7 million tons of current rated
annual production capacity, 4.88 to 5.10 million tons are sold under long-term
contracts, leaving 4.60 to 4.82 million tons to be sold under short-term
contracts or on the spot market.

Jim Walter Resources' supply contract with Alabama Power Company ("Alabama
Power") that had been in effect since January 1, 1979, as amended, was
superseded by a new agreement executed on May 10, 1994 (the "New Alabama Power
Contract"). Under the New Alabama Power Contract, Alabama Power will purchase
4.0 million tons of coal per year from Jim Walter Resources through August 31,
1999. The New Alabama Power Contract has a fixed price subject to an escalation
based on the Consumer Price Index and adjustments for governmental impositions
and quality. The New Alabama Power Contract includes favorable modifications of
specification, shipping deviations and changes in transportation arrangements.

Jim Walter Resources and Cockerill Sambre are parties to a long-term
contract which expires on December 31, 2000. The contract provides for the sale
of approximately 880,000 tons annually, with an option on approximately 220,000
additional tons annually. The pricing mechanism is market driven and reflects
changes in prices of three specific coals or coal indices.

Blue Creek Mine No. 5 ("Mine No. 5") was shut down from November 17, 1993
through December 16, 1993 and from early April 1994 until May 16, 1994 as a
result of a fire due to spontaneous combustion heatings caused by pyritic sulfur
concentrations occurring in the mine's coal seam being exposed to air by the
mining process. Representatives of Jim Walter Resources, the Mine Safety and
Health Administration ('MSHA"), Alabama State Mine Inspectors and the United
Mine Workers of America ("UMWA") agreed that the longwall coal panel being mined
in Mine No. 5 at the time the fire recurred in April 1994 would be abandoned and
sealed off. Development mining for the two remaining longwall coal panels in
this section of the mine resumed on May 16, 1994 and mining on the first
longwall panel resumed on January 17, 1995. Production was adversely impacted
until such date. As a result of the fire, the Company and Jim Walter Resources
claimed compensable losses in the amount of $25 million under their business
interruption insurance coverage. When the insurers refused to pay their pro rata
part of the claim, the Company commenced litigation seeking to enforce such
insurance. The insurers issued policies insuring various percentages of the
risk. The Company has entered into settlements with several insurers who, in the
aggregate, have paid approximately $12.4 million, reducing the contract claims
in the lawsuit to $12.6 million. The Company and Jim Walter Resources continue
to pursue the litigation against the remaining carriers and a trial is
tentatively scheduled for October 1997.

In late November 1995, Mine No. 5 experienced another fire due to the
unexpected recurrence of spontaneous combustion heatings and the mine was shut
down. Efforts to contain and extinguish the fire were successful; however,
conditions dictated the mine be shut down for several weeks. Firefighting and
idle plant costs of approximately $16 million associated with the November 1995
fire were not insured since spontaneous combustion heatings caused by pyritic
sulfur concentrations in Jim Walter Resources'

Mine No. 4 and No. 5 are now excluded from the Company's and Jim Walter
Resources' insurance policies. The affected coal panels on the western side of
the mine were sealed off and from December 1995 through March 1997 development
work was accelerated on the eastern side of Mine No. 5. The mine returned to
production status in the fourth quarter of fiscal 1997. Longwall production
resumed in the eastern part of the mine in June 1997. While in development, the
mine's costs ($40.7 million) were capitalized. Jim Walter Resources three other
mines remained in full production.

In the three years ended May 31, 1997, 1996 and 1995, the Mining Division's
net sales and revenues were $310.7 million, $325.8 million and $299.4 million,
respectively, including $4.2 million, $4.8 million and $5.4 million,
respectively, to Sloss Industries Corporation ("Sloss Industries"), a wholly
owned subsidiary of the Company.

DE-GAS DIVISION

The De-Gas Division, through a joint venture headquartered in Brookwood,
Alabama, extracts and sells methane gas from the coal seams owned or leased by
Jim Walter Resources.

The original motivation for the joint venture was to increase safety in Jim
Walter Resources' Blue Creek mines by reducing methane gas concentrations with
wells drilled in conjunction with the mining operations. There were 390 wells
producing approximately 45 million cubic feet of gas per day, as of May 1997. As
many as 63 additional wells are planned for development in fiscal 1998. The
degasification operation, as had originally been expected, has improved mining
operations and safety by reducing methane gas levels in the mines, as well as
being a profitable operation.

The gas is transported through a 12-mile pipeline (owned and operated by
Black Warrior Transmission Corp., a corporation the stock of which is owned on a
50-50 basis by Jim Walter Resources and Sonat Exploration Company, an affiliate
of Southern Natural Gas Company (SNG)), directly to SNG's pipeline.

The De-Gas Division began operations in 1981 with the formation of an equal
joint venture with Kaneb Services, Inc. ("Kaneb") to capture and market methane
gas from the Blue Creek seam. SNG is the joint venture's exclusive customer for
all output of methane gas, all of which was originally at a price tied to the
price of fuel oil in New York. Kaneb subsequently sold its 50% interest in the
degasification operation to an indirect wholly owned subsidiary of Sonat, Inc.
In connection with this sale, additional areas were added to the gas sales
contract. This gas was priced at a market price nominated by SNG which was not
to be lower than the published price for spot purchases for SNG-South Louisiana
for the applicable month. Effective January 1, 1994, the gas sales contract was
amended. The price to be paid for gas delivered to SNG is now equal to the
average of two published spot prices provided, however, that the price will not
be less than $2.00 per MMBTU (approximately $1.96 per MCF) on a weighted annual
basis, calculated cumulatively each month. The contract also calls for SNG to
pay Jim Walter Resources a reservation fee of $675,000 per month through
December 31, 2001, provided certain minimum quantities of gas are delivered.
Black Warrior Methane Corp., a corporation the stock of which is owned on a
50-50 basis by Jim Walter Resources and Sonat Exploration Company, manages the
operational activities of the joint venture.

In the three years ended May 31, 1997, 1996 and 1995, the De-Gas Division's
net sales and revenues amounted to $28.8 million, $23.0 million and $20.8
million, respectively.

U.S. PIPE

United States Pipe and Foundry Company, Inc. ("U.S. Pipe"), headquartered in
Birmingham, Alabama, conducts its business through its Pressure Pipe Division
and Castings Division. The Pressure Pipe Division manufactures and sells a broad
line of ductile iron pressure pipe, pipe fittings, valves and hydrants. It is
one of the nation's largest producers of ductile iron pressure pipe. The
Castings Division produces and sells a wide variety of gray and ductile iron
castings.

In the three years ended May 31, 1997, 1996 and 1995, U. S. Pipe's net sales
and revenues amounted to $420.7 million, $421.4 million and $412.2 million,
respectively.

PRESSURE PIPE DIVISION

The Pressure Pipe Division manufactures and markets a complete line of
ductile iron pipe ranging from 4" to 64" in diameter as well as equivalent
metric sizes, at lengths up to 20 feet. In addition, this division produces and
sells a full line of fittings, valves and hydrants of various configurations to
meet municipal specifications. Approximately 70%--75% of the ductile iron
pressure pipe produced by this division is used in the transmission and
distribution of potable water and the remaining 25%--30% is used in the
transmission of waste water and industrial applications. The majority of ductile
iron pressure pipe and related fittings, valves and hydrants are for new
distribution systems. The market for rehabilitation, upgrading and replacement
of pipe systems accounts for approximately 30% of ductile iron pressure pipe
sales. Fittings, valves and hydrants produced by this division account for
approximately 20% of sales.

Ductile iron pressure pipe is manufactured by the deLavaud centrifugal
casting process and is typically classified into three size categories: 1) Small
pipe, ranging from 4" to 12" in diameter (approximately 59% of the division's
pipe production), used primarily for potable water distribution systems and
small water system grids; 2) Medium pipe, ranging from 14" to 24" in diameter
(approximately 25% of the division's pipe production), used primarily in
reinforcing distribution systems, including looping grids and supply lines; and
3) Large pipe, 30" to 64" in diameter (which accounts for the remaining 16% of
pipe production), used for major water and waste water transmission and
collection systems.

The ductile iron pressure pipe industry is highly competitive, with a small
number of manufacturers of ductile iron pressure pipe, fittings, valves and
hydrants. U.S. Pipe is one of the nation's largest producers of ductile iron
pressure pipe. Major ductile iron pipe competitors include McWane, Inc., Griffin
Ductile Iron Pipe Company and American Cast Iron Pipe Company. The division
competes with such other manufacturers of ductile iron pressure pipe on the
basis of price, customer service and product quality.

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

U.S. Pipe is also a manufacturer of ductile iron fittings. The Company
believes that McWane, Inc. has the largest market share in this market segment.
U.S. Pipe is not a major manufacturer of valves and hydrants.

Products of the Pressure Pipe Division are sold primarily to contractors,
water works distributors, municipalities, private utilities and other
governmental agencies. Most ductile iron pressure pipe orders result from
contracts which are bid by contractors or directly issued by municipalities or
private utilities. An increasing portion of ductile iron pressure pipe sales are
made through independent water works distributors. The division maintains
numerous supply depots in leased space throughout the country which are used as
a source of pipe for start-up projects to support ongoing projects and to aid in
completing projects. The Pressure Pipe Division's sales are primarily domestic,
with foreign sales accounting for approximately 5% of dollar sales in 1997. U.S.
Pipe has 36 regional sales offices in leased office space in the United States.

The order backlog of pressure pipe at May 31, 1997 was 108,341 tons, which
represents approximately three months shipments, compared to 121,734 tons at May
31, 1996.

The Pressure Pipe Division manufactures ductile iron pressure pipe at four
owned plants located in (i) Bessemer, Alabama (581,000 square feet on 169 acres
of land); (ii) North Birmingham, Alabama (358,000 square feet on 61 acres of
land); (iii) Union City, California (121,000 square feet on 70 acres of land);
and (iv) Burlington, New Jersey (329,000 square feet on 109 acres of land).
These plants have annual

rated capacities to produce 180,000 tons, 160,000 tons, 85,000 tons and 132,000
tons, respectively, of ductile iron pressure pipe based on one shift per day. In
addition, the division manufactures fittings, valves and hydrants at its owned
plant in Chattanooga, Tennessee (648,000 square feet on 91 acres of land). The
general offices located in Birmingham, Alabama contain 122,000 square feet of
office space on 6 acres of owned land.

While the pipe business is generally sensitive to recessions because of its
partial dependence on the level of new construction activity, certain aspects of
Pressure Pipe's operations have in the past helped to reduce the impact of a
downturn in new construction. First, Pressure Pipe's products have experienced a
strong level of demand in the replacement market. The Company believes that
growth of the replacement market will accelerate as a result of major
expenditures by governmental entities in an effort to rebuild the nation's
infrastructure, such as the replacement and upgrading of water and waste water
transmission systems. In addition, SAFE DRINKING WATER ACT ("SDWA") amendments
signed into law in 1996 mandate that communities nationwide upgrade their water
transmission systems over the next 20 years in order to comply with new federal
water quality standards. Second, Pressure Pipe's facilities are located in
regions of the country that have exhibited consistent economic strength. The
Burlington, New Jersey plant is adjacent to the northeastern market with its
significant replacement potential and the division's operations in the South are
located in areas of steady economic growth. The West Coast, served by the Union
City, California plant, has a critical shortage of water for many of the large
metropolitan areas which will require major transmission pipelines in the
future. Because freight costs for pipe are high, locations close to important
markets lower transportation costs, thereby making the Pressure Pipe Division's
products more competitive.

CASTINGS DIVISION

The Castings Division produces a wide variety of gray and ductile iron
castings for a diversified customer base, including special hardness castings
for the pollution control industry. In the year ended May 31, 1997,
approximately 55% of the Division's castings sales were directed to the Pressure
Pipe Division, with the balance of sales to various capital goods industries.
Manufacturing operations are located in Anniston, Alabama (240,000 square feet
on 21 acres of owned land).

SLOSS INDUSTRIES

Sloss Industries is a diversified manufacturing operation, headquartered in
Birmingham, Alabama, which has four major product lines: (1) foundry coke; (2)
furnace coke; (3) slag wool; and (4) specialty chemicals.

Foundry coke is marketed to cast iron pipe plants and foundries producing
castings, such as for the automotive and agricultural equipment industries. It
is shipped primarily into four geographic markets: the East Coast; the
Southeast; Mexico and the West Coast. Competition comes primarily from three
merchant suppliers: ABC Coke, Koppers Company, Inc. and Empire Coke Company. In
the year ended May 31, 1997, approximately 61% of the foundry coke produced by
Sloss Industries was sold to U. S. Pipe.

Furnace coke is sold primarily to basic steel producers. Furnace Coke sales
have been at capacity over the past years to satisfy a long-term contract with
National Steel Corporation. Sloss Industries has only an estimated 1% share of
the furnace coke market. Competition comes primarily from Koppers Company, Inc.
in the southern United States, Citizens Gas & Coke Utility and steel producers
with excess coking capacity in the Midwest.

Slag wool is an insulating fiber utilized principally as a raw material by
acoustical ceiling manufacturers. It is also used in manufactured-home
insulation, plastics molding and asphalt paving systems where it is used as a
bonding agent. A related product, processed mineral fiber, is used in friction
materials and thermoplastic molding compounds, adhesives, paints and sealants.
The continued success of the slag wool business depends upon Sloss Industries'
ability to produce ceiling tile fiber of consistent high quality and

react to customer demands for specific "customized" fiber composition. Of the
total slag wool sales in the year ended May 31, 1997, approximately 72% was sold
to Armstrong World Industries and 20% to Celotex.

Chemical products are manufactured in plants located in Birmingham and
Ariton, Alabama. The Birmingham product line is composed primarily of aromatic
sulfonic acids and sulfonyl chlorides used in the pharmaceutical, plasticizer,
foundry and coatings industries, as well as a custom manufactured specialty
monomer for the plastics industry. The Ariton facility produces custom
manufactured specialty products for the rubber and plastics industries.

Sloss Industries' manufacturing facilities are located in Birmingham,
Alabama and include: 120 coke ovens with an annual rated capacity of 410,000
tons and related buildings of 148,400 square feet, a slag wool plant with an
annual rated capacity of 102,000 tons in a building of 63,000 square feet and a
synthetic chemicals plant in a building of 63,300 square feet, all on 521 acres
of owned land. Sloss Industries also operates a specialty chemical facility in
Ariton, Alabama in a building of 6,880 square feet, on 53 acres of owned land.

In the three years ended May 31, 1997, 1996 and 1995, Sloss Industries' net
sales and revenues amounted to $91.1 million, $91.1 million and $88.0 million,
respectively, including $11.2 million, $12.0 million and $11.1 million,
respectively to U. S. Pipe.

JW ALUMINUM

JW Aluminum Company ("JW Aluminum"), headquartered in Mt. Holly, South
Carolina, is a leading producer of custom-coated fin stock used in heating and
air conditioning applications and telecommunications cable wrap. JW Aluminum's
other foil and sheet products are used in a variety of applications such as
lithoplate for newspapers and as a facer on foam insulation products. Aluminum
sheet products are primarily used for general building applications such as
siding, gutters, downspouts, roofing, mobile home siding and skirting,
residential siding and window components.

JW Aluminum sold 135.6 million pounds of aluminum products in fiscal 1997;
73% of which were foil products and 27% were sheet products. JW Aluminum has
focused on directing its product mix towards higher value added products such as
fin stock, where quality and service are relied upon more than price-driven
commodity products.

JW Aluminum operates a single manufacturing 300,000 square foot facility in
Mt. Holly, South Carolina on 30 acres of owned land. JW Aluminum's current rated
capacity is 150 million pounds per year based on its present product mix. A
two-year, $31.0 million expansion project is currently underway which will add
65,000 square feet of production space and increase JW Aluminum's capacity 60%
to approximately 240 million pounds per year at completion.

In the three years ended May 31, 1997, 1996 and 1995, JW Aluminum's net
sales and revenues totaled $150.4 million, $141.1 million and $134.2 million,
respectively, including $2.8 million, $3.4 million and $6.1 million,
respectively, to JW Window Components, Inc. ("JW Window Components"), a wholly
owned subsidiary of the Company.

JW WINDOW COMPONENTS

JW Window Components produces a variety of screens and screen components and
a full line of window components, such as extruded aluminum components,
weatherstripping, sash balances and spiral balances. The Company estimates that
60% of total sales are directed to the new construction market, 30% to the
renovation market and 10% to the commercial sector.

JW Window's products are sold through a network of independent sales agents,
covering the continental United States, the Caribbean and Central America.

JW Window's operates three plants located in Elizabethton, Tennessee
(190,000 square feet on 25 acres of owned land); Sioux Falls, South Dakota
(50,000 square feet on 3 acres of owned land); and Merrill, Wisconsin (54,000
square feet of leased space). The administrative offices located in
Elizabethton, Tennessee contain 8,500 square feet of leased office space.

In the three years ended May 31, 1997, 1996 and 1995, (JW Window Components'
net sales and revenues were $38.9 million, $37.0 million and $45.8 million,
respectively.

SOUTHERN PRECISION

Southern Precision Corporation ("Southern Precision") is the largest
producer of specialized industrial tooling products and resin coated sand in the
Southeast.

Southern Precision's Irondale, Alabama manufacturing facility incorporates
the plant, warehouse and administrative functions in 78,000 square feet of
building space located on 6 acres of owned land. Products and services provided
at this location include: wood and metal pattern tooling; computerized
numerically controlled machining for industries such as satellite and aircraft
communications, aerospace and glass machines; plastic injection, compression and
rubber molds; aluminum castings; and general machining of fabrications, castings
and plates.

Southern Precision's Birmingham, Alabama manufacturing facility (27,500
square feet on 5 acres of owned land) produces a coated sand for production of
shell cores for the foundry industry.

In the three years ended May 31, 1997, 1996 and 1995, Southern Precision's
net sales and revenues amounted to $15.6 million, $15.0 million and $14.4
million, respectively, including $1.2 million, $1.2 million and $2.4 million,
respectively to U.S. Pipe.

VESTAL MANUFACTURING

Vestal Manufacturing Company ("Vestal") produces a diversified line of metal
and foundry products for residential, commercial and industrial use. Vestal
manufactures a line of energy saving fireplaces, fireplace inserts, accessories
and wood-burning stoves, as well as lightweight castings for municipal markets
and metal building products. Its products are sold through a network of
independent sales agents to hardware and building material distributors, home
centers and mass merchandisers throughout the United States and Canada.

Vestal's performance to a large extent is tied to residential construction.
Foreign competition has also been a factor in recent years.

Vestal, located in Sweetwater, Tennessee, operates a foundry with 103,000
square feet of building, a steel fabrication plant with 109,000 square feet and
an administrative office containing 7,000 square feet, all on 46 acres of owned
land.

In the three years ended May 31, 1997, 1996 and 1995, Vestal's net sales and
revenues totaled $18.0 million, $17.3 million and $19.4 million, respectively.

UNITED LAND

United Land Corporation ("United Land") owns approximately 40,000 acres of
land, 141,000 acres of mineral rights and 1,300 acres of surface rights,
principally in Alabama.

United Land receives royalties resulting from leases to strip coal miners,
gas producers and timber companies. When market conditions are favorable,
management expects from time to time to sell excess real estate from the
holdings of United Land not utilized by any of the other subsidiaries of the
Company.

In the three years ended May 31, 1997, 1996 and 1995, United Land's net
sales and revenues amounted to $8.6 million, $14.6 million, and $15.8 million,
respectively, including gains on sales of certain excess real estate of $2.5
million, $6.1 million and $6.1 million, respectively.

WALTER LAND

Walter Land Company ("Walter Land") is a land sales business with an
inventory at May 31, 1997 of approximately 6,800 acres, primarily on the south
side of Houma, Louisiana. The bulk of the commercial development in Houma is
tied directly to service and support for offshore oil and gas drilling. Walter
Land's income is principally derived from land sales and rental income. The
management and sale of the Louisiana properties are handled by local personnel
on a contract basis. In the three years ended May 31, 1997, 1996 and 1995,
Walter Land's net sales and revenues amounted to $1.1 million, including gains
of $.8 million on land sales, $277,000 and $196,000, respectively.

