WALTER INDUSTRIES INC /NEW/, S-1/A, 1995-09-14

WALTER INDUSTRIES INC /NEW/
S-1/A, 1995-09-14
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As filed with the Securities and Exchange Commission on September 14, 1995

Registration No. 33-59021

================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________________

AMENDMENT NO. 2 TO

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
______________________________
WALTER INDUSTRIES, INC.
(Exact name of registrant as specified in charter)

<TABLE><CAPTION>
<S> <C> <C>
Delaware 6711 13-342995300
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>

1500 North Dale Mabry Highway
Tampa, FL 33607
(813) 871-4811
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
______________________________
Kenneth J. Matlock
Executive Vice President and Chief Financial Officer
Walter Industries, Inc.
1500 North Dale Mabry Highway
Tampa, FL 33607
(813) 871-4531
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
______________________________
Copy of all communications, including service of process, to:
Peter J. Gordon, Esq.
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017-3909
______________________________
Approximate date of commencement of proposed sale to the public:
From time to time after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. /X/

If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / ______________

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ______________

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
______________________________

The registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>

This Registration Statement contains two forms of prospectus: one to be
used in connection with an offering of Notes by the various Selling Security
Holders named therein (the "Primary Prospectus") and one to be used for the sale
of Notes by Lehman Brothers Inc. in market-making transactions (the "Market-
Making Prospectus"). The form of Primary Prospectus is included herein and is
followed by the alternate page for the Market-Making Prospectus, as described
below.

The Primary Prospectus and the Market-Making Prospectus are identical
except for the outside front cover page. The alternate page for the Market-
Making Prospectus included herein is labelled "Alternate Page for Market-Making
Prospectus."

<PAGE>
WALTER INDUSTRIES, INC.

Registration Statement on Form S-1

Cross Reference Sheet Pursuant to Item 501(b) of Regulation S-K Showing
the Location in the Prospectus of the Information Required by Part 1 of Form S-1

PROSPECTUS

Form S-1 Item and Heading Caption or Location in
------------------------------ ----------------------
Prospectus
----------

1. Forepart of the Front Cover Page
Registration Statement
and Outside Front Cover
Page of Prospectus

2. Inside Front and Outside Inside Front Cover Page;
Back Cover Page of Outside Back Cover Page
Prospectus

3. Summary Information, Risk Prospectus Summary; Certain
Factors and Ratio of Risk Factors; The Company;
Earnings to Fixed Charges Recent History; Selected
Historical Consolidated
Financial Data

4. Use of Proceeds Not Applicable

5. Determination of Offering Inside Front Cover Page; Plan
Price of Distribution

6. Dilution Not Applicable

7. Selling Security Holders Selling Security Holders

8. Plan of Distribution Inside Front Cover Page; Plan
of Distribution

9. Description of Securities Description of Notes; Certain
to be Registered Federal Income Tax
Consequences

10. Interests of Named Legal Matters; Experts
Experts and Counsel

11. Information with Respect Outside Front Cover Page;
to the Registrant Prospectus Summary; Certain
Risk Factors; The Company;
Recent History;
Capitalization; Selected
Historical Consolidated
Financial Data; Management's
Discussion and Analysis of
Financial Condition and
Results of Operations;
Business and Properties;
Management; Security Ownership
of Management and Principal
Stockholders; Description of
Notes; Description of Certain
Other Indebtedness;
Description of Capital Stock

12. Disclosure of Commission Not Applicable
Position on
Indemnification for
Securities Act
Liabilities

<PAGE>

SUBJECT TO COMPLETION, DATED SEPTEMBER 14, 1995

PROSPECTUS
----------
$218,609,000 12.19% Series B Senior Notes Due 2000

WALTER INDUSTRIES, INC.

This Prospectus relates to the offering from time to time of up to
$218,609,000 principal amount of 12.19% Series B Senior Notes Due 2000 (the
"Notes") that were issued by Walter Industries, Inc. (the "Company" or "Walter
Industries"), a Delaware corporation formerly named Hillsborough Holdings
Corporation, to certain former creditors of the Company and its subsidiaries
pursuant to the Company's Amended Joint Plan of Reorganization dated as of
December 9, 1994, as modified on March 1, 1995 (as so modified, the "Plan of
Reorganization"), under Section 1123(a) of the United States Bankruptcy Code
(the "Bankruptcy Code"). The Plan of Reorganization became effective on March
17, 1995 (the "Effective Date of the Plan of Reorganization"). Pursuant to the
Plan of Reorganization, $490,000,000 aggregate principal amount of Notes,
including the Notes to which this Prospectus pertains, were issued at that time.

The Notes may be sold to the public from time to time by certain holders
thereof (the "Selling Security Holders") in the amount and in the manner
described herein or as may be set forth in a Prospectus Supplement accompanying
this Prospectus. The Company will receive no proceeds from the sale of any of
the Notes by any of the Selling Security Holders. See "Plan of Distribution."

Interest on the Notes is payable semiannually on September 15 and March 15
of each year at the rate of 12.19% per annum. The Notes may be redeemed at any
time at the option of the Company, in whole or in part, upon not less than 30
nor more than 60 days notice, at a redemption price equal to 101% of the
principal amount thereof, plus accrued and unpaid interest, if any, to the date
of redemption, provided that no partial redemption may occur which results in
less than $150 million aggregate principal amount of Notes being outstanding;
and provided further that a redemption made from Excess Proceeds of any Asset
Sale (as such terms are defined under "Description of Notes -- Certain Covenants
-- Limitation on Asset Sales") shall be subject to the provisions described in
the succeeding sentence. The Company is obligated, in certain circumstances, to
apply the Excess Proceeds from an Asset Sale to either redeem or offer to
purchase Notes at a price equal to 100% of the principal amount thereof plus
accrued and unpaid interest, if any, to the date of redemption or purchase,
provided that no such redemption or purchase may occur which results in less
than $150 million aggregate principal amount of Notes being outstanding. In the
event of a Change of Control (as defined under "Description of Notes -- Certain
Definitions"), each Holder will have the right to require the Company to
repurchase all or any part of such Holder's Notes at a price equal to 101% of
the principal amount thereof plus accrued and unpaid interest, if any, to the
date of purchase. The Notes are secured by pledges of the capital stock of each
of the direct and indirect subsidiaries of the Company other than Mid-State
Homes, Inc. ("Mid-State Homes") and its subsidiaries and Cardem Insurance Co.,
Ltd. (Bermuda) ("Cardem Insurance"). The Notes rank senior in right of payment
to all subordinated indebtedness of the Company and pari passu in right of
payment to all other senior indebtedness of the Company (including indebtedness
under the Bank Revolving Credit Facility described herein). As of May 31, 1995,
the aggregate amount of senior indebtedness of the Company outstanding was
$2,220,370,000 (including the Notes). As of May 31, 1995, the Company had no
subordinated indebtedness outstanding. The Company conducts substantially all of
its operations through its subsidiaries. As indebtedness of a holding company,
the Notes are effectively subordinated to all obligations of the Company's
subsidiaries, which obligations at May 31, 1995 were not material (excluding the
obligations of Mid-State Trusts II, III, IV and V, the principal amounts of
which at such date were $584,000,000, $173,527,000, $953,843,000 and
$15,000,000, respectively). See "Certain Risk Factors -- Holding Company
Structure," "Business and Properties -- Mid-State Homes" and "Description of
Notes."
______________________________

SEE "CERTAIN RISK FACTORS" FOR INFORMATION CONCERNING CERTAIN RISKS
ASSOCIATED WITH AN INVESTMENT IN ANY OF THE NOTES.

The Notes are owned by a limited number of institutional and individual
investors and, to the Company's knowledge, no established public market for the
Notes currently exists. Lehman Brothers Inc. ("Lehman") has advised the Company
that it presently intends to make a market in the Notes, but it is

<PAGE>

not obligated to do so and it may discontinue any such market making activity at
any time in its sole discretion. There can be no assurance that the market for
the Notes will not be subject to disruptions that will render it difficult or
impossible for holders of the Notes to sell the Notes in a timely manner, if at
all, or to recoup their investment in the Notes. The Company does not intend in
the near future to apply for listing of the Notes on any securities exchange;
however, certain Holders of Notes have the right to require the Company to use
its best efforts to list their Notes on a national securities exchange or to
otherwise provide for the quotation of the Notes through the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") in
connection with the exercise on or after March 17, 1996, by such Holders of
certain registration rights with respect to the Notes. See "Certain Risk Factors
-- Liquidity; Absence Of Public Market" and "Description of Notes -- Senior Note
Registration Rights Agreement."
______________________________

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
______________________________

The date of this Prospectus is September , 1995

[End of Cover Page]

<PAGE>

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

<PAGE>

The Selling Security Holders directly, through agents designated from time
to time, or through dealers or underwriters also to be designated, may sell the
Notes from time to time on terms to be determined at the time of sale. To the
extent required, the specific Notes to be sold, the names of the Selling
Security Holders, the respective purchase prices and public offering prices, the
names of any such agent, dealer or underwriter, and any applicable commissions
or discounts with respect to a particular offer will be set forth in an
accompanying Prospectus Supplement. See "Plan of Distribution." If the Company
is advised that an underwriter has been engaged with respect to the sale of any
Notes offered hereby, or in the event of any other material change in the plan
of distribution, the Company will cause an appropriate amendment to the
Registration Statement of which this Prospectus forms a part to be filed with
the Securities and Exchange Commission (the "Commission") reflecting such
engagement or other change. See "Additional Information." Each of the Selling
Security Holders reserves the sole right to accept and, together with its agents
from time to time, to reject in whole or in part any proposed purchase of Notes
to be made directly or through agents.

The Company will not receive any proceeds from this offering, but agreed to
pay substantially all of the expenses of this offering other than applicable
transfer taxes and commissions and discounts payable to dealers, agents or
underwriters. The Selling Security Holders and any broker-dealers, agents or
underwriters that participate with the Selling Security Holders in the
distribution of the Notes may be deemed to be "underwriters" within the meaning
of the Securities Act of 1933, as amended (the "Securities Act"), and any
commissions received by them and any profit on the resale of the Notes purchased
by them may be deemed to be underwriting commissions or discounts under the
Securities Act. See "Description of Notes -- Senior Note Registration Rights
Agreement" and "Plan of Distribution" for a description of certain
indemnification arrangements.

<PAGE>

AVAILABLE INFORMATION

When the Registration Statement of which this Prospectus forms a part was
declared effective by the Commission, the Company became subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith became obligated to file
reports and other information with the Commission. Reports and other information
concerning the Company may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the Commission located at
Suite 1400, 500 West Madison Street, Chicago, Illinois 60661 and at Suite 1300,
7 World Trade Center, New York, New York 10048. Copies of such material can also
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 upon payment of the fees prescribed by the
Commission. If and when the common stock, par value $.01 per share ("Common
Stock"), of the Company is listed on the NASDAQ National Market System, such
reports and other information also could be inspected at the offices of the
National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
ADDITIONAL INFORMATION

The Company has filed with the Commission a Registration Statement (which
term shall encompass any amendments and exhibits thereto) under the Securities
Act with respect to the Notes offered hereby. This Prospectus, which forms a
part of such Registration Statement, does not contain all the information set
forth in such Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. Statements made in
this Prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete; with respect to each such contract,
agreement or other document filed as an exhibit to such Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference. Any interested parties may inspect such Registration Statement,
without charge, at the public reference facilities maintained by the Commission
at 450 Fifth Street, N.W., Washington D.C. 20549, and may obtain copies of all
or any part of it from the Commission upon payment of the fees prescribed by the
Commission. Neither the delivery of this Prospectus or any Prospectus Supplement
nor any sales made hereunder or thereunder shall under any circumstances create
any implication that the information contained herein or therein is correct as
of any time subsequent to the date hereof or thereof or that there has been no
change in the affairs of the Company since the date hereof or thereof.

<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the detailed
information and consolidated financial statements (the "Consolidated Financial
Statements") and notes thereto appearing elsewhere in this Prospectus. The
Company operates, and during all periods for which financial information appears
herein operated, on a fiscal year ending May 31.

Reference is made to the "Index to Defined Terms" for information regarding
the location of certain definitions used in this Prospectus.

The Company

The Homebuilding and Related Financing Group sells, constructs on the
customer's site, and finances standardized partially-finished homes. Sales are
made in approximately 23 states, primarily in the southern part of the United
States. Substantially all of the sales are made on credit provided by the Group.
A credit purchaser must provide his own land and give a first mortgage or deed
of trust to secure payment of the purchase price of the home.

The Water and Waste Water Transmission Products Group is one of the largest
domestic manufacturers of ductile iron pressure pipe and fittings. The Group
also manufactures valves and hydrants, fittings and castings.

The Natural Resources Group engages in coal mining and a related
degasification program. The Group owns four coal mines in Alabama and has the
capacity to produce a total of 9.5 million tons of coal annually. The Group
produced 7.6 million tons of coal in fiscal 1995. A substantial portion of this
output is under long-term contracts and the balance will be used internally to
produce furnace and foundry coke or sold to other customers on a short-term
contract or spot market basis. The Company does not consider itself to be a
significant factor in the domestic or international coal markets.

The Industrial and Other Products Group produces furnace and foundry grades
of coke, industrial chemicals, slag wool products, aluminum sheet, aluminum
foil, window and door screens, window balances, fireplace inserts, fireplaces
and accessories, municipal and original equipment manufacturer castings,
patterns and tooling and resin coated sand. See "The Company" and "Business and
Properties."

Recent History

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

<PAGE>

indirect wholly owned subsidiary of the Company, and (iv) the surviving
corporation of such merger changed its name to Jim Walter Corporation (and is
hereinafter referred to as "J-II" or "Jim Walter Corporation").

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

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

On December 27, 1989, the Company and 31 of its subsidiaries each filed a
voluntary petition for reorganization under Chapter 11 ("Chapter 11") of the
Bankruptcy Code with the Bankruptcy Court for the Middle District of Florida,
Tampa Division (the "Bankruptcy Court"); one additional subsidiary also filed a
voluntary petition for reorganization under Chapter 11 with the Bankruptcy Court
on December 3, 1990 (all such voluntary petitions for reorganization,
collectively, the "Chapter 11 Cases"). Two other subsidiaries, Cardem Insurance
and Jefferson Warrior Railroad Company, Inc. ("J.W. Railroad"), did not file
petitions for reorganization under Chapter 11. The filing of the voluntary
petitions resulted from a sequence of events stemming primarily from an
inability of the Company's interest reset advisors to reset interest rates on
approximately $624 million of outstanding indebtedness, which indebtedness by
its terms required that the interest rates thereon be reset to the rate per
annum such indebtedness should bear in order to have a bid value of 101% of the
principal amount thereof as of December 2, 1989. The reset advisors' inability
to reset the interest rates was primarily attributable to two factors: (i)
uncertainties arising from the pending Veil Piercing Litigation, including the
possibility either that such litigation would lead to the prohibition of further
asset sales and debt repayment or that substantial new asbestos-related claims
might become assertible against the Company, which uncertainties materially
hindered the ability of the Company and its subsidiaries to pursue a refinancing
or sell assets to reduce debt, and (ii) general turmoil in the high yield bond
markets at such time, both of which depressed the bid value of such
indebtedness.

On January 2, 1990, the Company and each of its subsidiaries party to the
Chapter 11 Cases filed a declaratory judgment action (the "Adversary
Proceeding") against all known Asbestos Claimants who had filed Veil Piercing
Claims, Celotex and Jim Walter Corporation seeking a declaration, among other
things, that (i) the corporate veil between Celotex and Original Jim Walter
could not be pierced, (ii) the Company could not be held liable for the
asbestos-related liabilities of either Celotex or Jim Walter Corporation on any
grounds and (iii) the LBO could not be deemed a fraudulent conveyance.

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

<PAGE>

On the Effective Date of the Plan of Reorganization, the Company and its
subsidiaries emerged from bankruptcy pursuant to the Plan of Reorganization.
At that time, pursuant to the Plan of Reorganization, 50,494,313 shares of
Common Stock were issued to certain former creditors and stockholders of the
Company and its subsidiaries and $490,000,000 aggregate principal amount of
Notes were issued to certain former creditors of the Company and its
subsidiaries.

Also pursuant to the Plan of Reorganization, (i) the Veil Piercing Claims,
the Veil Piercing Litigation and the Adversary Proceeding, among other things,
were settled after a ruling by the Bankruptcy Court (which was confirmed on
appeal by the United States District Court for the Middle District of Florida)
finding in favor of the Company on every claim asserted in the Adversary
Proceeding and (ii) the Fraudulent Conveyance Lawsuit was settled. See "Recent
History" and "Business and Properties -- Legal Proceedings -- Asbestos Related
Litigation Settlements."

See "Certain Risk Factors" for information concerning certain risks
associated with an investment in the Notes.

<PAGE>
Summary Consolidated Historical Financial Data

The following data, insofar as it relates to each of the fiscal years 1991
through 1995, has been derived from annual financial statements, including the
consolidated balance sheets at May 31, 1995 and 1994 and the related
consolidated statements of operations and retained earnings (deficit) and of
cash flows for the three years ended May 31, 1995 and the notes thereto
appearing elsewhere herein. All of the information presented below should be
read in conjunction with the Company's Consolidated Financial Statements and the
notes thereto, the pro forma consolidated statement of operations of the Company
(the "Pro Forma Consolidated Statement of Operations") and the notes thereto and
the other information contained elsewhere in this Prospectus.

<TABLE><CAPTION>
------------------------------------------------------------------------
Years ended May 31,
1991(1) 1992 1993(4) 1994 1995
------------- ------------- ------------- ------------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Sales and revenues . . . . . . . . $ 1,326,397 $ 1,366,581 $ 1,318,986 $ 1,328,524 $ 1,442,322
Cost of sales (exclusive of
depreciation) . . . . . . . . . . 826,455 891,882 804,411 845,061 951,381
Depreciation, depletion and
amortization . . . . . . . . . . 75,099 82,801 70,483 71,035 72,037
Interest and amortization of debt
discount and expense(2) . . . . . 209,511 177,060 171,581 155,470 304,548
Income tax expense (benefit) . . . 19,454 12,463 24,328 28,917 (170,450)
Income (loss) before discontinued
operations and cumulative effect of
accounting change(1)(4) . . . . . 20,632 22,342 46,594 7,175 (358,645)
Net income (loss) . . . . . . . . . 14,462 22,342 (58,014) 7,175 (358,645)
Ratio of earnings from continuing
operations to fixed charges(3) . 1.19 1.18 1.39 1.22 --

Additional Financial Data:
Total assets . . . . . . . . . . . $ 3,276,211 $ 3,171,266 $ 3,223,234 $ 3,140,892 $ 3,245,153
Long-term senior debt . . . . . . . 1,073,919 948,782 1,046,971 871,970 2,220,370
Liabilities subject to Chapter 11
proceedings . . . . . . . . . . . 1,883,704 1,845,328 1,725,631 1,727,684 --
Stockholders equity (deficit) . . . (253,282) (230,119) (287,737) (282,353) 360,774
</TABLE>

(1) The selected financial data reflects operations sold as discontinued
operations.

(2) Interest on unsecured obligations not accrued since December 27, 1989
amounted to $163.7 million in each of the years ended May 31, 1991 through
1994. The Company recorded additional interest and amortization of debt
discount and expense of $141.4 million related to the consummation of the
Plan of Reorganization in fiscal 1995.

(3) The ratio of earnings from continuing operations to fixed charges is
computed by dividing the sum of income (loss) from continuing operations
and fixed charges by fixed charges. Fixed charges consist of interest
expense, amortization of debt discount and expense and the portion (one-
third) of rent expense deemed to represent interest. For the year ended May
31, 1995, the loss from continuing operations plus fixed charges was
inadequate to cover fixed charges. The coverage deficiency was $530.3
million. On a pro forma basis for the fiscal year ended May 31, 1995, after
giving effect to the Plan of Reorganization and the related transactions as
if they had occurred as of June 1, 1994, the loss from continuing
operations plus fixed charges would have been inadequate to cover fixed
charges. The coverage deficiency would have been $14.2 million. See
"Prospectus Summary -- Summary Pro Forma Consolidated Statement of
Operations."

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

9
<PAGE>
Summary Pro Forma Consolidated Statement of Operations

The following unaudited summary pro forma consolidated statement of
operations was prepared to illustrate the estimated effects of the Plan of
Reorganization and related financings and the application of the proceeds
thereof as if they had occurred for statement of operations purposes as of June
1, 1994.

The pro forma consolidated statement of operations does not purport to be
indicative of the results of operations that would actually have been reported
had such transactions in fact been consummated on such date or of the results of
operations that may be reported by the Company in the future. The unaudited pro
forma adjustments are based upon available information and certain assumptions
that the Company believes are reasonable. All of the information presented below
should be read in conjunction with the Consolidated Financial Statements and the
notes thereto, the Pro Forma Consolidated Statement of Operations and the notes
thereto and the other information contained elsewhere in this Prospectus.

