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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K

Commission File Number 001-13711

WALTER INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)

Securities registered pursuant to Section 12(g) of the Act: NONE

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

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

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

        The aggregate market value of voting stock held by non-affiliates of the registrant, based on the closing price of the Common Stock on June 30, 2003, the registrant's most recently completed second fiscal quarter, as reported by the New York Stock Exchange, was approximately $205.7 million.

        Number of shares of common stock outstanding as of February 29, 2004: 41,936,104

Documents Incorporated by Reference

        Applicable portions of the Proxy Statement for the 2003 Annual Meeting of Stockholders of the Company to be held April 22, 2004 are incorporated by reference in Part III of this Form 10-K.

PART I

Item 1.    Description of Business

(a)

Narrative Description of Business

        General

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

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

        AIMCOR and JW Aluminum were each previously reported in the Carbon and Metals and the Industrial Products segments, respectively. As a result of the above sales, in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the operations of AIMCOR and JW Aluminum have been classified as discontinued operations in the statements of operations and their related assets and liabilities were considered "held for sale" in the balance sheet as of December 31, 2002.

        The Company makes its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments thereto available on its website at www.walterind.com without charge as soon as reasonably practicable after filing or furnishing to the SEC. Additionally, the Company will also provide without charge, a copy of its Form 10-K to any shareholder by mail. Requests should be sent to Walter Industries Inc., Attention: Shareholder Relations, 4211 W. Boy Scout Boulevard, Tampa, Florida 33607.

(b)

Industry Segments

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

        AIMCOR and Sloss Industries were previously reported in the now discontinued Carbon and Metals segment. As a result of classifying AIMCOR as a discontinued operation, the Company has evaluated the criteria under SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," and has concluded that Sloss Industries should be reported as a component of the Other segment. Consequently, Sloss' current and prior period results have been reclassified to the Other segment.

        All prior year information reflects these changes.

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Homebuilding

Jim Walter Homes, Inc.

        Jim Walter Homes, Inc. and its subsidiaries ("JWH"), headquartered in Tampa, Florida, markets and supervises the construction of detached, single-family residential homes, primarily in the southern United States where the weather generally permits year-round construction. JWH also provides mortgage financing on such homes. JWH historically has concentrated on the low to moderately priced segment of the housing market. Approximately 351,000 homes have been completed by JWH since its inception in 1946.

        JWH's products consist of over 50 models of conventionally-built (stick-built) homes (ranging in size from approximately 800 to 2,500 square feet) and over 50 modular home models (ranging in size from 1,100 to 2,860 square feet).

        At December 31, 2003, JWH operated 111 branch offices located in 16 states and serving two additional adjoining states. During 2003, home sales in Texas represented 32% of JWH's net sales, North Carolina 14%, Mississippi 10%, Alabama and Florida 7% each. The remaining sales were spread throughout other southeastern states. Approximately 72% of the branch offices are owned, with the balance on leased land. Substantially all of these branch offices serve as "display parks" that are designed to allow customers to view various actual models.

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

        Historically, JWH has not owned or acquired land for home construction purposes and was not a land developer. The actual construction of conventionally-built homes sold by JWH is generally performed on customer-owned land by local building sub-contractors with their own crews, pursuant to subcontracts executed in connection with each home. During 2001, JWH began implementing a strategy to grow its business through the construction of speculatively-built homes and subdivisions on land already owned by or to be purchased by the Company, in addition to its historical method of selling homes. Additional growth is also planned through expansion into slightly higher-priced segments of the housing market, such as those represented by its Neatherlin Homes and Dream Homes subsidiaries.

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

        JWH, through its wholly-owned subsidiary Crestline Homes, Inc. ("CHI"), also manufactures and distributes modular homes. CHI manufactures modular (factory-built) homes in its Laurinburg, North

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Carolina facility, which are sold by a network of independent dealers, primarily in the southern United States.

        The following chart shows the unit sales volume of JWH and the percent of homes sold by category (shell, various stages, 90% complete and modular) for the years ended December 31, 2003, 2002 and 2001.

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

        During the years ended December 31, 2003, 2002 and 2001, the average net sales price of a home was $66,200, $63,000, and $59,100, respectively.

        The estimated backlog of homes to be constructed by JWH as of December 31, 2003 was $136.4 million, as compared to $126.3 million at December 31, 2002. The time to construct a home averages between eleven and thirteen weeks.

        Most homes sold by JWH are purchased with financing provided by JWH. Qualified customers are offered fixed rate mortgages generally requiring no down payment and are secured by the home and the land on which it is situated. JWH does not charge closing costs, points, credit service fees or similar add-on charges and does not require private mortgage insurance. JWH offers credit terms for up to a maximum of 30 years, usually for 100% of the purchase price of the home. As of December 31, 2003, stated annual percentage rates offered for new mortgage instalment notes ranged between 6.75% and 11.2%.

        Some customers who purchase and finance homes through JWH may not qualify for traditional mortgage financing. To qualify for financing, a potential customer generally must provide information concerning personal income and employment history. If the customer owns the land on which the home is to be built, a legal description of the land and evidence of ownership is required. If the land is not owned outright, the purchase of the land and home can be financed through Walter Mortgage Company ("WMC") (see Financing, below). A customer's income and employment are usually verified by examining pay stubs, W-2 forms and occasionally through telephone conversations with the customer's employer or, if the customer is self-employed, income tax returns. An applicant generally must have a minimum of one year's continuous employment. Only a small percentage of secondary income (second jobs or part-time employment) is utilized in qualifying applicants. Ownership of land is verified by examining the title record. In addition, JWH's credit underwriting department obtains a tri-bureau credit report that includes, among other information, a credit score. Particular attention is paid to the credit information for the most recent two to three years. Attention is also given to the customer's total indebtedness and other monthly debt payments. If a favorable credit report is obtained,

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the required monthly payment does not exceed 25% of the customer's monthly gross income, and the customers total debt payments don't exceed 50% of monthly gross income, the application is usually approved. A title report is ordered and, frequently, a survey of the property is made. Independent registered surveyors perform surveys when, in the opinion of JWH, additional information beyond examination of the title record is needed. Such additional information is primarily concerned with verification of legal description, ownership of land, necessary right-of-way easements and existence of any encroachments.

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

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

        The single-family residential housing industry is highly competitive. JWH competes in each of its market areas with numerous homebuilders, ranging from regional and national firms to small local companies, on the basis of price, quality, design, finishing options and accessibility to financing. JWH also competes with manufactured and modular housing builders. JWH's strategy is to compete in a specific segment of the housing market by offering customers quality traditionally-built homes, at affordable prices, with favorable financing and no closing costs. Based on the most recent data available from Builder Magazine (May 2003), JWH was the eighteenth largest builder of detached single-family homes in the United States.

Financing

        Within the Financing Segment, MSH purchases and services instalment notes originated by JWH and WMC offers financing to homebuyers that is secured by first mortgages and liens. The interest income generated by both MSH and WMC is recognized using the interest method, however, the legal instruments used by each company allow for different amounts to be charged to the customer for late fees and ultimately recognized as revenue. Both the MSH instalment notes and the WMC mortgage loans have fixed monthly payments, similar repayment terms and the ability to levy costs to protect WMC's collateral position upon default, such as attorney fees and late charges as allowed by state law. References to instalment notes or mortgage instalment notes include mortgage loans offered by WMC. Mortgage loans in the WMC portfolio, before allowances, were approximately $75.5 million and $14.9 million at December 31, 2003 and 2002, respectively.

Mid-State Homes, Inc.

        MSH, headquartered in Tampa, Florida, was established in 1958 to purchase and service mortgage instalment notes originated by JWH. Currently, MSH funds its purchase of these mortgage instalment

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notes using various business trusts organized by it for that purpose. These business trusts acquire the mortgage instalment notes using the proceeds from borrowings secured by the notes. MSH owns, directly or indirectly, all of the beneficial interests in these trusts. Only the notes and MSH's beneficial interests in the trusts secure the borrowings of these trusts. These borrowings are non-recourse to the Company. (For additional information on the notes, the trusts and their related borrowings, see Notes 6 and 12 of "Notes to Consolidated Financial Statements.")