CARDEM INSURANCE

Cardem Insurance is a Hamilton, Bermuda based offshore reinsurance company.
The predominant portion of its business is reinsuring 75% of the risk on fire
and extended coverage insurance policies issued by Westchester Insurance
Company, an unrelated insurance company. Such insurance policies are with
individual owners of homes constructed by Jim Walter Homes. In the years ended
May 31, 1997, 1996 and 1995, Cardem Insurance's net sales and revenues amounted
to $12.3 million, $13.1 million and $11.8 million, respectively.

SEASONALITY

Certain of the businesses of the Company (primarily U.S. Pipe, Jim Walter
Homes, JW Window Components and Vestal Manufacturing) are subject to seasonal
variations to varying degrees. However, the businesses of the Company are
significantly influenced by the general economy and in particular, the level of
construction.

TRADE NAMES, TRADEMARKS AND PATENTS

The names of each of the Company's subsidiaries are well established in the
respective markets served by them. Management believes that the reputation of
such trade names is of some importance. The Company's subsidiaries have numerous
patents and trademarks. Management does not believe, however, that any one such
patent or trademark is of material importance to the Company's business as a
whole.

RESEARCH AND DEVELOPMENT

Research activities conducted by each business are directed toward new
products, process and building systems development, improvement of existing
products, development of new uses for existing products and cost reduction
efforts. Total research and development expenditures in each of the last three
fiscal years were less than 1% of consolidated net sales and revenues.

RAW MATERIALS

Substantially all of the raw materials needed for the operations of the
Company and its subsidiaries are either produced by the Company and its
subsidiaries or purchased from domestic sources. All materials used by the
various businesses of the Company are available in quantities required to
support their respective 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. Expenditures for compliance of ongoing
operations and for remediation of environmental conditions arising from past
operations in the fiscal year ended May 31, 1997 and May 31, 1996 were
approximately $6.8 million and $5.1 million, respectively. Because environmental
laws and regulations on the federal, state and local levels 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. Consequently,
the Company can give no assurance that such expenditures will not be material in
the future. Capital expenditures for environmental requirements are anticipated
to average approximately $6.0 million per year in the next five years.

U.S. Pipe has implemented an Administrative Consent Order ("ACO") for its
Burlington, New Jersey plant that was required under the New Jersey
Environmental Cleanup Responsibility Act (now known as the Industrial Site
Recovery Act) in connection with the completion of the LBO. The ACO required
soil and ground water cleanup. U.S. Pipe has completed, pending final approval,
the soil cleanup required by the ACO. U.S. Pipe also has completed, pending
final approval, ground water treatment as ordered in the ACO. Ground water
monitoring as required by the ACO continues. It is not known how long ground
water monitoring will be required. Management does not believe any further
cleanup costs will have a material adverse effect on the financial condition or
results of operations of the Company and its subsidiaries.

The Federal Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA"), generally imposes liability, which may be joint and several and
is without regard to fault or the legality of waste generation or disposal, on
certain classes of persons, including owners and operators of sites at which
hazardous substances are released into the environment (or pose a threat of such
release), persons that disposed or arranged for the disposal of hazardous
substances at such sites, and persons who owned or operated such sites at the
time of such disposal. CERCLA authorizes the EPA, the states and, in some
circumstances, private entities to take actions in response to public health or
environmental threats and to seek to recover the costs they incur from the same
classes of persons. Certain governmental authorities can also seek recovery for
damages to natural resources. Currently, U.S. Pipe has been identified as a
potentially responsible party ("PRP") by the EPA under CERCLA with respect to
cleanup of hazardous substances at two sites to which its wastes allegedly were
transported. U.S. Pipe is one of many PRP's at such sites and is in the process
of preliminary investigation of its relationship to these sites, if any, to
determine the nature of its potential liability and amount of remedial costs to
clean up such sites. Although no assurances can be given that U.S. Pipe will not
be required in the future to make material expenditures relating to these sites,
management does not believe at this time that the cleanup costs it will be
called on to bear, if any, associated with these sites will have a material
adverse effect on the financial condition or results of operations of the
Company and its subsidiaries. Management believes the extent of U.S. Pipe's
involvement, if any, to be minor in relation to that of other named PRP's, a
significant number of which are substantial companies.

EMPLOYEES

As of May 31, 1997, the Company and its subsidiaries employed 7,584 people,
of whom 4,784 were hourly workers and 2,800 were salaried employees.
Approximately 4,200 employees were represented by unions under collective
bargaining agreements, of which approximately 1,730 were covered by one contract
with the UMWA, which expires on August 1, 1998. The Company considers its
relations with its employees to be satisfactory.

The Company and its subsidiaries have various pension and profit sharing
plans covering substantially all employees. In addition to the Company's own
pension plans, contributions are made to certain multi-employer plans. The
funding of retirement and employee benefit plans is in accordance with the
requirements of such plans and, where applicable, in sufficient amounts to
satisfy the "Minimum Funding Standards" of the Employee Retirement Income
Security Act of 1974 ("ERISA"). The plans provide benefits based on years of
service and compensation or at stated amounts for each year of service. The
Company and its subsidiaries also provide certain postretirement benefits other
than pensions and profit sharing, primarily healthcare, to eligible retirees.

PROPERTIES

The Company's headquarters building contains approximately 200,000 square
feet of office space, located on approximately 13 acres in Tampa, Florida.

ITEM 3. LEGAL PROCEEDINGS

See Items 1 and 2 - Business and Properties - Introduction on pages 2
through 4 and Jim Walter Resources - Mining Division on pages 10 and 11 and Note
12 of the Notes to Consolidated Financial Statements on pages F-19 through F-22
included herein.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below is a list showing the names, ages (as of August 1, 1997) and
positions of the executive officers of the Company.

NAME AGE OFFICE
- ----------------------------------- --- -----------------------------------------------------------------------

Kenneth E. Hyatt................... 56 Chairman, President and Chief Executive Officer
Richard E. Almy.................... 55 Director, Executive Vice President and Chief Operating Officer
Dean M. Fjelstul................... 55 Senior Vice President and Chief Financial Officer
Robert W. Michael.................. 55 Senior Vice President and Group Executive
William N. Temple (1).............. 64 Senior Vice President and Group Executive
Frank A. Hult...................... 46 Vice President, Controller and Chief Accounting Officer
Donald M. Kurucz................... 58 Vice President and Treasurer
Edward A. Porter................... 50 Vice President--General Counsel and Secretary
David L. Townsend.................. 43 Vice President--Administration
George R. Richmond................. 47 President and Chief Operating Officer of Jim Walter Resources

- ------------------------

(1) Mr. Temple has announced his intention to retire in January 1998. On July
30, 1997, the Company announced that Ralph E. Fifield, former President of
United States Steel/Kobe Steel Company and a 28-year industrial
manufacturing veteran, would succeed Mr. Temple as President and Chief
Operating Officer of United States Pipe and Foundry Company effective August
1, 1997 with Mr. Temple assuming the position of Chairman pending his
retirement. Mr. Fifield, 51, gained extensive manufacturing and operations
management experience during a 28-year career with United States Steel,
which he joined in 1969 at the Company's Gary, Indiana plant. Following a
progressive series of plant engineering positions at the Gary facility, he
was named Plant Manager of U.S. Steel's South Works plant in Chicago in
1984. He later served as General Manager of the company's Fairless,
Pennsylvania plant from 1988 to 1990 and Fairfield, Alabama plant from 1990
to 1991. In 1991 he was promoted to

Corporate Vice President--Operations, overseeing six manufacturing
facilities. In 1994, Mr. Fifield was named President of Lorain, Ohio based
USS/KOBE Steel company, a joint venture with annual revenues of
approximately $770 million.

Kenneth E. Hyatt has been Chairman of the Board and Chief Executive Officer
of the Company since June 1, 1996 and has been President of the Company since
September 1, 1995. Between September 1, 1995 and June 1, 1996, Mr. Hyatt also
served as Chief Operating Officer of the Company. Mr. Hyatt was elected a
director on September 12, 1995. Mr. Hyatt served as President and Chief
Executive Officer and a director of Celotex from 1990 until shortly prior to his
election, effective September 1, 1995, as President and Chief Operating Officer
of the Company. Mr. Hyatt held various management and executive positions with
various subsidiaries of Original Jim Walter from 1966 until 1984, at which time
he was named Vice President and Group Executive of Original Jim Walter. In 1986,
he was elected Executive Vice President and Chief Operating Officer of Original
Jim Walter. Following Original Jim Walter's leveraged buyout in 1988 by KKR, Mr.
Hyatt joined with an investor group in the acquisition of Celotex and certain
related entities. In October 1990 Celotex and one of its subsidiaries filed
voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code
in the Bankruptcy Court as a result of massive litigation involving
asbestos-related liabilities. The Celotex Plan of Reorganization was confirmed
in December 1996 and became effective May 1997. The Celotex Trust is a principal
stockholder of the Company.

Richard E. Almy has been Executive Vice President and Chief Operating
Officer of the Company since June 1996. Previously, Mr. Almy was President and
Chief Operating Officer at JW Aluminum (1991-1996) and JW Window Components
(1995-1996).

Dean M. Fjelstul has been Senior Vice President and Chief Financial Officer
of the Company since October 1996. Between June 1, 1996 and October 1, 1996, Mr.
Fjelstul served as Senior Vice President - Finance of the Company. Previously,
he was employed by Alliant Techsystems as Vice President and Chief Financial
Officer (1990-1996). Prior thereto he served in various financial management
capacities with Honeywell, Inc. during a 22 year tenure with that company.

Robert W. Michael has been a Senior Vice President and Group Executive of
the Company since 1991 and President and Chief Operating Officer of Jim Walter
Homes since 1984. He also served as Vice President of Original Jim Walter from
1984 to 1988. Prior thereto, he was Vice President-Sales (1975-1984), a Regional
Manager (1973-1975), an Assistant Regional Manager (1970-1973), a Main Branch
Manager (1967-1970) and a Sub-Branch Manager (1966-1967) with Jim Walter Homes
and held various managerial positions with Mid-State Homes (1964-1966).

William N. Temple has been a Senior Vice President and Group Executive of
the Company since 1991 and President and Chief Operating Officer of U.S. Pipe
since 1993; he was a Vice President of the Company from 1988 to 1991 and from
1974 was a Vice President of Original Jim Walter. Previously he served as
President of the former Fasteners and Special Products Division of U.S. Pipe and
Vice President of U.S. Pipe (1972-1974), President of the former Southeastern
Bolt and Screw division of U.S. Pipe (1971-1974) and Controller of U.S. Pipe
(1965-1971).

Frank A. Hult has been a Vice President, Controller and the Chief Accounting
Officer of the Company since 1995. Previously, he was a Vice President (since
1994), the Controller (since 1991), Assistant Controller and Chief Accountant
(1989-1991) and Manager of Budgets (1988-1989) of the Company. Prior thereto he
was Manager of Budgets (1984-1988) and Financial Analyst (1978-1981) of Original
Jim Walter and Manager-Operations Administration (1981-1984), Plant Controller
and Cost Accountant (1974-1975) for Celotex.

Donald M. Kurucz has been a Vice President and the Treasurer of the Company
since 1991; he was Treasurer of the Company from 1988-1991. Previously he served
as Treasurer (1977-1988) and Assistant Treasurer (1975-1977) of Original Jim
Walter.

Edward A. Porter has been Vice President, General Counsel and Secretary of
the Company since January 1996. Previously, he was employed by National Gypsum
Company as Senior Vice President-Administration, General Counsel and Secretary
(1993-1995); Vice President--Administration, General Counsel and Secretary
(1988-1993) and held various legal positions (1980-1988).

David L. Townsend has been a Vice President of the Company since 1988.
Previously he served as a Vice President-Human Resources and Public Relations
(1994-1996) and Vice President-Public Relations (1988-1994) of the Company.
Prior thereto he served as a Vice President-Public Relations (since 1983),
Director of Public Relations (1982-1983) and Manager of Public Relations
(1980-1982) of Original Jim Walter and in various staff positions (1978-1980)
with Original Jim Walter.

George R. Richmond has been President and Chief Operating Officer of Jim
Walter Resources since June 1, 1997, succeeding William Carr as President and
Chief Operating Officer upon Mr. Carr's retirement on May 31, 1997. Previously
he served as Senior Vice President of Operations (since 1993) and Vice President
of Operations (1992). Prior thereto he was Deputy Mine Manager and No. 3 Mine
Manager, Longwall Manager, Master Mechanic and Longwall Mechanical Engineer.

Executive officers serve at the pleasure of the Board of Directors. The
Company is not aware of any family relationships among any of the foregoing
executive officers.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock (the "Common Stock") has been listed on the
Nasdaq National Market under the trading symbol "WLTR" since October 11, 1995.
The table below sets forth, for the quarterly periods indicated, the range of
high and low sales prices of the Company's Common Stock since such date.

1997 1996(1)
-------------------- ------------

HIGH LOW HIGH LOW
--------- --------- ----- ---
1st Quarter................................................. $ 14 1/4 $ 11 7/8
2nd Quarter................................................. 14 1/4 12 5/8 14 3/4 12 3/8
3rd Quarter................................................. 15 1/4 12 5/8 13 3/4 12
4th Quarter................................................. 15 3/8 13 1/4 14 1/2 12 5/8

- ------------------------

(1) Beginning October 11, 1995

The Registrant has never paid cash dividends on Common Stock and has no
present intention of paying any cash dividends on the Common Stock. Covenants
contained in certain of the debt instruments referred to in Note 8 of Notes to
Consolidated Financial Statements on pages F-11 through F-13 restrict the
ability of the Company to pay cash dividends.

As of July 25, 1997, there were 123 shareholders of record of the Company's
common stock.

ITEM 6. SELECTED FINANCIAL DATA

The following data, insofar as it relates to each of the fiscal years 1993
through 1997, has been derived from annual financial statements, including the
consolidated balance sheets at May 31, 1997 and 1996 and the related
consolidated statements of operations and cash flows for the three years ended
May 31, 1997 and the notes thereto appearing elsewhere herein. All of the
information presented below should be read in conjunction with the Company's
Consolidated Financial Statements and the notes thereto, and the other
information contained elsewhere in this report.

YEARS ENDED MAY 31,
-----------------------------------------------------------------------

1997 1996 (3) 1995 1994 1993 (2)
------------- ------------- ------------- ------------ ------------

(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)

Summary of Operations:
Sales and revenues............................. $ 1,507,061 $ 1,485,635 $ 1,442,322 $ 1,328,524 $ 1,318,986
Cost of sales (exclusive of depreciation)...... 980,235 987,354 951,381 845,061 804,411
Depreciation, depletion and amortization....... 71,814 74,341 72,037 71,035 70,483
Interest and amortization of debt discount and
expense (1).................................. 179,291 208,690 304,548 155,470 171,581
Income tax expense (benefit)................... 32,981 (55,155) (170,450) 28,917 24,328
Income (loss) before extraordinary item and
cumulative effect of accounting change
(2)(3)(4).................................... 37,117 (79,292) (358,645) 7,175 46,594
Net income (loss).............................. 37,117 (84,696) (358,645) 7,175 (58,014)
Net income (loss) per share (4) & (5)
Income (loss) before extraordinary item........ .67 (1.56) (7.10)
Extraordinary item............................. -- (.10) --
------------- ------------- -------------
Net income (loss).............................. .67 (1.66) (7.10)
------------- ------------- -------------
------------- ------------- -------------
Number of shares used in calculation of income
(loss) per share............................. 55,039,347 50,988,195 50,494,313
------------- ------------- -------------
------------- ------------- -------------
Additional Financial Data:
Gross capital expenditures..................... $ 101,755 $ 83,523 $ 91,317 $ 69,831 $ 71,708
Net property, plant and equipment.............. 568,176 541,536 662,792 657,863 663,040
Total assets................................... 3,027,385 3,091,377 3,245,153 3,140,892 3,223,234
Long-term senior debt.......................... 2,065,575 2,211,296 2,220,370 871,970 1,046,971
Liabilities subject to Chapter 11
proceedings.................................. -- -- -- 1,727,684 1,725,631
Stockholders' equity (deficit)................. 319,412 276,694 360,774 (282,353) (287,737)
Employees at end of year....................... 7,584 7,755 7,888 7,676 7,545

- ------------------------

(1) Interest on unsecured obligations not accrued since December 27, 1989
amounted to $163.7 million in each of the years ended May 31, 1993 and 1994.
The Company recorded additional interest and amortization of debt discount
and expense of $141.4 million related to the consummation of the Consensual
Plan in fiscal 1995.

(2) The Company adopted Statement of Financial Accounting Standards No. 106
"Employers Accounting for Postretirement Benefits Other Than Pensions"
("FASB 106") and Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" ("FASB 109") during fiscal year 1993.

(3) The Company adopted Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to
Be Disposed Of" ("FASB 121") during fiscal year 1996.

(4) Extraordinary item consists of redemption premium and write-off of
unamortized debt expense of $8.3 million ($5.4 million after tax) related to
early repayment of the Senior Notes and a $150 million bank credit facility
during fiscal year 1996 (see Note 8 to "Notes to Consolidated Financial
Statements").

(5) Per share information for fiscal years 1993 and 1994 is not relevant given
the significant change in the Company's capital structure following
consummation of the Consensual Plan.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION

The Company emerged from bankruptcy on March 17, 1995 pursuant to the
Consensual Plan. Accordingly, the Company's Consolidated Statement of Operations
and Retained Earnings (Deficit) for the years ended May 31, 1997 and 1996 are
not comparable to the Consolidated Statement of Operations and Retained Earnings
(Deficit) for prior periods.

This discussion should be read in conjunction with the consolidated
financial statements and notes thereto of Walter Industries, Inc. and
subsidiaries, particularly Note 1 of "Notes to Consolidated Financial
Statements" on pages F-6 and F-7, which presents an unaudited pro forma
consolidated statement of operations for the year ended May 31, 1995 to
illustrate the estimated effects of the Consensual Plan and related financings
as if they had occurred as of June 1, 1994, and Note 15 of "Notes to
Consolidated Financial Statements" on pages F-26 through F-28, which presents
sales and operating income by operating group.

RESULTS OF OPERATIONS
YEARS ENDED MAY 31, 1997 AND 1996

Net sales and revenues for the year ended May 31, 1997 were $21.4 million,
or 1.4%, above the prior year with a 2.8% increase in pricing and/or product mix
partially offset by a 1.4% decrease in volume. The decrease in volume was
principally the result of lower coal shipments, reflecting reduced production
levels. In addition, continued delays in federal spending for planned water and
sewer pipeline projects resulted in lower ductile iron pressure pipe shipments.
The increase in pricing primarily resulted from higher average net selling
prices for homes, ductile iron pressure pipe and coal.

Homebuilding and Financing Group sales and revenues were $27.7 million, or
6.7%, greater than the prior year. This performance reflects a 12.3% increase in
the average net selling price per home sold, from $42,300 in 1996 to $47,500 in
1997, combined with a 3.7% increase in the number of homes sold, from 3,760
units in 1996 to 3,900 units in 1997. The higher average net selling price
reflects a greater percentage of "90% complete" homes sold in the current year
and price increases instituted to compensate for higher building material and
labor costs. The increase in unit sales reflects the decision by Jim Walter
Homes in December 1995 to reduce its financing rate from 10% to 8.5% for its
"90% complete" homes on a trial basis to generate additional unit sales. In
March 1996, the lower rate was formally advertised. Jim Walter Homes extended
the 8.5% financing rate to the remainder of its product line ("shell" and homes
sold at various "in-between" stages of interior finish) in the fourth quarter of
1997. Jim Walter Homes' backlog at May 31, 1997 was 1,972 units (all of which
are expected to be completed prior to the end of fiscal 1998) compared to 1,957
units at May 31, 1996. Time charge income (revenues received from Mid-State
Homes' instalment note portfolio) increased slightly from $231.1 million in 1996
to $231.4 million in 1997. This increase is attributable to increased payoffs
received in advance of maturity and to an increase in the average balance per
account in the portfolio, partially offset by a reduction in the total number of
accounts. Operating income of $81.7 million (net of interest expense) was $18.3
million greater than the prior year. This performance resulted from increases in
the average net selling price and number of homes sold, lower interest expense
in 1997 ($119.0 million) as compared to 1996 ($128.2 million), lower goodwill
amortization in 1997 ($28.5 million) versus 1996 ($31.2 million), and slightly
higher time charge income and homebuilding gross profit margins, partially
offset by higher selling, general and administrative expenses principally
resulting from changes to the base salary and commission structure at Jim Walter
Homes.