<TABLE><CAPTION>
Year ended
May 31, 1995
--------------------------
(Dollars in thousands
except per share amount)
<S> <C>
Summary of Operations:
Sales and revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,434,694
Cost of sales (exclusive of depreciation) . . . . . . . . . . . . . . . . 951,381
Depreciation, depletion and amortization . . . . . . . . . . . . . . . . 72,037
Interest and amortization of debt expense . . . . . . . . . . . . . . . . 223,184
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,280
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (38,277)
Net loss per share(1) . . . . . . . . . . . . . . . . . . . . . . . . . . (.75)
</TABLE>

(1) Net loss per share has been computed based on the weighted average number
of shares of Common Stock issuable (50,988,626, which includes 494,313
additional shares of Common Stock issued on September 13, 1995 (180 days
after the Effective Date of the Plan of Reorganization) pursuant to the
Plan of Reorganization, but does not include 3,880,140 additional shares
issued to an escrow account on such date pursuant to the Plan of
Reorganization because such issuance is contingent on future events and
would be anti-dilutive; see "Description of Capital Stock -- Additional
Stock Issuances").

10
<PAGE>
<TABLE><CAPTION>
The Offering

<S> <C>
Notes Offered . . . . . . . . . Up to $218,609,000 principal amount of 12.19% Series B Senior Notes
Due 2000 to be offered for sale from time to time by the Selling
Security Holders. The Company will receive no proceeds from the
sale of Notes by the Selling Security Holders. See "Selling
Security Holders" and "Plan of Distribution."
Issuer . . . . . . . . . . . . Walter Industries, Inc.

Maturity Date . . . . . . . . . March 15, 2000

Interest Rate . . . . . . . . . 12.19%

Interest Payment Dates . . . . September 15 and March 15 of each year, commencing September 15,
1995. Interest began accruing on the Notes on March 17, 1995.

Ranking . . . . . . . . . . . . The Notes rank senior in right of payment to all subordinated
indebtedness of the Company and pari passu with all other senior
indebtedness of the Company (including indebtedness under the Bank
Revolving Credit Facility described herein). As of May 31, 1995,
the aggregate amount of senior indebtedness of the Company was
$2,220,370,000 (including the Notes). As of May 31, 1995, the
Company had no subordinated indebtedness outstanding.

Mandatory Sinking Fund . . . . None.

Optional Redemption . . . . . . The Notes may be redeemed at any time at the option of the Company,
in whole or in part, upon not less than 30 nor more than 60 days
notice at a redemption price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest, if any, to the date of
redemption, provided that no partial redemption may occur which
results in less than $150 million aggregate principal amount of the
Notes being outstanding.
Change of Control Offer to
Purchase . . . . . . . . . . . In the event of a Change of Control, each Holder will have the
right to require the Company to repurchase any and all part of such
Holder's Notes at a price equal to 101% of the principal amount
thereof plus accrued and unpaid interest, if any, to the date of
purchase. There can be no assurance that the Company will have the
financial ability to repurchase Notes upon the occurrence of a
Change of Control.

Asset Sales . . . . . . . . . . The Company is obligated in certain circumstances to apply the Net
Cash Proceeds from an Asset Sale to either redeem or offer to
purchase Notes at a price equal to 100% of the principal amount
thereof plus accrued and unpaid interest, if any, to the date of
redemption or purchase, provided that no such redemption or
purchase may occur which results in less than $150 million
aggregate principal amount of Notes being outstanding.

Certain Covenants . . . . . . . The Indenture contains covenants which, among other things, (i)
restrict the ability of: (a) the Company and its Subsidiaries
(defined with respect to the Company not to include Mid-State Homes
and its subsidiaries or
</TABLE>

11
<PAGE>
<TABLE>
<S> <C>
Cardem Insurance) to incur additional indebtedness, create liens,
or engage in sale and leaseback transactions; (b) the Company, Mid-
State Homes and their respective Subsidiaries to pay dividends,
repurchase capital stock, prepay subordinated debt, make certain
other Restricted Payments, engage in transactions with affiliates,
or sell the capital stock of their respective Subsidiaries; (c) the
Subsidiaries of the Company to encumber their ability to pay
dividends or make distributions to the Company or other
Subsidiaries; and (d) the Company to engage in mergers and
consolidations, (ii) require the Company to make regular reports to
Holders of Notes and to file all such reports with the Commission
for public availability and (iii) with certain exceptions, require
the Company to maintain its corporate existence and the corporate,
partnership or other existence of its Subsidiaries and to maintain
the licenses and franchises of the Company and its Subsidiaries.

Security . . . . . . . . . . . The Notes are secured by pledges of the capital stock of each of
the direct and indirect subsidiaries of the Company other than Mid-
State Homes and its subsidiaries and Cardem Insurance.
</TABLE>

Contemporaneous Common Stock Offering

The Company also has filed with the Commission a shelf registration
statement with respect to the sale from time to time by certain selling security
holders of up to 31,911,136 shares of Common Stock held by such security
holders. Such registration statement and the Registration Statement of which
this Prospectus forms a part were filed by the Company pursuant to registration
rights agreements entered into as part of the Plan of Reorganization. See
"Description of Capital Stock -- Common Stock Registration Rights Agreement" and
"Description of Notes -- Senior Note Registration Rights Agreement." The Company
will not receive any proceeds from the contemporaneous offering of such Common
Stock, all of which will be received by the selling holders thereof.

<PAGE>
CERTAIN RISK FACTORS

Set forth below are certain significant risks involved in investing in the
Notes offered by this Prospectus. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business and Properties" for
a description of other factors affecting the Company's businesses generally.

Leverage

Upon completion of the Plan of Reorganization, the Company continued to
have significant indebtedness. At May 31, 1995, the Company had total
consolidated debt of approximately $2,220,370,000 and a ratio of total
consolidated debt to stockholders' equity of approximately 6.2 to 1.0. As a
result of the Plan of Reorganization, the Company will have substantially higher
interest expense. On a pro forma basis after giving effect to the Plan of
Reorganization and related transactions, the Company would have reported a loss
of $38.3 million for the year ended May 31, 1995. See "Pro Forma Consolidated
Statement of Operations" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

The ability of the Company to meet its debt service obligations will be
dependent upon the future performance of the Company, which, in turn, will be
subject to general economic conditions and to financial, competitive, business
and other factors, including factors beyond the Company's control. The level of
the Company's indebtedness could restrict its flexibility in responding to
changing business and economic conditions. The Company believes that the Mid-
State Trust V Variable Funding Loan Agreement, a three-year $500 million credit
facility described under "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Financial Condition," will provide Mid-
State Homes with the funds needed to purchase the instalment notes and mortgages
generated by Jim Walter Homes, Inc. ("Jim Walter Homes"). See "Business and
Properties -- Mid-State Homes." The Company also believes that under present
operating conditions sufficient operating cash flow will be generated through
fiscal year 1999 to make all required interest and principal payments and
planned capital expenditures and meet substantially all operating needs and that
amounts available under the Bank Revolving Credit Facility described herein will
be sufficient to meet peak operating needs. However, it is currently anticipated
that sufficient operating cash flow will not be generated to repay at maturity
the principal amount of the Notes without refinancing a portion of such debt or
selling assets. No assurance can be given that any refinancing will take place
or that such sales of assets can be consummated. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations".

The degree to which the Company is leveraged and the terms governing the
Company's debt instruments, including restrictive covenants and events of
default, could have important consequences to holders of the Notes, including
the following: (i) the Company's ability to obtain additional financing in the
future for working capital, capital expenditures, acquisitions, general
corporate purposes or other purposes may be impaired; (ii) a substantial portion
of the Company's cash flow from operations must be dedicated to service its
indebtedness; (iii) terms of the Company's debt instruments will restrict the
Company's ability to pay dividends and will impose other operating and financial
restrictions; (iv) the Company may be more leveraged than other providers of
similar products and services, which may place the Company at a competitive
disadvantage; and (v) the Company's significant degree of leverage could make it
more vulnerable to changes in general economic conditions. Following the Plan of
Reorganization, the Company believes that it will be able through fiscal year
1999 to make its principal and interest payments as and when required with funds
derived from its operations. However, unexpected declines in the Company's
future business, increases in interest rates or the inability to borrow
additional funds for its operations if and when required could impair the
Company's ability to meet its debt service obligations and, therefore, have a
material adverse effect on the Company's business and future prospects. No
assurance can be given that additional debt or equity funds will be available
when needed or, if available, on terms which are favorable to the Company.
Moreover, the terms of the Company's indebtedness contain change in control
provisions which may have the effect of discouraging a potential takeover of the
Company. See "Capitalization," "Pro Forma Consolidated Statement of Operations,"
"Selected Historical Consolidated Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Financial
Condition" and "-- Liquidity and Capital Resources," "Description of Notes"
and "Description of Certain Other Indebtedness."

<PAGE>
Borrowings under the Company's $150 million Bank Revolving Credit Facility
bear interest at rates that fluctuate. As of May 31, 1995, there were no
borrowings under this facility; however there were $22,727,000 face amount of
letters of credit outstanding thereunder. See "Description of Certain Other
Indebtedness -- Bank Revolving Credit Facility."

Accounting Presentation

The Company emerged from bankruptcy on March 17, 1995. Accordingly, the
Company's Consolidated Balance Sheets at and after May 31, 1995 and its
Consolidated Statements of Operations and Retained Earnings (Deficit) for May
31, 1995 and periods thereafter will not be comparable to the Consolidated
Financial Statements for prior periods included elsewhere herein. Furthermore,
the Company's Consolidated Statement of Operations and Retained Earnings
(Deficit) for May 31, 1995 will not be comparable to the Company's consolidated
statements of operations and retained earnings (deficit) for periods thereafter.
Among other things, the Consolidated Statement of Operations and Retained
Earnings (Deficit) for the year ended May 31, 1995 includes numerous adjustments
required by the Plan of Reorganization, including adjustments to interest
expense, payment of substantial professional expenses related to the bankruptcy
and payment of $390 million pursuant to the Veil Piercing Settlement described
herein. See "Business and Properties -- Legal Proceedings -- Asbestos-Related
Litigation Settlements." Similarly, the Company's Consolidated Balance Sheet as
of May 31, 1995 reflects consummation of the Plan of Reorganization, and
therefore is not comparable to the Company's Consolidated Balance Sheets at May
31, 1994 or dates prior thereto.

Holding Company Structure

The Company has no business operations other than (i) holding the capital
stock of its operating subsidiaries and intermediate holding companies, (ii)
holding cash, cash equivalents and marketable securities and (iii) advancing
funds to, and receiving funds from, its subsidiaries. In repaying its
indebtedness, including the Notes, the Company relies primarily on cash flows
from its subsidiaries, including debt service and dividends. The ability of the
Company's subsidiaries to make payments with respect to advances from the
Company will be affected by the obligations of such subsidiaries to their
creditors. Claims of holders of indebtedness of the Company, including the
Notes, against the cash flows and assets of the Company's subsidiaries will be
effectively subordinated to claims of such creditors. The ability of such
subsidiaries to pay dividends will also be subject to applicable law and, under
certain circumstances, to restrictions contained in agreements entered into, or
debt instruments issued, by the Company and its subsidiaries. Under the terms of
the Bank Revolving Credit Facility, the subsidiaries of the Company may declare
and pay dividends in cash to the Company to enable it to pay, among other
things, amounts owing under the Notes when such amounts become due and payable
under the terms of the Indenture. See "Description of Certain Other Indebtedness
-- Bank Revolving Credit Facility." The Notes are secured by pledges of the
capital stock of each of the direct and indirect subsidiaries of the Company
other than Mid-State Homes and its subsidiaries and Cardem Insurance.

Restrictive Covenants

The Indenture and the Bank Revolving Credit Facility contain a number of
significant covenants that, among other things, restrict the ability of the
Company and its subsidiaries to dispose of assets, incur additional
indebtedness, make capital expenditures, pay dividends, create liens on assets,
enter into leases, investments or acquisitions, engage in mergers or
consolidations, or engage in certain transactions with subsidiaries and
affiliates and otherwise restrict corporate activities (including change of
control and asset sale transactions). In addition, under the Bank Revolving
Credit Facility, the Company is required to maintain specified financial ratios
and comply with certain financial tests, including interest coverage and fixed
charge coverage ratios, maximum leverage ratios and minimum earnings before
interest, taxes, depreciation and amortization expense, some of which become
more restrictive over time. A substantial portion of the Company's indebtedness
is secured by the capital stock or assets of certain subsidiaries of the
Company.

The Company currently is in compliance with the covenants and restrictions
contained in its existing debt instruments. However, its ability to continue to
so comply may be affected by events beyond its control. The breach of any of
these covenants or restrictions could result in a default under those debt
instruments, which would permit the lenders or other creditors thereunder to
declare all amounts borrowed thereunder to be due and

14
<PAGE>
payable together with accrued and unpaid interest, would result in the
termination of the commitments of the lenders under the Bank Revolving Credit
Facility to make further loans and issue letters of credit and could permit such
lenders and other creditors to proceed against the collateral securing the
obligations owing to them. Any such default could have a significant adverse
effect on the market value and the marketability of the Notes. See "Description
of Notes" and "Description of Certain Other Indebtedness."

Risks of Business Downturn

Certain of the Company's businesses are affected by general economic or
other factors outside their control. The sales of United States Pipe and Foundry
Company ("U.S. Pipe") are dependent to some extent upon the rate of residential
and non-residential building construction and other forms of construction
activity, and are thus subject to certain economic factors such as general
economic conditions, the underlying need for construction projects, interest
rates and governmental incentives provided to building projects. The cyclical
nature of U.S. Pipe's business is offset to some extent by U.S. Pipe's sales to
the replacement market. The replacement market generally fluctuates less than
the rate of new construction and therefore tends to have a stabilizing influence
during a period of depressed construction activity. Jim Walter Homes is also
sensitive to certain general economic and other factors. Its business has tended
to be countercyclical to national home construction activity. In times of high
interest rates or lack of availability of mortgage funds, and thus limited new
home construction, Jim Walter Homes' volume of home sales tends to increase due
to the terms of the financing it offers. However, in times of low interest rates
and increased availability of mortgage funds, Jim Walter Homes' volume of home
sales tends to decrease. Also, in times of low interest rates and high
availability of mortgage funds, additional competition is able to enter the
market. A significant portion of the sales of Jim Walter Resources, Inc. ("Jim
Walter Resources") are made pursuant to long-term contracts, which tend to
stabilize the results of its operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business and
Properties."

Asbestos-Related Litigation Settlements

As discussed more fully under "Recent History" and "Business and Properties
-- Legal Proceedings -- Asbestos-Related Litigation Settlements," the Company
and the Indemnitees were defendants in the Veil Piercing Litigation and are
beneficiaries of the Veil Piercing Settlement.

In order for a holder of a Veil Piercing Claim or any claim related to the
LBO which is held by any person who has asserted or may in the future assert
Veil Piercing Claims (such claims and Veil Piercing Claims, whether asserted in
the past or in the future, collectively, the "Settlement Claims") to assert that
Settlement Claim against the Company or any of the Indemnitees, such holder
would have to attack the Plan of Reorganization, the approval of the Class (as
defined under "Business and Properties -- Legal Proceedings -- Asbestos-Related
Litigation Settlements"), the approval of the Veil Piercing Settlement and all
of the actions taken under the Veil Piercing Settlement. Because there were no
objections to the Plan of Reorganization or the Veil Piercing Settlement (apart
from an objection of the United States Environmental Protection Agency (the
"EPA") concerning the scope of certain releases affecting government
environmental claims; see "Business and Properties -- Legal Proceedings -- Plan
of Reorganization"), such an attack would have to be based upon an alleged
failure to provide due process under the United States Constitution. The
Company believes, and the Bankruptcy Court has found, that due process
requirements have been met. Should such an attack be sustained, however, the
Company, the Indemnitees and the other Released Parties (as defined under
"Business and Properties -- Legal Proceedings -- Asbestos-Related Litigation
Settlements") could be exposed to additional liabilities in the future of an
indeterminate, but possibly substantial, amount.

Future holders of Settlement Claims may also attack the injunctions
discussed under "Business and Properties -- Legal Proceedings --
Asbestos-Related Litigation Settlements" on the grounds that the Bankruptcy
Court did not have jurisdiction over their future claims. The Company believes
that the Bankruptcy Court and the Celotex bankruptcy court have jurisdiction
to issue "channelling" injunctions barring such future claims. In addition,
the provisions of Section 524(g) of the Bankruptcy Code explicitly authorize
an injunction barring claims by future claimants asserting asbestos-related
diseases. Accordingly, if the Celotex bankruptcy court confirms a plan of
reorganization containing such an injunction, as contemplated by the Veil
Piercing Settlement, and such plan of reorganization is consummated, Section
524(g) of the Bankruptcy Code would be an additional
15
<PAGE>

basis for preventing future Settlement Claims from being asserted against the
Company, the Indemnitees and the other Released Parties. However, there can be
no assurance that such a plan of reorganization will be confirmed and
consummated. There will be an evidentiary hearing on October 17, 1995, in the
Celotex bankruptcy proceeding to consider all objections to the proposed
disclosure statement for the plan of reorganization proposed by Celotex. The
hearing will cover claims by certain constituencies in the Celotex bankruptcy
proceeding that the proposed Celotex plan of reorganization does not comply
with the Veil Piercing Settlement, and may result in changes to the proposed
Celotex plan of reorganization, which could affect the availability of a
Section 524(g) injunction in the Celotex bankruptcy proceeding. In addition, a
future holder of a Settlement Claim may try to attack Section 524(g) as
unconstitutional or try to preclude its application to the Company's case.
Should that happen, the Company, the Indemnitees and the other Released
Parties could be exposed to additional liabilities in the future of an
indeterminate, but possibly substantial, amount.

It is also possible that some constituencies might seek to have the terms
of the Veil Piercing Settlement altered. In the National Gypsum reorganization,
the trust established to settle asbestos claims has sought an order requiring
the reorganized debtor in that case to make additional payments to the trust.
The Company believes that should not happen in its case because the settlement
amount is being paid into another reorganization pursuant to final court orders
in both cases. Any such request would have to be made to the Bankruptcy Court,
which has previously approved the settlement payment as fair. However, should
such a request be made and granted, the Company, the Indemnitees and the other
Released Parties could be exposed to additional liabilities in the future of an
indeterminate, but possible substantial, amount.

Liquidity; Absence of Public Market

The Notes may be characterized as "high yield" or "junk" bonds.
Historically, the market for high yield bonds, such as the Notes, has had fewer
participants and involved a smaller amount of securities than certain other
capital markets. It has historically, and particularly in recent periods, been
subject to disruptions that have caused substantial volatility in the prices of
securities similar to the Notes. The Notes are owned by a limited number of
institutional and individual investors. To the Company's knowledge, no
established public market for the Notes currently exists. Lehman has advised the
Company that it presently intends to make a market in the Notes, but it is not
obligated to do so and it may discontinue any such market making activity at any
time in its sole discretion. There can be no assurance that the market for the
Notes will not be subject to disruptions that will render it difficult or
impossible for holders of the Notes to sell the Notes in a timely manner, if at
all, or to recoup their investment in the Notes. The Company does not intend to
apply for listing of the Notes on any securities exchange. Consequently, a
purchaser may not be able to liquidate his investment in the event of an
emergency or for any other reason and the Notes may not be readily acceptable as
collateral for loans.

The prices at which the Notes may be sold will be determined by the Selling
Security Holders or by agreement between Selling Security Holders and
underwriters or dealers, if any. See "Plan of Distribution."

Effect of Future Sales of Notes

No prediction can be made as to the effect, if any, that future sales of
Notes, or the availability of Notes for future sale, will have on the market
price of the Notes prevailing from time to time. Sales of substantial amounts of
Notes, or the perception that such sales could occur, could adversely affect
prevailing market prices for the Notes. Pursuant to the Plan of Reorganization,
an aggregate of $490 million principal amount of Notes was issued on the
Effective Date of the Plan of Reorganization. Pursuant to Section 1145 of the
Bankruptcy Code, all of the Notes are freely tradeable without registration
under the Securities Act, except for Notes issued to an "underwriter" (as
defined in Section 1145(b) of the Bankruptcy Code) or subsequently acquired by
an "affiliate" of the Company. Except in limited circumstances, none of the
holders of such Notes has agreed to restrict or otherwise limit in any way such
holder's ability to dispose of such Notes. See "Description of Notes -- Senior
Note Registration Rights Agreement." No assurance can be given that sales of
substantial amounts of Notes will not occur in the foreseeable future or as to
the effect that any such sales, or the perception that such sales may occur,
will have on the market or the market price of the Notes.

Tax Considerations

A substantial controversy exists with regard to federal income taxes
allegedly owed by the Company. Proofs of claim have been filed by the Internal
Revenue Service (the "IRS") in the aggregate amount of $110,560,883 with respect
to fiscal years ended August 31, 1980 and August 31, 1983 through August 31,
1987, $31,468,189 with respect to fiscal years ended May 31, 1988 (nine months)
and May 31, 1989 and $44,837,693 with respect to fiscal years ended May 31, 1990
and May 31, 1991. Objections to the proofs of claim have been

16
<PAGE>

filed by the Company and the various issues are being litigated in the
Bankruptcy Court. The Company believes that such proofs of claim are
substantially without merit and intends to defend such claims against the
Company vigorously, but there can be no assurance as to the ultimate outcome.

Set forth under "Certain Federal Income Tax Consequences" is a description
of certain United States federal income tax consequences to prospective
purchasers expected to result from the purchase, ownership and sale or other
disposition of the Notes under currently applicable law.

Disputed Claims Reserves

The total face amount of prepetition claims against the Company and certain
of its subsidiaries which are still being disputed by the Company, including the
Federal Income Tax Claims (see "Description of Capital Stock -- Additional Stock
Issuances"), is substantial. If the Company or any of its subsidiaries is unable
to pay any claims which ultimately are allowed against it by the Bankruptcy
Court, under the Plan of Reorganization the holders of such allowed claims would
have recourse to the Company or any such subsidiary as applicable. Management
does not expect that any allowed claims will have a material adverse effect on
the Company's financial position.

