Deep. Value. Delivered.

(1) Total return values were calculated based on cumulative total return assuming (i) the investment of $100 in the Company's Common Stock, the Russel 2000 and the Dow Jones Industrial Average on January 1, 2003 and (ii) reinvestment of all dividens. Source: Standard & Poor's Compustat

From two of North America’s deepest underground coal mines to ports in South America, Europe and elsewhere, Walter Industries, Inc. delivered nearly six million tons of its high-quality metallurgical coal from deep within Alabama’s Blue Creek coal seam to manufacturers in some of the world’s fastest growing steel-producing nations, making us one of the world’s leading producers of exported U.S. metallurgical coal.

We also delivered significant value to our investors, with a nearly 33 percent increase in our share price in 2007; and the value of $100 invested five years ago was worth more than $668 at the end of 2007.

And we are delivering on a promise to grow our Natural Resources business. We invested more than $73 million in capital in 2007 on two major expansion projects at Jim Walter Resources, which, once completed, will give us an annual metallurgical coal capacity of more than nine million tons – a 50 percent increase compared to our current production levels. We also expanded by way of acquisition in 2007. In August, we acquired Tuscaloosa Resources, Inc., an Alabama-based surface coal producer for the steam and industrial coal markets, and we continue to seek ways to diversify and expand our Natural Resources business in Southern Appalachia. We will continue to mine value from this business as we explore additional organic and acquisition-related opportunities in the future.

The timing for our growth could not be better. Worldwide steel production is increasing at more than seven percent per year and, in our strategic markets of South America and Europe, several new projects are coming on line. We also are seeing demand from places beyond our historical markets, such as eastern Europe. Additionally, inventories at steel mills appear to be at very low levels, and we are seeing robust demand for thermal coal which indirectly influences the price of metallurgical coal.

Along with increases in demand, the global coal market also faced supply challenges in 2007. Flooding in Australia, mining problems in the Ukraine, Russia and here in the United States, China’s restriction on metallurgical coal exports, further closure of government-subsidized coal mines in Germany and diminishing production and quality from several eastern European coal producers have all impacted the global supply of metallurgical coal.

The combination of these supply and demand factors points to the potential for record high prices in the global coal and coke markets in 2008 and continued strength for many years to come.

Operationally, both Jim Walter Resources’ Nos. 4 and 7 mines boasted record production for the year with 3.1 million tons produced at Mine No. 4 and 2.7 million tons produced at Mine No. 7. More importantly, both mines operated with lost-time safety incident rates below industry averages.

Looking forward, our expansion projects continue as planned with expected annual production capacity increases of 20 percent in 2008 and more than 50 percent in 2009 compared to 2007 levels.

At Sloss Industries, our furnace and foundry coke business, operating income improved 47 percent on increased production and we expect even larger contributions in 2008, as global coke prices track the record highs in the metallurgical coal market.

Our natural gas business continues to contribute to earnings and cash flow, a trend we expect to continue, and likely increase, as our metallurgical coal production volumes grow over the next three years.

Turning to Financing and Homebuilding, this business delivered $44.3 million in operating income this year as Financing continued its strong, steady performance and Homebuilding improved versus the prior year, primarily on higher prices and improved cycle times, despite significant headwinds in the residential construction and mortgage industries. In addition, we recently announced a major restructuring initiative for the business that will generate $26 to $28 million in annual cost savings. This smaller, leaner and more efficient Financing and Homebuilding organization will be better able to weather the challenges facing the entire industry as our remaining sales centers operate in our most successful markets and generate a significant portion of our overall unit deliveries. The restructured organization is also better positioned for execution of the strategic alternatives we are considering for the business. We expect the ultimate separation of Financing and Homebuilding from our Natural Resources business to occur by the end of 2008, concluding our long-term vision of turning Walter Industries, Inc. into a “pure play” natural resources and energy company. We have outstanding management in place to make this separation a reality, and both businesses are positioned for success in 2008.

In closing, our significant organic and acquisition-related expansion projects have us uniquely positioned to take full advantage of record-high prices for metallurgical coal and furnace and foundry coke in 2008.

This is an exciting time for all of us at Walter Industries, Inc., and I thank you for your investment in us.

Michael T. Tokarz

Chairman of the Board of Directors
Walter Industries, Inc.