Industrial Products Group sales and revenues were $12.6 million, or 4.4%,
greater than the prior year. Increased sales volumes of aluminum foil and sheet
products, slag wool, furnace coke, window components and metal building
products, combined with improved sales prices for furnace and foundry coke,
window components and metal building and foundry products, were partially offset
by lower sales volumes of foundry coke and lower sales prices for aluminum foil
and sheet products. The group's operating income in 1997 was $21.4 million,
compared to an operating loss of $10.4 million in 1996. The improved performance

was the result of the overall sales increases and higher gross profit margins
realized on furnace and foundry coke, slag wool, aluminum foil and sheet
products, window components and metal building and foundry products. Results for
1996 were adversely impacted by a $22.9 million write-off of goodwill,
reflecting the Company's adoption of FASB 121 (see Note 5 of "Notes to
Consolidated Financial Statements").

Water Transmission Products Group sales and revenues declined slightly in
1997. The group's performance reflected lower sales volumes, but higher selling
prices for ductile iron pressure pipe and fittings and higher selling prices and
sales volumes for valves and hydrants. The order backlog at May 31, 1997 was
108,341 tons, which represents approximately three months shipments, compared
with 121,734 tons at May 31, 1996. Operating income of $14.0 million was $3.5
million above the prior year. This increase was principally due to improved
operating efficiencies and lower raw material costs, especially for scrap iron,
the principal raw material used in the manufacture of ductile iron pressure
pipe.

Natural Resources Group sales and revenues were $17.9 million, or 4.9%,
below the prior year. The decrease resulted from lower coal shipments due to
reduced production levels, a $3.7 million gain (in 1996) from the sale of gas
royalty interests in certain mineral properties, lower gains realized from the
sale of excess real estate in 1997 ($2.5 million) versus 1996 ($6.1 million) and
lower coal and timber royalty income, partially offset by higher average selling
prices for coal and methane gas and greater methane gas volume. A total of 6.95
million tons of coal was sold in 1997 versus 7.61 million tons in 1996, an 8.7%
decrease reflecting lower shipments to certain export customers, partially
offset by increased tonnage sold to Alabama Power Company ("Alabama Power"). The
average price per ton of coal sold increased $1.64 from $42.85 in 1996 to $44.49
in 1997 as a result of higher prices realized in the worldwide metallurgical
market and a greater percentage of tonnage sold to Alabama Power at above-market
contract prices. Methane gas sales volumes were 7.6 billion cubic feet in 1997
versus 6.8 billion cubic feet in 1996. The average selling price per thousand
cubic feet, which included a monthly reservation fee of $675,000, was $3.75 in
1997 versus $3.32 in 1996. The group's operating income in 1997 was $27.6
million compared to an operating loss of $105.9 million in 1996. Coal production
costs of $36.73 per ton in 1997 were slightly higher than 1996 costs of $36.12
per ton. Operating income of $27.6 million in 1997 includes settlement of a
legal claim related to a theft of coal inventory from the Port of Mobile,
Alabama, partially offset by a charge relating to a reduction in Jim Walter
Resources' salaried workforce under a voluntary early retirement program. The
operating loss of $105.9 million in 1996 included a $120.4 million FASB 121
write-down of fixed assets to estimated fair market values at two coal mines
(see Note 5 of "Notes to Consolidated Financial Statements") and firefighting
and idle plant costs of $16 million, principally associated with a fire at Blue
Creek Mine No. 5 ("Mine No. 5") in November 1995. From December 1995 through
March 1997, Mine No. 5 accelerated development of its eastern reserves. While in
development, the mine's costs ($40.7 million) were capitalized.

As a result of a previous fire that began in Mine No. 5 on November 17,
1993, the Company and Jim Walter Resources claimed compensable losses in the
amount of $25 million under their business interruption coverage. When the
insurers refused to pay their pro rata portion of the claim, the Company and Jim
Walter Resources commenced litigation seeking to enforce such insurance. The
Company has entered into settlement with several insurers who, in the aggregate,
have paid approximately $12.4 million to date, reducing the contract claims to
approximately $12.6 million. The Company and Jim Walter Resources continue to
pursue litigation against the remaining carriers, and a trial is tentatively
scheduled for October 1997 (see Note 12 of "Notes to Consolidated Financial
Statements").

Cost of sales, exclusive of depreciation, of $980.2 million was 78.4% of net
sales in 1997 versus $987.4 million and 80.9% in 1996. Cost of sales in 1996 was
adversely impacted by firefighting and idle plant costs associated with the Mine
No. 5 fire. In addition, 1997 costs were favorably affected by decreases in the
cost of scrap iron, the major raw material used in the manufacture of ductile
iron pressure pipe.

Selling, general and administrative expenses of $144.7 million were 9.6% of
net sales and revenues in 1997 versus $135.8 million and 9.1% in 1996. The
increases principally reflect higher expenses at Jim Walter Homes and Jim Walter
Resources as previously discussed.

Interest and amortization of debt expense was $179.3 million in 1997 versus
$208.7 million in 1996, reflecting lower outstanding debt balances and reduced
interest rates resulting from a debt refinancing completed on January 22, 1996.
The average rate of interest in 1997 was 8.1% compared to 9.1% in 1996. The
prime interest rate ranged from 8.25% to 8.5% in 1997 compared to a range of
8.25% to 9.0% in 1996.

The Company's effective tax rate in 1997 and 1996 differed from the
statutory tax rate due to amortization of goodwill and the FASB 121 write-off of
goodwill of $22.9 million (in 1996), which are not deductible for tax purposes,
and percentage depletion. Also, in the fiscal 1996 fourth quarter, the Company
recorded approximately $27 million of non-recurring tax benefits resulting from
utilization of a capital loss carry forward, the Company's election to carry its
1995 net operating loss forward rather than back to prior years (thereby
avoiding the effect of a rate difference and loss of certain tax credits), and
other miscellaneous tax adjustments (see Note 9 of "Notes to Consolidated
Financial Statements" for further discussion of income taxes).

Net income for the year ended May 31, 1997 was $37.1 million compared to a
net loss of $84.7 million in 1996, reflecting all of the previously mentioned
factors as well as the impact of lower postretirement health benefits in 1997.
The loss in fiscal 1996 includes an extraordinary loss of $8.3 million ($5.4
million net of income tax benefit) consisting of a redemption premium and
write-off of deferred financing costs resulting from the debt refinancing
completed in January 1996.

YEARS ENDED MAY 31, 1996 AND PRO FORMA 1995

Net sales and revenues for the year ended May 31, 1996 were $50.9 million,
or 3.6%, ahead of the prior year with a 3.0% increase in pricing and/or product
mix and a 0.6% increase in volume. This increase was the result of improved
sales and revenues in all operating groups.

Homebuilding and Financing Group sales and revenues were $5.9 million, or
1.5%, ahead of the prior year. This performance reflects a 5.2% increase in the
average net selling price per home sold, from $40,200 in 1995 to $42,300 in
1996, partially offset by an 8.9% decrease in the number of homes sold, from
4,126 units in 1995 to 3,760 units in 1996. The higher average net selling price
reflects a greater percentage of "90% complete" homes sold in the current year
and a price increase instituted February 1, 1995 to compensate for higher
building material costs. The decrease in unit sales resulted from extremely
competitive conditions in virtually every Jim Walter Homes sales region. The
relatively low mortgage interest rate environment and higher availability of
mortgage financing for home buyers adversely affected Jim Walter Homes' sales
volumes. In an effort to generate additional unit sales, Jim Walter Homes in
December 1995 reduced its financing rate from 10% to 8.5% for its "90% complete"
homes on a trial basis and, in March 1996, began formally advertising the lower
rate. Jim Walter Homes' backlog at May 31, 1996 was 1,957 units compared to
1,529 units at May 31, 1995, a 28% increase. Time charge income (revenues
received from Mid-State Homes' instalment note portfolio) increased from $222.2
million in 1995 to $231.1 million in 1996 due to increased payoffs received in
advance of maturity and an increase in the average balance per account,
partially offset by a reduction in the total number of accounts. Operating
income of $63.4 million (net of interest expense) was $18.4 million greater than
the prior year. This performance reflected higher time charge income and
improved homebuilding gross profit margins (resulting from a higher average net
selling price per home sold and lower lumber costs) and lower interest expense
in 1996 ($128.2 million) as compared to that incurred in 1995 ($131.6 million),
partially offset by the lower number of homes sold.

Water Transmission Products Group sales and revenues were $8.5 million, or
2.1%, ahead of the prior year. The increase was the result of higher sales
prices, partially offset by reduced volumes for ductile iron pressure pipe,
fittings and castings. Sales volumes were negatively impacted by severe winter
weather

conditions and delays in federal funding for planned water and sewer pipeline
projects. The order backlog at May 31, 1996 was 121,734 tons compared with
121,548 tons at May 31, 1995. Operating income of $10.5 million was $2.4 million
below the prior year. The lower performance resulted from the lower sales
volumes and higher raw material costs, especially for scrap iron and alloys
which are major raw material components, partially offset by higher sales
prices.

Natural Resources Group sales and revenues exceeded the prior year by $30.8
million, or 9.3%. The increase resulted from greater sales volumes for coal and
methane gas, a higher average selling price for coal, higher outside gas and
timber royalty income and a $3.7 million gain (in 1996) from the sale of gas
royalty interests in certain mineral properties. Gains from sales of certain
excess real estate were $6.1 million in each year. A total of 7.61 million tons
of coal was sold in 1996 versus 7.20 million tons in 1995, a 5.7% increase
resulting from greater shipments to certain export customers, partially offset
by lower shipments to Alabama Power and Japanese steel mills. The average price
per ton of coal sold increased $1.51, from $41.34 in 1995 to $42.85 in 1996, due
to higher prices realized in the worldwide metallurgical market and to Alabama
Power. Mine No. 5 was shut down from November 17, 1993 through December 16, 1993
and from early April 1994 until May 16, 1994 as a result of a fire due to
spontaneous combustion heatings. Representatives of Jim Walter Resources, MSHA,
Alabama State Mine Inspectors and the UMWA agreed that the longwall coal panel
being mined in Mine No. 5 at the time the fire recurred in April 1994 would be
abandoned and sealed off. Development mining for the two remaining longwall coal
panels in this section of the mine resumed on May 16, 1994 and mining on the
first longwall panel resumed on January 17, 1995. Production was adversely
impacted until such date. As a result of the fire, the Company and Jim Walter
Resources claimed compensable losses in the amount of $25 million under their
business interruption insurance coverage. When the insurers refused to pay their
pro rata portion of the claim, the Company commenced litigation seeking to
enforce such insurance. The insurers issued policies insuring various
percentages of the risk. The Company has entered into settlements with several
insurers who, in the aggregate, paid approximately $11.7 million through May 31,
1996, reducing the contract claims in the lawsuit to $12.7 million. The Company
and Jim Walter Resources continue to pursue litigation against the remaining
carriers, and a trial is tentatively scheduled for October 1997 (see Note 12 of
"Notes to Consolidated Financial Statements"). In November 1995, Mine No. 5
experienced another fire due to the unexpected recurrence of spontaneous
combustion heatings and the mine was shut down. Efforts to contain and
extinguish the fire were successful; however, conditions dictated that the mine
be shut down for several weeks. The affected coal panels on the western side of
the mine were then sealed off and development work on the eastern side of the
Mine was ongoing from December 1995 through May 1996. Such development work was
completed in March 1997. Jim Walter Resources' three other mines remained in
full production during 1996 and 1995. The group incurred an operating loss of
$105.9 million in 1996 as compared to operating income of $22.3 million in 1995.
The lower performance reflects a $120.4 million FASB 121 write-down of fixed
assets to estimated fair market values at two coal mines (see Note 5 of "Notes
to Consolidated Financial Statements") and firefighting and idle plant costs of
$16 million, principally associated with the fire at Mine No. 5. These factors
were partially offset by increased sales volumes of coal and methane gas, a
higher average sales price for coal, higher gas and timber royalty income, the
$3.7 million gain (in 1996) from the sale of certain gas royalty interests and
slightly lower costs per ton of coal produced ($36.12 in 1996 versus $37.13 in
1995).

Industrial Products Group sales and revenues were $6.0 million, or 2.1%,
greater than the prior year. Increased selling prices for furnace and foundry
coke, aluminum foil products, window components and metal building and foundry
products combined with greater sales volumes of furnace and foundry coke,
resin-coated sand and patterns and tooling were partially offset by lower
aluminum sheet products selling prices and volumes and reduced sales volumes of
window components and metal building and foundry products. The group's operating
loss in 1996 was $10.4 million compared to operating income of $6.6 million in
1995. This performance reflects a $22.9 million FASB 121 write-off of excess of
purchase price over net assets acquired (goodwill) (see Note 5 of "Notes to
Consolidated Financial Statements") lower window components sales volume, higher
raw material costs and reduced efficiencies due to prolonged

start-up problems associated with the consolidation and relocation of JW Window
Components' Hialeah, Florida and Columbus, Ohio operations to Elizabethton,
Tennessee. These decreases were partially offset by increased margins realized
on aluminum sheet and foil products, furnace coke and resin-coated sand.

Cost of sales, exclusive of depreciation, of $987.4 million was 80.9% of net
sales in 1996 versus $951.4 million and 80.5% in 1995. The cost of sales
increase was primarily the result of lower gross profit margins for pipe
products, window components, patterns, tooling and metal building and foundry
products, combined with firefighting and idle plant costs principally associated
with the fire at Mine No. 5. These increases were partially offset by improved
profit margins on home sales, aluminum foil and sheet products, furnace coke and
resin-coated sand.

Selling, general and administrative expenses of $135.8 million were 9.1% of
net sales and revenues in 1996 versus $130.6 million and 9.1% in 1995.

Interest and amortization of debt expense was $208.7 million in 1996 versus
$223.2 million, on a pro forma basis in 1995, reflecting lower outstanding debt
balances and reduced interest rates resulting from the debt refinancing
completed on January 22, 1996. The average rate of interest in 1996 was 9.1% as
compared to 9.8%, on a pro forma basis in 1995. The prime interest rate ranged
from 8.25% to 9.0% in 1996 compared to a range of 7.25% to 9.0% in 1995.

The Company's effective tax rate in 1996 and, on a pro forma basis, in 1995
differed from the statutory tax rate due to amortization of goodwill and the
FASB 121 write-off of goodwill of $22.9 million (in 1996) which are not
deductible for tax purposes. In addition, in the fiscal 1996 fourth quarter, the
Company recorded approximately $27 million of non-recurring tax benefits
resulting from utilization of a capital loss carry forward, the Company's
election to carry forward its net operating loss (thereby avoiding the effect of
a rate difference and loss of certain tax credits), and other miscellaneous tax
adjustments (see Note 9 of "Notes to Consolidated Financial Statements" for
further discussion of income taxes).

On January 22, 1996, the Company completed a $550 million financing with a
syndicate of banks led by NationsBank National Association (South). The
financing consisted of a $365 million revolving credit facility (the "Revolving
Credit Facility"), a six-year $125 million term loan ("Term Loan A") and a $60
million seven-year term loan ("Term Loan B") (collectively, the "Credit
Facilities"). Proceeds from the financing, together with $75 million drawn under
the Mid-State Trust V Variable Funding Loan Agreement, were used to redeem in
full the $490 million aggregate amount of 12.19% Series B Senior Notes due 2000
(the "Senior Notes") at a redemption price of 101% of the principal amount
thereof plus accrued and unpaid interest thereon to the date of redemption and
to replace an existing $150 million bank credit facility, both of which were
incurred as a result of the Company's emergence from bankruptcy in March 1995.
The Company recorded an extraordinary loss of $8.3 million ($5.4 million net of
income tax benefit) consisting of a redemption premium and write-off of
unamortized debt expense related to the early repayment of the Senior Notes and
the $150 million bank credit facility (see Note 8 of "Notes to Consolidated
Financial Statements").

The net loss for the year ended May 31, 1996 was $84.7 million compared to a
net loss of $38.3 million, on a pro forma basis, in 1995 reflecting all of the
previously mentioned factors as well as the impact of higher postretirement
health benefits in 1996.

YEARS ENDED MAY 31, 1995 AND 1994

Net sales and revenues for the year ended May 31, 1995 were $113.8 million,
or 8.6%, greater than the prior year, with a 7.0% increase in volume and a 1.6%
increase in pricing and/or product mix. The increase in net sales and revenues
was the result of improved sales and revenues in all operating groups except
Homebuilding and Financing.

Industrial Products Group sales and revenues were $56.7 million, or 25.2%,
greater than the prior year. Increased sales volumes of aluminum foil and sheet
products, foundry coke, chemicals, patterns and

tooling, resin-coated sand, window components and metal building and foundry
products, combined with higher selling prices for aluminum foil and sheet
products, furnace coke, window components and metal building and foundry
products and a $3.6 million gain from the sale of JW Window Components' Hialeah,
Florida facility were partially offset by reduced sales volumes of furnace coke
and slag wool. The Group's operating income of $6.6 million was $3.3 million
lower than the prior year. The decrease was the result of higher manufacturing
costs in the window components business due to increased raw material costs,
especially aluminum, a major raw material component, start-up costs associated
with the consolidation and relocation during 1995 of JW Window Components'
Hialeah, Florida and Columbus, Ohio, operations to Elizabethton, Tennessee and
reduced operating efficiencies, including start-up problems associated with the
relocation of Vestal Manufacturing's steel fabrication operation in May 1994.
These decreases were partially offset by increased income for aluminum foil and
sheet, foundry coke, chemicals, patterns and tooling and resin-coated sand due
to the sales increases, improved gross profit margins for furnace coke and the
gain from the Hialeah facility sale.

Water Transmission Products Group sales and revenues were $55.2 million, or
15.5%, ahead of the prior year. The increase was the result of higher sales
volumes and prices for ductile iron pressure pipe, valves, hydrants and
castings. The order backlog for pressure pipe at May 31, 1995 was 121,548 tons
compared to 111,907 tons at May 31, 1994. Operating income of $13.0 million
exceeded the prior year by $3.0 million. The improved performance resulted from
the increased sales prices and volumes, partially offset by higher raw material
costs, especially scrap, a major raw material component.

Natural Resources Group sales and revenues were $14.1 million, or 4.4%,
greater than the prior year. The increase resulted from greater sales volumes
for coal and a $6.1 million gain from the sale of excess real estate, partially
offset by lower sales prices for coal and methane gas and lower outside coal and
gas royalty income. A total of 7.20 million tons of coal was sold in 1995 versus
6.56 million tons in 1994, a 9.8% increase. The increase in tonnage sold was the
result of increased shipments to Alabama Power and certain export customers,
partially offset by lower shipments to Japanese steel mills. Increased shipments
to Alabama Power were the result of the New Alabama Power Contract for the sale
and purchase of coal, replacing the 1979 contract and the 1988 amendment
thereto. Under the New Alabama Power Contract, Alabama Power will purchase 4.0
million tons of coal per year from Jim Walter Resources during the period July
1, 1994 through August 31, 1999. The New Alabama Power Contract has a fixed
price subject to an escalation based on the Consumer Price Index or another
appropriate published index and adjustments for government impositions and
quality. The New Alabama Power Contract includes favorable modifications of
specification, shipping deviations and changes in transportation arrangements.
The average price per ton of coal sold decreased $2.79 from $44.13 in 1994 to
$41.34 in 1995 due to lower prices realized on shipments to Alabama Power, the
Japanese steel mills and certain export customers. Mine No. 5 was shut down from
November 17, 1993 through December 16, 1993 and from early April 1994 until May
16, 1994 as a result of a fire due to spontaneous combustion heatings.
Representatives of Jim Walter Resources, MSHA, Alabama State Mine Inspectors and
the UMWA agreed that the longwall coal panel being mined in Mine No. 5, at the
time the fire recurred in April 1994, would be abandoned and sealed off.
Development mining for the two remaining longwall coal panels in this section of
the mine resumed on May 16, 1994 and mining on the first longwall panel resumed
on January 17, 1995. Production was adversely impacted until such date. As a
result of the fire, the Company and Jim Walter Resources claimed compensable
losses in the amount of $25 million under their business interruption insurance
coverage. When the insurers refused to pay their pro rata part of the claim, the
Company commenced litigation seeking to enforce such insurance. (See Note 12 of
Notes to Consolidated Financial Statements.) Operating income of $22.3 million
exceeded the prior year by $21.4 million. The improved performance principally
resulted from the increased sales volumes of coal, lower costs per ton of coal
produced ($37.13 in 1995 versus $38.29 in 1994) and the gain on the sale of
certain excess real estate, partially offset by decreases in selling prices for
coal and methane gas and lower outside coal and gas royalty income.