Certain Corporate Governance Matters; Antitakeover Legislation

The Restated Certificate of Incorporation of the Company (the "Charter")
and the Plan of Reorganization provide that until March 17, 1998 the Board of
Directors of the Company shall have nine members, two of whom must be
Independent Directors (as defined under "Management -- Board of Directors"),
three of whom must be G. Robert Durham, James W. Walter and a senior officer of
the Company (currently Kenneth E. Hyatt) or their successors who shall be
senior officers of the Company, one of whom must be designated by KKR, an
affiliate of certain principal stockholders of the Company, and three of whom
must be designated by Lehman, whose affiliate Lehman Brothers Holdings, Inc.
("Lehman Holdings") is another principal stockholder of the Company (except
that (i) in certain circumstances KKR will have the right to compel the
resignation of one or two of Lehman's designees and designate the successor(s),
(ii) if more than one director is a designee of KKR, in certain circumstances
Lehman will have the right to compel the resignation of one of KKR's designees
and designate the successor and (iii) Lehman's or KKR's designees must resign
if Lehman or KKR, as the case may be, cease to beneficially own a specified
equity interest in the Company). See "Management -- Board of Directors" and
"Security Ownership of Management and Principal Stockholders." As a result of
this provision, stockholders of the Company other than Lehman and KKR will not
have the ability to elect any of the Company's directors prior to March 17,
1998.

In addition, the Charter and the Company's By-laws provide that until
March 17, 1998 each committee of the Board of Directors (other than the Tax
Oversight Committee) must include a number of directors designated by KKR and
Lehman, respectively, so that each of KKR and Lehman has representation on the
committee proportionate to its representation on the Board. The Charter provides
that the foregoing provision and certain other provisions of the By-laws cannot
be amended by the Board of Directors prior to March 17, 1998 unless 67% of the
whole Board of Directors votes in favor of the amendment. See "Management --
Committees of the Board of Directors."

The foregoing provisions would, among other things, impede the ability of a
third party to acquire control of the Company by seeking election of its
nominees to the Board of Directors.

In addition, Section 203 ("Section 203") of the Delaware General
Corporation Law (the "DGCL") provides that, subject to certain exceptions
specified therein, an "interested stockholder" of a Delaware corporation shall
not engage in any business combination, including mergers or consolidations or
acquisitions of additional shares of the corporation, with the corporation for a
three-year period following the date on which such stockholder becomes an
"interested stockholder" unless (i) prior to such date, the board of directors
of the corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an "interested stockholder," (ii)
upon consummation of the transaction which resulted in the stockholder becoming
an "interested stockholder," the interested stockholder owned at least 85% of
the voting stock of the corporation outstanding at the time the transaction
commenced (excluding certain shares), or (iii) on or subsequent to such date,
the business combination is approved by the board of directors of the
corporation and

<PAGE>

authorized at an annual or special meeting of stockholders by the affirmative
vote of at least 66-2/3% of the outstanding voting stock which is not owned by
the "interested stockholder." Except as otherwise specified in Section 203, an
"interested stockholder" is defined to include (x) any person that is the owner
of 15% or more of the outstanding voting stock of the corporation, or is an
affiliate or associate of the corporation and was the owner of 15% or more of
the outstanding voting stock of the corporation at any time within three years
immediately prior to the relevant date and (y) the affiliates and associates of
any such person. For purposes of Section 203, the Board has approved the
transaction (the consummation of the Plan of Reorganization) which resulted in
Lehman and the Celotex Settlement Fund Recipient becoming "interested
stockholders" and, accordingly, the Company believes that neither of them will
be subject to the restrictions of Section 203 unless it ceases to be the owner
of 15% or more of the outstanding voting stock of the Company and seeks to
reattain such level of ownership. The Board also approved the purchase of Common
Stock by Channel One Associates, L.P., a limited partnership the general partner
of which is KKR Associates, L.P. ("Channel One"), and its affiliates and
associates of 15% or more of the outstanding voting stock of the Company through
open market purchases or otherwise. Accordingly, the Company believes that none
of Channel One and its affiliates and associates (including the KKR Investors
referred to in "Security Ownership of Management and Principal Stockholders")
will be subject to the restrictions of Section 203. In connection with the
above-described Board approval, Channel One and the KKR Investors agreed with
the Company that they will not, and will not permit any of their affiliates to,
vote any shares of Common Stock of the Company or otherwise take any other
action to modify the composition of the Board of Directors of the Company prior
to April 6, 1998 other than as expressly provided for in the Company's Charter
and the Plan of Reorganization and that during such period they will not
participate in the solicitation of proxies to vote, or seek to advise or
influence any person with respect to, voting securities of the Company to modify
the composition of the Board of Directors, or propose, assist in or encourage
any person in connection with any of the foregoing. See "Description of Capital
Stock -- Antitakeover Legislation."

Under certain circumstances, Section 203 makes it more difficult for a
person who would be an "interested stockholder" to effect various business
combinations with a corporation for a three-year period, although the
stockholders may elect to exclude a corporation from the restrictions imposed
thereunder. The Charter does not exclude the Company from the restrictions
imposed under Section 203. The provisions of Section 203 may encourage companies
interested in acquiring the Company to negotiate in advance with the Board of
Directors because the stockholder approval requirement would be avoided if a
majority of the directors then in office approve either the business combination
or the transaction which results in the stockholder becoming an interested
stockholder. Such provisions also may have the effect of preventing changes in
the management of the Company. It is possible that such provisions could make it
more difficult to accomplish transactions which stockholders may otherwise deem
to be in their best interests.
THE COMPANY

The Company, through its direct and indirect subsidiaries currently offers
a diversified line of products and services for homebuilding, water and waste
water transmission, residential and non-residential construction, and industrial
markets. A brief description of the Company's four major operating groups
follows.

<PAGE>

customers on a short-term contract or spot market basis. The Company does not
consider itself to be a significant factor in the domestic or international coal
markets.

The Company's executive offices are located at 1500 North Dale Mabry
Highway, Tampa, Florida 33607. The Company's telephone number is (813) 871-4811.

RECENT HISTORY

The Company was organized in August 1987 by a group of investors led by KKR
for the purpose of acquiring Original Jim Walter, pursuant to the LBO. Following
its organization, the Company organized and acquired all of the outstanding
shares of capital stock of a group of direct and indirect wholly owned
subsidiaries, including HAC. On September 18, 1987, HAC acquired approximately
95% of the outstanding shares of common stock of Original Jim Walter pursuant to
the Tender Offer. On January 7, 1988, (i) Original Jim Walter merged into HAC
(which changed its name to Jim Walter Corporation), (ii) HAC distributed
substantially all of its assets (principally excluding the stock of Celotex and
several other subsidiaries of Original Jim Walter) to a parent corporation of
HAC (which was merged into the Company on April 1, 1991) in redemption of all of
the shares of capital stock of HAC owned by such parent corporation, (iii) HAC
merged into its other stockholder, another indirect wholly owned subsidiary of
the Company, and (iv) the surviving corporation of such merger changed its name
to Jim Walter Corporation.

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

Also during this time, the Company, certain of its subsidiaries and the
Indemnitees were named as co-defendants in the Veil Piercing Litigation brought
by or on behalf of the Asbestos Claimants against Celotex alleging, among other
things, that (i) Original Jim Walter, its successors and other entities,
including the Company and certain of its subsidiaries, were liable for all
damages, including asbestos-related damages, caused by products manufactured,
sold and distributed by a predecessor of Celotex by reason of the Veil Piercing
Claims, and (ii) the aforementioned distribution by HAC of substantially all of
its assets pursuant to the LBO constituted a fraudulent conveyance. See
"Business and Properties -- Legal Proceedings -- Asbestos-Related Litigation
Settlements."

On December 27, 1989, the Company and 31 of its subsidiaries each filed a
voluntary petition for reorganization under Chapter 11 with the Bankruptcy
Court; one additional subsidiary also filed a voluntary petition for
reorganization under Chapter 11 with the Bankruptcy Court on December 3, 1990.
Two other subsidiaries, Cardem Insurance and J.W. Railroad, did not file
petitions for reorganization under Chapter 11. The filing of the voluntary
petitions resulted from a sequence of events stemming primarily from an
inability of the Company's interest reset advisors to reset interest rates on
approximately $624 million of outstanding indebtedness, which indebtedness by
its terms required that the interest rates thereon be reset to the rate per
annum such indebtedness should bear in order to have a bid value of 101% of the
principal amount thereof as of December 2, 1989. The reset advisors' inability
to reset the interest rates was primarily attributable to two factors: (i)
uncertainties arising from the pending Veil Piercing Litigation, including the
possibility either that such litigation would lead to the prohibition of further
asset sales and debt repayment or that substantial new asbestos-related claims
might become assertible against the Company, which uncertainties materially
hindered the ability of the Company and its subsidiaries to pursue a refinancing
or sell assets to reduce debt, and (ii) general turmoil in the high yield bond
markets at such time, both of which depressed the bid value of such
indebtedness.

<PAGE>

On January 2, 1990, the Company and each of its subsidiaries party to the
Chapter 11 Cases filed the Adversary Proceeding against all known Asbestos
Claimants who had filed Veil Piercing Claims, Celotex and Jim Walter Corporation
seeking a declaration, among other things, that (i) the corporate veil between
Celotex and Original Jim Walter could not be pierced, (ii) the Company could not
be held liable for the asbestos-related liabilities of either Celotex or Jim
Walter Corporation on any grounds and (iii) the LBO could not be deemed a
fraudulent conveyance.

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

Also pursuant to the Plan of Reorganization, (i) the Veil Piercing Claims,
the Veil Piercing Litigation and the Adversary Proceeding, among other things,
were settled after a ruling by the Bankruptcy Court (which was confirmed on
appeal by the United States District Court for the Middle District of Florida)
finding in favor of the Company on every claim in the Adversary Proceeding and
(ii) the Fraudulent Conveyance Lawsuit was settled. See "Business and Properties
-- Legal Proceedings -- Asbestos-Related Litigation Settlements."

<PAGE>
CAPITALIZATION

The following table sets forth the consolidated capitalization of the
Company and its subsidiaries as of May 31, 1995. This table should be read in
conjunction with the Company's Consolidated Financial Statements and the notes
thereto.

May 31, 1995
--------------------------------
(Dollars in thousands)

<S> <C>
Long-Term Senior Debt:
Mid-State Trust II Mortgage-Backed Notes . . . . . . . . . . . . . . . . $ 584,000
Mid-State Trust III Asset Backed Notes . . . . . . . . . . . . . . . . . 173,527
Mid-State Trust IV Asset Backed Notes . . . . . . . . . . . . . . . . . . 953,843
Mid-State Trust V Variable Funding Loan(1) . . . . . . . . . . . . . . . 15,000
12.19% Series B Senior Notes Due 2000 . . . . . . . . . . . . . . . . . . 490,000
Bank Revolving Credit Facility(2) . . . . . . . . . . . . . . . . . . . . --
Other Senior Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000
----------
$2,220,370
==========

Stockholders Equity:
Common Stock (par value $.01 per share, 200,000,000 shares authorized,
50,494,313 shares issued and outstanding) . . . . . . . . . . . . . . . $ 505
Capital in Excess of Par Value . . . . . . . . . . . . . . . . . . . . . 1,159,384
Retained Earnings (Deficit) . . . . . . . . . . . . . . . . . . . . . . . (793,165)
Excess of Additional Pension Liability
over Unrecognized Prior Years Service Cost . . . . . . . . . . . . . . . (5,950)
----------
$ 360,774
==========
</TABLE>

(1) The Mid-State Trust V Variable Funding Loan is available to provide
temporary financing to Mid-State Homes for its current purchases of
instalment notes and mortgages from Jim Walter Homes. The agreement
provides for a three-year $500 million credit facility secured by the
instalment notes and mortgages Mid-State Trust V purchases from Mid-State
Homes. See "Business and Properties -- Mid-State Homes."

(2) The Bank Revolving Credit Facility is available to provide up to $150
million at any time outstanding for working capital needs with a sublimit
for trade and standby letters of credit in an amount not in excess of $40
million and a sub-facility for swingline advances in an amount not in
excess of $15 million. See "Description of Certain Other Indebtedness --
Bank Revolving Credit Facility."

<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

The following unaudited pro forma consolidated statement of operations was
prepared to illustrate the estimated effects of the Plan of Reorganization and
related financings and the application of the proceeds thereof as if they had
occurred as of June 1, 1994.

The following unaudited pro forma consolidated statement of operations does
not purport to be indicative of the results of operations that would actually
have been reported had such transactions in fact been consummated on such date
or of the results of operations that may be reported by the Company in the
future. The unaudited pro forma adjustments are based upon available information
and certain assumptions that the Company believes are reasonable. All of the
information presented below should be read in conjunction with the Company's
Consolidated Financial Statements and the notes thereto and the other
information contained elsewhere in this Prospectus.
<TABLE><CAPTION>
Pro Forma Consolidated Statement of Operations
(Unaudited)

For the year ended May 31, 1995
----------------------------------------------------------
As Reported Adjustments Pro Forma
------------------- --------------------------------------
(Dollars in thousands except per share amounts)

<S> <C> <C> <C>
Sales and revenues:
Net sales . . . . . . . . . . . . . . . . . . . . . . . $1,181,635 $1,181,635
Time charges . . . . . . . . . . . . . . . . . . . . . 222,221 222,221
Miscellaneous . . . . . . . . . . . . . . . . . . . . . 30,838 30,838
Interest income from Chapter 11 proceedings . . . . . . 7,628 $ (7,628)(1) --
---------- ---------- ----------
1,442,322 (7,628) 1,434,694
---------- ---------- ----------

Costs and expenses:
Cost of sales . . . . . . . . . . . . . . . . . . . . . 951,381 951,381
Depreciation, depletion and amortization . . . . . . . 72,037 72,037
Selling, general and administrative . . . . . . . . . . 130,616 130,616
Postretirement health benefits . . . . . . . . . . . . 25,961 25,961
Provision for possible losses . . . . . . . . . . . . . 4,485 4,485
Chapter 11 costs . . . . . . . . . . . . . . . . . . . 442,362 (442,362)(2) --
Interest and amortization of debt discount and expense 304,548 (81,364)(3) 223,184
Amortization of excess of purchase price over net assets
acquired . . . . . . . . . . . . . . . . . . . . . . 40,027 40,027
---------- ---------- ----------
1,971,417 (523,726) 1,447,691
---------- ---------- ----------
(529,095) 516,098 (12,997)

Income tax benefit (expense) . . . . . . . . . . . . . . 170,450 (195,730)(4) (25,280)
---------- ---------- ----------
Net income (loss) . . . . . . . . . . . . . . . . . . . . $ (358,645) $ 320,368 $ (38,277)
========== ========== ==========
Net loss per share . . . . . . . . . . . . . . . . . . . $ (0.75)(5)
==========
Weighted average shares outstanding(5) . . . . . . . . . 50,988,626(5)
</TABLE>

Changes from historical financial statements in the pro forma consolidated
statement of operations consist of the following adjustments (all amounts in
thousands):

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

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

(3) Interest and amortization of debt discount and expense has been reduced by
$81,364 to give retroactive effect as if all indebtedness to be repaid
pursuant to the Plan of Reorganization was so done as of June 1, 1994 and
the $490 million of Notes had been outstanding for the full year ended May
31, 1995. Borrowings under the Mid-State Trust IV Asset Backed Notes were
assumed to increase during the period June 1, 1994 through November 30,
1994 proportionately with the

22
<PAGE>
comparable period increase in the outstanding economic balance of the
instalment notes sold by Mid-State Homes to Mid-State Trust IV on March 16,
1995. Borrowings under the Mid-State Trust V Variable Funding Loan
Agreement were based on 78% of Jim Walter Homes' credit sales during the
six-month period commencing on December 1, 1994 and ending on May 31, 1995.
This time period is subsequent to the Mid-State Trust IV cut-off date for
purchases of instalment notes from Mid-State Homes. See "Business and
Properties -- Mid-State Homes." No working capital borrowings were assumed
under the Bank Revolving Credit Facility. Pro forma interest expense,
however, includes letter of credit fees and unused working capital
commitment fees.

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

(5) Net loss per share has been computed based on the weighted average number
of shares of Common Stock issuable (50,988,626, which includes 494,313
additional shares of Common Stock issued on September 13, 1995 (180 days
after the Effective Date of the Plan of Reorganization) pursuant to the
Plan of Reorganization, but does not include 3,880,140 additional shares
issued to an escrow account on such date pursuant to the Plan of
Reorganization because such issuance is contingent on future events and
would be anti-dilutive; see "Description of Capital Stock -- Additional
Stock Issuances").

<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The following data, insofar as it relates to each of the fiscal years 1991
through 1995, has been derived from annual financial statements, including the
consolidated balance sheets at May 31, 1995 and 1994 and the related
consolidated statements of operations and retained earnings (deficit) and of
cash flows for the three years ended May 31, 1995 and the notes thereto
appearing elsewhere herein. All of the information presented below should be
read in conjunction with the Company's Consolidated Financial Statements and the
notes thereto, the Pro Forma Consolidated Statement of Operations and the notes
thereto and the other information contained elsewhere in this Prospectus.

Years ended May 31,
----------------------------------------------------------------------------
1991(1) 1992 1993(4) 1994 1995
-------------- -------------- -------------- -------------- ------------
(Dollars in thousands)

<S> <C> <C> <C> <C> <C>
Summary of Operations:
Sales and revenues . . . . . . . $ 1,326,397 $ 1,366,581 $ 1,318,986 $ 1,328,524 $ 1,442,322
Cost of sales (exclusive of
depreciation) . . . . . . . . . 826,455 891,882 804,411 845,061 951,381
Depreciation, depletion and
amortization . . . . . . . . . 75,099 82,801 70,483 71,035 72,037
Interest and amortization of debt
discount and expense(2) . . . . 209,511 177,060 171,581 155,470 304,548
Income tax expense (benefit) . . 19,454 12,463 24,328 28,917 (170,450)
Income (loss) before discontinued
operations and cumulative
effect of accounting
change(1)(4) . . . . . . . . . 20,632 22,342 46,594 7,175 (358,645)
Net income (loss) . . . . . . . . 14,462 22,342 (58,014) 7,175 (358,645)
Ratio of earnings from continuing
operations to fixed charges(3) 1.19 1.18 1.39 1.22 --

Additional Financial Data:
Gross capital expenditures . . . $ 69,046 $ 68,349 $ 71,708 $ 69,831 $ 91,317
Net property, plant and equipment
683,777 664,622 663,040 657,863 662,792
Total assets . . . . . . . . . . 3,276,211 3,171,266 3,223,234 3,140,892 3,245,153
Long term senior debt . . . . . . 1,073,919 948,782 1,046,971 871,970 2,220,370
Liabilities subject to Chapter 11
proceedings . . . . . . . . . . 1,883,704 1,845,328 1,725,631 1,727,684 --
Stockholders equity (deficit) . . (253,282) (230,119) (287,737) (282,353) 360,774

Employees at end of year . . . . 8,104 7,645 7,545 7,676 7,888
</TABLE>

(1) The selected financial data reflects operations sold as discontinued
operations.

(4) The Company adopted FAS 106 and FAS 109 during fiscal year 1993.

24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

This discussion should be read in conjunction with the Company's
Consolidated Financial Statements and the notes thereto, particularly the
"Segment Information" on pages F-25 and F-26 which presents sales and operating
income by operating group.

Pursuant to the Plan of Reorganization, the Company emerged from bankruptcy
on March 17, 1995. Accordingly, the Company's Consolidated Balance Sheets at and
after May 31, 1995 and its Consolidated Statements of Operations and Retained
Earnings (Deficit) for May 31, 1995 and periods thereafter will not be
comparable to the Consolidated Financial Statements for prior periods included
elsewhere herein. Furthermore, the Company's Consolidated Statement of
Operations and Retained Earnings (Deficit) for May 31, 1995 will not be
comparable to the Company's consolidated statements of operations and retained
earnings (deficit) for periods thereafter.

Results of Operations

Years ended May 31, 1995 and 1994. Net sales and revenues for the year
ended May 31, 1995 were $113.8 million, or 8.6%, greater than the prior year,
with a 7.0% increase in volume and a 1.6% increase in pricing and/or product
mix. The increase in net sales and revenues was the result of improved sales and
revenues in all operating groups except Homebuilding and Related Financing.

Industrial and Other Products Group sales and revenues were $59.6 million,
or 26.5%, greater than the prior year. Increased sales volumes of aluminum foil
and sheet products, foundry coke, chemicals, patterns and tooling, resin coated
sand, window components and metal building and foundry products, combined with
higher selling prices for aluminum foil and sheet products, furnace coke, window
components and metal building and foundry products and a $3.6 million gain from
the sale of JW Window Components, Inc.'s ("JW Window Components") Hialeah,
Florida facility were partially offset by reduced sales volumes of furnace coke
and slag wool. The Group's operating income of $11.9 million was $1.9 million
lower than the prior year. The decrease was the result of higher manufacturing
costs in the window components business due to increased raw material costs,
especially aluminum, a major raw material component, startup costs associated
with the consolidation and relocation during 1995 of JW Window Components'
Hialeah, Florida and Columbus, Ohio operations to Elizabethton, Tennessee and
reduced operating efficiencies, including startup problems associated with
relocation of Vestal Manufacturing Company's ("Vestal Manufacturing") steel
fabrication operation in May 1994. These decreases were partially offset by
increased income for aluminum foil and sheet, foundry coke, chemicals, patterns
and tooling and resin coated sand due to the sales increases, improved gross
profit margins for furnace coke and the gain from the Hialeah facility sale.