        At December 31, 2003, MSH's portfolio was geographically distributed as follows: Texas (29%), Mississippi (14%), Alabama (9%) and Florida (8%). The remaining portfolio was spread primarily in other southeastern states.

Walter Mortgage Company

        WMC was established in 2001 to provide home financing to customers of JWH. Through WMC, homebuyers have the option of financing land along with their home purchase, including a traditional cash down payment in lieu of land equity. Existing MSH customers also have the option of refinancing their mortgage with WMC. The Company believes WMC will be a key component in achieving the growth plans of the Homebuilding and Financing Segments. Since inception through December 31, 2003, 1,152 mortgages totaling approximately $79.6 million have been originated, purchased, or funded through WMC. WMC initiated a program to buy seasoned mortgage loans in 2003 that meet the Company's strict underwriting criteria. During 2003, approximately $49 million of seasoned mortgages were purchased.

Other

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

Industrial Products

United States Pipe and Foundry Company, Inc.

        United States Pipe and Foundry Company, Inc. ("U.S. Pipe") manufactures and sells a broad line of ductile iron pressure pipe, fittings, valves, hydrants and other cast iron products. Founded in 1899 and headquartered in Birmingham, Alabama, it is one of the nation's largest producers of ductile iron pressure pipe based on industry shipping information provided by the Ductile Iron Pipe Research Association. In the years ended December 31, 2003, 2002 and 2001, net sales and revenues amounted to $452.9 million, $479.2 million and $513.3 million, respectively.

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

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

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

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

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

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

        The estimated order backlog consists of pressure pipe, valves and hydrants, fittings and castings and at December 31, 2003 was $86 million, compared to $66 million at December 31, 2002. The ductile iron pipe business is generally sensitive to economic recession because of its partial dependence on the level of new construction activity and state, municipal and federal tax revenues to fund water projects. However, certain aspects of U.S. Pipe's operations have in the past helped to reduce the impact of downturns in new construction. First, U.S. Pipe's products have experienced a strong level of demand in the replacement market, in part driven by mandates from the Safe Drinking Water Act. U.S. Pipe believes that growth of the replacement market will accelerate as a result of anticipated major expenditures by government entities, such as the New York, Boston, Washington, D.C., Atlanta and Philadelphia municipalities, to rehabilitate aging or inadequate water transmission systems. U.S. Pipe believes that this represents a significant growth opportunity and that it is well positioned to take advantage of this opportunity. Second, U.S. Pipe's Burlington, New Jersey plant is adjacent to the northeastern market with its significant replacement potential and its operations in the south are located in areas of steady economic growth. The west coast, served by the Union City, California plant, has a critical shortage of water for many of the large metropolitan areas that will require major transmission pipelines in the future. Because freight costs for pipe are high, locations close to important markets lower transportation costs, thereby making U.S. Pipe's products more competitive. During 2003, approximately 21% of U.S. Pipe's sales were to one customer. The Company believes the loss of this single customer would not have a material adverse effect on the results of operations of the Company on a consolidated basis as a result of its size, impact on operating income, and because the Company believes that, based on an overall balance of supply and demand within the pipe industry, the loss of this customer would be replaced with sales to other existing or new customers. Foreign sales accounted for approximately 4% of U.S. Pipe's sales during the year.

Natural Resources

Jim Walter Resources, Inc.

        The operations of Jim Walter Resources, Inc. ("JWR") are conducted through its Mining Division, which mines and sells coal from three underground mines in Alabama, and its De-Gas Division, which extracts and sells methane gas from the coal seams owned or leased by JWR. On December 1, 2003,

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the Company announced that it expects to close Mine No. 5 during the fourth quarter of 2004 due to continuing adverse geologic conditions. The mine was originally scheduled to close in 2006. However, given its poor operating conditions, the Company determined it is no longer economically feasible to access Mine No. 5's remaining coal reserves beyond 2004. Approximately 1.4 million tons of coal were produced by Mine No. 5 during 2003.

Mining Division

        In the years ended December 31, 2003, 2002 and 2001 Mining Division's net sales and revenues totaled $218.4 million, $221.0 million and $197.8 million, respectively.

        The Mining Division, headquartered in Brookwood, Alabama, has approximately 7.0 million tons of rated annual coal production capacity from its three mines located in west central Alabama between the cities of Birmingham and Tuscaloosa. The Mining Division extracts coal primarily from Alabama's Blue Creek and Mary Lee seams, which contain high-quality bituminous coal. Blue Creek coal offers high coking strength with low coking pressure, low sulfur and low-to-medium ash content with high BTU values and can be sold either as metallurgical coal, used to produce coke, or as compliance steam coal, used by electric utilities because it meets current environmental compliance specifications.

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

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

        The Mining Division's coal is sold to a diversified base of domestic and foreign customers. In the United States, Alabama Power Company ("Alabama Power") is one of the division's primary customers for low-sulfur steam coal. In January 1998, JWR entered into an agreement to supply coal to Alabama Power from January 1, 2000 to December 31, 2005. Under the agreement, Alabama Power agreed to purchase approximately 1.5 million tons of coal per year from JWR. In June 2001, the contract was amended to increase this tonnage to 1.8 million tons per year. The division's metallurgical coal is sold to customers in numerous markets throughout Europe, Latin America and the Middle East. Most metallurgical coal sales are made under supply contracts, usually negotiated in March through June of each year, for fixed prices that are typically one year in length. However, some sales, of both metallurgical and steam coal, are conducted in the spot market as dictated by available JWR supply and market demand.

De-Gas Division

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

        The original motivation for the joint venture was to increase safety in JWR's Blue Creek mines by reducing methane gas concentrations with wells drilled in conjunction with the mining operations. There were 392 wells producing approximately 16.1 billion cubic feet of methane gas in 2003 (JWR's interest is 8.7 billion cubic feet in 2003). Approximately 32 additional wells are planned for development in 2004. The degasification operation, as originally expected, has improved mining

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operations and safety by reducing methane gas levels in the mines, and has developed into a profitable operation.

Other

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

Sloss Industries

        Sloss is a manufacturing operation, founded in 1918 and headquartered in Birmingham, Alabama, which has four major product lines: foundry coke, furnace coke, slag fiber and specialty chemicals. Foundry coke is marketed to ductile iron pipe plants and foundries producing castings, such as for the automotive and agricultural equipment industries. For the year ended December 31, 2003, approximately 63% of the foundry coke produced by Sloss was sold to U.S. Pipe. Furnace coke is sold primarily to the domestic steel industry for producing steel in blast furnaces. Slag fiber is an insulating fiber utilized principally as a raw material by acoustical ceiling tile manufacturers. Specialty chemical products are composed primarily of rubber additives, plastics additives, pharmaceutical raw materials, and nutraceutical components, as well as other custom manufactured products.

Seasonality

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

Trade Names, Trademarks and Patents

        The names of each of the Company's subsidiaries are well established in the respective markets they serve. Management believes that customer recognition of such trade names is of significant importance. The Company's subsidiaries have numerous patents and trademarks. Management does not believe, however, that any one such patent or trademark is material to the Company's individual segments or to the business as a whole.

Research and Development

        Research activities conducted by each business are directed toward new products, improvement of existing products, development of new uses for existing products, process and systems development, and cost reduction efforts. Total research and development expenditures for all of the businesses in the years ended December 31, 2003, 2002 and 2001, were less than 1% of the Company's consolidated net sales and revenues.

Raw Materials

        Substantially all of the raw materials needed for the operations of the Company and its subsidiaries are either purchased from domestic sources or produced by the Company and its subsidiaries. All materials used by the various businesses of the Company are available in quantities

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required to support their respective operations. Availability and the cost of raw materials may have a significant influence over the revenues and costs of the Company. Costs potentially having a significant influence on the Company include costs for scrap iron and steel, as well as lumber and other building materials.