Homebuilding and Financing Group sales and revenues were $16.9 million, or
4.0%, below the prior year. This performance reflects a 4.7% decrease in the
number of homes sold, from 4,331 units in 1994 to 4,126 units in 1995, partially
offset by an increase in the average selling price per home sold, from $38,300
in 1994 to $40,200 in 1995. The decrease in unit sales was due to strong
competition in virtually every Jim Walter Homes sales region. The higher average
selling price in 1995 principally reflects a smaller percentage of the lower
priced Affordable line homes sold. Jim Walter Homes' backlog at May 31, 1995 was
1,529 units compared to 2,065 units at May 31, 1994. Time charge income
(revenues received from Mid-State Homes' instalment note portfolio) decreased
from $238.1 million in 1994 to $222.2 million in 1995. The decrease in time
charge income is attributable to a reduction in the total number of accounts and
lower payoffs received in advance of maturity, partially offset by an increase
in the average balance per account in the portfolio. The Group's operating
income of $45.0 million (net of interest expense) was $16.6 million below the
prior year. This decrease resulted from the lower number of homes sold, reduced
homebuilding gross profit margins resulting from discounts related to sales
promotions on certain models, the decrease in time charge income and higher
interest expense in 1995 ($131.6 million) as compared to that incurred in 1994
($128.8 million), partially offset by the increase in the average selling price
per home sold.

Cost of sales, exclusive of depreciation, of $951.4 million was 80.5% of net
sales versus $845.1 million and 79.1% in 1994. The cost of sales percentage
increase was primarily the result of lower gross profit margins on homes sales,
pipe products, window components and metal building and foundry products.

Selling, general and administrative expenses of $130.6 million were 9.1% of net
sales and revenues in 1995 versus $127.9 million and 9.6% in 1994.

Chapter 11 costs of $442.4 million in 1995 include $390 million in
settlement of all asbestos-related veil piercing claims and related legal fees
and $52.4 million for professional fees, settlement of various disputed claims
and other bankruptcy expenses.

Interest and amortization of debt discount and expense increased $149.1
million principally due to $141.4 million of additional interest and
amortization of debt expense related to consummation of the Consensual Plan. The
average rate of interest in 1995 was 10.19% (such rate calculated excluding
$141.4 million additional interest and amortization of debt discount and expense
related to the consummation of the Consensual Plan) versus 9.58% in 1994. The
prime interest rate ranged from 7.25% to 9.0% in 1995 compared to a range of
6.0% to 7.25% in 1994. During the pendency of the Chapter 11 cases, the Company
did not accrue interest on its pre-filing date unsecured debt obligations.

Amortization of excess of purchase price over net assets acquired (goodwill)
decreased $8.5 million primarily due to lower payoffs received in advance of
maturity on the instalment note portfolio.

The income tax benefit for 1995 was $170.5 million, which included
recognition of tax benefits resulting from $583.8 million of additional expenses
related to consummation of the Consensual Plan previously mentioned, compared to
income tax expense of $28.9 million in 1994. On August 10, 1993, the Omnibus
Budget Reconciliation Act of 1993 was signed into law, raising the federal
corporate income tax rate to 35% from 34% retroactive to January 1, 1993. The
effect of the rate change resulted in a $2.8 million charge to deferred tax
expense in 1994.

The net loss for 1995 and the net income for 1994 reflect all of the
previously mentioned factors as well as the impact of slightly higher
postretirement health benefits, partially offset by the greater interest income
from Chapter 11 proceedings.

FINANCIAL CONDITION

On March 17, 1995, the Company and its subsidiaries emerged from bankruptcy
pursuant to the Consensual Plan. Despite the confirmation and effectiveness of
the Consensual Plan, the Bankruptcy

Court continues to have jurisdiction over the resolution of disputed prepetition
claims against the Company and other matters that may arise in connection with
or related to the Consensual Plan.

A substantial controversy exists with regard to federal income taxes
allegedly owed by the Company. Proofs of claim have been filed by the Internal
Revenue Service for taxes, interest and penalties in the amount of $110,560,883
with respect to fiscal years ended August 31, 1980 and August 31, 1983 through
August 31, 1987; $31,468,189 with respect to fiscal years ended May 31, 1988
(nine months) and May 31, 1989; and $44,837,693 with respect to fiscal years
ended May 31, 1990 and May 31, 1991. These proofs of claim represent total
adjustments to taxable income of approximately $360 million for all tax periods
at issue. Objections to the proofs of claim have been filed by the Company and
the various issues are being litigated in the Bankruptcy Court. Included in the
proofs of claim is an adjustment to taxable income disallowing a deduction of
approximately $51 million for hedging losses incurred during fiscal 1988. This
issue was conceded by the Internal Revenue Service pursuant to a joint
stipulation of parties approved by the Bankruptcy Court by an order dated
January 3, 1997. The Company believes that the balance of such proofs of claim
are substantially without merit and intends to vigorously defend such claims
against the Company, but there can be no assurance as to the ultimate outcome.

Since May 31, 1996, total debt has decreased $145.7 million resulting from
early repayments, net of borrowings, on the Revolving Credit Facility ($89.0
million), quarterly principal payments on Term Loan A and Term Loan B ($16.0
million), scheduled payments of Mid-State Trust II Mortgage-Backed Notes ($87.0
million), scheduled payments of Mid-State Trust III Asset Backed Notes ($30.7
million), scheduled payments of Mid-State Trust IV Asset Backed Notes ($61.1
million) and scheduled retirements of other long-term debt ($0.9 million),
partially offset by borrowings under the Mid-State Trust V Variable Funding Loan
Agreement ($139.0 million).

The Credit Facilities contain a $365 million revolving credit facility which
includes a sub-facility for trade and other standby letters of credit up to $75
million at any time outstanding and a sub-facility for swingline advances not to
exceed/limited to $15 million at any time outstanding. At May 31, 1997, $40.0
million of letters of credit were outstanding under this facility.

The Credit Facilities contain a number of significant covenants that, among
other things, restrict the ability of the Company and its subsidiaries to
dispose of assets, incur additional indebtedness, pay dividends, create liens on
assets, enter into leases, make investments or acquisitions, engage in mergers
or consolidations or engage in certain transactions with subsidiaries and
affiliates and otherwise restricts corporate activities (including change of
control and asset sale transactions). In addition, under the Credit Facilities,
the Company is required to maintain specified financial ratios and comply with
certain financial tests, including interest coverage ratios, fixed charge
coverage ratios and maximum leverage ratios, some of which become more
restrictive over time. The Company was in compliance with these covenants at May
31, 1997 and believes it will meet these financial tests over the remaining
terms of these debt agreements.

The Trust V Variable Funding Loan Agreement's covenants, among other things,
restrict the ability of Trust V to dispose of assets, create liens and engage in
mergers or consolidations. The Company was in compliance with these covenants at
May 31, 1997.

LIQUIDITY AND CAPITAL RESOURCES

At May 31, 1997, cash and cash equivalents net of bank overdrafts, were
approximately $10.3 million. Operating cash flows for the year ended May 31,
1997, together with issuance of long-term debt under the Revolving Credit
Facility and the Mid-State Trust V Variable Funding Loan Agreement, were
primarily used for working capital requirements, retirement of long-term senior
debt, interest payments and capital expenditures.

Working capital is required to fund adequate levels of inventories and
accounts receivable. Commitments for capital expenditures at May 31, 1997 are
not material; however, it is estimated that gross capital expenditures for the
Company and its subsidiaries for the year ending May 31, 1998 will approximate
$105 million.

Because the Company's operating cash flow is significantly influenced by the
general economy and, in particular, the level of construction, prior years'
results should not necessarily be used to predict the Company's liquidity,
capital expenditures, investment in instalment notes receivable or results of
operations. The Company believes that the Mid-State Trust V Variable Funding
Loan Agreement will provide Mid-State Homes with the funds needed to purchase
the instalment notes and mortgages generated by Jim Walter Homes. On June 11,
1997, Mid-State purchased from Mid-State Trust V mortgage instalment notes
having a gross amount of $1.196 billion and an economic balance of $462.3
million and subsequently sold such mortgage instalment notes to Mid-State Trust
VI ("Trust VI"), a business trust organized by Mid-State which owns all of the
beneficial interest in Trust VI. These sales were in exchange for the net
proceeds from the public issuance by Trust VI of $439.2 million of Trust VI
Asset Backed Notes. The notes were issued in four classes, bear interest at
rates ranging from 7.34% to 7.79% and have a final maturity of July 1, 2035.
Payments will be made quarterly on January 1, April 1, July 1, and October 1
based on collections on the underlying collateral less amounts paid for interest
on the notes and Trust VI expenses. Net proceeds from the public offering were
used primarily to pay down the Mid-State Trust V Variable Funding Loan Agreement
indebtedness of $384.0 million. It is anticipated that one or more permanent
financings similar to Mid-State Trust VI will be required over the next several
years to repay borrowings under the Mid-State Trust V Variable Funding Loan
Agreement. The Company believes that, under present operating conditions,
sufficient operating cash flow will be generated to make all required interest
and principal payments, planned capital expenditures and meet substantially all
operating needs. It is further expected that amounts available under the Credit
Facilities will be sufficient to meet peak operating needs of the Company.

PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT

This Form 10-K contains certain forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) and information
relating to the Company that is based on the beliefs of the management of the
Company, as well as assumptions made by and information currently available to
the management of the Company. When used in this Form 10-K, the words
"estimate," "project," "believe," "anticipate," "intend," "expect," and similar
expressions are intended to identify forward-looking statements. Such statements
reflect the current views of the Company with respect to future events and are
subject to risks and uncertainties that could cause actual results to differ
materially from those contemplated in such forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. The Company does not undertake any
obligation to publicly release any revisions to these forward looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Index to Financial Statements on page F-1

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

None

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Incorporated by reference to pages 5 through 7 of the Proxy Statement (the
"Proxy Statement") included in the Schedule 14A filed by the Company with the
Securities and Exchange Commission (the "Commission") on August 12, 1997 under
the Securities Exchange Act of 1934, as amended. Certain information with
respect to executive officers is included in Part I, Item 4A.

ITEM 11. EXECUTIVE COMPENSATION

Incorporated by reference to pages 13 through 21 of the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Incorporated by reference to pages 10 through 12 of the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated by reference to page 9 of the Proxy Statement.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

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

(b) Reports on Form 8-K--None

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.

August 27, 1997 /s/ DEAN M. FJELSTUL
------------------------------------------------
Dean M. Fjelstul, Senior 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.

August 27, 1997 /s/ KENNETH E. HYATT*
------------------------------------------------
Kenneth E. Hyatt, Chairman,
Director and Principal Executive Officer

August 27, 1997 /s/ RICHARD E. ALMY*
------------------------------------------------
Richard E. Almy, Executive Vice President,
Director and Principal Operating Officer

August 27, 1997 /s/ HOWARD L. CLARK, JR.*
------------------------------------------------
Howard L. Clark, Jr., Director

August 27, 1997 /s/ JAMES B. FARLEY*
------------------------------------------------
James B. Farley, Director

August 27, 1997 /s/ ELIOT M. FRIED*
------------------------------------------------
Eliot M. Fried, Director

August 27, 1997 /s/ PERRY GOLKIN*
------------------------------------------------
Perry Golkin, Director

August 27, 1997 /s/ JAMES L. JOHNSON*
------------------------------------------------
James L. Johnson, Director

August 27, 1997 /s/ MICHAEL T. TOKARZ*
------------------------------------------------
Michael T. Tokarz, Director

August 27, 1997 /s/ JAMES W. WALTER*
------------------------------------------------
James W. Walter, Director

August 27, 1997 /s/ DEAN M. FJELSTUL*
------------------------------------------------
Dean M. Fjelstul, Senior Vice President
and Principal Financial Officer

August 27, 1997 /s/ FRANK A. HULT
------------------------------------------------
Frank A. Hult, Vice President, Controller
and Principal Accounting Officer

/s/ FRANK A. HULT
------------------------------
Frank A. Hult
*By: Attorney-in-fact

INDEX TO FINANCIAL STATEMENTS

PAGES
--------------

Walter Industries, Inc. and Subsidiaries

Report of Independent Certified Public Accountants.............................................. F-2

Consolidated Balance Sheet--May 31, 1997 and 1996............................................... F-3

Consolidated Statement of Operations for the Three Years Ended
May 31, 1997.................................................................................. F-4

Consolidated Statement of Cash Flows for the Three Years Ended
May 31, 1997.................................................................................. F-5

Notes To Consolidated Financial Statements...................................................... F-6 to F-28

Financial Statement Schedules for the three years ended May 31, 1997:

Report of Independent Certified Public Accountants On Financial
Statement Schedules........................................................................... F-29

Schedule III--Valuation and Qualifying Accounts................................................. F-30 to F-32

All other schedules have been omitted because they are not applicable or the
required information is included in the financial statements or notes thereto.

F-1

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

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

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations and of cash flows present fairly, in all
material respects, the financial position of Walter Industries, Inc. and its
subsidiaries at May 31, 1997 and 1996, and the results of their operations and
their cash flows for each of the three years in the period ended May 31, 1997 in
conformity with generally accepted accounting principles. 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
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit 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 the opinion expressed
above.

Price Waterhouse LLP

Tampa, Florida

July 10, 1997

F-2

WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET

MAY 31,
---------------------------

1997 1996
------------ -------------

(IN THOUSANDS)

ASSETS
Cash and cash equivalents (Notes 3 and 14)........................................... $ 35,782 $ 32,543
Short-term investments, restricted (Notes 3 and 14).................................. 195,371 175,432
Marketable securities (Notes 3 and 14)............................................... 41,222 49,338
Instalment notes receivable (Notes 4, 8 and 14)...................................... 4,256,845 4,208,252
Less--Provision for possible losses................................................ (26,394) (26,138)
Unearned time charges........................................................ (2,896,517) (2,851,961)
------------ -------------
Net........................................................................ 1,333,934 1,330,153
Trade receivables.................................................................... 170,236 178,847
Less--Provision for possible losses................................................ (8,225) (8,180)
------------ -------------
Net........................................................................ 162,011 170,667
Other notes and accounts receivable.................................................. 20,880 21,055
Inventories, at lower of cost (first in, first out or average) or market
Finished goods..................................................................... 117,949 124,456
Goods in process................................................................... 32,291 32,798
Raw materials and supplies......................................................... 52,066 51,674
Houses held for resale............................................................. 3,068 2,517
------------ -------------
Total inventories.......................................................... 205,374 211,445
Prepaid expenses..................................................................... 11,862 11,937
Property, plant and equipment, at cost (Notes 5 and 6)............................... 978,006 888,991
Less--Accumulated depreciation, depletion and amortization......................... (409,830) (347,455)
------------ -------------
Net........................................................................ 568,176 541,536
Investments.......................................................................... 5,112 6,646
Deferred income taxes (Note 9)....................................................... 109,023 155,171
Unamortized debt expense (Note 8).................................................... 22,793 29,548
Other assets (Note 13)............................................................... 41,671 44,971
Excess of purchase price over net assets acquired (Notes 1, 5 and 7)................. 274,174 310,935
------------ -------------
$ 3,027,385 $ 3,091,377
------------ -------------
------------ -------------

LIABILITIES AND STOCKHOLDERS' EQUITY
Bank overdrafts (Note 3)............................................................. $ 25,523 $ 28,194
Accounts payable..................................................................... 86,418 74,330
Accrued expenses..................................................................... 131,768 120,477
Income taxes payable (Note 9)........................................................ 58,884 56,238
Long-term senior debt (Notes 4, 8 and 14):
Mortgage-backed/asset backed notes................................................. 1,752,125 1,791,946
Other senior debt.................................................................. 313,450 419,350
Accrued interest..................................................................... 23,220 28,819
Accumulated postretirement health benefits obligation (Note 13)...................... 268,959 247,827
Other long-term liabilities (Note 13)................................................ 47,626 47,502
Stockholders' equity (Notes 1, 10 and 11):
Common stock, $.01 par value per share:
Authorized--200,000,000 shares
Issued--55,063,412 shares and 54,868,335 shares.................................. 551 549
Capital in excess of par value..................................................... 1,164,261 1,159,332
Retained earnings (deficit)........................................................ (840,744) (877,861)
Excess of additional pension liability over unrecognized
prior years service cost......................................................... (4,656) (5,326)
------------ -------------
Total stockholders' equity................................................. 319,412 276,694
------------ -------------
$ 3,027,385 $ 3,091,377
------------ -------------
------------ -------------

F-3

WALTER INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE YEARS ENDED MAY 31,
----------------------------------------

1997 1996 1995
------------ ------------ ------------

(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

Sales and revenues:
Net sales............................................................. $ 1,251,022 $ 1,220,397 $ 1,181,635
Time charges (Note 4)................................................. 231,388 231,104 222,221
Miscellaneous......................................................... 24,651 34,134 30,838
Interest income from Chapter 11 proceedings (Note 1).................. -- -- 7,628
------------ ------------ ------------
1,507,061 1,485,635 1,442,322
------------ ------------ ------------
Cost and expenses:
Cost of sales......................................................... 980,235 987,354 951,381
Depreciation, depletion and amortization (Note 6)..................... 71,814 74,341 72,037
Selling, general and administrative................................... 144,703 135,840 130,616
Postretirement health benefits (Note 13).............................. 22,710 27,129 25,961
Provision for possible losses......................................... 3,340 4,367 4,485
Chapter 11 costs (Note 1)............................................. -- -- 442,362
Interest and amortization of debt discount and expense (Notes 1 and
8).................................................................. 179,291 208,690 304,548
Amortization of excess of purchase price over net assets acquired
(Note 7)............................................................ 34,870 39,096 40,027
Long-lived asset impairment (Note 5).................................. -- 143,265 --
------------ ------------ ------------
1,436,963 1,620,082 1,971,417
------------ ------------ ------------
70,098 (134,447) (529,095)
Income tax benefit (expense) (Note 9):
Current............................................................... (8,244) (621) 80,754
Deferred.............................................................. (24,737) 55,776 89,696
------------ ------------ ------------
Income (loss) before extraordinary item................................. 37,117 (79,292) (358,645)
Extraordinary item--loss on debt repayment (net of income tax benefit of
$2,910) (Note 8)...................................................... -- (5,404) --
------------ ------------ ------------
Net income (loss)....................................................... $ 37,117 $ (84,696) $ (358,645)
------------ ------------ ------------
------------ ------------ ------------
Net income (loss) per share (Note 10):
Income (loss) before extraordinary item............................... $ .67 $ (1.56) $ (7.10)
Extraordinary item.................................................... -- (.10) --
------------ ------------ ------------
Net income (loss)................................................... $ .67 $ (1.66) $ (7.10)
------------ ------------ ------------
------------ ------------ ------------

F-4

WALTER INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEARS ENDED MAY 31,
-------------------------------