Water and Waste Water Transmission Products Group sales and revenues were
$55.0 million, or 15.4%, ahead of the prior year. The increase was the result of
higher sales volumes and prices for ductile iron pressure pipe, valves and
hydrants and castings. The order backlog for pressure pipe at May 31, 1995 was
121,548 tons, which represents approximately three months' shipments, compared
to 111,907 tons at May 31, 1994. Operating income of $28.5 million exceeded the
prior year by $2.8 million. The improved performance resulted from the increased
sales prices and volumes, partially offset by higher raw material costs,
especially scrap, a major raw material component.

Natural Resources Group sales and revenues were $12.8 million, or 4.0%,
greater than the prior year. The increase resulted from greater sales volumes
for coal and a $6.1 million gain from the sale of excess real estate, partially
offset by lower sale prices for coal and methane gas and lower outside coal and
gas royalty income. A total of 7.20 million tons of coal was sold in 1995 versus
6.56 million tons in 1994, a 9.8% increase. The increase in tonnage sold was the
result of increased shipments to Alabama Power Company ("Alabama Power") and
certain export customers, partially offset by lower shipments to Japanese steel
mills. Increased shipments to Alabama Power were the result of a new agreement
signed May 10, 1994 (the "New Alabama Power Contract") for the sale and purchase
of coal, replacing the 1979 contract and the 1988 amendment thereto. See
"Business and Properties -- Jim Walter Resources." Under the New Alabama Power
Contract, Alabama Power will purchase 4.0 million tons of coal per year from Jim
Walter Resources during the period July 1, 1994 through August 31, 1999. In
addition, Jim Walter Resources will have the option to extend the New Alabama

25
<PAGE>
Power Contract through August 31, 2004, subject to mutual agreement on the
market pricing mechanism and certain other terms and conditions of such
extension. The New Alabama Power Contract has a fixed price subject to an
escalation based on the Consumer Price Index or another appropriate published
index and adjustments for government impositions and quality. The New Alabama
Power Contract includes favorable modifications of specification, shipping
deviations and changes in transportation arrangements. The average price per ton
of coal sold decreased $2.79 from $44.13 in 1994 to $41.34 in 1995 due to lower
prices realized on shipments to Alabama Power, the Japanese steel mills and
certain export customers. Blue Creek Mine No. 5 ("Mine No. 5") was shut down
from November 17, 1993 through December 16, 1993 and from early April 1994 until
May 16, 1994 as a result of a fire due to spontaneous combustion heatings.
Representatives of Jim Walter Resources, the Mine Safety and Health
Administration ("MSHA"), Alabama State Mine Inspectors and the United Mine
Workers of America ("UMWA") agreed that the longwall coal panel being mined in
Mine No. 5 at the time the fire recurred in April 1994 would be abandoned and
sealed off. Development mining for the two remaining longwall coal panels in
this section of the mine resumed on May 16, 1994 and mining on the first
longwall panel resumed on January 17, 1995. Production was adversely impacted
until such date; however, a portion of the increased costs is expected to be
recovered from business interruption insurance and the Company has commenced
litigation seeking to enforce such insurance. See "Business and Properties --
Legal Proceedings -- Jim Walter Resources" and Note 11 of Notes to Financial
Statements. Operating income of $20.1 million exceeded the prior year by $21.2
million. The improved performance principally resulted from the increased sales
volumes of coal, lower costs per ton of coal produced ($37.13 in 1995 versus
$38.29 in 1994) and the gain on the sale of certain excess real estate,
partially offset by decreases in selling prices for coal and methane gas and
lower outside coal and gas royalty income.

Homebuilding and Related Financing Group sales and revenues were $17.4
million, or 4.1%, below the prior year. This performance reflects a 4.7%
decrease in the number of homes sold, from 4,331 units in 1994 to 4,126 units in
1995, partially offset by an increase in the average selling price per home
sold, from $38,300 in 1994 to $40,200 in 1995. The decrease in unit sales
reflects continuing strong competition in virtually every Jim Walter Homes sales
region. The higher average selling price in 1995 principally reflects a smaller
percentage of the lower priced Affordable line homes sold. Jim Walter Homes'
backlog at May 31, 1995 was 1,529 units (all of which are expected to be
completed prior to the end of fiscal 1996) compared to 2,065 units at May 31,
1994. Time charge income (revenues received from Mid-State Homes' instalment
note portfolio) decreased from $238.1 million in 1994 to $222.2 million in 1995.
The decrease in time charge income is attributable to a reduction in the total
number of accounts and lower payoffs received in advance of maturity, partially
offset by an increase in the average balance per account in the portfolio. The
Group's operating income of $76.5 million (net of interest expense) was $25.4
million below the prior year. This decrease resulted from the lower number of
homes sold, reduced homebuilding gross profit margins resulting from discounts
related to sales promotions on certain models, the decrease in time charge
income and higher interest expense in 1995 ($131.6 million) as compared to that
incurred in 1994 ($128.8 million), partially offset by the increase in the
average selling price per home sold.

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

Selling, general and administrative expenses (exclusive of postretirement
health benefits) of $130.6 million were 9.1% of net sales and revenues in 1995
versus $127.9 million and 9.6% in 1994.

Chapter 11 costs of $442.4 million in 1995 include $390 million in
settlement of all asbestos-related veil piercing claims and related legal fees
and $52.4 million for professional fees, settlement of various disputed claims
and other bankruptcy expenses. See "Business Properties -- Legal Proceedings --
Asbestos-Related Litigation Settlements."

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

26
<PAGE>
Amortization of excess of purchase price over net assets acquired
(goodwill) decreased $8.5 million primarily due to lower payoffs received in
advance of maturity on the instalment note portfolio.

The income tax benefit for 1995 was $170.5 million, which included
recognition of tax benefits resulting from $583.8 million of additional expenses
related to consummation of the Plan of Reorganization previously mentioned,
compared to income tax expense of $28.9 million in 1994. On August 10, 1993, the
Omnibus Budget Reconciliation Act of 1993 was signed into law raising the
federal corporate income tax rate to 35% from 34% retroactive to January 1,
1993. The effect of the rate change resulted in a $2.8 million charge to
deferred tax expense in 1994. See Note 8 of Notes to Financial Statements for
further discussion of income taxes.

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

Years ended May 31, 1994 and 1993. Net sales and revenues for the year
ended May 31, 1994 were $9.5 million, or .7%, greater than the prior year. The
improved performance was the result of increased pricing and/or product mix as
sales volumes were level with the prior year. The increase in net sales and
revenues was the result of improved sales and revenues in all operating groups
except the Natural Resources Group.

Homebuilding and Related Financing Group sales and revenues were $5.2
million, or 1.2%, greater than the prior year. This performance reflects a 3.5%
increase in the average selling price per home sold, from $37,000 in 1993 to
$38,300 in 1994, which was more than offset by a 9.5% decrease in the number of
homes sold, from 4,784 units in 1993 to 4,331 units in 1994. The higher average
selling price in 1994 reflects a price increase instituted on April 1, 1993 to
compensate for higher lumber costs and a greater percentage of "90% complete"
homes sold in 1994 versus the prior year. The decrease in unit sales resulted
from strong competition in virtually every Jim Walter Homes sales region. Jim
Walter Homes' backlog at May 31, 1994 was 2,065 units compared to 1,831 units at
May 31, 1993. Time charge income (revenues received from Mid-State Homes's
instalment note portfolio) increased from $218.7 million in 1993 to $238.1
million in 1994. The increase in time charge income is attributable to increased
payoffs received in advance of maturity and to an increase in the average
balance per account in the portfolio. The Group's operating income of $102.0
million (net of interest expense) exceeded the prior year by $13.1 million. This
improvement resulted from the increase in the average selling price per home
sold, the higher time charge income and lower interest expense in 1994 ($128.8
million) compared to that incurred in 1993 ($137.9 million), partially offset by
the lower number of homes sold, reduced homebuilding gross profit margins and
higher selling, general and administrative expenses. The lower gross profit
margins were the result of higher average lumber prices, the effect of discounts
relating to sales promotions on certain models instituted during the period
February 1994 through May 1994 and the decision in October 1992 to reduce gross
profit margins on five smaller basic shelter homes to generate additional sales.

Industrial and Other Products Group sales and revenues were $12.1 million,
or 5.7%, ahead of the prior year. Increased sales volumes of aluminum foil,
foundry coke, window components, metal building and foundry products, resin
coated sand and chemicals, combined with higher selling prices for furnace coke
and window components, were partially offset by lower sales volumes of slag wool
and patterns and tooling and lower selling prices for aluminum foil and sheet
products. The Group's operating income of $13.9 million was $2.6 million greater
than the prior year. The improved performance resulted from the sales increases
and higher gross profit margins for furnace coke and slag wool, partially offset
by reduced margins for chemicals, foundry coke, window components, metal
building and foundry products, resin coated sand and patterns and tooling.

Water and Waste Water Transmission Products Group sales and revenues were
$26.0 million, or 7.8%, ahead of the prior year. The increase was the result of
higher selling prices and volumes for ductile iron pressure pipe and valves and
hydrants, greater castings sales volume and increased selling prices for
fittings, partially offset by lower fittings volume. The order backlog of
pressure pipe at May 31, 1994 was 111,907 tons compared to 121,173 tons at May
31, 1993. Operating income of $25.6 million exceeded the prior year period by
$9.6 million. The improved performance resulted from the increased sales prices
and volumes, partially offset by higher raw material costs, especially scrap (a
major raw material component) and lower gross profit margins for castings.

Natural Resources Group sales and revenues were $31.6 million, or 9.0%,
below the prior year. The decrease resulted from lower sales volumes and prices
for coal and reduced methane gas selling prices, partially

27
<PAGE>
offset by increased methane gas sales volume and an increase in outside gas and
timber royalty income. A total of 6.56 million tons of coal was sold in 1994
versus 7.18 million tons in 1993, an 8.6% decrease. The decrease in tonnage sold
was the result of lower shipments to Alabama Power and Japanese steel mills.
Reduced shipments to Alabama Power were the result of an agreement reached with
Alabama Power to ship reduced tonnage for the contract year ending June 30, 1994
(see "Business and Properties -- Jim Walter Resources"). The average price per
ton of coal decreased 1.6%, from $44.84 in 1993 to $44.13 in 1994, due to lower
prices realized on shipments to Japanese steel mills and other export customers.
As previously mentioned, Mine No. 5 was shut down from November 17, 1993 through
December 16, 1993 and from early April 1994 until May 16, 1994 as a result of a
fire due to spontaneous combustion heatings. Representatives of Jim Walter
Resources, MSHA, Alabama State Mine Inspectors and the UMWA investigated the
problem. Because the area of the suspected fire was inaccessible, a decision was
made to drill vertical holes from the surface and flood the area with
combinations of water, carbon dioxide, foam and cementitious mixtures to
neutralize the fire. MSHA approved the resumption of operations at the mine on
December 17, 1993. In early April 1994, the fire recurred and the mine was shut
down. Representatives of Jim Walter Resources, MSHA, Alabama State Mine
Inspectors and the UMWA agreed that the longwall coal panel being mined at the
time the fire recurred would be abandoned and sealed off. Development mining for
the two remaining longwall coal panels in this section of the mine resumed on
May 16, 1994 and mining on the first longwall panel resumed on January 17, 1995.
Production was adversely impacted until January 17, 1995; however, a portion of
the increased costs is expected to be recovered from business interruption
insurance and the Company has commenced litigation seeking to enforce such
insurance. See "Business and Properties -- Legal Proceedings -- Jim Walter
Resources" and Note 11 of Notes to Financial Statements. The Group incurred an
operating loss of $1.2 million in 1994 compared to operating income of $50.8
million in 1993. The lower performance reflects the decrease in sales volumes
and prices for coal, lower methane gas selling prices, reduced coal mining
productivity as a result of various geological problems in all mines during
portions of the year which resulted in higher costs per ton of coal produced
($38.29 in 1994 versus $33.45 in 1993) and idle plant costs of $5.7 million
associated with the Mine No. 5 shut downs, all of which more than offset the
effect of increased methane gas sales volume and greater outside gas and timber
royalty income.

Cost of sales in fiscal 1994, exclusive of depreciation, of $845.1 million
was 79.1% of net sales versus $804.4 million and 75.0% in fiscal 1993. The cost
of sales percentage increase was primarily the result of lower gross profit
margins on home sales, coal, chemicals, foundry coke, castings, resin coated
sand, patterns and tooling, window components and metal building and foundry
products, partially offset by improved margins on furnace coke, slag wool and
pipe products.

Selling, general and administrative expenses (exclusive of postretirement
health benefits) of $127.9 million were 9.6% of net sales and revenues in 1994
versus $124.6 million and 9.4% in 1993.

The Company adopted Statement of FAS 106 in 1993 (see Note 12 of Notes to
Financial Statements). Upon adoption the Company elected to record the
transition obligation of $166.4 million pre-tax ($104.6 million after tax) as a
one time charge against earnings rather than amortize it over a longer period.
The annual accrual for postretirement health benefit costs in 1994 was $25.6
million versus $23.5 million in 1993.

Interest and amortization of debt discount and expense decreased $16.1
million. The decrease was principally the result of reductions in the
outstanding debt balances on the Mid-State Trust II Mortgaged-Backed Notes and
Mid-State Trust III Asset Backed Notes (see "Business and Properties --
Mid-State Homes" and Note 7 of Notes to Financial Statements) and lower
amortization of debt discount and expense, partially offset by higher interest
rates. The average interest rate in 1994 was 9.58% versus 9.44% in 1993. The
prime interest rate ranged from 6.0% to 7.25% in 1994 compared to a range of
6.0% to 6.5% in 1993. Interest in the amount of $724.3 million ($163.7
million in each of the years 1994 and 1993) on unsecured obligations was
not accrued in the Consolidated Financial Statements since the date of the
filing of petitions for reorganization. This amount was based on the balances
of the unsecured debt obligations and their interest rates as of December 27,
1989 and did not consider fluctuations in the level of short-term debt and
interest rates and the issuance of commercial paper that would have occurred
to meet the working capital requirements of the Homebuilding and Related
Financing Group.

Amortization of excess of purchase price over net assets acquired
(goodwill) increased $9.1 million. The increase primarily resulted from
adjustments to amortization of the goodwill due to greater payoffs received in
advance of maturity on the instalment note portfolio.

28
<PAGE>
On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 was
signed into law raising the federal corporate income tax rate to 35% from 34%,
retroactive to January 1, 1993. The effect of the rate change resulted in a $2.8
million charge to deferred tax expense. The rate change effect combined with
reduced percentage depletion and increased amortization of goodwill (both
permanent book/tax differences) resulted in an effective tax rate of 80.1% in
1994 versus an effective tax rate of 34.3% in 1993.

The net income for fiscal 1994 and the net loss for fiscal 1993 reflects
all of the previously mentioned factors as well as the $4.5 million increase in
Chapter 11 costs, partially offset by slightly higher interest income from
Chapter 11 proceedings. The increase in Chapter 11 costs was due to the Veil
Piercing Litigation (see Note 11 of Notes to Financial Statements) and the
filing of two amended plans of reorganization.

Years ended May 31, 1993 and 1992. As previously mentioned, the Company
adopted FAS 106 in 1993. Accordingly, operating income presented in the "Segment
Information" includes postretirement health benefits of $23.5 million in 1993.
However, for purposes of the following discussion of results of operations for
the years ended May 31, 1993 and 1992, the fiscal 1993 operating income referred
to in each business segment excludes such postretirement health benefits
expenses (hereinafter referred to as "1993 adjusted operating income").

Net sales and revenues for the year ended May 31, 1993 decreased $47.6
million, or 3.5%. A 5.9% decrease in volume was partially offset by a 2.4%
increase in price and/or product mix. The decrease in net sales and revenues
resulted from lower sales and revenues in the Water and Waste Water Transmission
Products and Natural Resources Groups, partially offset by improved sales in the
Homebuilding and Related Financing and Industrial and Other Products Groups.

Water and Waste Water Transmission Products Group sales and revenues were
$953,000, or .3%, below the prior year. The decrease was basically the result of
lower ductile iron pressure pipe sales volume due to weak construction activity
and rehabilitation work, partially offset by improved selling prices and greater
castings sales volume. The order backlog of pressure pipe at May 31, 1993 was
121,173 tons compared to 121,956 tons at May 31, 1992. The 1993 adjusted
operating income of $20.2 million was $3.2 million below the prior year. The
effect of lower ductile iron pressure pipe sales volume on this highly capital
intensive product group was the primary reason for the decline in operating
profit, which was partially offset by lower scrap costs (a major raw material
component), improved selling prices, higher castings profit margins and reduced
selling, general and administrative expenses (due principally to legal and
settlement costs in 1992 associated with a lawsuit filed by the City of
Atlanta).

Natural Resources Group sales and revenues were $68.3 million, or 16.3%,
below the prior year. The decrease was the result of lower coal shipments and a
decrease in outside coal royalties, partially offset by higher average selling
prices for coal and methane gas and greater methane gas sales volume. A total of
7.18 million tons of coal was sold in 1993 versus 9.18 million tons in 1992, a
21.8% decrease. On June 17, 1992 a major production hoist accident occurred at
Blue Creek Mine No. 3 ("Mine No. 3") causing extensive damage. The mine did not
resume production until August 31, 1992. The hoist accident resulted in a
mutually agreed postponement of shipments of 400,000 tons to Alabama Power from
the period July through September 1992 to the period January through June 1993.
Fiscal 1992 tonnage shipments to Alabama Power were favorably impacted by a
separate lower selling price short-term contract for 964,000 tons. Shipments to
Japanese steel mills and other export customers were also below the prior year
due to the hoist accident and an April 1992 workforce reduction which reduced
production tonnage available for sale. The average price per ton of coal sold
increased 4.9%, from $42.76 in 1992 to $44.84 in 1993. The higher price
realization in 1993 was the result of coal shipped to Alabama Power in 1992
under the previously mentioned separate lower selling price short-term contract,
partially offset by lower selling prices to the Japanese steel mills and other
export customers in 1993. The Group's 1993 adjusted operating income of $64.2
million exceeded the prior year by $48.2 million. The improved performance
resulted from the increased coal and methane gas selling prices, higher methane
gas sales volume, lower selling, general and administrative expenses and
improved mining productivity, including the effect of the April 1992 workforce
reduction, which resulted in lower costs per ton of coal produced ($33.45 in
1993 versus $36.03 in 1992), partially offset by the reduced coal sales volume
and the decrease in outside coal royalties. Prior year results were also
adversely impacted by severance, vacation pay and ongoing medical benefits
associated with the April 1992 workforce reduction ($6.2 million), accelerated
depreciation on the remaining assets at a previously closed small coal mine
($5.6 million) and idle plant costs associated with a three-week shutdown of
Blue Creek Mine No. 4 ("Mine No. 4") due to an accident which damaged the
production hoist ($4.4 million) and wildcat strikes by the UMWA ($2.4 million)
in August 1991.

29
<PAGE>
Homebuilding and Related Financing Group sales and revenues were $10.3
million, or 2.5%, greater than 1992. This performance reflects a 6.9% increase
in the average selling price per home sold, from $34,600 in 1992 to $37,000 in
1993, which was more than offset by a 9.8% decrease in the number of homes sold,
from 5,305 units in 1992 to 4,784 units in 1993. The increase in average selling
price in 1993 was attributable to higher average prices realized on both the
Standard line and the larger sized Regency homes combined with a greater
percentage of Regency homes sold. The decrease in unit sales reflected strong
competition in virtually every Jim Walter Homes sales region and 1993 having
one-week shorter sales period than 1992. Jim Walter Homes' backlog at May 31,
1993 was 1,831 units compared to 1,637 units at May 31, 1992. Time charge income
(revenues received from Mid-State Homes' instalment note portfolio) increased
from $195.0 million in 1992 to $218.7 million in 1993. The increase in time
charge income was attributable to the growth of the mortgage portfolio,
increased payoffs received in advance of maturity and new mortgages having a
higher yield than the older mortgages paying out. The Group's 1993 adjusted
operating income of $90.9 million (net of interest expense) exceeded the prior
year by $8.2 million. This improvement resulted from the increase in average
selling price per home sold, the higher time charge income and lower selling,
general and administrative expenses, partially offset by the lower number of
homes sold, reduced homebuilding gross profit margins (due principally to the
sales of the larger sized, lower margin Regency homes and increased lumber
prices) and slightly higher interest expense in 1993 ($137.9 million) as
compared to that incurred in 1992 ($137.0 million). Lumber prices rose from $259
per thousand board feet in June 1992 to a high of $506 in March 1993 and ended
the year at $325. A price increase was instituted effective April 1, 1993 to
compensate for these increased costs.

Industrial and Other Products Group sales and revenues were $8.5 million,
or 4.2%, greater than the prior year. Increased sales volumes of foundry coke,
chemicals and aluminum foil were partially offset by lower sales volumes of
aluminum sheet, resin coated sand, patterns and tooling, furnace coke and slag
wool and lower selling prices for aluminum foil and sheet, furnace coke, resin
coated sand and patterns and tooling. The Group's 1993 adjusted operating income
of $14.6 million was $120,000 below the prior year. The decrease was the result
of lower margins for chemicals, resin coated sand and patterns and tooling.