Environmental

        The Company and its subsidiaries are subject to a wide variety of laws and regulations concerning the protection of the environment, both with respect to the construction and operation of many of its plants, mines and other facilities, and with respect to remediating environmental conditions that may exist at its own and other properties. The Company believes that it and its subsidiaries are in substantial compliance with federal, state and local environmental laws and regulations. Expenditures charged to the statement of operations for compliance of ongoing operations and for remediation of environmental conditions arising from past operations in the years ended December 31, 2003, 2002 and 2001, were approximately $10.8 million, $5.8 million and $7.8 million, respectively. Because environmental laws and regulations continue to evolve, and because conditions giving rise to obligations and liabilities under environmental laws are in some circumstances not readily identifiable, it is difficult to forecast the amount of such future environmental expenditures or the effects of changing standards on future business operations or results. Consequently, the Company can give no assurance that such expenditures will not be material in the future. Capital expenditures for environmental requirements are anticipated to average approximately $2.3 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). The ACO required soil and ground water cleanup. U.S. Pipe has completed, and has received final approval on the soil cleanup required by the ACO. U. S. Pipe is continuing to address ground water issues at this site. Further remediation could be required. These remediation costs are expected to be minimal. Long term ground water monitoring will be required to verify natural attenuation. It is not known how long ground water monitoring will be required. Management does not believe monitoring or further cleanup costs, if any, will have a material adverse effect on the financial condition or results of operations of the Company and its subsidiaries.

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

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on the financial condition of the Company and its subsidiaries, but could be material to results of operations in a reporting period.

        Sloss entered into a consent order in 1989 relative to a Resource Conservation Recovery Act ("RCRA") compliance program mandated by the EPA. A RCRA Facility Investigation ("RFI") Work Plan was prepared which proposed investigative tasks to assess the presence/absence of contamination at the Sloss facility. The Work Plan was approved in 1994 and the Phase I investigations were conducted and completed between 1995 and 1999. Phase II investigations for the Chemical Plant/Coke Plant and Biological Treatment Facility and Sewers/Land Disposal Areas were performed in 2000 and 2001 and are substantively complete. An Interim Remedial Measure ("IRM") Work Plan for the Chemical Plant groundwater, which was presented to the EPA, was implemented during 2003 with progress continuing in 2004. Monitoring requirements will continue on a long-term basis and contamination levels are expected to continue to decline.

        The United States Environmental Protection Agency, the Alabama Department of Environmental Management, and the Jefferson County Department of Health have alleged that Sloss has allowed discharges in excess of permitted limits and violated certain reporting requirements. In settlement of allegations of permit violations relating to wastewater discharges into an adjacent creek, Sloss paid a fine of approximately $0.7 million and donated approximately 300 acres of land for public use in 2003. Sloss is in negotiations with the Jefferson County Department of Health regarding alleged violations of the Clean Air Act. Sloss expects to be required to enter into a supplemental environmental project, and may also be required to pay a fine, in order to settle these allegations. Management does not expect the overall cost of the settlement to be material to the financial position or results of operations of the Company and its subsidiaries.

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

Employees

        As of December 31, 2003, the Company and its subsidiaries employed approximately 5,391 people, of whom 3,120 were hourly workers and 2,271 were salaried employees. Unions represented approximately 2,762 employees under collective bargaining agreements, of which approximately 986 were covered by one contract with the United Mine Workers of America, which expires on December 31, 2006.

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Item 2. Description of Property

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

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        Recoverable coal reserves assigned to currently operating mines were estimated to be approximately 146 million tons as of December 31, 2003.

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

ESTIMATED RECOVERABLE(1) COAL RESERVES AS OF DECEMBER 31, 2003
(In Thousands of Tons)

(1)

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

(2)

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

(3)

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

(4)

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

(5)

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

(6)

During December 2003, an announcement was made to close Mine No. 5 during the fourth quarter of 2004.

(7)

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

(8)

Bessie Mine suspended operations in August 1988.

(9)

Quality factors are on a "received basis", which includes an estimate for moisture, which averaged 1.4% to 1.8% during 2003.

Item 3. Legal Proceedings

        See the section entitled "Environmental" in Management's Discussion and Analysis and Notes 11 and 17 of "Notes to Consolidated Financial Statements" included herein.

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

        None.

12

Executive Officers of the Registrant

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

        Don DeFosset was appointed President and Chief Executive Officer on November 2, 2000 and elected a Director on November 6, 2000. He was appointed to the additional position of Chairman of the Board of Directors on March 1, 2002. He served as Executive Vice President and Chief Operating Officer of Dura Automotive Systems, Inc. from 1999 through October 2000. From 1996 to 1999, he was Executive Vice President and President—Truck Group of Navistar International Transportation Corporation. He is also a Director of Terex Corporation and Safelite Glass Corp.

        William F. Ohrt was appointed Executive Vice President and Chief Financial Officer of the Company in January 2001. Prior thereto, he was Vice President and Chief Financial Officer of Dura Automotive Systems, Inc. from December 1999 through January 2001. From April 1998 to December 1999, he was Vice President and Chief Financial Officer—Truck Group of Navistar International Transportation Corporation.

        Charles E. Cauthen was appointed Senior Vice President and Controller in November 2000. Prior thereto, he was Senior Vice President and Chief Financial Officer—Consumer Products Group, Bank of America, from October 1999 to November 2000. From October 1997 to October 1999, he was Senior Vice President and Chief Financial Officer—Consumer Finance Group, Bank of America.

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

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

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

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

        George R. Richmond was appointed President and Chief Operating Officer of Jim Walter Resources in June 1997.

13

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

        Brad Kitterman was appointed President of U.S. Pipe in January 2003. Prior to joining the Company, from 1998 to 2002, he was President of the North American Utilities Division for Schlumberger Ltd., which specializes in providing oil and gas services.

14

PART II

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

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

        During the year ended December 31, 2003, the Company declared and paid to shareholders of record on February 20, May 15, August 14, and November 13, 2003, a dividend of $.03 per share as of each of these dates. During the year ended December 31, 2002, the Company declared and paid to shareholders of record on February 20, May 15, August 15 and November 21 a dividend of $.03 per share as of each of these dates. Covenants contained in certain of the debt instruments referred to in Note 12 of "Notes to Consolidated Financial Statements" may restrict the amount the Company can pay in cash dividends.

        As of March 1, 2004, there were 204 shareholders of record of the Common Stock.

        The following table sets forth certain information relating to the Company's equity compensation plans as of December 31, 2003:

15

Item 6. Selected Financial Data

        During 2000, the Company changed its year end to December 31, resulting in a seven-month transition period ended December 31, 2000 ("the transition period"). The transition period results are shown in addition to results for the years ended December 31, 2003, 2002 and 2001 and the fiscal years ended May 31, 2000 and 1999.

        The following data, insofar as it relates to each of the years ended December 31, 2003, 2002 and 2001, the transition period ended December 31, 2000 and the fiscal years ended May 31, 2000 and 1999, has been derived from annual consolidated financial statements, including the consolidated balance sheets and the related consolidated statements of operations, changes in stockholders' equity and cash flows and the notes thereto as they relate to the Company's continuing operations as of December 31, 2003. The information presented below is for continuing operations and should be read in conjunction with the Company's consolidated financial statements and the notes thereto including Note 2 related to discontinued operations, the portions of Note 3 related to changes in accounting principles, and the other information contained elsewhere in this report.

(1)

Excludes assets of discontinued operations held for sale

(2)

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

16

Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition and

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

Revenue Recognition

        The Company recognizes revenue based on the recognition criteria set forth in the Securities and Exchange Commission's Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements."

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

a.

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



b.

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



c.

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

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

        On Your Lot Sales constitute the majority of the sales in the homebuilding business (approximately 84% of new units sold in 2003). Since the real estate (land) is already owned by the customer and is not financed by the Company, these transactions represent sales of personal property financed by instalment sales contracts ("Notes"). Revenue from the construction and sale of a home is recognized upon completion of construction and legal transfer of ownership to the customer.

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

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

a.

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

17

b.

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



c.

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



d.