1997 1996 1995
--------- --------- ---------

(IN THOUSANDS)

OPERATIONS
Income (loss) before extraordinary item........................................ $ 37,117 $ (79,292) $(358,645)
Charges to income not affecting cash:
Settlement of Chapter 11 claims with debt and new common stock............... -- -- 444,752
Depreciation, depletion and amortization..................................... 71,814 74,341 72,037
Provision for deferred income taxes.......................................... 24,737 (55,776) (89,696)
Accumulated postretirement health benefits obligation (Note 13).............. 21,132 19,416 18,449
Provision for other long-term liabilities.................................... 1,336 (4,034) 294
Amortization of excess of purchase price over net assets acquired (Note 7)... 34,870 39,096 40,027
Amortization of debt discount and expense.................................... 6,914 7,250 11,783
Long-lived asset impairment (Note 5)......................................... -- 143,265 --
--------- --------- ---------
197,920 144,266 139,001
Decrease (increase) in:
Short-term investments, restricted (Notes 3 and 14).......................... (19,939) (47,430) (20,450)
Marketable securities (Notes 3 and 14)....................................... 8,116 20,534 92,168
Instalment notes receivable, net (a)......................................... (3,781) 30,875 (1,849)
Trade and other receivables, net............................................. 8,831 (8,900) (44,009)
Federal income tax receivable................................................ -- 99,875 (99,875)
Inventories.................................................................. 6,071 (15,008) (23,858)
Prepaid expenses............................................................. 75 757 (1,359)
Deferred income taxes (Note 9)............................................... 21,411 (79,941) --
Increase (decrease) in:
Bank overdrafts (Note 3)..................................................... (2,671) (5,552) 3,867
Accounts payable............................................................. 14,850 (7,361) 28,925
Accrued expenses............................................................. 11,937 7,054 28,242
Income taxes payable (Note 9)................................................ 2,646 2,977 (15,348)
Accrued interest............................................................. (5,599) (9,033) 24,156
--------- --------- ---------
Cash flows from operations................................................. 239,867 133,113 109,611
--------- --------- ---------
FINANCING ACTIVITIES
Issuance of long-term senior debt (Notes 4, 8 and 14).......................... 159,000 680,000 974,450
Additions to unamortized debt expense.......................................... (159) (6,045) (17,153)
Extraordinary item-loss on debt repayment...................................... -- (5,404) --
Charge to income not affecting cash:
Write off of unamortized debt expense........................................ -- 3,414 --
Provision for deferred income tax............................................ -- (2,910) --
Retirement of long-term senior debt (Notes 4, 8 and 14)........................ (304,721) (689,074) (120,250)
Disposition of liabilities subject to Chapter 11 proceedings................... 3,427 (63,932) (604,044)(b)
Payment of accrued postpetition interest on Chapter 11 secured debt
obligations.................................................................. -- -- (244,334)
Fractional share payments...................................................... (13) (8) --
--------- --------- ---------
Cash flows used in financing activities...................................... (142,466) (83,959) (11,331)
--------- --------- ---------
INVESTING ACTIVITIES
Additions to property, plant and equipment, net of normal retirements.......... (98,454) (73,485) (76,966)
Decrease (increase) in investments and other assets............................ 4,292 (1,261) (4,442)
--------- --------- ---------
Cash flows used in investing activities...................................... (94,162) (74,746) (81,408)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents........................... 3,239 (25,592) 16,872
Cash and cash equivalents at beginning of year (Notes 3 and 14)................ 32,543 58,135 41,263
--------- --------- ---------
Cash and cash equivalents at end of year (Notes 3 and 14)...................... $ 35,782 $ 32,543 $ 58,135
--------- --------- ---------
--------- --------- ---------

- ------------------------

(a) Consists of sales and resales, net of repossessions and provision for
possible losses, of $173,418,000, $148,749,000 and $155,236,000 and cash
collections on account and payouts in advance of maturity of $169,637,000,
$179,624,000 and $153,387,000, for the years ended May 31, 1997, 1996 and
1995, respectively.

(b) In addition, $490 million of Series B Senior Notes and 44,050,974 shares of
new common stock were issued to satisfy a portion of the allowed claims of
holders of secured and subordinated debt, settle a portion of the
asbestos-related veil-piercing claims and 6,443,339 shares of new common
stock were issued to the former shareholders in cancellation of their
original holdings.

F-5

WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--RECENT HISTORY

Walter Industries, Inc. (the "Company") was organized in 1987 for the
purpose of acquiring Jim Walter Corporation ("Original Jim Walter"). The
Company's financial statements reflect the allocation of the purchase price of
Original Jim Walter based upon the fair value of the assets acquired and the
liabilities assumed. 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 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 relate to the Consensual Plan. The
following unaudited pro forma consolidated statement of operations for fiscal
1995 was prepared to illustrate the estimated effects of the Consensual Plan and
related financings as if they had occurred as of June 1, 1994.

PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)

FOR THE YEAR ENDED MAY 31, 1995
----------------------------------------

AS REPORTED ADJUSTMENTS PRO FORMA
------------ ----------- -------------

(IN THOUSANDS EXCEPT PER SHARE AMOUNT)

Sales and revenues:
Net sales...................................................... $ 1,181,635 $ 1,181,635
Time charges................................................... 222,221 222,221
Miscellaneous.................................................. 30,838 30,838
Interest income from Chapter 11 proceedings.................... 7,628 $ (7,628)(1) --
------------ ----------- -------------
1,442,322 (7,628) 1,434,694
------------ ----------- -------------
Cost and expenses:
Cost of sales.................................................. 951,381 951,381
Depreciation, depletion and amortization....................... 72,037 72,037
Selling, general and administrative............................ 130,616 130,616
Postretirement health benefits................................. 25,961 25,961
Provision for possible losses.................................. 4,485 4,485
Chapter 11 costs............................................... 442,362 (442,362)(2)
Interest and amortization of debt discount and expense......... 304,548 (81,364)(3) 223,184
Amortization of excess of purchase price over net assets
acquired..................................................... 40,027 40,027
------------ ----------- -------------
1,971,417 (523,726) 1,447,691
------------ ----------- -------------
(529,095) 516,098 (12,997)

Income tax benefit (expense)..................................... 170,450 (195,730)(4) (25,280)
------------ ----------- -------------
Net income (loss)................................................ $ (358,645) $ 320,368 $ (38,277)
------------ ----------- -------------
------------ ----------- -------------
Net loss per share............................................... $ (.75)(5)
-------------
-------------
Weighted average shares outstanding.............................. 50,988,626

- ------------------------

(FOOTNOTES ON NEXT PAGE)

F-6

WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1--RECENT HISTORY (CONTINUED)
FOOTNOTES FOR PRECEDING PAGE)

Changes from the historical financial statement in the pro forma consolidated
statement of operations consist of the following adjustments:

(1) Interest income from Chapter 11 proceedings of $7,628,000, which would not
have been realized assuming the Consensual Plan became effective June 1,
1994, has been eliminated.

(2) Chapter 11 costs of $442,362,000, which would not have been incurred
assuming the Consensual Plan became effective June 1, 1994, have been
eliminated.

(3) Interest and amortization of debt discount and expense has been reduced
$81,364,000 to give retroactive effect as if all indebtedness to be repaid
pursuant to the Consensual Plan was so done as of June 1, 1994 and the $490
million of Series B Senior Notes had been outstanding for the full year
ended May 31, 1995. Borrowings under the Trust IV Asset Backed Notes were
assumed to increase during the period June 1, 1994 through November 30, 1994
proportionately with the comparable period increase in the outstanding
economic balance of the instalment notes sold by Mid-State to Trust IV on
March 16, 1995. Borrowings under the Trust V Variable Funding Loan Agreement
were based on 78% of Jim Walter Homes' credit sales during the six-month
period December 1, 1994 through May 31, 1995. This time period is subsequent
to the Trust IV cut-off date for purchases of instalment notes from
Mid-State. No working capital borrowings were assumed under the Bank Credit
Facility. Pro forma interest expense, however, includes letter of credit
fees and unused working capital commitment fees.

(4) The provision for income taxes has been adjusted at the applicable statutory
rates to give effect to the pro forma adjustments described above.

(5) Net loss per share has been computed based on the weighted average number of
common shares outstanding (including 494,313 additional shares of Common
Stock issued six months after the Effective Date of the Consensual Plan, but
not including 3,880,140 additional shares which have been issued to an
escrow account and would be anti-dilutive).

NOTE 2--PRINCIPLES OF CONSOLIDATION

The Company, through its direct and indirect subsidiaries, currently offers
a diversified line of products and services for homebuilding, water and waste
water transmission, coal mining and related degasification, residential and
non-residential construction, and industrial markets. The consolidated financial
statements include the accounts of the Company and all of its subsidiaries.
Preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements. Actual
results could differ from those estimates. All significant intercompany balances
have been eliminated. In addition, certain reclassifications have been made in
the accompanying consolidated financial statements in order to conform with the
fiscal 1997 presentation.

NOTE 3--CASH AND CASH EQUIVALENTS, RESTRICTED SHORT-TERM INVESTMENTS AND
MARKETABLE SECURITIES

Cash and cash equivalents include short-term deposits and highly liquid
investments which have original maturities of three months or less and are
stated at cost which approximates market. The Company's cash management system
provides for the reimbursement of all major bank disbursement

F-7

WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--CASH AND CASH EQUIVALENTS, RESTRICTED SHORT-TERM INVESTMENTS AND
MARKETABLE SECURITIES (CONTINUED)
accounts on a daily basis. Checks issued but not yet presented to the banks for
payment are classified as bank overdrafts.

Restricted short-term investments include (i) temporary investment of
reserve funds and collections on instalment notes receivable owned by Mid-State
Trusts II, III, IV and V ($101,467,000) which are available only to pay expenses
of the Trusts and principal and interest on indebtedness of the Trusts, (ii)
certain funds held by Trust II that are in excess of the amount required to be
paid for expenses, principal and interest on the Trust II Mortgage-Backed Notes
but which are subject to retention ($79,706,000) and (iii) miscellaneous other
segregated accounts restricted to specific uses ($14,198,000).

Investments with original maturities greater than three months are
classified as marketable securities. In accordance with Statement of Financial
Accounting Standards No. 115-- "Accounting for Certain Investments in Debt and
Equity Securities," the Company's marketable securities are classified as
available for sale and are carried at estimated fair values.

NOTE 4--INSTALMENT NOTES RECEIVABLE

The instalment notes receivable arise from sales of partially finished homes
to customers for time payments primarily over periods of twelve to thirty years
and are secured by first mortgages or similar security instruments. The credit
terms offered by Jim Walter Homes, Inc. ("Jim Walter Homes") are usually for
100% of the purchase price of the home and the instalment notes receivable
currently carry either an 8.5% or 10% annual percentage rate, without points or
closing costs. Revenue and income from the sale of homes is included in income
upon completion of construction and legal transfer to the customer. The buyer's
ownership of the land and the improvements necessary to complete the home
constitute a significant equity investment to which the Company has access
should the buyer default on payment of the instalment note obligation. Of the
gross amount of $4,256,845,000 an amount of $3,967,340,000 is due after one
year. Instalment payments estimated to be receivable within each of the five
years from May 31, 1997 are $289,505,000, $284,802,000, $277,990,000,
$270,327,000 and $262,932,000, respectively, and $2,871,289,000 after five
years. Of the gross amount of instalment notes receivable of $4,256,845,000,
19%, 12% and 11% are secured by homes located in the states of Texas,
Mississippi and Florida, respectively. Time charges are included in equal parts
in each monthly payment and are taken into income as collected. This method
approximates the interest method since a much larger provision for loan losses
and other expenses would be required if time charge income were accelerated. The
aggregate amount of instalment notes receivable having at least one payment 90
or more days delinquent was 2.78% and 3.14% of total instalment notes receivable
at May 31, 1997 and 1996, respectively.

Mid-State Homes, Inc. ("Mid-State") purchases instalment notes from Jim
Walter Homes on homes constructed and sold by Jim Walter Homes and services such
instalment mortgage notes. Mid-State Trust II ("Trust II"), Mid-State Trust III
("Trust III") and Mid-State Trust IV ("Trust IV") are business trusts organized
by Mid-State, which owns all of the beneficial interest in Trust III and Trust
IV. Trust IV owns all of the beneficial interest in Trust II. The Trusts were
organized for the purpose of purchasing instalment notes receivable from
Mid-State with the net proceeds from the issuance of the Trust II
Mortgage-Backed Notes, the Trust III Asset Backed Notes and the Trust IV Asset
Backed Notes. The assets of Trust II, Trust III and Trust IV, including the
instalment notes receivable, are not available to satisfy claims of general
creditors of the Company and its subsidiaries. The liabilities of Trusts II, III
and IV for their publicly issued debt are to be satisfied solely from the
proceeds of the underlying instalment notes and are non-recourse

F-8

WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4--INSTALMENT NOTES RECEIVABLE (CONTINUED)
to the Company and its subsidiaries. The gross amount of instalment notes
receivable at May 31, 1997 was $4,256,845,000 and had an economic balance of
$2,019,581,000. The economic balance of an account is the present value of the
future scheduled monthly payments due on the account. Such present value is
calculated by discounting the remaining future scheduled monthly payments on an
account by the effective financing rate. The effective financing rate is
determined by calculating the discount rate which, when applied in a present
value calculation, results in the present value of all originally scheduled
monthly payments on such account being equal to the original amount financed. In
effect, the economic balance of an account is the amount of principal that can
be amortized by the instalment payments due over the remaining term of the
account at the effective financing rate. Instalment notes receivable owned by
Trust II had a gross book value of $966,072,000 and an economic balance of
$609,227,000; receivables owned by Trust III had a gross book value of
$364,872,000 and an economic balance of $195,535,000; and receivables owned by
Trust IV had a gross book value of $1,612,880,000 and an economic balance of
$704,532,000. Mid-State Trust V ("Trust V"), a business trust in which Mid-State
holds all the beneficial interest, was organized to hold instalment notes
receivable as collateral for borrowings to provide temporary financing to
Mid-State for its current purchases of instalment notes and mortgages from Jim
Walter Homes. At May 31, 1997, receivables owned by Trust V had a gross book
value of $1,310,206,000 and an economic balance of $509,059,000 (see Note 8).
Instalment notes receivable not pledged to the trusts had a gross book value of
$2,815,000 and an economic balance of $1,228,000.

NOTE 5--LONG-LIVED ASSET IMPAIRMENT

In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 C "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of " ("FASB 121")
which became effective for fiscal years beginning after December 15, 1995
(fiscal year 1997 for the Company). The Company elected to adopt FASB 121 during
the third quarter of fiscal 1996 as a result of significant adverse changes in
the results of operations during fiscal 1996, principally in the Natural
Resources business segment. A fire which resulted from the unexpected recurrence
of spontaneous combustion heatings at Jim Walter Resources' Mine No. 5 at the
end of the fiscal second quarter, as well as various geological problems at the
three other coal mines during portions of the year, led to the conclusion that
there was an impairment of fixed assets within the Natural Resources segment.

After performing a review for asset impairment at each of the Company's
business segments and applying the principles of measurement contained in FASB
121, the Company recorded a charge against earnings in 1996 of $143,265,000
before tax ($101,125,000 after tax). The charge included a $120,400,000 pre-tax
($78,260,000 after tax) write-down of fixed assets at two coal mines in the
Natural Resources segment to their estimated fair market values. Fair market
values were based principally on expected future discounted cash flows. In
addition, a $22,865,000 write-off of excess of purchase price over net assets
acquired was recorded in the Industrial Products segment, substantially all of
which was at JW Window Components, Inc. Adoption of this standard had no impact
on cash flow.

F-9

WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6--PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are summarized as follows (see Note 5):

MAY 31,
----------------------

1997 1996
---------- ----------

(IN THOUSANDS)

Land and minerals..................................................... $ 150,667 $ 150,708
Land improvements..................................................... 20,476 18,143
Buildings and leasehold improvements.................................. 106,004 98,452
Mine development costs................................................ 80,363 47,930
Machinery and equipment............................................... 597,357 548,562
Construction in progress.............................................. 23,139 25,196
---------- ----------
Total............................................................... $ 978,006 $ 888,991
---------- ----------
---------- ----------

The Company provides depreciation for financial reporting purposes
principally on the straight line method over the useful lives of the assets.
Assets (primarily mine development costs) extending for the full life of a coal
mine are depreciated on the unit of production basis. For federal income tax
purposes, accelerated methods are used for substantially all eligible
properties. The depreciable property categories and the principal rates for
depreciation used are as follows:

Land improvements....................................... 3.5% to 10%
Buildings............................................... 2% to 20%
Leasehold improvements.................................. Over term of
leases
Mine development costs.................................. Over life of mines
Machinery and equipment................................. 3.5% to 33.3%

Depletion of minerals is provided based on estimated recoverable quantities.

The Company has capitalized interest on qualifying properties in accordance
with Statement of Financial Accounting Standards No. 34. Interest capitalized
for the years ended May 31, 1997, 1996 and 1995 was immaterial.

Rental expense for all operating leases was $12.0 million, $11.0 million and
$10.0 million for the fiscal years ended May 31, 1997, 1996 and 1995,
respectively. Future minimum payments under noncancelable operating leases at
May 31, 1997 are: 1998, $11.3 million; 1999, $7.8 million; 2000, $6.7 million;
2001, $6.6 million; and 2002, $5.4 million.

NOTE 7--EXCESS OF PURCHASE PRICE OVER NET ASSETS ACQUIRED

The excess of purchase price over net assets acquired in connection with the
acquisition of Original Jim Walter is being amortized over periods ranging up to
twenty years. The Company evaluates, on a regular basis, whether events or
circumstances have occurred that indicate the carrying amount of goodwill may
warrant revision or may not be recoverable. The Company measures impairment of
goodwill based upon estimated future undiscounted cash flows from operations of
the related business unit (see Note 5). At May 31, 1997, the accumulated
amortization of goodwill was approximately $478.1 million. At May 31, 1997, the
net unamortized balance of goodwill is not considered to be impaired.

F-10

WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8--DEBT

Long-term debt, in accordance with its contractual terms, consisted of the
following at each year end:

MAY 31,
--------------------------

1997 1996
------------ ------------

(IN THOUSANDS)

Senior debt:
Walter Industries, Inc.
Revolving Credit Facility......................................................... $ 146,000 $ 235,000
Term Loan A....................................................................... 106,250 121,250
Term Loan B....................................................................... 58,750 59,750
Other............................................................................. 2,450 3,350
------------ ------------
313,450 419,350
------------ ------------
Mid-State Trusts
Trust II Mortgage-Backed Notes.................................................... 410,000 497,000
Trust III Asset Backed Notes...................................................... 116,934 147,669
Trust IV Asset Backed Notes....................................................... 841,191 902,277
Trust V Variable Funding Loan..................................................... 384,000 245,000
------------ ------------
1,752,125 1,791,946
------------ ------------
Total........................................................................... $ 2,065,575 $ 2,211,296
------------ ------------
------------ ------------

Interest paid in cash for the years ended May 31, 1997, 1996 and 1995 was
$179,749,000, $220,959,000 and $437,357,000, respectively.

On January 22, 1996, the Company completed a $550 million financing with a
syndicate of banks led by NationsBank National Association (South). The
financing consisted of a $365 million revolving credit facility ("Revolving
Credit Facility"), a $125 million six-year term loan ("Term Loan A") and a $60
million seven-year term loan ("Term Loan B") (collectively the "Credit
Facilities"). Proceeds from the financing, together with $75 million drawn under
the Trust V Variable Funding Loan Agreement, were used to redeem in full $490
million aggregate amount of Series B Senior Notes Due 2000 (the "Senior Notes")
at a redemption price of 101% of the principal amount thereof plus accrued and
unpaid interest thereon to the date of redemption and to replace the existing
$150 million bank credit facility, both issued in connection with the Company's
emergence from bankruptcy in March 1995. The Company recorded an extraordinary
loss of $8,314,000 ($5,404,000 net of income tax benefit) consisting of a
redemption premium and the write-off of unamortized debt expense related to the
early repayment of the Senior Notes and the $150 million bank credit facility.
The Credit Facilities are secured by a pledge of intercompany notes and stock of
certain subsidiaries of the Company. Net cash proceeds from certain asset sales
must be applied to permanently reduce the Credit Facilities and, beginning with
fiscal year ending May 31, 1997, 50% of the excess cash flow (as defined in the
Credit Facilities) must be used to permanently reduce Term Loan A and Term Loan
B.