Cost of sales, exclusive of depreciation, of $804.4 million was 75.0% of
net sales versus $891.9 million and 78.3% in 1992. The cost of sales percentage
decrease was primarily the result of improved gross profit margins on coal,
metal building and foundry products and castings, partially offset by lower
margins on home sales, ductile iron pressure pipe, chemicals, resin coated sand
and patterns and tooling. Results in 1992 were adversely affected by the impact
of charges resulting from the previously mentioned Jim Walter Resources mining
operations workforce reduction and idle plant costs associated with the wildcat
strikes by the UMWA.

Selling, general and administrative expenses of $124.6 million were 9.4% of
net sales and revenues in 1993 as compared to $129.4 million and 9.5% in 1992.
Expenses in 1992 were adversely impacted by legal and settlement costs
associated with a lawsuit filed by the City of Atlanta.

As previously mentioned, the Company adopted FAS 106 in 1993. Upon
adoption, the Company elected to record the transition obligation of $166.4
million pre-tax ($104.6 million after tax) as a one time charge against earnings
rather than amortize it over a longer period. The annual accrual under the new
accounting method amounted to $23.5 million in the year ended May 31, 1993. See
Note 12 of the Notes to Financial Statements.

Interest and amortization of debt discount and expense decreased $5.5
million. The decrease was the result of lower outstanding debt balances on
secured obligations and lower interest rates, partially offset by greater
amortization of debt discount and expense. The average interest rate in 1993 was
9.44% versus 9.62% in 1992. The prime interest rate ranged from 6.0% to 6.5% in
1993 compared to a range of 6.25% to 8.5% in 1992. Interest in the amount of
$560.6 million ($163.7 million in each of the years 1993 and 1992) on unsecured
obligations was not accrued in the Company's Consolidated Financial Statements
since the date of the filing of petitions for reorganization. This amount is
based on the balances of the unsecured debt obligations and their interest rates
as of December 27, 1989 and did not consider fluctuations in the level of short-
term debt and interest rates and the issuance of commercial paper that would
have occurred to meet the working capital requirements of the Homebuilding and
Related Financing Group.

The net loss for 1993 and the net income for 1992 reflects all of the
previously mentioned factors as well as the impact of a slightly lower effective
income tax rate and slightly higher interest income from Chapter 11 proceedings,
partially offset by a $4.6 million increase in Chapter 11 costs.

30
<PAGE>
Financial Condition

On December 27, 1989, the Company and 31 of its subsidiaries each filed a
voluntary petition for reorganization under Chapter 11 with the Bankruptcy
Court. On December 3, 1990, one additional subsidiary also filed a voluntary
petition for reorganization under Chapter 11 with the Bankruptcy Court. Two
other small subsidiaries, Cardem Insurance and J.W. Railroad, did not file
petitions for reorganization under Chapter 11. The filing of the voluntary
petitions resulted from a sequence of events stemming primarily from an
inability of the Company's interest reset advisors to reset interest rates on
approximately $624 million of outstanding indebtedness, which indebtedness by
its terms required that the interest rates thereon be reset to the rate per
annum such indebtedness should bear in order to have a bid value of 101% of the
principal amount thereof as of December 2, 1989. The reset advisors' inability
to reset the interest rates was primarily attributable to two factors: (i)
uncertainties arising from the then pending asbestos-related Veil Piercing
Litigation, including the possibility either that such litigation would lead to
the prohibition of further asset sales and debt repayment or that substantial
new asbestos-related claims might become assertible against the Company, which
uncertainties materially hindered the ability of the Company and its
subsidiaries to pursue a refinancing or sell assets to reduce debt, and (ii)
general turmoil in the high yield bond markets at such time, both of which
depressed the bid value of such notes.

On March 17, 1995, the Company and 32 of its subsidiaries emerged from
bankruptcy. In summary, pursuant to the Plan of Reorganization (the actual terms
of which govern and should be consulted), the Company has repaid or will repay
substantially all of its unsecured claims and senior and subordinated
indebtedness subject to the Chapter 11 Cases as follows:

- Trade creditors received 75% of their allowed claims plus interest in
cash following the Effective Date of the Plan of Reorganization and
are entitled to receive the remaining 25% six months following the
Effective Date of the Plan of Reorganization with additional interest
for such period at the prime rate. At May 31, 1995, the remaining
amount to be distributed to trade creditors approximated $23.5
million;

- Revolving Credit and Working Capital bank claims and Series B and C
Senior Note claims received a combination of cash and Common Stock
following the Effective Date of the Plan of Reorganization;

- Unsecured bondholders received or are entitled to receive following the
Effective Date of the Plan of Reorganization, depending on elections made,
either shares of Common Stock or a combination of cash, Notes and shares of
Common Stock, in either case having an aggregate reorganization value equal
to their prepetition claims. In addition, pre-LBO bondholders received
shares of Common Stock having an aggregate reorganization value equal to
$11.3 million in settlement of the Fraudulent Conveyance Lawsuit commenced
by the indenture trustees for the pre-LBO bondholders;

- The Veil-Piercing Claimants (as defined in the Veil Piercing Settlement)
received cash, Notes and shares of Common Stock with an aggregate
reorganization value of $375 million in settlement of all claims. In
addition, the attorneys for the Veil-Piercing Claimants (as defined in the
Veil Piercing Settlement) received a cash payment of $15 million.

A substantial controversy exists with regard to federal income taxes
allegedly owed by the Company. Proofs of claim have been filed by the IRS in the
aggregate amount of $110,560,883 with respect to fiscal years ended August 31,
1980 and August 31, 1983 through August 31, 1987, $31,468,189 with respect to
fiscal years ended May 31, 1988 (nine months) and May 31, 1989 and $44,837,693
with respect to fiscal years ended May 31, 1990 and May 31, 1991. Objections to
the proofs of claim have been filed by the Company and the various issues are
being litigated in the Bankruptcy Court. The Company believes that such proofs
of claim are substantially without merit and intends to defend such claims
against the Company vigorously, but there can be no assurance as to the ultimate
outcome.

See "Capitalization" for the consolidated capitalization of the Company and
its subsidiaries as of May 31, 1995, as adjusted in March 1995 and all of the
distributions and adjustments required by the Plan of Reorganization.

For a description of Mid-State Trusts II, III and IV, see "Business and
Properties -- Mid-State Homes."

31
<PAGE>
The assets of Mid-State Trusts II, III and IV are not available to satisfy
claims of general creditors of Mid-State Homes or the Company and its other
subsidiaries. The liabilities of Mid-State Trusts II, III and IV for their
publicly issued debt are to be satisfied solely from proceeds of the underlying
instalment notes and are nonrecourse to Mid-State Homes and the Company and its
other subsidiaries.

In connection with the Plan of Reorganization, on March 16, 1995, pursuant
to approval by the Bankruptcy Court, Mid-State Homes sold mortgage instalment
notes having a gross amount of $2,020,258,000 and an economic balance of
$826,671,000 to Mid-State Trust IV. In addition, on such date Mid-State Homes
sold its beneficial interest in Mid-State Trust II to Mid-State Trust IV. At
such date, Mid-State Trust II had a total collateral value of $910,468,000 with
$605,750,000 of Mid-State Trust II Mortgage-Backed Notes outstanding. These
sales were in exchange for the net proceeds from the public issuance by Mid-
State Trust IV of $959,450,000 of Mid-State Trust IV Asset Backed Notes. See
"Business and Properties -- Mid-State Homes" and Notes 1 and 7 of Notes to
Financial Statements.

On February 27, 1995, Mid-State Homes established Mid-State Trust V to
provide funds to Mid-State Homes for its current purchases of instalment notes
receivable from Jim Walter Homes. On March 3, 1995, Mid-State Trust V entered
into a Variable Funding Loan Agreement (the "Mid-State Trust V Variable Funding
Loan Agreement") with Enterprise Funding Corporation, an affiliate of
NationsBank N.A., as lender, and NationsBank N.A. (Carolinas), as Administrative
Agent. This agreement provides for a three-year $500 million credit facility
secured by the instalment notes and mortgages Mid-State Trust V purchases from
Mid-State Homes. See "Business and Properties -- Mid-State Homes" and Notes 1
and 7 of Notes to Financial Statements.

The Notes were issued by the Company pursuant to the Plan of Reorganization
as part of the distribution made in payment of claims of holders of certain
unsecured indebtedness of the Company and certain of its subsidiaries. See
"Description of Notes" and Notes 1 and 7 of Notes to Financial Statements.

The Company and certain of its subsidiaries have entered into the Bank
Revolving Credit Facility, providing up to $150 million at any time outstanding
for working capital needs with a sub-limit for trade and standby letters of
credit in an amount not in excess of $40 million at any time outstanding and a
sub-facility for swingline advances in an amount not in excess of $15 million at
any time outstanding. See "Description of Certain Other Indebtedness -- Bank
Revolving Credit Facility" and Notes 1 and 7 of Notes to Financial Statements.

The Notes, the Bank Revolving Credit Facility and the Mid-State Trust V
Variable Funding Loan Agreement contain a number of significant covenants that,
among other things, restrict the ability of the Company and its subsidiaries to
dispose of assets, incur additional indebtedness, make capital expenditures, pay
dividends, create liens on assets, enter into leases, investments or
acquisitions, engage in mergers or consolidations, or engage in certain
transactions with subsidiaries and affiliates and otherwise restrict corporate
activities (including change of control and asset sale transactions). In
addition, under the Bank Revolving Credit Facility, the Company is required to
maintain specified financial ratios and comply with certain financial tests,
including interest coverage and fixed charge coverage ratios, maximum leverage
ratios and minimum earnings before interest, taxes, depreciation and
amortization expense, some of which become more restrictive over time. See
"Description of Certain Other Indebtedness -- Bank Revolving Credit Facility".
The Company believes it will meet these financial tests over the terms of these
debt agreements.

Liquidity and Capital Resources

At May 31, 1995, cash and short-term investments were approximately $128
million. Principal sources of cash in 1995 were $959.5 million of proceeds from
the issuance of the Mid-State Trust IV Asset Backed Notes and cash flows from
operations, which were used, together with the issuance of Notes and shares of
Common Stock, to repay Chapter 11 claimants pursuant to the terms of the Plan of
Reorganization. Operating cash flows were also used for working capital
requirements; for capital expenditures for business expansion, productivity
improvement, cost reduction and replacements necessary to maintain the business;
to retire long-term senior debt; and to provide a return to lenders. Borrowings
under the Mid-State Trust V Variable Funding Loan Agreement totaled $15 million
at May 31, 1995.

Working capital is required to fund adequate levels of inventories and
accounts receivable. Commitments for capital expenditures at May 31, 1995 are
not material; however, it is estimated that gross

32
<PAGE>
capital expenditures of the Company and its subsidiaries for the year ending May
31, 1996 will approximate $80 million.

Because the Company's operating cash flow is significantly influenced by
the general economy and, in particular, the level of construction, prior years'
results should not necessarily be used to predict the Company's liquidity,
capital expenditures, investment in instalment notes receivable or results of
operations. The Company believes that the Mid-State Trust V Variable Funding
Loan Agreement will provide Mid-State Homes with the funds needed to purchase
the instalment notes and mortgages generated by Jim Walter Homes. It is
contemplated that one or more permanent financings similar to the Mid-State
Trust II, III and IV financings will be required over the next four years in
order to repay borrowings under the Mid-State Trust V Variable Funding Loan
Agreement. The Company also believes that under present operating conditions
sufficient operating cash flow will be generated through fiscal year 1999 to
make all required interest and principal payments and planned capital
expenditures and meet substantially all operating needs and that amounts
available under the Bank Revolving Credit Facility will be sufficient to meet
peak operating needs. However, it is currently anticipated that sufficient
operating cash flow will not be generated to repay at maturity the principal
amount of the Notes without refinancing a portion of such debt or selling
assets. No assurance can be given that any refinancing will take place or that
such sales of assets can be consummated.

Selected Quarterly Data

The following tables set forth quarterly unaudited financial data for
fiscal years 1993, 1994 and 1995:

33
<PAGE>
<TABLE><CAPTION>
Fiscal Year 1993
For the quarters ended
---------------------------------------------------------------
Aug. 31, 1992 Nov. 30, 1992 Feb. 28, 1993 May 31, 1993
--------------- --------------- --------------- ---------------
(Dollars in thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Summary of Operations:
Sales and revenues . . . . . . . . . . . . . $ 326,839 $ 338,268 $ 306,002 $ 347,877
Cost of sales (exclusive of depreciation) . . 198,959 211,307 186,451 207,694
Depreciation, depletion and amortization . . 16,479 17,709 17,587 18,708
Interest and amortization of debt discount
and expense . . . . . . . . . . . . . . . . 42,802 42,507 41,930 44,342
Income tax expense . . . . . . . . . . . . . 9,739 8,305 4,223 2,061
Income before cumulative effect of
accounting change(1) . . . . . . . . . . . 8,455 6,133 6,030 25,976
Net income (loss) . . . . . . . . . . . . . . (96,153) 6,133 6,030 25,976

Additional Financial Data:
Total assets . . . . . . . . . . . . . . . . $3,254,952 $3,229,182 $3,219,923 $3,223,234
Long-term senior debt . . . . . . . . . . . . 1,157,964 1,118,696 1,077,694 1,046,971
Liabilities subject to Chapter 11
proceedings . . . . . . . . . . . . . . . . 1,724,616 1,724,868 1,725,014 1,725,631
Stockholders equity (deficit) . . . . . . . . (326,272) (320,139) (314,109) (287,737)
</TABLE>

<TABLE><CAPTION>
Fiscal Year 1994
For the quarters ended
---------------------------------------------------------------
Aug. 31, 1993 Nov. 30, 1993 Feb. 28, 1994 May 31, 1994
--------------- --------------- --------------- ---------------
(Dollars in thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Summary of Operations:
Sales and revenues . . . . . . . . . . . . . $ 333,770 $ 341,768 $ 309,492 $ 343,494
Cost of sales (exclusive of depreciation) . . 212,716 213,010 197,631 221,704
Depreciation, depletion and amortization . . 16,386 17,334 17,751 19,564
Interest and amortization of debt discount
and expense . . . . . . . . . . . . . . . . 40,112 40,375 37,642 37,341
Income tax expense . . . . . . . . . . . . . 10,390 9,659 5,323 3,545
Net income (loss) . . . . . . . . . . . . . . 1,392 6,817 857 (1,891)(2)

Additional Financial Data:
Total assets . . . . . . . . . . . . . . . . $3,198,288 $3,193,505 $3,162,660 $3,140,892
Long-term senior debt . . . . . . . . . . . . 1,003,240 958,670 907,504 871,970
Liabilities subject to Chapter 11
proceedings . . . . . . . . . . . . . . . . 1,725,952 1,726,421 1,727,345 1,727,684
Stockholders equity (deficit) . . . . . . . . (286,345) (279,528) (278,671) (282,353)
</TABLE>

<TABLE><CAPTION>
Fiscal Year 1995
For the quarters ended
---------------------------------------------------------------
Aug. 31, 1994 Nov. 30, 1994 Feb. 28, 1995 May 31, 1995
--------------- --------------- --------------- ---------------
(Dollars in thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Summary of Operations:
Sales and revenues . . . . . . . . . . . . . $ 340,640 $ 363,330 $ 338,691 $ 399,661
Cost of sales (exclusive of depreciation) . . 224,119 237,737 221,074 268,451
Depreciation, depletion and amortization . . 16,757 17,930 18,407 18,943
Interest and amortization of debt discount
and expense . . . . . . . . . . . . . . . . 36,463 36,290 34,994 196,801(3)
Income tax expense (benefit) . . . . . . . . 6,857 9,109 6,022 (192,438)
Net income (loss) . . . . . . . . . . . . . . 1,433 4,920 (233) (364,765)(4)

Additional Financial Data:
Total assets . . . . . . . . . . . . . . . . $3,107,659 $3,009,803 $3,098,947 $3,245,153
Long-term senior debt . . . . . . . . . . . . 841,254 812,547 784,815 2,220,370(5)
Liabilities subject to Chapter 11
proceedings . . . . . . . . . . . . . . . . 1,727,889 1,727,279 1,728,215 --(5)
Stockholders equity (deficit) . . . . . . . . (280,920) (276,000) (276,233) 360,774(5)
</TABLE>

34
<PAGE>
(1) The Company adopted FAS 106 and FAS 109 during the first quarter of fiscal
year 1993.
(2) The net loss is primarily attributable to adjustments to amortization of
goodwill and the temporary shutdown of the Natural Resources Group's Mine
No. 5 in early April 1994. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations --
Years ended May 31, 1995 and 1994."
(3) Includes additional interest and amortization of debt expense of $141.4
million related to the consummation of the Plan of Reorganization.
(4) The net loss includes $583.8 million of additional expenses related to the
consummation of the Plan of Reorganization.
(5) Reflects the consummation of the Plan of Reorganization.

BUSINESS AND PROPERTIES

General

The Company, through its direct and indirect subsidiaries, currently offers
a diversified line of products and services for homebuilding, water and waste
water transmission, residential and non-residential construction, and industrial
markets. The operations of the Company are carried out by its operating
subsidiaries, the business and properties of which are described below. For
financial information relating to the industry segments of the Company and its
subsidiaries, see "Segment Information" on pages F-25 and F-26.

Jim Walter Homes

Jim Walter Homes, headquartered in the Walter Industries building in Tampa,
Florida, is in the business of marketing and supervising the construction of
standardized, partially-finished and shell, detached, single family residential
homes, primarily in the southern region of the United States where the weather
permits year-round construction. Jim Walter Homes has concentrated on the low to
moderately priced segment of the housing market. Over 300,000 homes have been
completed by Jim Walter Homes and its predecessor since 1955.

Jim Walter Homes' products consist of 35 models of conventionally built
homes, built of wood on concrete foundations or wood pilings, and ranging in
size from approximately 640 to 2,214 square feet. Each home is completely
finished on the outside and is unfinished on the inside except for rough floors,
ceiling joists, partition studding and closet framing. The buyer may elect to
purchase optional interior components, including installation thereof, such as
plumbing and electrical materials, heating and air conditioning, wallboard,
interior doors, interior trim and floor finishing. A buyer selecting all options
receives a home considered to be "90 percent complete," excluding only floor
covering, inside paint, and water and sewer hookups. Shell homes are those which
are completely finished on the outside with the inside containing only rough
floors, partition studding and closet framing, but not interior walls, floor
finishing, plumbing, electrical wiring and fixtures, doors and cabinetry. The
remaining units are sold at varying "in-between" stages of interior finishing.
Jim Walter Homes builds all of its homes "on site," and only against firm
orders. The following chart shows the sales volume of Jim Walter Homes and the
percent of homes sold in the three stages of completion for fiscal years ended
May 31, 1995, 1994 and 1993:

<TABLE><CAPTION>
Percent of Unit Sales
--------------------------------------------
Fiscal Year Ended May 31, Units Sold Shell Various Stages 90% Complete
-------------------------------------- ------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
1995 . . . . . . . . . . . . . . . . 4,126 25% 9% 66%
1994 . . . . . . . . . . . . . . . . 4,331 23 10 67
1993 . . . . . . . . . . . . . . . . 4,784 26 12 62
</TABLE>

During the fiscal years 1995, 1994 and 1993 the average net sales price of
a home was $40,200, $38,300 and $37,000, respectively.

Jim Walter Homes' backlog as of May 31, 1995 was 1,529 units, compared to
2,065 units at May 31, 1994. The average time to construct a home ranges from
four to twelve weeks.

Jim Walter Homes currently operates 105 branch offices located in 17
states (Alabama, Arizona, Arkansas, Florida, Georgia, Kentucky, Louisiana,
Mississippi, New Mexico, North Carolina, Ohio, Oklahoma, South Carolina,
Tennessee, Texas, Virginia and West Virginia). In addition, Jim Walter Homes
serves six adjoining states (Delaware, Illinois, Indiana, Maryland, Missouri
and Pennsylvania). Of such branch offices, approximately 82% are owned, with
the balance on leased land. These branch offices serve as "display parks,"
which are designed to allow customers to view actual models completed to the
various stages of interior finishing available. Jim Walter Homes does not

35
<PAGE>
own or acquire land for purposes of its operations and is not a real estate
developer. Accordingly, these operations are not subject to significant
concentrations of credit risks. The actual construction of all homes sold by Jim
Walter Homes is done by local building contractors with their own crews,
pursuant to subcontracts executed in connection with each home, and inspected by
Jim Walter Homes' supervisory personnel. Jim Walter Homes maintains warehouses
near each of its district offices from which a portion of the necessary building
materials may be obtained; the balance of the building materials is purchased
locally.