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

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

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

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

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

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

18

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

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

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

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

Allowances for Losses

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

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

Employee Benefits

        The Company provides a range of benefits to its employees and retired employees, including pensions and postretirement healthcare. The Company records annual amounts relating to these plans based on calculations specified by generally accepted accounting principles, which include various actuarial assumptions including the following:

19

        The discount rate used to determine 2004 pension and other post-retirement expense was decreased to 6.35% from 7.25% used in 2003. In addition, the rate of return on plan assets used to determine the 2004 pension expense decreased to 8.9% from 9.25%. The discount rate is based on a model portfolio of AA rated bonds with a maturity matched to the estimated payouts of future pension benefits. The expected return on plan assets is based on the Company's expectation of the long-term average rate of return on assets in the pension funds, which was modeled based on the current and projected asset mix of the funds and considering the historical returns earned on the type of assets in the funds. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when appropriate. As required by U.S. GAAP, the effects of the modifications are amortized over future periods.

        Assumed health care cost trend rates, discount rates, expected return on plan assets and salary increases have a significant effect on the amounts reported for the pension and health care plans. A one-percentage-point change in the trend rate for these assumptions would have the following effects (in thousands):

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

        Workers compensation and Black Lung benefit liabilities are also affected by discount rates used. Changes in the frequency or severity of losses from historical experience, changes in discount rates or actual losses on individual claims that differ materially from estimated amounts could affect the recorded amount of these liabilities. A one-percentage-point increase in the discount rate on the discounted workers' compensation liability would decrease the liability by $1.5 million, while a one-percentage-point decrease in the discount rate would increase the liability by $1.6 million. A one-percentage-point increase in the discount rate on the discounted Black Lung liability would decrease the liability by $0.8 million, while a one-percentage-point decrease in the discount rate would increase the liability by $0.9 million.

20

Litigation, Investigations and Claims

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

        As discussed in Note 11 of "Notes to Consolidated Financial Statements," the Company is in dispute with the Internal Revenue Service (the "IRS") on a number of Federal income tax issues. The Company believes that its tax filing positions have substantial merit and it intends to vigorously defend these positions. The Company has established accruals that it feels are sufficient to address claims, including related interest and penalties, where its defense may be unsuccessful or where a settlement of issues may be warranted. The amount of the accrual is based on an assessment by management of both the probability and extent of loss for each of the disputed issues involved. Since the issues involved are highly complex, are subject to the uncertainties of extensive litigation and/or administrative processes and may require an extended period of time to reach ultimate resolution, it is possible that management's estimate of this liability could change.

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

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

21

RESULTS OF OPERATIONS

2003 Summary Operating Results

(1)

Excludes senior debt interest expense.

Year Ended December 31, 2003 and 2002

Overview

        In 2003, the Company made significant progress in one of its key strategic initiatives—reducing the complexity of the Company and increasing the focus on key core businesses—by completing divestitures of its AIMCOR and JW Aluminum businesses. The sale of these businesses in December 2003 generated net proceeds of approximately $242.3 million, which was principally used to reduce outstanding borrowings and to increase cash and cash equivalents. As a result of the sales, AIMCOR and JW Aluminum have been reclassified to discontinued operations in the Company's financial statements.

22

        Discontinued operations for the year ended December 31, 2003 produced a net loss of $32.7 million, or $0.75 per diluted share, including a net loss on the sale of AIMCOR and JW Aluminum of $51.4 million, or $1.18 per diluted share. Income from discontinued operations for 2003 was $18.7 million, or $0.43 per diluted share, as compared to $21.1 million, or $0.47 per diluted share, in 2002.

        The Company's remaining businesses experienced very difficult operating conditions in 2003. Income from continuing operations for the year ended December 31, 2003 was $3.3 million, or $0.08 per diluted share. This compares to income from continuing operations of $52.3 million, or $1.17 per diluted share in 2002. Principal factors impacting 2003 results as compared to 2002 included:

•

Fewer unit completions and higher costs in the Homebuilding segment.



•

Despite a slight increase in credit losses, continued stable operating results in the Financing segment.



•

Lower volumes and significant increases in scrap metal and other costs in the Industrial Products segment.



•

The end of a price war in the Industrial Products segment, reflected in the ability to implement several price increases in the second half of the year.



•

Difficult geological conditions in the Natural Resources segment.



•

The favorable resolution of a dispute with the IRS that resulted in a reduction of interest and income tax expenses totaling $21.4 million, or $0.49 per diluted share.

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

Continuing Operations

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

        Cost of sales, exclusive of depreciation, of $922.0 million was 85.0% of net sales in 2003 versus $862.4 million and 78.6% of net sales in 2002. The increase in cost of sales as a percentage of net sales is primarily due to increased costs of lumber and other building materials in the Homebuilding segment, higher scrap metal, alloy, natural gas and other costs in the Industrial Products segment and higher production costs in the Natural Resources segment.

        Depreciation for the year ended December 31, 2003 was $53.4 million, an increase of $2.0 million compared with 2002 primarily due to increases at Homebuilding and Financing related to

23

implementations of new enterprise systems, and at Natural Resources due to capital expenditures for mining equipment.

        Selling, general and administrative expenses were $171.8 million in 2003, compared to $167.2 million in 2002. The increase in expenses occurred mostly in the Homebuilding segment as a result of higher costs related to a reorganization of the sales and construction organizations, as well as the implementation of a new enterprise system and new initiatives designed to drive future growth, such as New Home Gallery expansion and higher advertising expenses. In addition, there was an increase in environmental-related expenses at Sloss of approximately $2.3 million. The increased costs in the current period were partially offset by productivity and cost reduction programs in place throughout the Company. The prior period included a $2.6 million charge to bad debt expense related to a Sloss customer that filed for bankruptcy protection, as well as higher professional fees related to restating Mid-State Home's accounting for interest income on instalment notes to the interest method.

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

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

        Interest expense was $151.9 million in 2003, a decrease of $1.3 million compared with 2002. Interest expense on mortgage-backed/asset-backed notes was $129.3 million in 2003, compared to $135.1 million in 2002. This reflected lower interest rates, partially offset by higher borrowings. Corporate senior debt interest expense was $22.6 million in 2003 versus $18.1 million in 2002. This increase resulted from higher interest rates on the 2003 facility beginning in April 2003, as compared to the previous facility, as well as the accelerated recognition of $2.4 million of term loan debt issue costs and discount amortization as a result of mandatory debt repayments required by the sale of AIMCOR and JW Aluminum in December 2003.

        Litigation expense of $6.5 million in 2003 principally relates to the settlement of a class action employment matter at U.S. Pipe.

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

        The Company's effective income tax rate for the year ended December 31, 2003 differed from the Federal statutory tax rate due to a reduction of income tax accruals as a result of the favorable settlement of a dispute with the IRS, a deduction for depletion related to the Company's mining operations, the effect of state and foreign income taxes and amortization of goodwill. In July 2003, the Company favorably resolved a longstanding dispute with the IRS concerning Federal income tax returns for fiscal years ended May 31, 1995 and 1996. The IRS had previously disallowed deductions of $391 million and related legal fees of $15 million associated with the settlement of veil piercing litigation in the Bankruptcy Proceedings. The Company successfully defended its position through an IRS appeals process, and will not be required to pay income taxes related to this issue. The Company had previously established accruals for both Federal income taxes and interest associated with this issue that were no longer required. Accordingly, the Company recorded reductions of $2.5 million and $18.9 million to interest expense and income tax expense, respectively, in the statement of operations. The Company's effective tax rate for the year ended December 31, 2002 of 22.6% differed from the federal statutory tax rate due to a $2.8 million tax benefit related to the November 1998 sale of JW

24

Window Components, a deduction for depletion related to the Company's mining operations and the utilization of a nonconventional fuel credit. The $2.8 million tax benefit was from an increased capital loss carryforward due to a change in the consolidated return loss disallowance rules, which favorably affected the Company's previous treatment of the November 1998 sale of JW Window Components.

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

Segment Analysis

Homebuilding

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

        Operating income was $1.5 million for the year ended December 31, 2003 compared to $17.1 million in the prior year. The $15.6 million decrease was principally caused by fewer unit completions, higher lumber and other material costs, and expenses related to significant investments in a major advertising campaign, a reorganization of the sales and construction organizations, and installation of a new enterprise system during 2003, partially offset by increases in average selling prices.