The Revolving Credit Facility is a six-year non-amortizing facility which
includes a sub-facility for trade and other standby letters of credit in an
amount up to $75 million at any time outstanding and a sub-facility for
swingline advances in an amount not in excess of $15 million at any time
outstanding. Interest, at the option of the Company, is at (i) the greater of
(a) the Prime Rate or (b) the Federal Funds Effective Rate plus .50%, or (ii) a
LIBOR rate plus an Applicable Margin of .75% to 1.75% (based upon a leverage

F-11

WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8--DEBT (CONTINUED)
ratio pricing grid). At May 31, 1997, the weighted average interest rate was
7.73%. A commitment fee ranging from .25% to .50% per annum (based upon a
leverage ratio pricing grid) is payable on the daily average unutilized
commitment. The fee for outstanding letters of credit is priced at the
Applicable Margin less .375%. At May 31, 1997, there were no swingline
borrowings outstanding under this facility; however, letters of credit in the
aggregate face amount of $39,967,000 have been issued thereunder.

Term Loan A interest, at the option of the Company is at (i) the greater of
(a) the Prime Rate or (b) the Federal Funds Effective Rate plus .50%, or (ii) a
LIBOR rate plus .75% to 1.75% (based upon a leverage ratio pricing grid).
Scheduled principal payments to be made in each of the five years from May 31,
1997 are $16,250,000, $21,250,000, $25,000,000, $25,000,000 and $18,750,000,
respectively. At May 31, 1997, the weighted average interest rate was 6.87%

Term Loan B interest is at LIBOR plus 2% to 2.25% (based upon a leverage
ratio pricing grid). At May 31, 1997, the interest rate was 7.88%. Scheduled
principal payments in each of the five years from May 31, 1997 are $1,000,000,
$1,000,000, $1,000,000, $1,000,000 and $11,750,000, respectively.

The Trust II Mortgage-Backed Notes (see Note 4) were issued in five classes
in varying principal amounts. Three of the classes have been fully repaid. The
two remaining classes, A3 and A4, bear interest at the rates of 9.35% and
9.625%, respectively. Interest on each class of notes is payable quarterly on
each January 1, April 1, July 1 and October 1 (each a "Payment Date"). On each
Payment Date, regular scheduled principal payments will be made on the Class A3
and Class A4 Notes in order of maturity. Maturities of the balance of these
Mortgage-Backed Notes range from April 1, 1998 for the Class A3 Notes to April
1, 2003 for the Class A4 Notes. The Class A3 and Class A4 Notes are subject to
special principal payments and the Class A4 Notes may be subject to optional
redemption under specified circumstances. The scheduled principal amount of
notes maturing in each of the five years from May 31, 1997 is $87,000,000,
$64,600,000, $64,600,000, $64,600,000 and $64,600,000, respectively.

The Trust III Asset Backed Notes (see Note 4) bear interest at 7.625%,
constitute a single class and have a final maturity date of April 1, 2022.
Payments are made quarterly on January 1, April 1, July 1 and October 1, based
on collections on the underlying collateral less amounts paid for interest on
the notes and Trust III expenses.

The Trust IV Asset Backed Notes (see Note 4) bear interest at 8.33%,
constitute a single class and have a final maturity of April 1, 2030. Payments
are made quarterly on January 1, April 1, July 1 and October 1 based on
collections on the underlying collateral and distributions from Trust II, less
amounts paid for interest on the notes and Trust IV expenses.

On March 3, 1995, Trust V entered into the three-year $500 million Variable
Funding Loan Agreement with Enterprise Funding Corporation, an affiliate of
NationsBank National Association, as lender, and NationsBank National
Association (Carolinas) as Administrative Agent. It is contemplated that this
facility will be an evergreen three-year facility with periodic paydowns from
the proceeds of permanent financings similar to those done by Trusts II, III and
IV. The facility currently matures on March 3, 2000. Accordingly, the $384
million of borrowings outstanding at May 31, 1997 has been classified as
long-term debt. Interest is based on the cost of A-1 and P-1 rated commercial
paper plus .50%. The commitment fee on the unused portion of the facility is
.20%.

On June 11, 1997, Mid-State purchased from Mid-State Trust V mortgage
instalment notes having a gross amount of $1,196,479,000 and an economic balance
of $462,287,000 and subsequently sold such

F-12

WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8--DEBT (CONTINUED)
mortgage instalment notes to Mid-State Trust VI ("Trust VI"), a business trust
organized by Mid-State which owns all of the beneficial interest in Trust VI.
These sales were in exchange for the net proceeds from the public issuance by
Trust VI of $439,150,000 of Trust VI Asset Backed Notes. The notes were issued
in four classes, bear interest at rates ranging from 7.34% to 7.79% and have a
final maturity of July 1, 2035. Payments will be made quarterly on January 1,
April 1, July 1 and October 1 based on collections on the underlying collateral,
less amounts paid for interest on the notes and Trust VI expenses. Net proceeds
from the public offering were used primarily to pay down the Trust V
indebtedness of $384,000,000.

The Company has traditionally used interest rate swaps as hedge instruments
to manage interest rate risks. The Company has two types of interest rate risks:
(i) current risk on interest rates related to debt which has floating rates and
(ii) risk of interest and proceeds in refinancing from short-term to long-term
certain indebtedness secured by the fixed rate instalment notes receivable
generated by its homebuilding business. At May 31, 1997, Trust V had in place a
swap agreement with a notional amount of $360 million under which it pays a
fixed interest rate of 5.25% and receives interest based on commercial paper
rates. This swap was in effect until June 30, 1997, it accreted monthly and was
designed to offset the interest rate risk of the Trust V Variable Funding Loan
Agreement. Also at May 31, 1997, Trust V had in place forward swaps totaling
$150 million notional amount which were to start June 30, 1997 and run for 10
years at a blended monthly fixed rate of 7.25%. At that time, Trust V was to
receive interest based on prevailing commercial paper rate levels. On May 15,
1997, in order to offset refinancing risk, Trust V entered into a rate swap
agreement with a notional amount of $250 million under which Trust V was to pay
a fixed rate of 6.62%. This transaction had a termination date of June 13, 1997.
With the creation of Trust VI on June 11, 1997, all swap agreements were
terminated. Since interest rates have declined over the past year, Trust VI
coupon levels were below those originally expected. This lower level of interest
cost served to mitigate the losses incurred ($8.6 million) on the swap
agreements at termination. These losses will be deferred and amortized over the
life of Trust VI.

The Credit Facilities contain a number of significant covenants that, among
other things, restrict the ability of the Company and its subsidiaries to
dispose of assets, incur additional indebtedness, pay dividends, create liens on
assets, enter into leases, make investments or acquisitions, engage in mergers
or consolidations, or engage in certain transactions with subsidiaries and
affiliates and otherwise restrict corporate activities (including change of
control and asset sale transactions). In addition, under the Credit Facilities,
the Company is required to maintain specified financial ratios and comply with
certain financial tests, including interest coverage, fixed charge coverage
ratios and maximum leverage ratios, some of which become more restrictive over
time. The Company was in compliance with these covenants at May 31, 1997.

The Trust V Variable Funding Loan Agreement's covenants, among other things,
restricts the ability of Trust V to dispose of assets, create liens and engage
in mergers or consolidations. The Company was in compliance with these covenants
at May 31, 1997.

F-13

WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9--INCOME TAXES

Income tax expense (benefit) is made up of the following components:

MAY 31, 1997 MAY 31, 1996 MAY 31, 1995
---------------------- ----------------------- ----------------------

CURRENT DEFERRED CURRENT DEFERRED CURRENT DEFERRED
----------- --------- ----------- ---------- ---------- ----------

(IN THOUSANDS)

United States................... $ 4,745 $ 25,697 $ (799) $ (54,846) $ (80,445) $ (88,815)
State and local................. 3,499 (960) 1,420 (930) (309) (881)
----------- --------- ----------- ---------- ---------- ----------
Total......................... $ 8,244 $ 24,737 $ 621 $ (55,776) $ (80,754) $ (89,696)
----------- --------- ----------- ---------- ---------- ----------
----------- --------- ----------- ---------- ---------- ----------

In fiscal 1997 and 1995, the Company paid federal income tax of
approximately $3.0 million and $30.6 million, respectively. In fiscal 1997, the
Company received a refund of federal income tax of $21.4 million due to a net
operating loss carryback. In fiscal 1996, the Company received a refund of
federal income tax of $22.2 million paid in a previous year as estimated
payments. State income taxes paid in 1997 and 1995 were approximately $2.6
million and $4.0 million respectively, while state income taxes refunded in
fiscal 1996 were approximately $100,000.

The Company complies with Statement of Financial Accounting Standards No.
109--"Accounting for Income Taxes" ("FASB 109"). FASB 109 is an asset and
liability approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events which have been
recognized in the Company's financial statements or tax returns. FASB 109
generally considers all expected future events other than changes in tax law or
rates.

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

FOR THE YEARS ENDED MAY 31,
-------------------------------

1997 1996 1995
--------- --------- ---------
Statutory tax rate................................................. 35.0% (35.0)% (35.0)%
Effect of:
State and local income tax....................................... 2.3 .2 (.2)
Percentage depletion............................................. (8.8) (2.6) (.5)
Amortization of excess of purchase price over net assets acquired
and FASB 121 charge............................................ 17.5 16.2 2.7
Benefit of capital loss carryforward............................. -- (5.9) (1.5)
Adjustment of prior years net operating loss carryforward........ -- (5.0) --
Effect of rate difference and avoidance of loss of credits on net
operating loss due to carryforward election.................... .5 (9.1) 2.3
Other, net....................................................... .5 .2 --
--- --------- ---------
Effective tax rate................................................. 47.0% (41.0)% (32.2)%
--- --------- ---------
--- --------- ---------

In fiscal 1996, the tax benefit related to the extraordinary item
approximated the statutory rate and is deferred federal income tax.

F-14

WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9--INCOME TAXES (CONTINUED)

Deferred tax liabilities (assets) are comprised of the following:

MAY 31,
------------------------

1997 1996
----------- -----------

(IN THOUSANDS)

Instalment sales method for instalment notes receivable in prior
years............................................................. $ 27,504 $ 34,691
Depreciation........................................................ 84,721 78,462
Difference in basis of assets under purchase accounting............. 18,536 20,424
Net operating loss carryforward..................................... (91,230) (155,283)
Accrued expenses.................................................... (46,101) (39,034)
Postretirement benefits other than pensions......................... (102,453) (94,431)
----------- -----------
Total deferred tax (asset) liability.............................. $ (109,023) $ (155,171)
----------- -----------
----------- -----------

The Revenue Act of 1987 eliminated the instalment sales method of tax
reporting for instalment sales after December 31, 1987.

As a result of the loss incurred in the 1996 fiscal year, the Company
recorded a deferred tax asset of $25.0 million. During fiscal 1997, the Company
elected to carry the 1996 loss back to prior years rather than forward,
resulting in a refund of federal income taxes of $21.4 million, which was
accordingly charged against the deferred tax asset. The election to carry back
the net operating loss generated a tax charge of approximately $400,000 in the
fourth quarter of fiscal 1997 due to the effect of the rate difference and other
miscellaneous tax adjustments.

During fiscal 1996, the Company elected to carry a 1995 loss forward rather
than back to prior years, which generated a tax benefit of approximately $19
million in the fourth quarter of fiscal 1996 due to the effect of the rate
difference, avoidance of loss of credits and other miscellaneous tax
adjustments. Also during the fourth quarter of fiscal 1996, the Company utilized
its capital loss carryforward of approximately $22.8 million. The Company's net
operating loss carryforward at May 31, 1997 approximates $242.1 million, which
will expire in fiscal 2010. The Company's minimum tax credit carryforward at May
31, 1997 approximates $6.5 million.

Under the Internal Revenue Code, if certain substantial changes in the
Company's ownership occur, there are annual limitations on the amount of loss
and credit carryforwards. The reorganization under the Consensual Plan created
an ownership change in fiscal 1995; therefore, $164.6 million of the remaining
net operating loss carryforward is subject to the annual limitation. However,
the Company believes that the annual limitation will not affect the realization
of the net operating loss carryforward, which is expected to be fully utilized
by fiscal 1999.

The Company allocates federal income tax expense (benefit) to its
subsidiaries based on their separate taxable income (loss).

F-15

WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9--INCOME TAXES (CONTINUED)
claim represent total adjustments to taxable income of approximately $360
million for all tax periods at issue. Objections to the proofs of claim have
been filed by the Company, and the various issues are being litigated in the
Bankruptcy Court. Included in the proofs of claim is an adjustment to taxable
income disallowing a deduction of approximately $51 million for hedging losses
incurred during fiscal year 1988. This issue was conceded by the Internal
Revenue Service pursuant to a joint stipulation of parties approved by the
Bankruptcy Court by an order dated January 3, 1997. The Company believes that
the balance of such proofs of claim are substantially without merit and intends
to defend vigorously such claims; however, there can be no assurance as to the
ultimate outcome.

NOTE 10--STOCKHOLDERS' EQUITY

The Company is authorized to issue 200,000,000 shares of common stock, $.01
par value. As of May 31, 1997, 55,063,412 shares of common stock were
outstanding. On June 24, 1997, the Company repurchased 1,387,092 shares of
outstanding common stock and such shares are being held as treasury stock.

Pursuant to the Consensual Plan, 494,313 shares were issued on September 13,
1995 to all former stockholders as of the Effective Date of the Consensual Plan.
Also on September 13, 1995, pursuant to the Consensual Plan, 3,880,140 shares of
common stock were issued to an escrow account. To the extent that certain
federal income tax matters of the Company are resolved satisfactorily, up to a
maximum 3,880,140 of the escrowed shares will be distributed to former
stockholders of the Company as of the Effective Date. To the extent such matters
are not resolved satisfactorily, the escrowed shares will be returned to the
Company and canceled.

Pursuant to the Consensual Plan, a total of 54,868,766 shares of common
stock were to be issued to creditors and former stockholders of the Company. The
plan of reorganization originally proposed by certain creditors and committees
(the "Creditors Plan") provided that subordinated bondholders could elect to
receive "Qualified Securities" (cash and/or new senior notes) in lieu of common
stock of the Company. The Consensual Plan confirmed by the Bankruptcy Court,
which technically constituted a modification of the Creditors Plan kept in place
the bondholders election. Certain subordinated bondholders, however, were unable
to provide documentation evidencing their right to receive Qualified Securities
within the two year time frame prescribed by the Consensual Plan. As a result,
approximately 212,000 additional shares of common stock were issued in lieu of
Qualified Securities in 1997. In addition, certain former stockholders did not
tender their shares, which resulted in approximately 17,000 shares not being
issued.

Primary net income per share in 1997 was computed by dividing net income by
the monthly weighted average number of shares of common stock and common stock
equivalents outstanding. Common stock equivalents include the number of shares
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 average market price of the common stock during the year. Primary net loss
per share in 1996 does not include 3,880,140 additional shares issued to an
escrow account on September 13, 1995 pursuant to the Consensual Plan because
such issuance would be anti-dilutive. Fully diluted net income (loss) per share
is not materially different from primary net income (loss) per share.

F-16

WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10--STOCKHOLDERS' EQUITY (CONTINUED)
Changes in stockholders' equity for the two years ended May 31, 1997 are
summarized as follows:

EXCESS OF
COMMON STOCK ADDITIONAL
---------------------- CAPITAL IN RETAINED PENSION
SHARES PAR VALUE EXCESS EARNINGS LIABILITY
--------- ----------- ------------ ----------- -----------

(IN THOUSANDS)
Balance at May 31, 1995.............................. 50,494 $ 505 $ 1,159,384 $ (793,165) $ (5,950)
Stock issued......................................... 4,374 44 (44)
Fractional share payments............................ (8)
Net loss............................................. (84,696)
Reverse excess of additional pension liability....... 624
--------- ----- ------------ ----------- -----------
Balance at May 31, 1996.............................. 54,868 549 1,159,332 (877,861) (5,326)
Stock issued, net.................................... 195 2 4,942
Fractional share payments............................ (13)
Net income........................................... 37,117
Reverse excess of additional pension liability....... 670
--------- ----- ------------ ----------- -----------
Balance at May 31, 1997.............................. 55,063 $ 551 $ 1,164,261 $ (840,744) $ (4,656)
--------- ----- ------------ ----------- -----------
--------- ----- ------------ ----------- -----------

In management's opinion, information for fiscal 1995 is not relevant given
the significant change in the Company's capital structure which occurred as a
result of the Company's reorganization pursuant to the Consensual Plan (see Note
1).

In February 1997, Statement of Financial Accounting Standards No.
128--"Earnings per Share" ("FASB 128"), was issued. FASB 128 will be effective
for both interim and annual periods ending after December 15, 1997 and will
require a restatement of previously reported earnings per share. Under FASB 128,
"basic" earnings per share will replace the reporting of "primary" earnings per
share. Basic earnings per share is calculated by dividing the income available
to common stockholders by the weighted average number of common shares
outstanding for the period, without consideration for common stock equivalents.
"Fully diluted" earnings per share will be replaced by "diluted" earnings per
share under FASB 128. The calculation of diluted earnings per share is similar
to that of fully diluted earnings per share under existing accounting
pronouncements. Basic earnings per share and diluted earnings per share are not
expected to be significantly different from primary net income per share and
fully diluted net income per share as calculated by the Company for the years
ended May 31, 1997 or 1996.

NOTE 11--STOCK OPTIONS

Under the Walter Industries, Inc. Long-Term Incentive Stock Plan approved by
stockholders in October 1995, an aggregate of 3,000,000 shares of the Company's
common stock have been reserved for the grant and issuance of incentive and
non-qualified stock options, stock appreciation rights ("SARs") and stock
awards. The maximum number of such shares with respect to which stock options or
SARs may be granted to any employee during which the plan is in effect is
500,000 shares and the aggregate number of such shares that may be used in
settlement of stock awards is 1,000,000 shares. An option becomes exercisable at
such times and in such installments as set by the Compensation Committee of the
Board, but no option will be exercisable after the tenth anniversary of the date
on which it is granted. The option price

F-17

WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 11--STOCK OPTIONS (CONTINUED)
per share may not be less than the fair market value of a share on the date the
option is granted. Information on stock options is summarized as follows:

1997 1996
--------------------- -----------------------

WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
---------- --------- ---------- -----------
Outstanding at beginning of year.............. 1,487,000 $ 14.120 -- $ --
Granted....................................... 1,219,000 12.313 1,500,000 14.120
Exercised..................................... -- -- -- --
Canceled...................................... (36,001) 13.571 (13,000) 14.125
---------- ----------
Outstanding at end of year.................... 2,669,999 13.301 1,487,000 14.120
---------- ----------
---------- ----------
Exercisable at end of year.................... 487,333 14.118 --
---------- ----------
---------- ----------

OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
----------------------------------------- ------------------
NUMBER WEIGHTED AVERAGE NUMBER
OUTSTANDING AT REMAINING CONTRACTUAL EXERCISABLE AT
EXERCISE PRICES MAY 31, 1997 LIFE (YEARS) MAY 31, 1997
- --------------- -------------- ------------------------- ------------------

12.313 1,208,000 9.2 --
14.063 153,000 8.2 51,000
14.125 1,308,999 8.2 436,333
-------------- -------
2,669,999 8.7 487,333
-------------- -------
-------------- -------

Had compensation cost for the Company's option plans been determined based
on the fair value at the grant dates as prescribed by Statement of Financial
Accounting Standards No. 123 "Accounting for Stock Based Compensation" ("FASB
123"), the Company's net income and net income per share on a pro forma basis
would have been (in thousands, except per share data):

1997
---------

Pro forma net income............................................................... $ 35,314
---------
---------
Pro forma net income per share..................................................... $ .64
---------
---------

The preceding pro forma results were calculated with the use of the Black
Scholes option-pricing model. The following assumptions were used for the year
ended May 31, 1997: (1) risk free interest rate of 7.36%; (2) dividend yield of
0.0%; (3) expected life of 5.0 years; and (4) volatility of 29.3%.