Approximately 96% of the homes Jim Walter Homes sells are purchased with
financing it arranges. In order to qualify for a credit sale the purchaser of a
home must own his property free and clear of all encumbrances. In addition to
owning the land, the purchaser must perform certain steps to complete the home
and obtain a certificate of occupancy. Depending on the degree of completion of
the home purchased, these steps can cost a significant amount of money. The
credit terms offered by Jim Walter Homes have a maximum 30-year term, are
usually for 100% of the purchase price of the home, and carry a 10% "annual
percentage rate", without points or closing costs. The 10% "annual percentage
rate" has been in effect since 1979. To qualify for financing a potential
customer must also provide information concerning his or her monthly income
and employment history as well as a legal description of and evidence that
the customer owns the land on which the home is to be built. A customer's
income and employment usually are verified through telephone conversations with
such customer's employer and by examining his or her pay stubs, W2 forms or, if
the customer is self-employed, income tax returns. An applicant must have a
minimum of one year's continuous employment or, if he or she has changed jobs,
the new job must be in the same field of work. Only a small percentage of
secondary income (second job or part-time work) is utilized in qualifying
applicants. Ownership of the land is verified by examining the title record. In
addition, Jim Walter Homes' credit department obtains a credit report. If a
favorable report is obtained and the required monthly payment does not exceed
25% of the customer's monthly gross income, the application usually is approved
and a building or instalment sales contract is executed, a title report is
ordered and frequently a survey of the property is made. Surveys are performed
by independent registered surveyors when, in the opinion of Jim Walter Homes,
additional information beyond examination of the title record in needed. Such
additional information is primarily concerned with verification of legal
description, ownership of land and existence of any encroachments. Jim Walter
Homes does not use a point or grade credit scoring system. Particular attention
is paid to the credit information for the most recent three to five years.
Attention is also given to the customer's total indebtedness and total other
monthly payments on a judgmental basis by the credit department. The customer's
credit standing is considered favorable if the employment history, income and
credit report meet the aforementioned criteria. The contract is subject to (i)
executing a promissory note which is secured by a first lien on the land and the
home to be built, (ii) executing a mortgage, deed of trust or other security
instrument, (iii) receiving a satisfactory title report, (iv) inspecting the
land to determine that it is suitable for building and (v) obtaining required
permits. Although the mortgages, deeds of trust and similar security instruments
constitute a first lien on the land and the home to be built, such security
instruments are not insured by the Federal Housing Administration or guaranteed
by the Veterans Administration or otherwise insured or guaranteed.

Jim Walter Homes does not obtain appraisals or title insurance. Although
consideration is given to the ratio of the amount financed to the estimated
value of the home and the land securing such amount, there is no explicit
appraisal-based loan-to-value test. However, there is a requirement that the
value of the lot on which the home is to be built, as estimated solely on the
basis of Jim Walter Homes' mortgage servicing division employees' experience and
knowledge, be at least equal to 10% of the principal amount of the loan. Before
occupying a new home, the customer must complete the utility and sewer hook-ups
and any of the other components not purchased from Jim Walter Homes, arrange for
the building inspection and, if required, obtain a certificate of occupancy. The
costs to complete a new home depend on the stage of completion of the home
purchased and whether public water and sewer systems are available or wells and
septic tanks must be installed. Such costs could range from $2,000-$3,000 to
$30,000-$40,000. Upon construction of a new home to the agreed-upon percentage
of completion, Jim Walter Homes sells the building and instalment sales
contract, the note, and the related mortgage, deed of trust or other security
instrument to Mid-State Homes in the ordinary course of business pursuant to an
Agreement of Purchase and Sale of Instalment Obligations and Servicing of
Delinquent Accounts. Pursuant to this agreement, Jim Walter Homes provides field
servicing on all delinquent accounts, including collection of delinquent
accounts, recommendations of foreclosure, foreclosure and resale of foreclosed
properties.

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

36
<PAGE>
decrease. Also, in times of low interest rates and high availability of mortgage
funds, additional competition is able to enter the market.

The single-family residential housing industry is highly competitive. Jim
Walter Homes competes in each of its market areas on the basis of price,
design, finishing options and accessibility to financing with numerous home
builders ranging from regional and national firms to small local companies. Jim
Walter Homes also competes with manufactured housing. For the calendar year
1994, Jim Walter Homes was the sixth largest builder of detached single-family
homes in the United States after having been the fifth largest builder in 1993,
the fourth largest builder in 1992 and 1991, the third largest builder in 1990,
the fourth largest builder in 1988 and 1989, the second largest builder in 1986
and 1987 and the largest builder in 1984 and 1985. However, because there are
so many firms engaged in the single-family homebuilding industry, Jim Walter
Homes accounted for less than .5% of all new detached for sale homes built in
1994.

In the three years ended May 31, 1995, 1994 and 1993, Jim Walter Homes' net
sales and revenues amounted to $165.8 million, $166.0 million and $177.2
million, respectively.

Mid-State Homes

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

In April 1988, Mid-State Homes sold to Mid-State Trust II instalment notes
and mortgages which it had acquired from Jim Walter Homes through February 29,
1988 with a gross amount of approximately $3,376,000,000 and an aggregate
outstanding economic balance of approximately $1,750,000,000, pursuant to a
purchase and sale agreement, in exchange for a purchase price of $1,326,665,600,
representing the net cash proceeds from the public offering of $1,450,000,000
aggregate face amount of mortgage-backed notes ("Mid-State Trust II Mortgage-
Backed Notes") of Mid-State Trust II after paying the expenses associated with
the sale of such Mid-State Trust II Mortgage-Backed Notes. The outstanding
balance at May 31, 1995 of such Mid-State Trust II Mortgage-Backed Notes was
$584,000,000. At May 31, 1995 such Mid-State Trust II instalment notes and
mortgages had a gross book value of $1,396,138,000 and an economic balance of
approximately $846,481,000.

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

On July 1, 1992, pursuant to approval by the Bankruptcy Court, mortgage
instalment notes having a gross amount of $638,078,000 and an economic balance
of $296,160,000 were sold by Mid-State Homes to Mid-State Trust III in exchange
for the net proceeds from the public issuance by Mid-State Trust III of
$249,864,000 of asset backed notes ("Mid-State Trust III Asset Backed Notes").
Net proceeds were used to repay in full all outstanding indebtedness due under a
revolving credit facility, with the excess cash used to fund the ongoing
operations of the Company and its subsidiaries. The outstanding balance at
May 31, 1995 of such Mid-State Trust III Asset Backed Notes was $173,527,000. At
May 31, 1995, such Mid-State Trust III instalment notes and mortgages had a
gross book value of $472,980,000 and an economic balance of $239,200,000.

On March 16, 1995, pursuant to approval by the Bankruptcy Court, mortgage
instalment notes having a gross amount of $2,020,258,000 and an economic balance
of $826,671,000 were sold by Mid-State Homes to Mid-State Trust IV. In addition,
on such date, Mid-State Homes sold its beneficial interest in Mid-State Trust II
to Mid-State Trust IV. Mid-State Trust II had a total collateral value of
$910,468,000 with $605,750,000 of Mid-State Trust II Mortgage-Backed Notes
outstanding. These sales were in exchange for the net proceeds from the public
issuance by Mid-State Trust IV of $959,450,000 of asset backed notes ("Mid-State
Trust IV Asset Backed Notes"). The outstanding balance at May 31, 1995 of such
Mid-State Trust IV Asset Backed Notes was

37
<PAGE>
$953,843,000. At May 31, 1995, such Mid-State Trust IV instalment notes and
mortgages had a gross book value of $1,970,887,000 and an economic balance of
$814,182,000.

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

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

On February 27, 1995 Mid-State Homes established Mid-State Trust V, a
business trust in which Mid-State Homes owns all the beneficial interests, to
provide temporary financing to Mid-State Homes for its current purchases of
instalment notes and mortgages from Jim Walter Homes. On March 3, 1995 Mid-State
Trust V entered into the Mid-State Trust V Variable Funding Loan Agreement with
Enterprise Funding Corporation, an affiliate of NationsBank N.A., as lender, and
NationsBank N.A. (Carolinas), as Administrative Agent. The agreement provides
for a three-year $500,000,000 credit facility (the "Mid-State Trust V Variable
Funding Loan") secured by the instalment notes and mortgages Mid-State Trust V
purchases from Mid-State Homes. It is contemplated that the facility will be an
evergreen three-year facility with periodic paydowns from the proceeds of
permanent financings similar to those done by Mid-State Trusts II, III and IV.
The outstanding Mid-State Trust V Variable Funding Loan balance at May 31, 1995
was $15 million. At May 31, 1995, such Mid-State Trust V instalment notes and
mortgages had a gross book value of $254,871,000 and an economic balance of
$92,466,000.

The revenues of Mid-State Trusts II, III, IV and V are required by
generally accepted accounting principles to be consolidated as part of Mid-State
Homes' revenues for financial statement purposes. In the three years ended May
31, 1995, 1994 and 1993, Mid-State Homes' revenues amounted to $237.1 million,
$255.3 million and $235.7 million, respectively, including revenues of Mid-State
Trust II of $141.5 million, $164.5 million and $161.8 million, respectively, and
revenues of Mid-State Trust III of $24.1 million, $27.5 million and $23.2
million, respectively. Revenues of Mid-State Trusts IV and V in the year ended
May 31, 1995 amounted to $22.5 million and $.5 million, respectively.

Jim Walter Resources

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

Mining Division

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

The majority of the coal is mined using longwall technology, complemented
by the more standard continuous mining method. Since the late 1970's, by
replacing the traditional methods of underground mining with the longwall
technique, the Mining Division has achieved greater production efficiency,
improved safety, generated superior coal recovery results and lowered production
costs. There are approximately 80 longwall mining systems in use in the United
States, of which the Mining Division operates six. The Mining Division's normal
operating plan is a longwall/continuous ratio of about 75%/25%, which is the
long-term sustainable ratio.

Recoverable reserves as of May 31, 1995 were estimated to be approximately
249 million tons, of which 224 million tons relate to the four Blue Creek mines.

38
<PAGE>
A summary of the reserves is as follows:

<TABLE><CAPTION>
ESTIMATED RECOVERABLE(1) COAL RESERVES AS OF MAY 31, 1995
(In Thousands of Tons)

JWR's
Reserves(2) Classifications(3) Type(4) Interest Quality(6) Production(7)
--------------------------- ------------------ ------- ----------------- ------------------- ------------------
Steam(S)
or
Mining Metallur-
Property Total Assigned Unassigned Measured Indicated gical(M) Owned Leased(5) Ash Sulf. BTU/lb 1993 1994 1995
---------- ------- -------- ---------- -------- --------- --------- ------ --------- ----- ----- ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
No. 3 Mine 62,159 62,159 -- 45,763 16,396 S/M 1,446 60,713 8.2 0.56 14,469 1,564 1,347 1,730
No. 4 Mine 73,405 73,405 -- 43,435 29,970 S/M 4,328 69,077 9.4 0.69 14,240 2,417 2,257 2,448
No. 5 Mine 29,552 29,552 -- 24,566 4,986 S/M 27,217 2,335 8.8 0.66 14,334 1,326 1,074 948
No. 7 Mine 58,979 58,979 -- 33,471 25,508 S/M 16,261 42,718 8.0 0.65 14,499 2,012 1,849 2,501
------- ------- ------- ------- ------- ------ ------- ----- ----- -----
224,095 224,095 -- 147,235 76,860 49,252 174,843 7,319 6,527 7,627
Bessie(8) 24,919 -- 24,919 14,880 10,039 S/M 658 24,261 11.0 1.30 13,655 -- -- --
------- ------- ------- ------- ------- ------ ------- ----- ----- -----
TOTAL 249,014 224,095 24,919 162,115 86,899 49,910 199,104 7,319 6,527 7,627
======= ======= ======= ======= ======= ====== ======= ===== ===== =====
</TABLE>

(1) "Recoverable" reserves are defined as tons of mineable coal in the
Blue Creek and Mary Lee seams which can be extracted and marketed
after deduction for coal to be left in pillars, etc. and adjusted
for reasonable preparation and handling losses.
(2) "Assigned" reserves represent coal which has been committed by Jim
Walter Resources to its operating mines and plant facilities.
"Unassigned" reserves represent coal which is not committed to an
operating mine and would require additional expenditure to
recover. The division of reserves into these two categories is
based upon current mining plans, projections, and techniques.
(3) The recoverable reserves (demonstrated resources) are the sum of
"Measured" and "Indicated" resources. Measured coal extends 1/4
mile from any point of observation or measurement. Indicated coal
is projected to extend from 1/4 mile to 3/4 mile from any point of
observation or measurement. Inferred coal extends from 3/4 mile to
3 miles from any point of observation or measurement. Inferred
reserves are not included in recoverable reserves.
(4) All of the coal in the Blue Creek and Mary Lee seams is suitable
for metallurgical purposes although, for marketing reasons, some
is sold as compliance steam coal.
(5) The leases are either renewable until the reserves are mined to
exhaustion or are of sufficient duration to permit mining of all
of the reserves before the expiration of the term.
(6) Values shown are weighted averages of all reserves and are
calculated on a dry basis. Bessie Mine reserves are equivalent to
preparation at a 1.60 specific gravity whereas the others are at a
1.40 specific gravity.
(7) Production for 1995, 1994 and 1993 is for the fiscal years ended
May 31.
(8) The Bessie Mine was closed in August 1988.

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

The facilities of the Mining Division are summarized as follows:
<TABLE><CAPTION>
Facility Location Sq. Footage
------------------------------------------------------------ ----------------------------- -----------------------------
<S> <C> <C>
Administration headquarters . . . . . . . . . . . . . . . . Brookwood, AL 41,500

Central shop, supply center and training center . . . . . . Brookwood, AL 128,400

Current
Operating Mines Location Rated Capacity
------------------------------------------------------------ ----------------------------- -----------------------------
Blue Creek No. 3 . . . . . . . . . . . . . . . . . . . . . Adger, AL 2,500,000 tons

Blue Creek No. 4 . . . . . . . . . . . . . . . . . . . . . Brookwood, AL 2,800,000 tons

Blue Creek No. 5 . . . . . . . . . . . . . . . . . . . . . Brookwood, AL 1,600,000 tons

Blue Creek No. 7 . . . . . . . . . . . . . . . . . . . . . Brookwood, AL 2,600,000 tons
</TABLE>

Of the Mining Division's approximately 9.5 million tons of current rated
annual production capacity, 4.88 to 5.10 million tons are sold under long-term
contracts, leaving 4.40 to 4.62 million tons to be sold under short-term
contracts or on the spot market.

Jim Walter Resources' supply contract with Alabama Power that had been in
effect since January 1, 1979, as amended, was superseded by the New Alabama
Power Contract executed on May 10, 1994. Under the

39
<PAGE>
New Alabama Power Contract, Alabama Power will purchase 4.0 million tons of coal
per year from Jim Walter Resources during the period from July 1, 1994 through
August 31, 1999. In addition, Jim Walter Resources will have the option to
extend the New Alabama Power Contract through August 31, 2004, subject to mutual
agreement on the market pricing mechanism and other terms and conditions of such
extension. The New Alabama Power Contract has a fixed price subject to an
escalation based on the Consumer Price Index and adjustments for governmental
impositions and quality. The New Alabama Power Contract includes favorable
modifications of specifications and shipping deviations and changes in
transportation arrangements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations."

Jim Walter Resources' long-term contracts with six Japanese steel mills for
2.75 to 3.0 million tons annually, depending on the level of steel production in
Japan, expired on March 31, 1994. The pricing mechanisms in such contracts were
market driven and reflected changes in the prices of four specific coal indices.
The composite change in market prices of these coal indices from the base point
was then reflected in the billing price to the steel mills. Jim Walter Resources
has negotiated one-year market-based contracts to sell approximately 1.5 million
tons of coal to a group of Japanese steel mills previously served under the
long-term contract. In addition, approximately 300,000 tons of coal not
previously shipped under terms of the long-term contracts will be shipped during
fiscal 1996 at the long-term contract price, which is substantially higher than
the current market price.

Jim Walter Resources and Carcoke, S.A. are parties to a long-term contract
which expires on December 31, 1996. The contract provides for the sale of
approximately 880,000 tons annually, with an option on approximately 220,000
additional tons annually. The pricing mechanism is market driven and reflects
changes in prices of three specific coals or coal indices.

Mine No. 5 was shut down for a substantial portion of the period from July
9, 1990 through September 16, 1990 as a result of safety concerns arising from
spontaneous combustion heatings which were a result of pyritic sulfur
concentrations occurring in the coal seam in the southern part of the mine being
exposed to the air by the mining process. The exposure of the sulfur deposits
and its reaction with oxygen contained in the ventilation air currents caused
the heatings to occur. Throughout this period, Jim Walter Resources was engaged
in discussions with MSHA regarding a new ventilating arrangement, designed to
reduce the contact between oxygen and sulfur, for the longwall faces at Mine No.
5. Idle plant expenses associated with the shutdown were $6.5 million. Although
MSHA approved the resumption of operations at the mine on September 14, 1990,
providing for a modified conventional ventilation system, productivity was poor
and costs were therefore high. In February 1991, the mine's one longwall unit
was moved from the southern part of the mine to a longwall coal panel in the
northern area and productivity improved. The southwestern area of the mine was
subsequently abandoned and sealed off as efforts to design a ventilation
arrangement acceptable to MSHA which properly controlled the spontaneous
combustion heatings and provided acceptable productivity and costs of operation
were not successful.

Mine No. 5 also was shut down from November 17, 1993 through December 16,
1993 and from early April 1994 until May 16, 1994 as a result of a fire due to
spontaneous combustion heatings. Representatives of Jim Walter Resources, MSHA,
Alabama State Mine Inspectors and the UMWA investigated the problem. Because the
area of the suspected fire was inaccessible, a decision was made to drill
vertical holes from the surface and flood the area with combinations of water,
carbon dioxide, foam and cementitious mixtures to neutralize the fire. MSHA
approved the resumption of operations at the mine on December 17, 1993. In early
April 1994, the fire recurred at Mine No. 5 and the mine was shut down. Jim
Walter Resources, MSHA, Alabama State Mine Inspectors and the UMWA agreed that
the longwall coal panel being mined at the time the fire recurred would be
abandoned and sealed off. Development mining for the two remaining longwall coal
panels in this section of the mine resumed on May 16, 1994 and the mining on the
first longwall panel resumed on January 17, 1995.

Production was adversely impacted until January 17, 1995; however, a
portion of the increased costs is expected to be recovered from business
interruption insurance. On May 31, 1995, the Company commenced a lawsuit in the
Circuit Court for Tuscaloosa County, Alabama against a group of insurance
companies with which the Company has such business interruption insurance
seeking damages in excess of $25 million for loss from interruption to Jim
Walter Resources' business resulting from the shut down of Mine No. 5. The
lawsuit is in its initial stages, but the Company and Jim Walter Resources
believe their claim is meritorious and intend to pursue

40
<PAGE>
it vigorously. See "Legal Proceedings -- Jim Walter Resources" below and Note 11
of Notes to Financial Statements.

In the three years ended May 31, 1995, 1994 and 1993, the Mining Division's
net sales and revenues were $299.4 million, $290.3 million and $324.4 million,
respectively, including $5.4 million, $5.7 million and $7.1 million,
respectively, to Sloss Industries, Inc., a wholly owned subsidiary of the
Company ("Sloss Industries").

De-Gas Division

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

The original motivation for the joint venture was to increase safety in Jim
Walter Resources' Blue Creek mines by reducing the level of methane gas through
wells drilled in conjunction with the mining operations. As of May 1995, there
were 268 wells producing approximately 33 million cubic feet of gas per day. As
many as 250 additional wells are planned for development over the next several
years. The degasification operation, as had originally been expected, has had
the effect of improving mining operations and safety by reducing methane gas
levels in the mines, as well as becoming a profitable operation.

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

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

In the three years ended May 31, 1995, 1994 and 1993, the De-Gas Division's
net sales and revenues amounted to $20.8 million, $23.0 million and $22.5
million, respectively.

U.S. Pipe

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

In the three years ended May 31, 1995, 1994 and 1993, U.S. Pipe's net sales
and revenues amounted to $412.2 million, $357.2 million and $331.2 million,
respectively.

Pressure Pipe Division

The Pressure Pipe Division manufactures and sells a complete line of
ductile iron pipe ranging from 4" to 64" in diameter as well as most equivalent
metric sizes. In addition, this division produces and sells a full line of
fittings, valves and hydrants of various configurations to meet various
municipal specifications. Approximately 70%-75% of the ductile iron pressure
pipe produced by this division is used in the transmission and distribution

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of potable water and the remaining 25%-30% is used in the transmission of waste
water and industrial applications. The majority of ductile iron pressure pipe
and related fittings, valves and hydrants are for new distribution systems.
However, the market for rehabilitation, upgrading and replacement of pipe
systems has grown significantly in recent years as major municipalities have
initiated programs to rehabilitate aging water and waste water transmission
systems, and is currently estimated to represent approximately 30% of ductile
iron pressure pipe sales. Fittings, valves and hydrants produced by this
division account for approximately 20% of sales.

Ductile iron pressure pipe is manufactured by the deLavaud centrifugal
casting process and is typically classified into three size categories. Small
pipe, ranging from 4" to 12" in diameter (approximately 54% of the Pressure Pipe
Division's pipe production), is used primarily for potable water distribution
systems and small water system grids. Medium pipe ranging from 14" to 24" in
diameter (approximately 29% of the Pressure Division's pipe production) is used
primarily in reinforcing distribution systems, including looping grids and
supply lines. Large pipe, 30" to 64" in diameter, which accounts for the
remaining 17% of pipe production, is used for major water and waste water
transmission and collection systems.

The ductile iron pressure pipe industry is highly competitive, with a small
number of manufacturers of ductile iron pressure pipe, fittings, valves and
hydrants as well as a larger number of manufacturers which produce substitute
materials, such as PVC, concrete, fiberglass, reinforced plastic and steel. U.S.
Pipe is one of the nation's largest producers of ductile iron pressure pipe.
Other major competitors include McWane, Inc., Griffin Ductile Iron Pipe Company
and American Cast Iron Pipe Company. The division competes with other
manufacturers of ductile iron pressure pipe on the basis of price, customer
service and product quality.