        The Company anticipates lower year-over-year unit completions and operating income in the first half of 2004 as a result of weaker new sales contract activity in the fourth quarter of 2003. The Homebuilding segment has recently introduced new home models in higher price point ranges, new advertising and promotion programs and new incentive programs in an effort to increase new sales contract activity and, ultimately, to improve unit completions.

Financing

        Net sales and revenues were $239.8 million in 2003, a decrease of $1.2 million from the prior year. This decrease is attributable to lower interest income earned on restricted cash balances due to lower interest rates, partially offset by higher insurance revenues. Operating income was $51.9 million in 2003, compared to $55.0 million in the year-ago-period. The decrease was a result of an increase in the provision for losses on instalment notes receivables due to anticipated higher losses resulting from a record level of bankruptcies and related foreclosures that will continue to move through the repossession and resale process. Income was also impacted by increased expenses related to higher commissions paid for insurance placed on customer homes and costs related to the implementation of new financial systems. This increase was offset by a $5.6 million decrease in interest expense, principally as a result of a reduction in the interest rates on borrowings. In addition, there was an increase in

25

interest income on instalment notes from higher prepayment speeds as a result of increased recognition of unamortized discount that occurs when payoffs are received in advance of maturity. Prepayment speeds were 8.88% in 2003 compared to 6.85% in the prior year. Delinquencies (the percentage of amounts outstanding over 30 days past due) at December 31, 2003 were 6.3% of net instalment balances outstanding. Delinquencies based on gross instalment balances was 7.0% at December 31, 2003, compared to 7.6% at December 31, 2002.

        Repossession inventory units at December 31, 2003 increased to 455 units ($18.9 million), compared to 255 units ($10.3 million) at December 31, 2002. This increase is attributable to higher levels of bankruptcies and the Company's efforts to accelerate foreclosure activity during 2002 and 2003.

Industrial Products

        Net sales and revenues were $461.9 million for the year ended December 31, 2003, a decrease of $27.4 million from $489.2 million for the year ended December 31, 2002. This decrease was due to lower pipe, valve, hydrant and fittings volumes, partially offset by price increases. Total U.S. Pipe tons shipped were down 5.6% in 2003 compared to the prior year. The volume decline, believed to be a temporary reduction in market share, occurred during the course of the year as U.S. Pipe instituted multiple price increases. These price increases were in response to rising scrap metal and other costs and an easing of the intense pricing competition within the industry that occurred in 2002. The first of the price increases took effect mid-June 2003, the second October 1, 2003 and a third took effect January 1, 2004. U.S. Pipe also recently announced a fourth price increase scheduled to take effect March 15, 2004. The average price per ton at U.S. Pipe was up 9.3% in the fourth quarter of 2003 as compared to the fourth quarter of 2002, reflecting the impact of the first two price increases.

        The operating loss of $11.9 million for 2003 was a $38.1 million deterioration from operating income of $26.2 million for 2002. Operating income decreased as a result of lower volumes, higher scrap metal costs ($15.6 million), increased litigation accruals principally related to an employment matter at U.S. Pipe ($6.5 million), increased workers compensation costs ($3.5 million) and increased natural gas costs ($3.7 million). Segment results also reflected $1.7 million to settle a commercial dispute during 2003 that had previously been accrued in the Other segment and, accordingly, there was no net impact on consolidated results of operations. In addition, U.S. Pipe recorded a restructuring charge related to ceasing production and manufacturing operations at the U.S. Pipe Anniston casting plant ($5.9 million), which is more fully described below.

        Major increases in the cost of scrap metal occurred at U.S. Pipe in 2003. Scrap metal is a primary raw material in the production of ductile iron pipe, accounting for up to 40% of the costs of producing pipe. Historically averaging $110 per net ton or less in cost, scrap metal cost averaged in excess of $145 per ton in 2003. Recent purchases, through early March 2004, have been for as high as $250 per net ton. Unparalleled scrap export volume, especially to China, has been the principal reason for the record high costs of scrap metal. The Company expects that the price increases it has already implemented or announced will largely offset the increases in cost that have occurred and will enable the Company, in the second half of 2004, to return to profitability levels that existed before 2002's price war and the recent increases in scrap costs. The Company's ability to achieve these results is dependent on its ability to pass along recent and future increases in scrap costs to customers in the form of price increases. This ability could be affected by the reactions of customers or competitors to these price increases.

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

26

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

        Other associated costs principally include site clean-up costs that will be expensed as incurred.

        It is anticipated that cessation of the castings operations will result in improvements to operating income.

Natural Resources

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

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

        For 2003, Natural Resources had an operating loss of $25.6 million, compared to income of $22.4 million for 2002. This decline was due to the effect of adverse geological conditions and unanticipated equipment repairs in Mine No. 7, which resulted in 31 days of lost longwall production. In Mine No. 5 a scheduled longwall move took longer than expected, resulting in 18 days of lost production, and a geologic fault slowed the longwall advance rate in the second half of the year. Additionally, the Mine Safety and Health Administration temporarily ordered the closure of Mine No. 5 for approximately two weeks in July 2003, resulting in $1.3 million of idle mine costs. The temporary closure resulted in no fines or penalties. Partially offsetting these negatives, the natural gas operation posted increased revenue and operating income, due to higher gas prices.

        In December 2003, the Company announced that JWR expects to close Mine No. 5 during the fourth quarter of 2004, approximately two years earlier than originally scheduled, due to continuing adverse geologic conditions. As a result, Natural Resources expects to incur restructuring charges and additional operating costs associated with the shutdown of approximately $17.8 million, of which

27

approximately $12.7 million will qualify as restructuring charges. Costs associated with this closure recorded in 2003 included $6.7 million recorded as restructuring charges, which was primarily for an increase in benefits costs associated with a curtailment of the other postretirement benefits plan ($5.8 million) and severance costs ($0.8 million). Estimated costs associated with the restructuring are as follows (in thousands):

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

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

        Performance at Natural Resources is expected to improve after the first quarter of 2004 when the existing panels in Mines No. 5 and 7 with difficult geologic conditions are completed and mining moves to more productive areas. In addition, as a result of increased demand, particularly from China, as well as reduced supplies, the world's metallurgical coal markets have seen significant increases in prices. In the first quarter of 2004, Jim Walter Resources completed negotiations for most of its annual metallurgical coal supply contracts, which generally cover the period from July 2004 through June 2005. These contracts were negotiated with price increases that averaged in excess of 50% from previous contracts. The combination of better geologic conditions, efficiencies related to the announced closure of Mine No. 5 and increases in metallurgical coal pricing in the second half of the year should have a significant positive impact on Natural Resources profitability in 2004.

Other

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

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        The operating loss for the Other segment declined from $28.5 million in 2002, to $17.4 million in 2003. General corporate expenses included in this segment were approximately $21.3 million in 2003 compared to $26.7 million in 2002. Of the $5.4 million decrease, $2.2 million relates to credits to expenses of this segment in 2003 for charges made to other segments, primarily Industrial Products, in 2003. These expenses were included as costs of this segment in 2002. The remaining decrease was due to lower incentive compensation and other personnel-related costs ($4.1 million), lower depreciation expenses ($0.7 million) and higher life-insurance- related income ($0.9 million). Corporate expenses also reflected reduced income from land sales ($3.0 million) that was offset by increased gains of $6.4 million from sales of land in the Land Group. Sloss' operating loss increased by $0.7 million in 2003 on weaker slag and specialty chemical results, increases in environmental-related expenditures ($2.3 million), and other increased expenses, partially offset by income from asset sales ($1.1 million) and the effect of a $2.6 million bad debt expense in 2001.