The Walter Industries, Inc. Employee Stock Purchase Plan was adopted in
January 1996. 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% of each participant's actual payroll
deduction as authorized, and remits such funds to a designated brokerage firm
who purchases in the open market, as agent for the Company, as many shares of
common stock as such funds will permit for the accounts of the participants. The
amount of stock purchased depends upon the market prices of the common stock at
the time the purchases are made. The total number of shares which may be
purchased

F-18

WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 11--STOCK OPTIONS (CONTINUED)
under the plan is 500,000. Total shares purchased under the plan in 1997 were
approximately 200,000, and the Company's contribution was approximately
$400,000.

NOTE 12--LITIGATION

VEIL-PIERCING SUITS

Beginning in early 1989, the Company and certain of its officers, directors
and shareholders were named as co-defendants in a number of lawsuits brought by
persons ("Asbestos Claimants") claiming that the Company should be held liable
for all asbestos-related liabilities of The Celotex Corporation ("Celotex") and
its parent, Jim Walter Corporation ("JWC"). The stock of a predecessor of JWC
("Original Jim Walter") was acquired by a company known as Hillsborough
Acquisition Corporation ("HAC"), a former subsidiary of the Company, pursuant to
a 1988 leveraged buyout (the "LBO"). Asserting a variety of theories of
derivative liability, including piercing the corporate veil, the suits alleged,
among other things, that Original Jim Walter was liable for all asbestos-related
liabilities of Celotex and that the distribution by HAC of substantially all of
its assets to the Company pursuant to the LBO was a fraudulent conveyance (the
"Veil-Piercing Suits").

On December 27, 1989, the Company and certain of its subsidiaries filed for
protection under Chapter 11 of Title 11 of the United States Bankruptcy Code in
the United States Bankruptcy Court for the Middle District of Florida, Tampa
Division (the "Bankruptcy Court"), which stayed all Veil-Piercing Suits pursuant
to the automatic stay. In January 1990, the Company filed a declaratory judgment
action ("Adversary Proceeding") against all Asbestos Claimants who had filed
Veil-Piercing Suits seeking a ruling that the Company could not be held liable
for any asbestos-related liabilities of Celotex or JWC on any grounds, asserting
that the corporate veil separating Original Jim Walter and Celotex was intact,
and asserting that the LBO could not be deemed a fraudulent conveyance.

In April 1994, the Bankruptcy Court ruled in favor of the Company on all of
the claims asserted in the Adversary Proceeding. The ruling was affirmed by the
United States District Court for the Middle District of Florida (the "District
Court") in October 1994. Thereafter, a settlement (the "Veil-Piercing
Settlement") was entered into among the Company, certain of its creditors,
Celotex, JWC and representatives of the Asbestos Claimants pursuant to which all
the Veil-Piercing Suits would be dismissed and the Company and its officers,
directors and relevant stockholders would be released from all liabilities
relating to the LBO or associated with asbestos-related liabilities of Celotex
or JWC. The Veil-Piercing Settlement is embodied in the Amended Joint Plan of
Reorganization Dated as of December 9, 1994 as modified on March 1, 1995 (as so
modified the "Consensual Plan") that was confirmed by the Bankruptcy Court
pursuant to an order signed on March 2, 1995. The Consensual Plan binds all
known and unknown claimants and enjoins such persons or entities from bringing
any suits against the Company in the future for asbestos or LBO related claims.
Dismissal of the Veil-Piercing Suits is in process and all of these suits will
be dismissed in the near future pursuant to the terms of the Veil-Piercing
Settlement and the Consensual Plan.

In March 1996, the Company, together with various other parties, filed an
adversary proceeding with the Bankruptcy Court, naming Celotex and JWC as
defendants. In this proceeding the Company and the other named plaintiffs allege
that Celotex and JWC breached the Veil-Piercing Settlement by failing to propose
and use their best efforts to obtain confirmation of a Chapter 11 plan for
Celotex that included an injunction issued pursuant to Section 524(g) of the
Bankruptcy Code or other similar injunctive relief

F-19

WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 12--LITIGATION (CONTINUED)
acceptable to each of the parties to the Veil-Piercing Settlement. Although all
Veil-Piercing claims by Asbestos Claimants were resolved as part of the
Consensual Plan, the Company believes that Section 524(g) affords additional
statutory protection to the Company against the possibility of such claims in
the future.

On May 28, 1996, the Bankruptcy Court issued an order granting in part the
Company's motion for summary judgment and denying the motions for summary
judgment filed by Celotex and JWC. The Bankruptcy Court found, among other
things, that the plan of reorganization filed by Celotex in its Chapter 11
proceeding did not comply with the terms of the Veil-Piercing Settlement. The
Bankruptcy Court's May 28, 1996 Order was appealed by Celotex and JWC.

In October 1996, Celotex and various other parties in the Celotex bankruptcy
announced to the Court in the Celotex Bankruptcy (the "Celotex Bankruptcy
Court") that an agreement had been reached between Celotex and each of its
creditor groups pursuant to a Modified Joint Plan of Reorganization (the
"Celotex Modified Plan") which, among other things, superseded and replaced all
prior plans. The Celotex Modified Plan contains a provision for a Section 524(g)
injunction as to all asbestos claimants. The Celotex Modified Plan was approved
by a vote of the Celotex creditors and in December 1996 the Celotex Bankruptcy
Court entered an Order confirming the Celotex Modified Plan. The Celotex
Modified Plan became effective as of May 30, 1997. As a result of the Celotex
Modified Plan containing a provision for a Section 524(g) injunction and such
Plan having become effective, the Company believes that the appeal of Celotex
and JWC of the Bankruptcy Court's May 28, 1996 Order is now moot and that the
only issue which remains in that adversary proceeding is whether the Company and
other plaintiffs are entitled to collect attorneys' fees and expenses from
Celotex and JWC with respect to the prosecution of the adversary proceeding.

SUIT BY THE COMPANY AND JIM WALTER RESOURCES, INC. FOR BUSINESS INTERRUPTION
LOSSES

On May 31, 1995, the Company and Jim Walter Resources, Inc. ("JWR") filed a
lawsuit in the Circuit Court for Tuscaloosa County, Alabama (Civil Action No.
CV-95-625) against certain insurers. The lawsuit arises out of a spontaneous
combustion fire that began in JWR's underground coal mine No. 5 on November 17,
1993. Efforts to control the fire caused a blockage in the tunnels, corridors,
and passageways necessary to conduct mining, so mining operations temporarily
ceased. After JWR believed that the fire had been extinguished or brought under
control, JWR resumed its mining operations. JWR subsequently detected that the
intensity of the fire had increased substantially, making it necessary to seal
off portions of the mine and to lose permanently certain corridors and
passageways necessary to the continued mining of the longwall panel then being
mined. JWR's longwall mining was interrupted until another longwall panel could
be prepared. In addition to the mining of coal, JWR produces natural gas from
wells drilled into the mine, and production of the gas from the area of the lost
longwall panel was also lost. As a result of the fire, the Company and JWR
claimed compensable losses in the amount of $25 million under their business
interruption insurance coverage. When the insurers refused to pay their pro rata
part of the claim, the lawsuit described above was commenced.

The complaint filed by the Company and JWR seeks payment of the amounts
claimed to be due under the insurance policies in question and a declaratory
judgment that the policies in question are not void or voidable due to any
alleged failure to disclose or a lack of fortuity. Certain of the insurers have
counterclaimed for rescission on the basis of nondisclosure and lack of
fortuity. The Company and JWR also seek a declaratory judgment stating that each
of the insurers is liable for its pro rata share of the

F-20

WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 12--LITIGATION (CONTINUED)
business interruption loss. In addition, the Company and JWR have asserted a
claim for bad faith refusal to pay against certain insurers.

The insurers issued policies insuring various percentages of the risk. The
Company has entered into settlements with several insurers who, in the
aggregate, have paid approximately $12.4 million to date, reducing the contract
claims in the lawsuit to approximately $12.6 million. The Company and JWR
continue to pursue the litigation against the remaining carriers, and a trial is
tentatively scheduled for October 1997.

LITIGATION RELATED TO CHAPTER 11 DISTRIBUTIONS TO CERTAIN HOLDERS OF
SUBORDINATED NOTES AND/OR DEBENTURES

The plan of reorganization originally proposed by certain creditors and
committees (the "Creditors' Plan") provided that subordinated bondholders could
elect to receive "Qualified Securities" (cash and/or new senior notes) in lieu
of shares of Common Stock of the Company. Such elections (the "Subordinated Note
Claim Election") were to be made on the ballots used for voting on the
Creditors' Plan. A balloting agent was retained to receive and separately
tabulate ballots cast on the Creditors' Plan and the Debtors' Fifth Amended
Joint Plan of Reorganization (the "Company's Plan"). Voting on the Company's
Plan and the Creditors' Plan took place during the period August 12, 1994
through September 23, 1994.

Subsequent to September 23, 1994, the balloting agent filed with the
bankruptcy Court two (2) separate voting certificates.

In preparing to make distributions to subordinated bondholders, it came to
the attention of the Company that certain schedules associated with the
certifications were inaccurate. As a result, the Company reviewed all ballots
that the balloting agent claimed to be in its possession and determined that
discrepancies existed between the schedules and certain of the ballots cast by
subordinated bondholders.

The Company filed a motion with the Bankruptcy Court seeking to amend the
schedules. In April 1995, an order was entered reflecting the Bankruptcy Court's
decision to permit the amendment of the schedules in certain respects but not
others (the "April Order").

Appeals from the April Order were filed with the District Court by various
bondholders. In November 1996, the District Court entered an order granting the
Company's motion to dismiss and dismissing as moot all appeals in this matter.
No appeal of the District Court's Order was taken and that Order is now final.

INCOME TAX LITIGATION

A substantial controversy exists with regard to federal income taxes
allegedly owed by the Company. See Note 9--Income Taxes for a more complete
explanation.

MISCELLANEOUS LITIGATION

The Company and its subsidiaries are parties to a number of other lawsuits
arising in the ordinary course of their businesses. Most of these cases are in a
preliminary stage and the Company is unable to predict a range of possible loss,
if any. The Company provides for costs relating to these matters when a loss is
probable and the amount is reasonably estimable. The effect of the outcome of
these matters on the Company's future results of operations cannot be predicted
because any such effect depends on future

F-21

WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 12--LITIGATION (CONTINUED)
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 condition.

NOTE 13--PENSION AND OTHER EMPLOYEE BENEFITS

The Company has various pension and profit sharing plans covering
substantially all employees. In addition to its own pension plans, the Company
contributes to certain multi-employer plans. Total pension expense for the years
ended May 31, 1997, 1996 and 1995, was $7.6 million, $11.8 million and $8.2
million, respectively. The funding of retirement and employee benefit plans is
in accordance with the requirements of the plans and, where applicable, in
sufficient amounts 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.

F-22

WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 13--PENSION AND OTHER EMPLOYEE BENEFITS (CONTINUED)

The net pension costs for Company administered plans are as follows:

FOR THE YEARS ENDED MAY 31,
----------------------------------

1997 1996 1995
---------- ---------- ----------

(IN THOUSANDS)

Service cost-benefits earned during the period............ $ 6,644 $ 6,072 $ 5,817
Interest cost on projected benefit obligation............. 17,589 16,972 16,174
Actual loss (return) on assets............................ (28,532) (35,347) 4,304
Net amortization and deferral............................. 8,680 20,236 (21,377)
---------- ---------- ----------
Net pension costs....................................... $ 4,381 $ 7,933 $ 4,918
---------- ---------- ----------
---------- ---------- ----------

The following table sets forth the funded status of Company administered
plans:

MAY 31, 1997 MAY 31, 1996
-------------------------- --------------------------

PLANS IN WHICH PLANS IN WHICH
-------------------------- --------------------------

ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
------------ ------------ ------------ ------------
(IN THOUSANDS)

Actuarial present value of accumulated benefit obligations:
Vested benefits............................................. $ 166,103 $ 46,853 $ 149,542 $ 50,941
Non-vested benefits......................................... 7,444 1,525 6,815 1,585
------------ ------------ ------------ ------------
$ 173,547 $ 48,378 $ 156,357 $ 52,526
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Plan assets at fair value, primarily stocks and bonds......... $ 213,726 $ 33,341 $ 189,728 $ 34,609
Projected benefit obligations................................. 207,610 48,430 188,422 54,008
------------ ------------ ------------ ------------
Plan assets in excess of (less than) projected benefit
obligations................................................. 6,116 (15,089) 1,306 (19,399)
Unamortized portion of transition (asset) obligation at June
1, 1986..................................................... (7,524) 2,918 (9,185) 4,021
Unrecognized net loss from actual experience different from
that assumed................................................ 6,743 4,758 13,191 6,124
Prior service cost not recognized............................. 633 3,695 618 3,595
Contribution to plans after measurement date.................. 103 1,126 -- 1,042
------------ ------------ ------------ ------------
Prepaid (accrued) pension cost................................ 6,071 (2,592) 5,930 (4,617)
Additional liability.......................................... -- (11,294) -- (12,507)
------------ ------------ ------------ ------------
Prepaid pension cost (pension liability) recognized in the
balance sheet............................................... $ 6,071 $ (13,886) $ 5,930 $ (17,124)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------

The projected benefit obligations were determined using an assumed discount
rate of 7.50% in fiscal 1997 and 1996 and, where applicable, an assumed increase
in future compensation levels of 4.50% in fiscal 1997 and 1996. The assumed
long-term rate of return on plan assets was 9% and 8% in fiscal 1997 and 1996,
respectively.

F-23

WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 13--PENSION AND OTHER EMPLOYEE BENEFITS (CONTINUED)
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, as amended by the Multiemployer Pension Plan
Amendments Act of 1980, an employer is liable for a proportionate part of the
plans' unfunded vested benefits liabilities. The Company estimates that its
allocated portion of the unfunded vested benefits liabilities of these plans
amounted to approximately $34.7 million at May 31, 1997. However, although the
net liability can be estimated, its components, the relative position of each
employer with respect to actuarial present value of accumulated benefits and net
assets available for benefits, are not available to the Company.

The Company provides certain postretirement benefits other than pensions,
primarily healthcare, to eligible retirees. The Company's postretirement benefit
plans are not funded. Postretirement benefit costs were $22.7 million in 1997,
$27.1 million in 1996 and $26.0 million in 1995. Amounts paid for postretirement
benefits were $7.3 million in 1997, $7.7 million in 1996 and $7.5 million in
1995.

The net periodic postretirement benefit cost includes the following
components:

FOR THE YEARS ENDED MAY 31,
-------------------------------

1997 1996 1995
--------- --------- ---------

(IN THOUSANDS)

Service cost................................................. $ 7,642 $ 8,668 $ 8,491
Interest cost................................................ 14,990 18,701 17,470
Net amortization and deferral................................ 78 (240) --
--------- --------- ---------
Net periodic postretirement benefit cost................... $ 22,710 $ 27,129 $ 25,961
--------- --------- ---------
--------- --------- ---------

The accumulated postretirement benefits obligation at May 31, 1997 and 1996
are as follows:

MAY 31,
----------------------

1997 1996
---------- ----------

(IN THOUSANDS)

Retirees.............................................................. $ 81,731 $ 93,380
Fully eligible, active participants................................... 37,189 32,896
Other active participants............................................. 106,493 132,026
---------- ----------
Accumulated postretirement benefit obligation......................... 225,413 258,302
Unrecognized net gain (loss).......................................... 43,546 (10,475)
---------- ----------
Postretirement benefit liability recognized in the balance sheet...... $ 268,959 $ 247,827
---------- ----------
---------- ----------

The principal assumptions used to measure the accumulated postretirement
benefit obligation include a discount rate of 7.50% in fiscal 1997 and 1996 and
a health care cost trend rate of 8.50% declining to 5.25% over a eight year
period and remaining level thereafter in fiscal 1997 and a health care cost
trend rate of 9.50% declining to 5.25% over a nine year period in fiscal 1996. A
one percent increase in trend rates would increase the accumulated
postretirement benefit obligation by 18% and increase net periodic
postretirement benefit cost for 1997 by 21%.

Certain subsidiaries of the Company maintain profit sharing plans. The total
cost of these plans for the years ended May 31, 1997, 1996 and 1995 was $3.4
million, $2.9 million and $3.0 million, respectively.

F-24

WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 13--PENSION AND OTHER EMPLOYEE BENEFITS (CONTINUED)
In February 1997, a reduction in the salaried workforce at Jim Walter
Resources was completed under a voluntary early retirement program. The total
cost of this program was $6.2 million.

NOTE 14--FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" ("FASB 107") requires disclosure of estimated
fair values for all financial instruments for which it is practicable to
estimate fair value. Considerable judgment is necessary in developing estimates
of fair value and a variety of valuation techniques are allowed under FASB 107.
The derived fair value estimates resulting from the judgments and valuation
techniques applied cannot be substantiated by comparison to independent
materials or to disclosures by other companies with similar financial
instruments. Furthermore, FASB 107 fair value disclosures do not purport to be
the amount which could be attained in immediate settlement of the financial
instrument. Fair value estimates are not necessarily more relevant than
historical cost values and have limited usefulness in evaluating long-term
assets and liabilities held in the ordinary course of business. Accordingly,
management believes that the disclosures required by FASB 107 have limited
relevance to the Company and its operations.

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

Cash and cash equivalents, restricted short term investments and
marketable securities--The carrying amounts reported in the balance sheet
approximate fair value.

Instalment notes receivable--The estimated fair value of instalment
notes receivable at May 31, 1997 was in the range of $2.0 billion to $2.1
billion. The estimated fair value is based upon valuations prepared by an
investment banking firm as of May 31, 1997. The value of mortgage-backed
instruments such as instalment notes receivable are very sensitive to
changes in interest rates.

Debt--The estimated fair value of long term debt at May 31, 1997 was
$2.142 billion based on current yields for comparable debt issues or prices
for actual transactions.

F-25

WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 15--SEGMENT INFORMATION

Information relating to the Company's business segments is set forth below.