U.S. Pipe is also a manufacturer of ductile iron fittings. The Company
believes that Tyler Corporation and McWane, Inc. have larger market shares than
U.S. Pipe in this market segment. U.S. Pipe is not a major manufacturer of
valves and hydrants.

Additional competition for ductile iron pressure pipe comes from pipe
composed of other materials. 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.

Products of the Pressure Pipe Division are sold primarily to contractors,
water works supply houses, municipalities and private utilities. Most ductile
iron pressure pipe orders result from contracts which are bid by contractors or
directly issued by municipalities or private utilities. A smaller portion of
ductile iron pressure pipe sales are made through independent water works supply
houses. The division maintains numerous supply depots in leased space throughout
the country which are used as a source of pipe for start-up projects, to supply
ongoing projects and to aid in completing projects. The Pressure Pipe Division's
sales are primarily domestic, with foreign sales accounting for approximately 4%
of dollar sales in 1995. U.S. Pipe has 34 sales offices in leased space in the
United States. It employs a salaried sales force of approximately 70 persons.

The order backlog of pressure pipe at May 31, 1995 was 121,548 tons, which
represents approximately three months' shipments, compared to 111,907 tons at
May 31, 1994.

The Pressure Pipe Division manufactures ductile iron pressure pipe at four
owned plants located in (i) Bessemer, Alabama (566,000 square feet on 169 acres
of land); (ii) North Birmingham, Alabama (336,000 square feet on 61 acres of
land); (iii) Union City, California (116,000 square feet on 70 acres of land);
and (iv) Burlington, New Jersey (329,000 square feet on 109 acres of land). Such
plants have annual rated capacities, on a one shift per day basis, of 200,000
tons, 190,000 tons, 78,000 tons and 140,000 tons, respectively, of ductile iron
pressure pipe. In addition, the division manufactures fittings, valves and
hydrants at its owned plant in Chattanooga, Tennessee (623,000 square feet on 80
acres of land). The general offices contain 122,000 square feet of office space
on 6 acres of owned land and are located in Birmingham, Alabama.

While the pipe business is generally sensitive to recessions because of its
partial dependence on the level of new construction activity, certain aspects of
Pressure Pipe's operations have in the past helped to reduce the impact on such
division of the effects of a downturn in new construction.

First, Pressure Pipe's products have experienced a strong level of demand
in the replacement market. The Company believes that the growth of the
replacement market will continue as a result of major expenditures by
governmental entities in an effort to rebuild the nation's infrastructure, such
as the replacement and upgrading

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of water and waste water transmission systems. In addition, legislation such as
the Clean Water Act and the Safe Drinking Water Act may force utilities and
cities to upgrade and/or replace their pipe systems.

Second, Pressure Pipe's facilities are located in regions of the country
which have exhibited consistent economic strength. The Burlington, New Jersey
plant is adjacent to the northeastern market with its significant replacement
potential and the division's operations in the South are located in areas of
steady economic growth. The West Coast, served by the Union City, California
plant, has a critical shortage of water for many of the large metropolitan areas
which will require major transmission pipelines in the future. Because freight
costs for pipe are high, locations close to important markets lower
transportation costs, thereby making the Pressure Pipe Division's products more
competitive.

Castings Division

The Castings Division produces a wide variety of gray and ductile iron
castings for a diversified customer base including special hardness castings for
the pollution control industry. In the year ended May 31, 1995, approximately
37% of the Castings Division's sales were sales of castings to the Pressure Pipe
Division, with the balance of the sales to various capital goods industries.
Manufacturing operations are located in Anniston, Alabama (228,000 square feet
on 21 acres of owned land).

Sloss Industries

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

Foundry coke is marketed to cast iron pipe plants and foundries producing
castings, such as for the automotive and agricultural equipment industries. It
is shipped primarily into four geographic markets: the East Coast; the
Southeast; Mexico; and the West Coast. Competition comes primarily from three
merchant suppliers: ABC Coke, Koppers Company, Inc., and Empire Coke Company. In
the year ended May 31, 1995, approximately 60% of the foundry coke produced by
Sloss Industries was sold to U.S. Pipe.

Furnace coke is sold primarily to basic steel producers. Furnace coke sales
were depressed in recent years. During fiscal 1995, 1994 and 1993, however,
Sloss Industries' furnace coke production was at near capacity as a result of a
contract with National Steel Corporation. Sloss Industries has only an estimated
1% of the market for furnace coke. Competition comes primarily from Koppers
Company, Inc. in the southern United States, Citizens Gas & Coke Utility and
steel producers with excess coking capacity in the Midwest.

Slag wool is utilized principally by acoustical ceiling manufacturers, and
is also used in fireproofing cements. A related product, Processed Mineral
Fiber, is used in friction materials and phenolic molding compounds. The
continued success of the slag wool business depends upon Sloss Industries'
ability to produce ceiling tile fiber of consistent high quality and react to
customer demands for specific "customized" fiber composition. Of the total slag
wool sales in the year ended May 31, 1995, approximately 71% was sold to
Armstrong World Industries and 28% to Apache Building Products Company.

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

Sloss Industries' manufacturing facilities located in Birmingham, Alabama
include 120 coke ovens with an annual rated capacity of 450,000 tons and related
buildings of 148,400 square feet, a slag wool plant with an annual rated
capacity of 96,000 tons in a building of 63,000 square feet and a synthetic
chemicals plant in a building of 63,300 square feet, all on 521 acres of owned
land. Sloss Industries also operates a specialty chemical facility in Ariton,
Alabama in a building of 6,900 square feet, on 53 acres of owned land.

In the three years ended May 31, 1995, 1994 and 1993, Sloss Industries' net
sales and revenues amounted to $88.0 million, $81.7 million and $77.5 million,
respectively, including $11.1 million, $9.4 million and $8.7 million,
respectively, to U.S. Pipe.

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JW Aluminum

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

JW Aluminum is one of a large number of suppliers nationwide of aluminum
sheet and foil. In fiscal 1995, JW Aluminum sold 120.6 million pounds of
aluminum products, 32% of which were sheet products and 68% foil products. JW
Aluminum has focused on directing its product mix away from building products
which are price sensitive, low value added products, toward higher value added
products such as fin stock, where product quality and service are relied upon
more than price.

JW Aluminum operates a single manufacturing facility in Mt. Holly, South
Carolina. Such facility is in a building of 210,000 square feet on 22 acres of
owned land. JW Aluminum's current rated capacity is 125 million pounds per year,
based on the present product mix.

In the three years ended May 31, 1995, 1994 and 1993, JW Aluminum's net
sales and revenues amounted to $134.2 million, $87.3 million and $82.3 million,
respectively, including $6.1 million, $2.1 million and $1.6 million,
respectively, to JW Window Components.

JW Window Components

JW Window Components produces a variety of screens and screen components
and a full line of window components, such as extruded aluminum components,
weatherstripping, sash balances and spiral balances. JW Window Components is
recognized as an industry leader in the production of block and tackle sash
balances. It also has the broadest product line of any supplier to the window
and patio door industry. The Company estimates that approximately 60% of total
sales are directed to the new construction market, approximately 30% to the
renovation market and approximately 10% to the commercial sector.

JW Window Components' products are sold through a network of independent
sales agents, who cover the continental United States, the Caribbean and Central
American countries.

JW Window Components operates three plants located in Elizabethton,
Tennessee (190,000 square feet on 31 acres of owned land); Sioux Falls, South
Dakota (50,000 square feet on 3 acres of owned land); and Merrill, Wisconsin
(54,000 square feet of leased space). The administrative offices are located in
the Company's headquarters building in Tampa, Florida.

In the three years ended May 31, 1995, 1994 and 1993, net sales and
revenues for JW Window Components amounted to $45.8 million, $38.7 million and
$36.4 million, respectively.

Southern Precision

Southern Precision Corporation's ("Southern Precision") products and
services include metal and wood pattern tooling, plastic and rubber mold
tooling, computerized numerically controlled machining of products and resin
coated sand for the foundry industry.

Southern Precision's Irondale, Alabama manufacturing facility, which
incorporates the plant, warehouse and administrative functions, is the largest
of its type in the Southeast (85,000 square feet of building located on 6 acres
of owned land). The facility and equipment enable the company to service larger
and more sophisticated tooling programs. Competition for resin coated sand,
which has been strong in recent years, is concentrated primarily in the
Southeast.

In order to expand production capacity for resin coated sand, Southern
Precision entered into an agreement with Borden, Inc. in February 1994 to lease
Borden, Inc.'s resin coated sand plant (together with the machinery and
equipment) containing approximately 14,000 square feet of space and located in
Birmingham, Alabama. The lease contained an option to purchase the plant at the
end of the third year. The transaction also

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included the execution by Southern Precision and Borden, Inc. of a sales
agreement, a license agreement and other ancillary agreements. On May 31, 1995,
Southern Precision exercised its option to purchase the plant and machinery and
equipment for approximately $1.5 million.

In the three years ended May 31, 1995, 1994 and 1993, Southern Precision's
net sales and revenues amounted to $14.4 million, $11.0 million and $10.7
million, respectively, including $2.4 million, $2.2 million and $1.6 million,
respectively, to U.S. Pipe.

Vestal Manufacturing

Vestal Manufacturing produces a diversified line of metal and foundry
products for residential, commercial and industrial use. Vestal Manufacturing
manufactures a line of energy saving fireplaces, fireplace inserts, accessories
and woodburning stoves, as well as lightweight castings for municipal markets
and metal building products.

Vestal Manufacturing's products are sold through a network of independent
sales agents to hardware and building materials distributors, home centers and
mass merchandisers throughout the United States and Canada.

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

Vestal Manufacturing, located in Sweetwater, Tennessee, operates a foundry
with 100,000 square feet of building and has a steel fabrication plant building
of 109,000 square feet, both on 32 acres of owned land. Vestal Manufacturing
also owns an unused 132,000 square foot plant and warehouse on 7 acres of land.
When market conditions are favorable, Vestal Manufacturing plans to sell the
unused facility.

In the three years ended May 31, 1995, 1994 and 1993, Vestal
Manufacturing's net sales and revenues amounted to $19.4 million, $17.4 million
and $15.2 million, respectively.

United Land

United Land owns approximately 56,000 acres of land and also owns
approximately 125,000 acres of mineral rights and 1,800 acres of surface rights,
all principally in Alabama.

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

In the three years ended May 31, 1995, 1994 and 1993, United Land's net
sales and revenues amounted to $15.8 million, including a gain of $6.1 million
on the sale of certain excess real estate, $9.2 million and $9.3 million,
respectively.

Walter Land

Walter Land Company ("Walter Land") is a land sales operation with an
inventory at May 31, 1995 of approximately 7,500 acres, primarily on the south
side of Houma, Louisiana. The bulk of the commercial development in Houma is
tied directly to service and support for offshore oil and gas drilling, which
has been in a longer term recession. Land sales have been few and small in
recent years. Presently, the majority of Walter Land's income is derived from
rental income. Management and sale of the Louisiana properties are handled by
local personnel on a contract basis. In the three years ended May 31, 1995, 1994
and 1993, Walter Land's net sales and revenues amounted to $196,000, $247,000
and $241,000, respectively.

Cardem Insurance

Cardem Insurance is a Hamilton, Bermuda based offshore reinsurance company.
The predominant part of its business is reinsuring 75% of the risk on fire and
extended coverage insurance policies issued by Westchester Insurance Company, an
unrelated insurance company. Such insurance policies are with individual owners
of homes constructed by Jim Walter Homes. In the years ended May 31, 1995, 1994
and 1993, Cardem Insurance's net sales and revenues amounted to $11.8 million,
$12.0 million and $14.1 million, respectively.

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Seasonality

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

Trade Names, Trademarks and Patents

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

Research and Development

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

Raw Materials

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

Environmental

The Company and its subsidiaries are subject to a wide variety of laws and
regulations concerning the protection of the environment, both with respect to
the construction and operation of many of its plants, mines and other
facilities, and with respect to remediating environmental conditions that may
exist at its own and other properties. The Company believes that it and its
subsidiaries are in substantial compliance with federal, state and local
environmental laws and regulations. Expenditures for compliance of ongoing
operations and for remediation of environmental conditions arising from past
operations in the fiscal year ended May 31, 1995 were approximately $4.3
million. Because environmental laws and regulations on the federal, state, and
local levels continue to evolve, and because conditions giving rise to
obligations and liabilities under environmental laws are in some circumstances
not readily identified, it is difficult to forecast the amount of such
environmental expenditures or the effects of changing standards on business
operations, and the Company can give no assurance that such expenditures will
not, in the future, be material. Capital expenditures for environmental
requirements are anticipated in the next five years to average $6.0 million per
year.

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

The federal Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), generally imposes liability, which may be joint and
several and is without regard to fault or the legality of waste generation or
disposal, on certain classes of persons, including owners and operators of sites
at which hazardous substances are released into the environment (or pose a
threat of such release), persons that disposed or arranged for the disposal of
hazardous substances at such sites, and persons who owned or operated such sites
at the time of such disposal. CERCLA authorizes the EPA, the states and, in some
circumstances, private entities to take actions in response to public health or
environmental threats and to seek to recover the costs they incur from the same
classes of persons. Certain governmental authorities can also seek recovery for
damages to natural resources. Various subsidiaries of the Company have been
identified as potentially responsible parties by the

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EPA under CERCLA with respect to cleanup of hazardous substances at several
sites to which their wastes allegedly have been transported. The subsidiaries
are in the process of preliminary investigation of their relationship to these
sites, if any, to determine the nature of their potential liability and amount
of remedial costs to clean up such sites. Although no assurances can be given
that the Company will not be required in the future to make material
expenditures relating to these sites, management does not believe at this time
that the cleanup costs its subsidiaries will be called on to bear, if any,
associated with these sites will have a material adverse effect on the financial
condition or results of operations of the Company and its subsidiaries;
management believes the extent of the subsidiaries' involvement, if any, to be
minor in relation to that of other named potentially responsible parties, a
significant number of which are substantial companies.

Employees

As of May 31, 1995, the Company and its subsidiaries employed approximately
7,900 people, of whom approximately 4,900 were hourly workers and approximately
3,000 were salaried employees. Approximately 4,300 employees were represented by
unions under collective bargaining agreements, of which approximately 1,750 were
covered by one contract with the UMWA, which currently expires on August 1,
1998. The Company considers its relations with its employees to be satisfactory.

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

Properties

The headquarters building of the Company is a modern twin tower eight-story
building of masonry and steel construction, containing approximately 200,000
square feet of office space, located on a plot of land in excess of 13 acres in
Tampa, Florida.

Legal Proceedings

Plan of Reorganization. The Plan of Reorganization was confirmed by the
Bankruptcy Court on March 2, 1995. A limited appeal from the order confirming
the Plan of Reorganization was filed by the United States on behalf of the EPA.
Notwithstanding the filing of such appeal, the Plan of Reorganization became
effective on March 17, 1995. The Company and the EPA have resolved all issues on
appeal. On July 11, 1995 the Bankruptcy Court entered its Order Granting Motion
to Approve Agreement of the United States and the Debtor Regarding Releases and
Injunctions Under Amended Joint Plan of Reorganization Dated as of December 9,
1994. A motion to dismiss the appeal has been filed and an order dismissing the
appeal will be entered shortly.

Despite the confirmation and effectiveness of the Plan of Reorganization,
the Bankruptcy Court continues to have jurisdiction to, among other things,
resolve disputed prepetition claims against the Company, resolve matters related
to the assumption, assumption and assignment, or rejection of executory
contracts pursuant to the Plan of Reorganization, and to resolve other matters
that may arise in connection with or relate to the Plan of Reorganization. (For
example, see Note 11 ("Litigation Related to Chapter 11 Distributions to Certain
Holders of Subordinated Notes and/or Debentures and Chapter 11 Adversary
Proceeding Filed by Certain Holders of Series B & C Senior Notes") of Notes to
Financial Statements.) Except as described in "Certain Risk Factors -- Tax
Considerations" and "-- Disputed Claims Reserves," provision was made under the
Plan of Reorganization in respect of all prepetition liabilities of the Company.

Asbestos-Related Litigation Settlements. As discussed more fully under
"Recent History", prior to filing the Chapter 11 Cases, the Company and the
Indemnitees were subject to significant and mounting Veil Piercing Litigation
arising from the LBO and the activities of Celotex, a former subsidiary of the
Company. Celotex filed for protection under Chapter 11 on October 12, 1990 as a
result, in part, of increasingly burdensome asbestos litigation. In the Veil
Piercing Litigation, the Asbestos Claimants sought (i) to pierce the corporate
veil that existed between Celotex and Original Jim Walter prior to the LBO and
(ii) to unwind the LBO. According to the Asbestos Claimants, if Original Jim
Walter were to be deemed responsible for Celotex's alleged multi-billion dollar
asbestos liabilities, the debt issued in connection with the LBO would have
rendered the Company

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insolvent, making the LBO a fraudulent conveyance. The Asbestos Claimants
asserted at various times that the amount of Celotex's asbestos liabilities
could reach $10 billion. Any finding that the Company could be liable for all or
any part of these liabilities would have threatened the Company's existence.

After the filing of the Chapter 11 Cases, the Company commenced the
Adversary Proceeding. After a full trial (the "Veil Piercing Trial"), the
Bankruptcy Court on April 18, 1994 found in favor of the Company on every claim
asserted in the Adversary Proceeding. The United States District Court for the
Middle District of Florida affirmed the Bankruptcy Court's decision on appeal on
October 13, 1995. The decision of the District Court was appealed to the United
States Court of Appeals for the Eleventh Circuit. On or about April 28, 1995, a
stipulation of dismissal of that appeal was filed pursuant to the terms of the
Veil Piercing Settlement described below.

On April 28, 1994, the Company commenced an action (the "Celotex Action")
in the Celotex bankruptcy proceeding seeking a ruling that, as a subsidiary of
Jim Walter Corporation, Celotex alone had standing to assert the Veil Piercing
Claims and that all creditors of Celotex were bound by the decisions in the
Adversary Proceeding. If granted, the relief sought in the Celotex Action would
have barred any future Veil Piercing Claims from being brought against the
Company or any other entity. Counsel for the Asbestos Claimants had indicated
that they would assert that only the named defendants in the Adversary
Proceeding could be bound by the decisions in that action, leaving thousands of
unnamed and future claimants free to relitigate the same issues raised therein.
The Celotex Action was dismissed without prejudice on October 13, 1994 for lack
of a case and controversy and for failure to join an indispensable party.
Counsel for the Asbestos Claimants asserted that they would vigorously oppose
any attempt by the Company to obtain an adjudication in any forum to the effect
that the Asbestos Claimants or any other individual claimants lack standing to
raise Veil Piercing Claims.

Prior to the Veil Piercing Trial, a number of the Company's creditors
reached a settlement agreement with the Asbestos Claimants and Celotex to
resolve the Veil Piercing Claims, the Veil Piercing Litigation and the Adversary
Proceeding (the "Initial Settlement"). The Company did not join in the Initial
Settlement and filed objections in the Chapter 11 Cases thereto.

On October 17, 1994, a hearing was commenced in the Chapter 11 Cases on the
fairness of the Initial Settlement and certain other issues relating to the
payment of post-petition interest to unsecured creditors of the Company and
challenges to the voting process. Before the completion of that hearing, all
parties conducted intensive settlement negotiations. As a result of those
negotiations, the Company, the Asbestos Claimants, certain creditors of the
Company, KKR, Jim Walter Corporation, Celotex and others agreed upon the terms
of a global settlement, ultimately resulting in the execution of the Second
Amended and Restated Veil Piercing Settlement Agreement dated as of November 22,
1994 (the "Veil Piercing Settlement"), the terms of which are embodied in and
made effective by the Plan of Reorganization.

Under the Veil Piercing Settlement, all pending and future Settlement
Claims are settled, satisfied, released, barred and discharged and all persons
that have asserted or may in the future assert Settlement Claims are permanently
enjoined from, among other things, (i) commencing, conducting or continuing in
any manner, directly or indirectly, any proceeding of any kind in respect of
Settlement Claims against, among others, the Company, KKR and any or all of
their present and former parents, subsidiaries, stockholders, partners,
officers, directors and employees (the "Released Parties"), (ii) enforcing,
levying, attaching, collecting or otherwise recovering by any manner, directly
or indirectly, any judgment, award, decree or order against any of the Released
Parties in respect of Settlement Claims and (iii) creating, perfecting or
otherwise enforcing in any manner, directly or indirectly, any encumbrance of
any kind against any of the Released Parties in respect of Settlement Claims.

The Veil Piercing Settlement was intended to resolve finally all Settlement
Claims. The Veil Piercing Settlement was signed by, among others, Celotex, Jim
Walter Corporation and counsel for the Asbestos Claimants, thus binding them to
the terms thereof. To implement the Veil Piercing Settlement, all present and
future holders of Settlement Claims other than Celotex, including Asbestos
Claimants, were certified by the Bankruptcy Court as a class (for settlement
purposes only) under applicable bankruptcy rules and the Federal Rules of Civil
Procedure (the "Class"). A representative of the Class was appointed by the
Bankruptcy Court (the "Class Representative"). All potential members of the
Class who could be identified received actual notice of the terms of the Veil
Piercing Settlement and the Plan of Reorganization in addition to wide
publication notice. The forms of notice were approved by the Bankruptcy Court.
The Class Representative and Celotex each filed proofs

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of claim in the Chapter 11 Cases for the Settlement Claims. The Company filed
objections to those proofs of claim and the Bankruptcy Court allowed the
Settlement Claims pursuant to the Veil Piercing Settlement in the aggregate
amount of $375 million.