Discontinued Operations

AIMCOR

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

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

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

JW Aluminum

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

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

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

29

2002 Summary Operating Results

(1)

Excludes senior debt interest expense

Year Ended December 31, 2002 and 2001

Continuing Operations

        Net sales and revenues for the year ended December 31, 2002 were $1.339 billion, substantially the same as in 2001. Revenue increases within the Homebuilding, Financing and Other segments were offset by decreases in the Industrial Products and Natural Resources segments. Homebuilding revenues improved on increased unit completions and higher average selling prices. Financing revenues increased primarily due to higher prepayment speeds. The Other segment increased on higher volumes and pricing for furnace coke at Sloss. Industrial Products revenue decreased due to a decrease in shipments of ductile iron pipe during 2002, reflecting the impact the national recession had on demand for these products, combined with lower pricing due to intense pricing competition within the industry. Revenues were lower in Natural Resources due to a decline in natural gas prices, a $12.2 million federal excise tax refund claim related to coal export sales recognized in the prior year, and the impact of the 2001 Mine No. 5 accident.

        Cost of sales, exclusive of depreciation, of $862.4 million was 78.6% of net sales in 2002 versus $827.1 billion and 76.7% of net sales in 2001. The increase of $35.3 million is primarily due to an increase in completed homes within the Homebuilding segment, higher production costs and higher scrap iron prices in Industrial Products, partially offset by reduced volumes in the Industrial Products

30

segment and productivity improvements. Also, in 2001 cost of sales reflected a $5.1 million reduction in the liability for Black Lung benefits in the Natural Resources segment.

        Depreciation for the year ended December 31, 2002 was $51.4 million, an increase of $3.7 million from 2001 due primarily to increases at Industrial Products related to the implementation of new software ($1.1 million) and at Natural Resources for new equipment purchased following the accident at Mine No. 5.

        Selling, general and administrative expenses were $167.2 million in 2002, compared to $164.0 million in 2001. The increase in expenses for 2002 was primarily due to a $2.6 million charge to bad debt expense related to a Sloss customer that filed for bankruptcy protection, higher professional fees related to restating Mid-State Home's accounting for interest income on instalment notes to the interest method, continued expansion into new homebuilding markets and higher legal and other professional expenses in Industrial Products and in corporate expenses. These increases were substantially offset by decreases related to various productivity and cost reduction projects in place throughout the Company including a 27% reduction in corporate headquarters staff in 2001. The 2001 expense reflected a $1.7 million charge to provide a legal reserve for an adverse verdict against one of the Company's subsidiaries in a contract dispute, offset by a $3.0 million reduction in the allowance for losses on trade receivables for the Natural Resources segment.

        Provision for losses on instalment notes increased to $12.4 million in 2002, compared to $11.0 million in 2001 due to slightly higher levels of losses on resales of repossessed homes.

        Interest expense was $153.2 million in the 2002 period, a decrease of $17.5 million from 2001. Interest expense on mortgage-backed/asset-backed notes was $135.1 million in 2002, compared to $137.6 million in 2001. This reflected slightly lower interest rates and levels of borrowings. Corporate senior debt interest expense was $18.1 million in 2002 versus $33.1 million in 2001. This decrease resulted from both lower interest rates and reduced levels of borrowings of senior debt in 2002 as compared to 2001.

        Amortization expense for goodwill and other intangibles was $7.2 million in 2002, compared to $28.4 million in 2001. The decrease was due to the adoption of SFAS No. 142 "Goodwill and Other Intangible Assets" as of January 1, 2002 which requires the discontinuance of amortization for all goodwill and indefinite-lived intangible assets.

        The Company's effective tax rate for the year ended December 31, 2002 of 22.6% differed from the Federal statutory tax rate primarily due to a $2.8 million tax benefit related to the November 1998 sale of JW Window Components, a deduction for depletion related to the Company's mining operations and the utilization of a nonconventional fuel credit. The $2.8 million tax benefit was from an increased capital loss carryforward due to a change in the consolidated return loss disallowance rules, which favorably affected the Company's previous treatment of the November 1998 sale of JW Window Components. The effective tax rate for the year ended December 31, 2001 of 47.4% differed from the Federal statutory tax rate primarily due to amortization of goodwill, a deduction for depletion related to the Company's mining operations, the utilization of a nonconventional fuel credit, and the effect of state and foreign income taxes.

        Restructuring and impairment charges totaling $6.3 million in 2001 include a $5.5 million charge associated with the planned shutdown of certain chemical operations at Sloss and a $0.8 million charge for severance related to headcount reductions from restructurings, principally at the corporate headquarters.

        The 2001 period included a $12.2 million federal excise tax refund credit and a $10.8 million pre-tax charge related to the coal mining accident at Natural Resources. This charge principally included costs and expenses associated with the accident and the idling of Mine No. 5 that were not covered by insurance.

31

        Discontinued operations, net of taxes, for the year ended December 31, 2002 totaled $21.1 million, or $0.47 per diluted share. This compares to $20.4 million, or $0.45 per diluted share, for 2001.

        The net loss for the year ended December 31, 2002 was $52.5 million, or $1.17 per diluted share, which included a charge of $125.9 million, net of tax, or $2.81 per diluted share, from the cumulative effect of a change in accounting principle associated with the initial adoption of SFAS No. 142. In 2001, net income was $43.3 million, or $0.95 per diluted share, which included approximately $20.1 million, or $0.44 per diluted share, of after-tax goodwill amortization, which is no longer being expensed under SFAS No. 142. The current and prior period results also include the impact of the factors discussed in the following segment analysis.

Segment Analysis

Homebuilding

        Net sales and revenues were $270.2 million during 2002, an increase of $32.6 million, or 13.7%, from the prior period. This increase reflects an increase of 246 completed homes and a $3,900 per home increase in average net selling prices. The Company's modular business completed 671 homes in 2002, compared to 736 in the prior year. Excluding the modular business, 3,596 homes were completed in 2002, compared to 3,285 in the prior year. Average net selling prices increased as a result of the Company's ongoing strategy to market and sell new product options, amenity upgrades and larger, more upscale models.

        Operating income was $17.1 million for the year ended December 31, 2002 compared to $2.8 million in the prior year. The $14.3 million increase was principally caused by a $9.0 million decrease in goodwill amortization, higher average selling prices and increased unit completions. Margins increased principally from cost reductions and productivity improvements.

Financing

        Net sales and revenues were $241.0 million in 2002, an increase of $2.9 million from $238.0 million for the prior year. The increase reflects a $6.3 million increase in interest income on instalment notes principally resulting from increased recognition of unamortized discounts that occurs when payoffs are received in advance of maturity, offset by lower portfolio yields. Operating income was $55.0 million in 2002, up significantly from $48.2 million in the prior year, primarily as the result of faster prepayment speeds of 6.9% in the 2002 period compared to 6.1% in the prior year and $2.5 million of lower interest expense, offset by a $1.4 million increase in the provision for losses on instalment notes. Delinquencies (the percentage of amounts outstanding over 30 days past due) were 7.6% of gross instalment balances at December 31, 2002, unchanged from December 31, 2001.

        Repossession inventory units at December 31, 2002 increased to 255 units ($10.3 million), compared to 195 units ($5.8 million) at December 31, 2001.

Industrial Products

        Net sales and revenues were $489.2 million for the year ended December 31, 2002, a decrease of $34.4 million from $523.6 million for the year ended December 31, 2001. The decrease is due to a decrease in average price per ton for pipe products attributable to pricing competition within the industry and to fewer ductile iron pipe shipments. The economic downturn at the beginning of the year negatively impacted sales in the first half of the year as U.S. Pipe customers deferred and delayed

32

construction and water projects. Volumes increased during the second half of 2002 as previously delayed projects were re-started. Third and fourth quarter 2002 shipments were 7.2% and 13.0% higher than the comparable periods in 2001, which partially offset lower shipments during the first half of 2002. Compared to the year ended December 31, 2001, U.S. Pipe revenues were down 7.3%, average price per ton for pipe products decreased 8.3%, and pipe shipments decreased 1.5%. Overall, U.S. Pipe product price reductions reduced 2002 sales compared to 2001 by $33.5 million.

        Operating income of $26.2 million for 2002 was down $21.9 million from $48.1 million for 2001. Operating income decreased due to the lower volumes and decreases of $33.5 million in prices for U.S. Pipe products, $5.8 million of higher scrap iron costs, $1.5 million of increased legal expenses and $0.9 million of severance expenses related to a 19% workforce reduction at U.S. Pipe. This was partially offset by a $10.4 million reduction in goodwill amortization and improved productivity from implementation of productivity initiatives such as the Six Sigma program.