FOR THE YEARS ENDED MAY 31,
----------------------------------------

1997 1996 1995
------------ ------------ ------------

(IN THOUSANDS)

Sales and Revenues:
Homebuilding and financing............................................ $ 440,749 $ 413,078 $ 407,172
Water transmission products........................................... 419,813 419,984 411,442
Natural resources (a)................................................. 345,011 362,948 332,151
Industrial products................................................... 299,851 287,230 281,280
Corporate............................................................. 1,637 2,395 10,277
------------ ------------ ------------
Consolidated sales and revenues (b)(c).............................. $ 1,507,061 $ 1,485,635 $ 1,442,322
------------ ------------ ------------
------------ ------------ ------------
Contributions to Operating Income (d)(e):
Homebuilding and financing (f)........................................ $ 81,731 $ 63,390 $ 44,954
Water transmission products........................................... 13,986 10,517 12,965
Natural resources (g)................................................. 27,595 (105,929) 22,314
Industrial products (g)............................................... 21,433 (10,406) 6,570
------------ ------------ ------------
144,745 (42,428) 86,803

Less-Unallocated corporate interest and other expense (h)............... (74,647) (92,019) (615,898)
Income tax benefit (expense).......................................... (32,981) 55,155 170,450
------------ ------------ ------------
Income (loss) before extraordinary item............................. $ 37,117 $ (79,292) $ (358,645)
------------ ------------ ------------
------------ ------------ ------------
Depreciation, Depletion and Amortization:
Homebuilding and financing............................................ $ 3,311 $ 3,279 $ 3,336
Water transmission products........................................... 17,010 18,636 16,520
Natural resources..................................................... 38,107 38,652 41,434
Industrial products................................................... 11,696 11,890 9,073
Corporate............................................................. 1,690 1,884 1,674
------------ ------------ ------------
Total............................................................... $ 71,814 $ 74,341 $ 72,037
------------ ------------ ------------
------------ ------------ ------------
Gross Capital Expenditures:
Homebuilding and financing............................................ $ 5,617 $ 3,735 $ 4,192
Water transmission products........................................... 14,479 12,888 15,538
Natural resources..................................................... 54,999 53,576 46,214
Industrial products................................................... 25,968 12,792 24,692
Corporate............................................................. 692 532 681
------------ ------------ ------------
Total............................................................... $ 101,755 $ 83,523 $ 91,317
------------ ------------ ------------
------------ ------------ ------------
Identifiable Assets:
Homebuilding and financing............................................ $ 1,796,949 $ 1,802,950 $ 1,789,582
Water transmission products........................................... 452,963 480,209 480,617
Natural resources..................................................... 387,167 381,582 465,680
Industrial products................................................... 192,688 177,668 213,836
Corporate (i)......................................................... 197,618 248,968 295,438
------------ ------------ ------------
Total............................................................... $ 3,027,385 $ 3,091,377 $ 3,245,153
------------ ------------ ------------
------------ ------------ ------------

F-26

WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 15--SEGMENT INFORMATION (CONTINUED)
- ------------------------

(a) Includes sales of coal of $309,308,000, $325,495,000 and $297,650,000 in
1997, 1996 and 1995, respectively. Jim Walter Resources' coal supply
contract with Alabama Power Company that had been in effect since January 1,
1979, as amended, was superseded by a new contract executed May 10, 1994.
The new contract is effective from July 1, 1994 through August 31, 1999.
Sales to Alabama Power Company in each of the years ended May 31, 1997, 1996
and 1995 were 13% of consolidated net sales and revenues.

(b) Inter-segment sales (made primarily at prevailing market prices) are
deducted from sales of the selling segment and are insignificant in amount
with the exception of the sales of the Industrial Products Group to the
Water Transmission Products Group of $12,440,000, $13,292,000 and
$13,373,000 and sales of the Natural Resources Group to the Industrial
Products Group of $4,172,000, $4,774,000 and $5,397,000 in 1997, 1996 and
1995, respectively.

(c) Export sales, primarily coal, were $134,733,000, $171,446,000 and
$129,071,000 in 1997, 1996 and 1995, respectively. Export sales to any
single geographic area do not exceed 10% of consolidated net sales and
revenues.

(d) Operating income amounts are after deducting amortization of excess of
purchase price over net assets acquired (goodwill) of $34,870,000 in 1997,
$39,096,000 in 1996 and $40,027,000 in 1995. A breakdown by segment is as
follows:

FOR THE YEARS ENDED MAY 31,
-------------------------------

1997 1996 1995
--------- --------- ---------

(IN THOUSANDS)

Homebuilding and financing................................... $ 28,538 $ 31,246 $ 31,703
Water transmission products.................................. 12,212 12,247 12,214
Natural resources............................................ (1,327) (1,331) (1,328)
Industrial products.......................................... 638 2,135 2,627
Corporate.................................................... (5,191) (5,201) (5,189)
--------- --------- ---------
$ 34,870 $ 39,096 $ 40,027
--------- --------- ---------
--------- --------- ---------

(e) Includes postretirement health benefits of $22,710,000, $27,129,000 and
$25,961,000 in 1997, 1996 and 1995. A breakdown by segment is as follows:

FOR THE YEARS ENDED MAY 31,
-------------------------------

1997 1996 1995
--------- --------- ---------

(IN THOUSANDS)

Homebuilding and financing................................... $ 1,888 $ 1,636 $ 2,295
Water transmission products.................................. 3,857 3,729 4,362
Natural resources............................................ 11,873 16,640 15,004
Industrial products.......................................... 4,519 4,581 3,610
Corporate.................................................... 573 543 690
--------- --------- ---------
$ 22,710 $ 27,129 $ 25,961
--------- --------- ---------
--------- --------- ---------

(f) In July 1986, Waltsons, Inc., a corporation in which James W. Walter,
Chairman Emeritus and a Director of the Company, has a twenty percent (20%)
interest, acquired a fifty percent (50%) interest

F-27

WALTER INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 15--SEGMENT INFORMATION (CONTINUED)
in the operations of Booker & Company, Inc. ("Booker"), a wholesale
distributor of building supplies and materials. In December 1996, Waltsons,
Inc. sold all of its interest in the operations of Booker. Booker has been a
supplier of various building supplies and materials to Dixie Building
Supplies, Inc., a wholly owned subsidiary of the Company. Booker's sales of
building supplies and materials to such subsidiary totaled $6,091,000,
$5,679,000 and $5,434,000 in 1997, 1996 and 1995, respectively. The Company
believes that the terms of the transactions between the Company and Booker
are at least as favorable to the Company as those that could be obtained
from unaffiliated third parties.

(g) Includes FASB 121 write-down of fixed assets of $120,400,000 at two coal
mines in the Natural Resources Group and write-off of goodwill of
$22,865,000 in the Industrial Products Group in 1996.

(h) Excludes interest expense incurred by the Homebuilding and Financing Group
of $118,959,000, $128,215,000 and $131,560,000 in 1997, 1996 and 1995,
respectively. Such amounts are net of intercompany interest income of
$33,135,000 and $28,127,000 in 1997 and 1996, and includes intercompany
interest expense of $35,128,000 in 1995. The balance of unallocated expenses
consisting primarily of unallocated interest, corporate expenses and Chapter
11 costs (in 1995) are attributable to all groups and cannot be reasonably
allocated to specific groups.

(i) Primarily cash and cash equivalents and corporate headquarters buildings and
equipment.

F-28

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

ON FINANCIAL STATEMENT SCHEDULES

To the Board of Directors and Stockholders

Walter Industries, Inc.

Our audits of the consolidated financial statements referred to in our
report dated July 10, 1997, appearing in the Form 10-K also included an audit of
the Financial Statement Schedules listed in Item 14(a) of this form. In our
opinion, these Financial Statement Schedules present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.

Price Waterhouse LLP

Tampa, Florida

July 10, 1997

F-29

SCHEDULE III

WALTER INDUSTRIES, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

FOR THE YEAR ENDED MAY 31, 1997

ADDITIONS
BALANCE AT CHARGED TO DEDUCTIONS BALANCE
BEGINNING COST AND FROM RECLASSI- AT END
DESCRIPTION OF YEAR EXPENSES RESERVES FICATIONS OF YEAR
- ----------------------------------------------------- ----------- ----------- ------------ ------------- ---------
(IN THOUSANDS)

Reserves (provision for possible losses) deducted
from installment notes receivable.................. $ 26,138 $ 2,861 $ 2,605(1) -- $ 26,394
--
--
----------- ----------- ------------ ---------
----------- ----------- ------------ ---------
Reserve (provision for possible losses) deducted from
trade receivables.................................. $ 8,180 $ 479 $ 434(1) -- $ 8,225
--
--
----------- ----------- ------------ ---------
----------- ----------- ------------ ---------
Accrued workmen's compensation (2)................... $ 8,668 $ 1,116 $ 21(3) -- $ 9,763
--
--
----------- ----------- ------------ ---------
----------- ----------- ------------ ---------
Black Lung reserves (2).............................. $ 14,225 $ -- $ 283(3) -- $ 13,942
--
--
----------- ----------- ------------ ---------
----------- ----------- ------------ ---------

- ------------------------

(1) Notes and accounts written off as uncollectible.

(2) Included in other long-term liabilities.

(3) Losses sustained.

F-30

SCHEDULE III

WALTER INDUSTRIES, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

FOR THE YEAR ENDED MAY 31, 1996

(IN THOUSANDS)
Reserves (provision for possible losses) deducted
from instalment notes receivable................... $ 26,556 $ 3,805 $ 4,223(1) -- $ 26,138
----------- ----------- ------------ --------- ---------
----------- ----------- ------------ --------- ---------
Reserve (provision for possible losses) deducted from
trade receivables.................................. $ 7,998 $ 562 $ 380(1) -- $ 8,180
----------- ----------- ------------ --------- ---------
----------- ----------- ------------ --------- ---------
Accrued workmen's compensation (2)................... $ 4,500 $ (257) $ 75(3) $ 4,500 $ 8,668
----------- ----------- ------------ --------- ---------
----------- ----------- ------------ --------- ---------
Black Lung reserves (2).............................. $ 21,867 $ (3,000) $ 142(3) $ (4,500) 14,225
----------- ----------- ------------ --------- ---------
----------- ----------- ------------ --------- ---------

- ------------------------

(1) Notes and accounts written off as uncollectible.

(2) Included in other long-term liabilities.

(3) Losses sustained.

F-31

SCHEDULE III

WALTER INDUSTRIES, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

FOR THE YEAR ENDED MAY 31, 1995

(IN THOUSANDS)
Reserves (provision for possible losses) deducted
from instalment notes receivable................... $ 26,301 $ 3,473 $ 3,218 (1) -- $ 26,556
----------- ----------- ------------ --- ---------
----------- ----------- ------------ --- ---------
Reserve (provision for possible losses) deducted from
trade receivables.................................. $ 7,392 $ 1,012 $ 406 (1) -- $ 7,998
----------- ----------- ------------ --- ---------
----------- ----------- ------------ --- ---------
Accrued workmen's compensation (2)................... $ 3,737 $ 763 $ -- -- $ 4,500
----------- ----------- ------------ --- ---------
----------- ----------- ------------ --- ---------
Black Lung reserves (2).............................. $ 21,997 $ -- $ 130 (3) -- $ 21,867
----------- ----------- ------------ --- ---------
----------- ----------- ------------ --- ---------

- ------------------------

(1) Notes and accounts written off as uncollectible.

(2) Included in other long-term liabilities.

(3) Losses sustained.

F-32

EXHIBIT INDEX

ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MAY 31, 1997

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(a) --Restated Certificate of Incorporation of the Company (3)

3(b) --By-Laws of the Company (3)

10(a) --Stockholder's Agreement (3)

10(b) --Form of Common Stock Registration Rights Agreement (3)

10(c) --Channel One Registration Rights Agreement (7)

10(d) --Second Amended and Restated Veil Piercing Settlement Agreement (included as Exhibit 3A
to Exhibit 2(a)(i) (1)

10(e) --Bank Credit Agreement (8)

10(f) --Director and Officer Indemnification Agreement, dated as of March 3, 1995, among the
Company and the Indemnities parties thereto (5)

10(g) --New Alabama Power Contract (4)(5)

10(h) --Escrow Agreement, dated as of September 12, 1995, between the Company and Harris Trust
and Savings Bank, as Escrow Agent (7)

10(i) --Walter Industries, Inc. Directors' Deferred Fee Plan (7)

10(j) --1995 Long-Term Incentive Stock Plan of Walter Industries, Inc. (6)

10(k) --Agreement, dated as of August 30, 1995, between the Company and James W. Walter (7)

11 --Statement re computation of per share earnings

21 --Subsidiaries of the Company

23 --Consent of Price Waterhouse LLP

24 --Power of Attorney

27 --Financial Data Schedule

- ------------------------

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

E-1

(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) Portions of this document have been omitted pursuant to an approved request
for confidential treatment dated October 11, 1995.

(5) 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.

(6) 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.

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

(8) This Exhibit is incorporated by reference to Form 8-K filed by the Company
with the Commission on February 16, 1996.

E-2

EXHIBIT 11
PAGE 1 OF 3

NET INCOME PER SHARE CALCULATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

YEAR ENDED MAY 31, 1997
------------------------------------------

PRIMARY FULLY DILUTED
-------------------- --------------------

DOLLARS SHARES DOLLARS SHARES
--------- --------- --------- ---------

Net income.......................................................... $ 37,117 $ 37,117
--------- ---------
--------- ---------
Weighted average shares of common stock outstanding:
Common stock (a).................................................... 54,922 54,922
Employee stock options.............................................. 117 (d) 142(c)(d)
--------- ---------
55,039 55,064
--------- ---------
--------- ---------
Per share........................................................... $ .67 $ .67
--------- ---------
--------- ---------

- ------------------------

(a) Includes 3,880,140 additional shares issued to an escrow account on
September 13, 1995 pursuant to the Consensual Plan .

(b) Represents the number of shares of common stock issuable on the exercise of
dilutive employee stock options granted in July 1996 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 average market price of the common stock during the period.

(c) Same as (a) except that purchases of common stock 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.

(d) Does not include 1,461,999 shares subject to options granted in July 1995 at
an average price of $14.120 per share because such options would have an
anti-dilutive effect in such period.

E-3

EXHIBIT 11
PAGE 2 OF 3

NET INCOME (LOSS) PER SHARE CALCULATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

YEAR ENDED MAY 31, 1996
----------------------------------------------

PRIMARY FULLY DILUTED
---------------------- ----------------------

DOLLARS SHARES DOLLARS SHARES
---------- ---------- ---------- ----------

Net loss before extraordinary item................................ $ (79,292) $ (79,292)
Weighted average share of common stock outstanding:
Common stock (a).................................................. 50,989 50,989
Employee stock options (b)........................................ -- --
---------- ----------
50,989 50,989
---------- ----------
---------- ----------
Per share......................................................... $ (1.56) $ (1.56)
Extraordinary item................................................ (5,404) (5,404)
Per share......................................................... (.10) (.10)
---------- ---------- ---------- ----------
Net Loss.......................................................... $ (84,696) $ (84,696)
---------- ----------
---------- ----------
Per share......................................................... $ (1.66) $ (1.66)
---------- ----------
---------- ----------

- ------------------------

(a) Does not include 3,880,140 additional shares issued to an escrow account on
September 13, 1995 pursuant to the Consensual Plan because such issuance
would be anti-dilutive in fiscal 1996.

(b) Does not include 1,487,000 share subject to options granted in July 1995 at
an average price of $14.120 per share because such options would have an
anti-dilutive effect in such period.

E-4

EXHIBIT 11
PAGE 3 OF 3

NET INCOME PER SHARE CALCULATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

YEAR ENDED MAY 31, 1995
------------------------------------------------

PRIMARY FULLY DILUTED
----------------------- -----------------------

DOLLARS SHARES DOLLARS SHARES
----------- ---------- ----------- ----------

Net income...................................................... $ (358,645) $ (358,645)
----------- -----------
----------- -----------
Weighted average shares of common stock outstanding:............
Common stock (a)................................................ 50,494 50,494
Employee stock options (b)...................................... -- --
---------- ----------
50,494 50,494
---------- ----------
---------- ----------
Per share....................................................... $ (7.10) $ (7.10)
---------- ----------
---------- ----------

- ------------------------

(a) Does not include 3,880,140 shares issued to an escrow account on September
13, 1995 pursuant to the Consensual Plan because such issuance would be
anti-dilutive in fiscal 1995.

(b) Does not include 1,487,000 shares subject to options because such options
would have an anti-dilutive effect in such period.

E-5

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. JW Aluminum Company (DE)

2. Homes Holdings Corporation (DE)

a. Jim Walter Homes, Inc. (FL) (a subsidiary of Homes Holdings
Corporation)

i. Jim Walter Homes of Louisiana, Inc. (LA) (a subsidiary of Jim
Walter Homes, Inc.)

ii. Walter Home Improvement, Inc. (FL) (a subsidiary of Jim Walter
Homes, Inc.)

iii. Neatherlin Homes, Inc. (TX) (a subsidiary of Jim Walter Homes,
Inc.)

iv. Jim Walter Homes of Georgia, Inc. (GA) (a subsidiary of Jim
Walter Homes, Inc.)

3. JW Window Components, Inc. (DE)

a. Jim Walter Window Components, Inc. (WI) (a subsidiary of JW Window
Components, Inc.)

4. Vestal Manufacturing Company (DE)

5. Sloss Industries Corporation (DE)

6. Southern Precision Corporation (DE)

7. Mid-State Holdings Corporation (DE)

a. Mid-State Homes, Inc. (FL) (a subsidiary of Mid-State Holdings
Corporation)

i. Mid-State Trust III (a business trust owned by Mid-State Homes,
Inc.)

ii. Mid-State Trust IV (a business trust owned by Mid-State Homes,
Inc.)

A. Mid-State Trust II (a business trust owned by Mid-State Trust
IV)

iii. Mid-State Trust V (a business trust owned by Mid-State Homes,
Inc.)

iv. Mid-State Trust VI (a business trust owned by Mid-State Homes,
Inc.)

8. United States Pipe and Foundry Company, Inc. (AL)

9. Railroad Holdings Corporation (DE)

a. Jefferson Warrior Railroad Company, Inc. (AL) (a subsidiary of
Railroad Holdings Corporation)

10. Computer Holdings Corporation (DE)

a. Jim Walter Computer Services, Inc. (DE) ( a subsidiary of Computer
Holdings Corporation)

11. Land Holdings Corporation (DE)

a. Walter Land Company (DE) (a subsidiary of Land Holdings Corporation)

12. J.W.I. Holdings Corporation (DE)

a. J.W. Walter, Inc. (DE) (a subsidiary of J.W.I. Holdings Corporation)

E-6

13. Hamer Holdings Corporation (DE)

a. Hamer Properties, Inc. (WV) (a subsidiary of Hamer Holdings
Corporation)

14. Best Insurors, Inc. (FL)

a. Best Insurors of Mississippi, Inc. (MS) (a subsidiary of Best
Insurors, Inc.)

b.Jim Walter Insurance Services, Inc. (FL) (a subsidiary of Best
Insurors, Inc.)

15. Cardem Insurance Co., Ltd. (Bermuda)

16. Coast to Coast Advertising, Inc. (FL)

17. United Land Corporation (DE)

18. Dixie Building Supplies, Inc. (FL)

19. 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.)

20. Walter International Sales, Inc. (Barbados, W.I.)

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 August 27, 1997.

E-7

EXHIBIT 23

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

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 July 10, 1997, appearing on page F-2 of Walter
Industries, Inc.'s Form 10-K for the year ended May 31, 1997. We also consent to
the incorporation by reference of our report on the Financial Statement
Schedules, which appears on page F-29 of this Form 10-K.

Price Waterhouse LLP

Tampa, Florida

August 29, 1997

E-8

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 Dean M. Fjelstul and Frank A. Hult, and each of
them, as his or her true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him or her in his or her name,
place and stead, in any and all capacities, to sign the name of such person in
the capacity indicated below opposite the name of such person to the Annual
Report for the fiscal year ended May 31, 1997 of Walter Industries, Inc. on Form
10-K and any and all amendments thereto and to file the same with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, or
their or his or her substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.

This Power of Attorney has been signed by the following persons in the
capacities indicated on July 22, 1997.

SIGNATURE TITLE
- ------------------------------------------------------ ---------------------------------------------------------

/s/ JAMES W. WALTER
------------------------------------------- Chairman Emeritus and Director
James W. Walter

/s/ KENNETH E. HYATT
------------------------------------------- Chairman of the Board, President, Chief Executive Officer
Kenneth E. Hyatt and Director (Principal Executive Officer)

/s/ DEAN M. FJELSTUL
------------------------------------------- Senior Vice President and Chief Financial Officer
Dean M. Fjelstul (Principal Financial Officer)

/s/ FRANK A. HULT
------------------------------------------- Vice President, Controller and Chief Accounting Officer
Frank A. Hult (Principal Accounting Officer)

/s/ RICHARD E. ALMY
------------------------------------------- Executive Vice President, Chief Operating Officer and
Richard E. Almy Director

/s/ HOWARD L. CLARK, JR.
------------------------------------------- Director
Howard L. Clark, Jr.

/s/ JAMES B. FARLEY
------------------------------------------- Director
James B. Farley

SIGNATURE TITLE
- ------------------------------------------------------ ---------------------------------------------------------

/s/ ELIOT M. FRIED
------------------------------------------- Director
Eliot M. Fried

/s/ PERRY GOLKIN
------------------------------------------- Director
Perry Golkin

/s/ JAMES L. JOHNSON
------------------------------------------- Director
James L. Johnson

/s/ MICHAEL T. TOKARZ
------------------------------------------- Director
Michael T. Tokarz