Natural Resources

        Net sales and revenues were $249.8 million for the year ended December 31, 2002, a decrease of $3.9 million from the $253.7 million in the prior year. The decrease in net sales and revenues is attributable to a $12.2 million excise tax refund in the prior year and a decrease in methane gas selling prices, which was partially offset by an increase in coal selling prices. Although Mine No. 5 was shutdown until June 2002, longwall efficiency in Mines No. 4 and 7 increased the tons available for sale.

        The average natural gas selling prices shown reflect the impact in 2001 of approximately $8.1 million of income recognized from gains on hedges of natural gas prices placed on anticipated production and sales in early 2001.

        For 2002, Natural Resources had operating income of $22.4 million, compared to $27.3 million for 2001. Prior year operating income included a $12.2 million excise tax refund claim, a $10.8 million pre-tax charge related to the accident at Mine No. 5, a $5.1 million reduction in the liability for Black Lung benefits, and a $3.0 million reduction in the allowance for losses on trade receivables. Operating income for 2001 also included $8.1 million paid to the Company by SONAT for a natural gas reservation fee. Under the terms of the agreement, this fee was no longer paid after December 31, 2001. Excluding these items, operating income for the segment increased by approximately $12.7 million. Operating income for 2002 improved due to a 16% increase in coal selling prices, partially offset by a 4% increase in average cost per ton of coal produced resulting from inefficiencies associated with the start-up of Mine No. 5. Results also reflect a decrease in the selling price of natural gas as compared to the prior year.

        During the third quarter of 2002, Mine No. 5 returned to full production following the September 2001 accident. Business interruption and property insurance covered the impact on operating results of reduced production and shipments and higher costs during the recovery period. Natural Resources recognized $25.4 million of business interruption claims as reductions of cost of sales in 2002 and $9.0 million in 2001. In addition, cost of sales included $12.7 million in 2002 and $7.7 million in 2001 for re-entry costs that were fully offset by property insurance and casualty claims

33

reflected as reductions to cost of sales in those years. The Company also recorded an allowance for potential uncollectible insurance recoveries of $5.6 million in 2001, which was reduced by $3.8 million in 2002, to cost of sales. Additionally, approximately $2.2 million of expected insurance proceeds were recorded as miscellaneous income in 2002, representing a gain on the reimbursement of fully depreciated equipment, the replacement cost of which was capitalized during the year ended December 31, 2002.

Other

        Net sales and revenues were $109.8 million in 2002, compared to $105.1 million in 2001. Sloss revenues were $3.6 million higher than 2001 as a result of higher volumes and pricing in furnace coke, which was partially offset by the closure of the Birmingham Chemical Plant and lower fiber sales in 2002.

        The operating loss for the Other segment was $28.5 million in 2002, compared to $41.1 million in 2001. General corporate expenses included in this segment were approximately $26.7 million during 2002 compared to $34.9 million in 2001. This decrease reflected $3.0 million of gains related to land sales, as well as the impact of reduced headcount and workforce savings ($3.6 million) and other cost reduction efforts. Segment results also reflected reduced coal and timber royalties and gains from sales of land of $2.3 million in the Company's land groups. Sloss' operating loss reflected an improvement in the furnace coke market, as well as the effect of a $5.5 million charge associated with the shutdown of certain chemical operations in 2001, partially offset by a $2.6 million bad debt charge in 2002.

Discontinued Operations

AIMCOR

        Net sales and revenues were $403.1 million for the year ended December 31, 2002, an increase of $8.4 million from the prior year. AIMCOR Metals revenues increased $5.8 million due to higher volumes and a short-term market price spike in ferro molybdenum that increased revenues by $1.4 million. AIMCOR Carbon revenues were $2.5 million higher due to higher calcined coke pricing, which reflects a pass-through of higher product costs, and additional revenues from in-refinery services at Gulf Coast refineries, partially offset by lower volumes from renegotiated supplier contracts.

        Income from discontinued operations, net of income tax, was $10.3 million in 2002, compared to $15.7 million in 2001. These results reflected a pre-tax impairment charge of $1.7 million to write-off certain petroleum coke handling assets located in the Gulf Coast region. These were partially offset by an $8.6 million reduction in goodwill amortization and productivity improvements. Consolidation of major oil refiners and intense competition continued to put significant volume and margin pressures on the Carbon business, further reducing its operating income. A contract with a major domestic refinery expired in March 2002. Although a revised contract was negotiated, the negative impact on pre-tax margins in 2002 was approximately $12.0 million associated primarily with increased costs to purchase petcoke under this revised contract.

JW Aluminum

        Net sales and revenues were $202.1 million for the year ended December 31, 2002, an increase of $9.1 million over the prior year. Revenues increased primarily due to higher volume, as the amount of pounds shipped increased by 13%. Aluminum shipments increased due to an expansion of the building products customer base.

        Income from discontinued operations, net of income tax, improved to $10.9 million in 2002 compared to $4.7 million in 2001. The improvement resulted from higher volumes and improved productivity from the implementation of initiatives such as the Six Sigma program.

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FINANCIAL CONDITION

        Cash and cash equivalents of $60.0 million at December 31, 2003 increased $51.7 million compared to December 31, 2002 principally due to proceeds from the sales of AIMCOR and JW Aluminum and the sale of the Company's former headquarters building in excess of amounts used to pay down Other Senior Debt. See additional discussion in the Liquidity and Capital Resources section.

        Net receivables, consisting principally of trade receivables, were $155.5 million at December 31, 2003, a decrease of $4.5 million from December 31, 2002. The decrease occurred primarily at Natural Resources which decreased $31.7 million principally due to the collection of approximately $16.6 million in insurance claim receivables during 2003 and lower trade receivables of $8.3 million principally due to decreased volume and pricing in the fourth quarter of 2003 compared to the prior year. This decrease was partially offset by the $16.2 million receivable for the estimated net cash and working capital adjustments related to the sales of businesses.

        Inventories were $215.9 million at December 31, 2003, an increase of $26.5 million from December 31, 2002 due to higher spec home and subdivision inventories in the Homebuilding segment ($12.9 million), along with higher repossession inventories in Financing ($7.7 million), and higher inventories at U.S. Pipe ($10.3 million), partially offset by lower coal inventories at Natural Resources ($4.8 million).

        Assets held for sale at December 31, 2002, was the Company's former headquarters building, which was sold in December 2003.

        Assets and liabilities of discontinued operations at December 31, 2002 were the assets and liabilities of AIMCOR and JW Aluminum which were sold in December 2003.

        Deferred tax assets were $47.5 million at December 31, 2003, compared to deferred tax liabilities of $5.1 million at December 31, 2002. This change in deferred taxes was primarily due to the recording of net operating loss carryforwards resulting from the loss on disposition of AIMCOR.

        Goodwill and other intangibles, net, were $150.0 million at December 31, 2003, a decrease of $8.6 million from December 31, 2002. This decrease was due to the normal amortization associated with the Trust II instalment notes receivable portfolio and the write-off of approximately $2.4 million of goodwill related to the shutdown of the Southern Precision operations.

        Accounts payable of $99.9 million at December 31, 2003 increased $5.2 million compared to December 31, 2002 primarily as a result of timing of vendor payments and increases in inventory.

        Accrued expenses of $109.1 million at December 31, 2003 increased $7.3 million compared to December 31, 2002 as a result of additional accruals for legal and workers compensation expenses, partially offset by a reduction of incentive compensation accruals.

        Other long-term liabilities of $202.8 million at December 31, 2003 increased $11.4 million compared to December 31, 2002 due to an increase in the pension plan liability and additional workers compensation accruals.

        Net instalment note receivables, generated principally from the financing of homes constructed by the Homebuilding segment, were $1.758 billion at December 31, 2003, an increase of $40.0 million from December 31, 2002. The increase is due to increased seasoned loan acquisitions at Walter Mortgage Company. The allowance for losses on instalment notes receivable was $12.7 million at December 31, 2003 compared to $11.3 million at December 31, 2002. See Note 6 of "Notes to the

35

Consolidated Financial Statements." The following table shows information about the balance of the allowance and losses charged to the allowance for the periods presented.

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

(1)

Based on gross instalment balances outstanding.

LIQUIDITY AND CAPITAL RESOURCES

        The Company's principal sources of short-term funding are operating cash flows, borrowings under the Revolving Credit Facility and the Trust IX Variable Funding Loan Facility. The Company's principal sources of long-term funding are the Term Debt portion of its Credit Facilities and its financings under mortgage-backed/asset-backed notes.

        The Company believes that, based on current forecasts and anticipated market conditions, sufficient operating cash flow will be generated to meet substantially all operating needs, to make planned capital expenditures and to make all required interest payments on indebtedness. However, the Company's operating cash flows and liquidity are significantly influenced by the general economy and, in particular, levels of construction activity, levels of government spending on water projects, costs of raw materials, prices of gas and coal, and interest rates.

        At December 31, 2003, the mortgage-backed/asset-backed notes outstanding totaled $1.8 billion and primarily consisted of six issues of public debt, providing financing for instalment notes receivable purchased by Mid-State. The debt also includes outstanding borrowings under a $400 million warehouse facility (the "Trust IX Variable Funding Loan Facility"), providing temporary financing to Mid-State for its current purchases of instalment notes from JWH, and purchases of loans from Walter

36

Mortgage Company. At December 31, 2003, there was $129.8 million outstanding under this facility and $270.2 million available under the facility.

        In 2003, Other Senior Debt decreased by $195.1 million, reflecting the use of proceeds from sales of subsidiaries to pay down debt. Mortgage debt increased by $53.9 million in 2003 due to the completion of the Mid-State Trust XI offering of $314 million in asset-backed notes, as discussed below, offset by paydowns of the Trust IX Variable Funding Loan Facility. Principal payments on the mortgage-backed/asset-backed notes from instalment notes receivable amounted to $260.5 million.

        On June 26, 2003, Mid-State Homes, Inc., a wholly owned subsidiary of the Company, completed its Mid-State Trust XI offering of $314 million in asset-backed notes. The Trust XI notes are secured by sales contracts, promissory notes and mortgages originated by Jim Walter Homes, Inc. and its affiliated homebuilding companies. The notes were issued in four separate classes with a single maturity date of July 2038 and with a weighted average, fixed interest coupon of 5.44%. The net proceeds from the transaction were used to repay borrowings under the Company's Trust IX Variable Funding Loan Facility, and provided approximately $63 million of additional liquidity.

        On April 17, 2003, the Company entered into a new $500 million bank credit facility arranged by Banc of America Securities, LLC and SunTrust Robinson Humphrey (the "2003 Credit Facility") which replaced the prior Revolving Credit Facility and Term Loan which was scheduled to mature on October 15, 2003. The 2003 Credit Facility consisted of a $245 million senior secured Revolving Credit Facility that matures on April 17, 2008 and a $255 million senior secured Term Loan that matures on April 15, 2010. The 2003 Credit Facility, which is secured by the stock of Walter Industries' subsidiaries and by certain assets (excluding real property) of the Company, was used to retire the prior Revolving Credit Facility and Term Loan, pay fees and expenses related to the refinancing, and the remainder was used for working capital and general corporate purposes. The Term Loan originally required quarterly principal payments in the amount of $6.4 million through March 2009, followed by three quarterly payments of $25.5 million until April 15, 2010, when all remaining principal outstanding is due. The cost of funds under this new facility increased as compared to the prior facility. The interest rate on the new Revolving Credit Facility is a floating rate of 350 basis points over LIBOR and on the Term Loan is a floating rate of 425 basis points over LIBOR. LIBOR was 1.2% at December 31, 2003. Under the terms of the 2003 Credit Facility, approximately half of the net proceeds from the sales of AIMCOR and JW Aluminum were used to paydown the Term Loan in December 2003. As a result of this early paydown, quarterly principal payments on the Term Loan have been reduced to $3.1 million through March 2009, followed by four quarterly payments of $12.5 million until April 15, 2010.

        At December 31, 2003, there were no borrowings under the $245 million Revolving Credit Facility. The Revolving Credit Facility includes a sub-facility for trade and other standby letters of credit in an amount up to $100.0 million at any time outstanding. At December 31, 2003 letters of credit with a face amount of $57.0 million were outstanding. At December 31, 2003 approximately $188 million was available under the Revolving Credit Facility.

        The 2003 Credit Facilities contain a number of significant covenants that, among other things, restrict the ability of the Company and certain subsidiaries to dispose of assets, incur additional indebtedness, pay dividends and repurchase stock, create liens on assets, enter into capital leases, make investments or acquisitions, engage in mergers or consolidations, or engage in certain transactions with subsidiaries and affiliates and otherwise restrict corporate activities (including change of control). In addition, under the 2003 Credit Facilities, the Company and its Restricted Subsidiaries (as defined in the 2003 Credit Facilities) are required to maintain specified financial ratios and comply with certain other financial tests. The most restrictive of these limitations are requirements to maintain (a) a minimum interest coverage ratio (the ratio of EBITDA to cash senior debt interest expense (excluding interest on mortgage-backed securities) for the Company and its Restricted Subsidiaries as defined in the 2003 Credit Facilities) of at least 3.50-to-1 (b) a maximum leverage ratio (the ratio of senior debt to EBITDA for the Company and its Restricted Subsidiaries as defined in the 2003 Credit Facilities) of

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not more than 2.75-to-1 and (c) a minimum fixed charge coverage ratio (the ratio of EBITDA minus capital expenditures minus cash taxes to senior debt cash interest expense plus dividends plus senior debt principal payments) of at least 1.25-to-1. EBITDA, as defined in the 2003 Credit Facilities Agreement, excludes the EBITDA generated by its Financing subsidiary, and substitutes instead, the cash released to the Company via its ownership of the residual beneficial interest in the Financing Trusts and the net cash proceeds from the periodic issuance of asset-backed notes. EBITDA also excludes certain non-cash restructuring charges, non-cash write-downs of goodwill and asset impairments. The Company's failure to comply with the covenants in its 2003 Credit Facilities Agreement could result in an event of default, which, if not cured, amended, or waived, could result in the Company's senior debt becoming immediately due and payable. At December 31, 2003, the Company was in compliance with these covenants.

        As of December 31, 2003, the Company's bank Credit Facilities were rated BB by Standard Poors and Ba2 by Moody's Investor Services, both with a stable outlook.

        Trust IX is a Delaware Statutory Trust whose assets are limited to pledged instalment notes and mortgages purchased from Mid-State. The Trust IX Variable Funding Loan Facility's covenants, among other things, restrict the ability of Trust IX to dispose of assets, create liens and engage in mergers or consolidations. In addition, events of default under the Trust IX Facility include the mortgage pool exceeding average consecutive three month delinquency and default ratios of 3.5% and 6.0%, respectively. Trust IX's failure to comply with the covenants in the Trust IX Variable Funding Loan Facility could result in an event of default, which, if not cured, amended or waived, could result in the entire principal balance and accrued interest becoming immediately due and payable. A default under the Trust IX Variable Funding Loan Facility that remains uncured might result in the curtailment of the Company's loan production activities and negatively affect its ability to securitize its loan production, which would have a material adverse effect on its business, financial condition, liquidity, and results of operations. Trust IX was in compliance with these covenants at December 31, 2003. Mid-State Homes and Walter Mortgage Company are servicers under the Trust IX Variable Funding Loan Facility and make customary representations and warranties with regard to their servicing activities. A servicer default under the Trust IX Variable Funding Loan Facility, which includes the maintenance of a minimum net worth at Mid-State, which if not cured, amended or waived, could result in the servicers being terminated and replaced by a successor servicer. The replacement of Mid-State and WMC would have a negative effect on their financial condition as they no longer would receive servicing fees. The Trust IX Variable Funding Loan Facility matured on February 2, 2004 and was subsequently renewed to January 31, 2005.