The Plan of Reorganization established a class of all present and future
holders of Settlement Claims ("Class U-7"). A bar date for the filing of Class
U-7 claims was set and notice thereof was approved by the Bankruptcy Court and
given by the Company to all known Veil Piercing Claimants and by publication.
For voting purposes, every member of Class U-7 was temporarily allowed a $1
claim. Every Class U-7 claimant was given an opportunity to vote on the Plan of
Reorganization. Class U-7 approved the Plan of Reorganization by a vote of
73,861 in favor to 16 opposed. No member of Class U-7 filed an objection to the
Plan of Reorganization or to the Veil Piercing Settlement embodied therein.

The Plan of Reorganization provides that acceptance of the Plan of
Reorganization by Class U-7 binds any and all present or future holders of
Settlement Claims to the terms of the Plan of Reorganization and thus bars them
from bringing any Settlement Claims against the Company, the Indemnitees or any
of the other Released Parties. Under the terms of the Veil Piercing Settlement,
the stated amount of the settlement ($375 million) (the "Celotex Settlement
Fund") was paid under the Plan of Reorganization in the form of Common Stock,
cash and Notes to a fund (the "Celotex Settlement Fund Recipient") that will
hold the proceeds for the exclusive benefit of the Veil Piercing Claimants (as
defined in the Veil Piercing Settlement). Under the Plan of Reorganization, all
Settlement Claims must be channeled to the Celotex Settlement Fund Recipient to
be administered under the jurisdiction of the bankruptcy court in the Celotex
bankruptcy proceeding.

On March 2, 1995, the Bankruptcy Court entered a confirmation order which,
among other things, (i) provided for the satisfaction, discharge and release of
the Settlement Claims, (ii) included an injunction permanently channelling all
Settlement Claims to the Celotex Settlement Fund Recipient, (iii) found the Veil
Piercing Settlement to be fair and reasonable and (iv) provided that the Class
shall be deemed to have provided releases of all Released Parties under the Veil
Piercing Settlement.

By orders dated February 13 and 25, 1995, the Celotex bankruptcy court
approved the Veil Piercing Settlement and directed Celotex to render performance
in accordance with its terms. In addition, the Celotex bankruptcy court
appointed a legal representative to protect the interests of unknown asbestos
bodily injury claimants. After review of the Veil Piercing Settlement, that
legal representative informed the Celotex bankruptcy court that the Veil
Piercing Settlement should be approved as being in the best interests of such
claimants.

On March 17, 1995, the Celotex bankruptcy court issued an order authorizing
the Celotex Settlement Fund Recipient to receive the Celotex Settlement Fund for
the exclusive benefit of the Veil Piercing Claimants (as defined in the Veil
Piercing Settlement). The Celotex bankruptcy court also ordered that "all claims
of the type settled by the Veil Piercing Settlement . . . shall attach solely to
the [Celotex] Settlement Fund and all persons and entities are enjoined from
commencing or continuing any suit, arbitration or other proceeding of any type
against any and all of the Released Parties . . . arising out of any such
claims." The Celotex bankruptcy court also enjoined anyone from taking any
action against the Celotex Settlement Fund without the prior approval of the
Celotex bankruptcy court.

Under the terms of the Veil Piercing Settlement, all parties thereto have
agreed to use their best efforts to obtain a confirmation of a plan of
reorganization in the Celotex bankruptcy proceeding that includes a provision
for and injunction pursuant to Section 524(g) of the Bankruptcy Code. Section
524(g) is part of the 1994 amendments to the Bankruptcy Code. It provides for
permanent supplemental injunctions, such as the ones contemplated in the Veil
Piercing Settlement, to protect third parties who are not debtors in bankruptcy.
Thus, a supplemental injunction under Section 524(g) would operate to bar future
Settlement Claims against the Company, the Indemnitees and the other Released
Parties. There had been some disputes about the statutory authorization of such
injunctions under caselaw before the enactment of Section 524(g). Under Section
524(g), the Celotex bankruptcy court may (i) bind all present and future holders
of Settlement Claims to the terms of the Veil Piercing Settlement and (ii)
enjoin such holders from bringing Settlement Claims against any Released Party
in the future.

The Plan of Reorganization does not provide for a Section 524(g)
injunction. However, as discussed above, under the terms of the Veil Piercing
Settlement the parties to the Celotex bankruptcy proceeding are required to seek
in good faith the confirmation of a plan of reorganization that contains such a
provision. A plan of reorganization has already been proposed in the Celotex
bankruptcy proceeding which provides for an

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injunction under Section 524(g). There will be an evidentiary hearing on
October 17, 1995, in the Celotex bankruptcy proceeding to consider all
objections to the proposed disclosure statement for the plan of reorganization
proposed by Celotex. The hearing will cover claims by certain constituencies
in the Celotex bankruptcy proceeding that the proposed Celotex plan of
reorganization does not comply with the Veil Piercing Settlement, and may
result in changes to the proposed Celotex plan of reorganization, which could
affect the availability of a Section 524(g) injunction in the Celotex
bankruptcy proceeding. Although there is no assurance that it will be
confirmed and consummated, if a Celotex plan of reorganization is confirmed and
consummated and it contains a Section 524(g) injunction, it would provide
additional protection for the Released Parties, including the Company.

Jim Walter Homes/Mid-State Homes. Jim Walter Homes and Mid-State Homes,
together with Mid-State Trust II and certain other parties, are involved in
litigation, primarily in the Bankruptcy Court, with approximately 750 owners of
houses constructed by Jim Walter Homes in south Texas. The homeowners seek
damages based upon alleged construction defects, common law fraud, and
violations of the Texas Deceptive Trade Practices Act, the Texas Consumer Credit
Code, federal and state debt collections statutes and the Racketeering Influence
Corruptions and Practices Act. Although Jim Walter Homes and Mid-State Homes
believe that the litigation is substantially without merit, a settlement
agreement ("Texas Settlement Agreement") has been reached with the attorney for
the homeowner claimants. The anticipated settlement amount will be approximately
$3.6 million in account balance reductions (of which approximately $1.25 million
represents a principal reduction), plus an approximate aggregate payment of
$27,500 in cash to certain clients and $2.9 million as attorney's fees (of which
$900,000 may be deferred and payable over the next five years). The consummation
of the Texas Settlement Agreement is subject to various conditions, including
approval by all of the parties thereto. It also contains provisions allowing
claimants to "opt out" or not participate in the Texas Settlement Agreement and
for the defendants to avoid the settlement in its entirety if, in their
judgment, the number of claimants who opt out is so large as to make the
settlement of little value. It also has a provision for the attorney for the
homeowner claimants to indemnify and hold harmless the defendants from any and
all claims, demands, causes of actions, lawsuits and settlements by the
homeowners. Further, it provides for the Bankruptcy Court to retain jurisdiction
over any claims which are not resolved by the Texas Settlement Agreement. On
June 27, 1995 the Bankruptcy Court ordered a notice to be sent to creditors of
the Company concerning the Texas Settlement Agreement which provided that any
objections to the settlement be filed with the Bankruptcy Court by July 12,
1995. On July 13, 1995, the Bankruptcy Court entered its Order Granting Motion
to Approve Compromise and Settlement Agreement and the parties have commenced
implementing the Texas Settlement Agreement.

In May 1995 Jim Walter Homes and Mid-State Homes settled a class action by
purchasers of houses constructed by Jim Walter Homes in South Carolina since
December 27, 1989 in which the plaintiffs contended that Jim Walter Homes
violated certain provisions of the South Carolina Consumer Protection Code (the
"South Carolina Statute") relating to a borrower's right to choose the
borrower's attorney in certain transactions. See Note 11 ("South Carolina Class
Actions") of Notes to Financial Statements for additional information concerning
the settlement. Jim Walter Homes and Mid-State Homes had filed an action in the
Bankruptcy Court for a declaratory judgment with respect to their liability, if
any, to purchasers of houses built by Jim Walter Homes in South Carolina from
July 1, 1982 (the date on which the South Carolina Statute become effective) to
December 27, 1989. Jim Walter Homes, Mid-State Homes and representatives of the
homeowners have negotiated a proposed settlement of that action which will
require a cash payment of approximately $3 million, which after application of
these settlement proceeds to pay existing arrearages on the homeowners'
mortgages will result in a net cash outlay of approximately $1,050,000. In
addition, legal fees of approximately $360,000 will be paid. The proposed
settlement is subject to the Bankruptcy Court's approval upon submission of an
appropriate motion. The proposed settlement may involve additional account
classifications which are in the process of being analyzed and which may be
included in an amended complaint to be filed in the above-described declaratory
judgment action.

During the year ended May 31, 1995, $18.0 million was accrued for the
anticipated settlement amounts described in the two preceding paragraphs.

Jim Walter Resources. On May 31, 1995 the Company and Jim Walter Resources
commenced a lawsuit in the Circuit Court for Tuscaloosa County, Alabama against
a group of insurance companies with which the Company has business interruption
insurance seeking damages in excess of $25 million for loss from interruption of
Jim Walter Resources' business resulting from a fire in November 1993 in Jim
Walter Resources' Mine No. 5. See "Business and Properties -- Jim Walter
Resources" and Note 11 of Notes to Financial Statements. The complaint also
seeks a declaratory judgment concerning the insurers' contentions that (i) the
risk which caused the loss was not insured because it was not fortuitous, but
was spontaneous combustion known to occur in Jim Walter Resources' mines, and
(ii) the Company failed to disclose the risk of loss from spontaneous combustion
and that the insurance policies are void or voidable because of such failure.
The lawsuit is in its initial stages, but the Company and Jim Walter Resources
believe their claim is meritorious and intend to pursue it vigorously.

U.S. Pipe -- Environmental Penalty. U.S. Pipe has recently entered into an
administrative consent order with the New Jersey Department of Environmental
Protection pursuant to which it agreed, among other things, to pay a civil
penalty of $187,000 to resolve alleged violations regarding its plant in
Burlington, New Jersey. The

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Company does not expect the civil penalty or any other aspect of the order to
have a materially adverse effect on its consolidated financial position. See
Note 11 of Notes to Financial Statements ("Environmental Matters").

Other. The Company and its subsidiaries are involved in various other
proceedings arising in the ordinary course of their businesses. The Company
provides for costs relating to these matters when a loss is probable and the
amount is reasonably estimable. The effect of the outcome of these matters on
the Company's future results of operations cannot be predicted because any such
effect depends on future results of operations and the amount and timing of the
resolution of such matters. Management does not expect that any of such other
proceedings will have a material adverse effect on the Company's consolidated
financial position.

MANAGEMENT
Directors and Executive Officers

Set forth below is a list showing the names, ages (as of September 15,
1995) and positions of all Directors of the Company, and, where applicable,
the executive office or offices held by each Director with the Company.

Name Age Position
---- --- --------

James W. Walter 72 Chairman and Director.

G. Robert Durham 66 Director; Chief Executive Officer.

Kenneth E. Hyatt 54 Director; President and Chief Operating Officer.

Howard L. Clark, Jr. 51 Director.

James B. Farley 64 Director.

Eliot M. Fried 62 Director.

James L. Johnson 68 Director.

Robert I. Shapiro 45 Director.

Michael T. Tokarz 45 Director.

James W. Walter has been the Chairman and a Director of the Company since
1988. Mr. Walter will retire as Chairman of the Company effective October 6,
1995 and thereafter will be the Chairman Emeritus and remain a Director of the
Company. Mr. Walter founded Walter Construction Co., a predecessor of Original
Jim Walter, in 1948 and Original Jim Walter (incorporated in 1955). He was
President and Chief Executive Officer of Original Jim Walter from 1955 to 1963,
Chairman and Chief Executive Officer from 1963 to 1983 and Chairman until 1988.
He is a Director of Anchor Glass Container Corporation and Contel Cellular, Inc.

G. Robert Durham has been Chief Executive Officer and a Director of the
Company since June 1991, and also served as President of the Company from
June 1991 to August 1995. Mr. Durham will become the Chairman of the Company
effective October 6, 1995. He was Chairman, President and Chief Executive
Officer of Phelps Dodge Corporation, a producer of copper, truck wheels and
rims, and carbon black, from 1987 to 1989, when he took early retirement.
Prior to 1987 he was President and Chief Operating Officer (1985-1987) and
held other executive positions (1967-1985) with Phelps Dodge Corporation
and/or its affiliated companies. He also is a Director of Homestake Mining
Company, MinCorp Holdings Inc. and The FINOVA Group Inc. and a Trustee of
Mutual of New York.

Kenneth E. Hyatt served as President and Chief Executive Officer and a
Director of Celotex from 1990 until shortly prior to his election, effective
September 1, 1995, as President and Chief Operating Officer of the Company.
Prior thereto, Mr. Hyatt held various management and executive positions with
various subsidiaries of Original Jim Walter. In 1986 he was elected Executive
Vice President and Chief Operating Officer of Original Jim Walter. Following
the LBO, Mr. Hyatt joined with an investors group in the acquisition of
Celotex and certain related entities. In October 1990 Celotex and one of its
subsidiaries filed voluntary petitions for reorganization under Chapter 11 of
the Bankruptcy Code in the Bankruptcy Court for the Middle District of Florida,
Tampa Division, as a result of massive litigation involving asbestos-related
liabilities. The Celotex Settlement Fund Recipient is a principal stockholder
of the Company. See "Security Ownership of Management and Principal
Stockholders -- Ownership of Principal Stockholders." Mr. Hyatt has been a
Director of the Company since September 12, 1995.

Howard L. Clark, Jr. has been the Vice Chairman of Lehman, an investment-
banking firm, since February 1993; prior thereto he served as Chairman and Chief
Executive Officer of Shearson Lehman Brothers, Inc. Prior thereto he was an
Executive Vice President and the Chief Financial Officer of American Express
Company, a financial services firm. He also is a Director of Lehman, Plasti-
Line, Inc., The Maytag Corporation,

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the Securities Industry Association and The Fund American Companies, Inc. Mr.
Clark has been a Director of the Company since March 17, 1995.

James B. Farley is the retired Chairman of the Board, and a current
Trustee, of Mutual of New York, a life insurance company. He served as Chairman
and Chief Executive Officer of Mutual of New York from 1989 to 1994. He also is
a Director of Ashland Oil, Inc. and The Promus Companies. Mr. Farley has been a
Director of the Company since March 17, 1995.

Eliot M. Fried has been a Managing Director of Lehman or Shearson Lehman
Brothers, Inc. since 1991 and is Co-chairman of Lehman's Firm Wide Investment
Committee. He served as a Senior Vice President of Shearson Hayden Stone, a
predecessor firm of Lehman, from 1982 to 1991. He also is a Director of American
Marketing Industries, Bridgeport Machines, Inc., Energy Ventures, Inc., Lear
Seating Corporation, Sun Distributors L.P. and Vernitron Corporation. Mr. Fried
has been a Director of the Company since March 17, 1995.

James L. Johnson is Chairman Emeritus of GTE Corporation, a telephone
company and cellular service provider. From April 1988 to May 1992 he was
Chairman and Chief Executive Officer of GTE. He also is a Director of Contel
Cellular, Inc., CellStar Corporation, The FINOVA Group Inc., Harte-Hanks
Communications Inc. and Valero Energy Corp. and a Trustee of Mutual of New York.
Mr. Johnson has been a Director of the Company since March 17, 1995.

Robert I. Shapiro has been a Managing Director of Lehman since 1985. He is
Chairman of Lehman's Employee Benefit Plans Committee and a Trustee of the
Lehman Brothers Pension Plan. Mr. Shapiro has been a Director of the Company
since March 17, 1995.

Michael T. Tokarz has been a general partner of KKR, a private investment
firm, since January 1993; prior thereto he was an associate at KKR since
September 1985. He also is a Director of Safeway, Inc., K-III Communications
Corporation, Flagstar Companies, Inc., Flagstar Corporation, Neway Anchorlok
International, Inc., KSL Recreation Corporation and IDEX Corporation. Mr. Tokarz
has been a Director of the Company since 1987.

Except as described under "Board of Directors" below, Directors of the
Company are elected by the stockholders of the Company. Each Director holds
office until his successor is elected and qualified. The Company is not aware of
any family relationships among any of the foregoing Directors.

Set forth below is a list showing the names, ages (as of September 15,
1995) and positions of the executive officers of the Company who are not
Directors of the Company.

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Name Age Offices
---- --- -------

Kenneth J. Matlock 67 Executive Vice President and Chief Financial
Officer

William Carr . 65 President and Chief Operating Officer of Jim
Walter Resources

Frank A. Hult . 44 Vice President and Controller of the Company

Donald M. Kurucz 56 Vice President and Treasurer of the Company

Robert W. Michael 54 Senior Vice President and Group Executive of the
Company; President and Chief Operating Officer of
Jim Walter Homes

Sam J. Salario 66 President of Mid-State Homes; Vice President of
Jim Walter Homes

William N. Temple 62 Senior Vice President and Group Executive of the
Company; President and Chief Operating Officer of
U.S. Pipe

David L. Townsend 41 Vice President-Human Resources/Public Relations of
the Company

John F. Turbiville 67 Vice President-Legal and Secretary of the
Company

William H. Weldon 63 Senior Vice President-Finance and Chief Accounting
Officer of the Company

Kenneth J. Matlock has been Executive Vice President and Chief Financial
Officer of the Company since 1991; prior thereto he was Senior Vice President
and Chief Financial Officer of the Company from 1988 to 1991. Mr. Matlock
also served as a Director of the Company from 1988 to September 1995. Mr.
Matlock joined Original Jim Walter in 1964, became Controller in 1970, Chief
Financial Officer in 1974 and Senior Vice President in 1984.

William Carr has been President and Chief Operating Officer of Jim Walter
Resources since 1991; prior thereto he was a Senior Executive Vice President and
Chief Operating Officer of Jim Walter Resources and President of its Mining
Division since 1976. He was a Vice President of Original Jim Walter from 1976 to
1988.

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

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

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

Sam J. Salario has been President of Mid-State Homes since 1984, and a Vice
President of Jim Walter Homes since 1972. Previously he served as an Assistant
Vice President (1963-1984), a Regional Supervisor (1961-1963) and a
Representative (1960-1961) with Mid-State Homes.

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

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

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John F. Turbiville has been a Vice President and the Secretary of the
Company since 1988. Previously he served as Assistant Secretary of the Company
(1988) and Original Jim Walter (1981-1988) and as a staff attorney (1979-1981)
with Original Jim Walter.

William H. Weldon has been a Senior Vice President and the Chief Accounting
Officer of the Company since 1991; he was Vice President, Controller and Chief
Accounting Officer of the Company from 1988 to 1991. Previously he served as
Vice President and Controller (1977-1988), Controller (1972-1977) and Assistant
Controller (1970-1972) of Original Jim Walter.

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

Board of Directors

Pursuant to the Plan of Reorganization and the Charter, the Board of
Directors of the Company consists of nine (9) directors. For the first three
years after the Effective Date of the Plan of Reorganization (the "Initial Three
Year Term"), the Board will be selected as follows (subject to the exceptions
discussed in the next paragraph): three directors will be G. Robert Durham,
James W. Walter and a senior officer of the Company (currently Kenneth E. Hyatt)
or their successors who shall be selected by the remaining directors from the
senior officers of the Company); one director will be a person designated by
KKR (the "KKR Director") (initially Michael T. Tokarz); three directors will be
persons designated by Lehman (the "Lehman Directors") (initially Howard L.
Clark, Jr., Eliot M. Fried and Robert I. Shapiro); and two directors (the
"Independent Directors") (initially James B. Farley and James L. Johnson) will
be persons who (a) are not (i) officers, affiliates, employees, Interested
Stockholders, consultants or partners of any Significant Stockholder or any
affiliate of any Significant Stockholder or of any entity that was dependent
upon any Significant Stockholder or any affiliate of any Significant
Stockholder for more than 5% of its revenues or earnings in its most recent
fiscal year, (ii) an officer, employee, consultant or partner of the Company
or any of its affiliates, or an officer, employee, Interested Stockholder,
consultant or partner or any entity that was dependent upon the Company or any
of its affiliates for more than 5% of its revenues or earnings in its most
recent fiscal year or (iii) any relative or spouse of any of the foregoing
persons or a relative of a spouse of any of the foregoing persons and (b) are
selected by management of the Company from a list of qualified candidates
provided by an independent search firm selected by management and Lehman. For
these purposes "Interested Stockholder" means, with respect to any person, any
other person that together with its affiliates and associates beneficially
owns (as defined in Rule 13d-3 under the Exchange Act) 5% or more of the equity
securities of such person, and "Significant Stockholder" means an Interested
Stockholder of the Company.

If, at any time during the Initial Three Year Term, (i) after six months
following the Effective Date of the Plan of Reorganization, Lehman notifies KKR
that it has determined to transfer to KKR the right to appoint one of the three
Lehman Directors or (ii) Lehman and its affiliates fail to have beneficial
ownership (as defined in Rule 13d-3 under the Exchange Act) of 8% of the
outstanding Common Stock (without giving effect to shares of Common Stock held
in escrow pursuant to the Plan of Reorganization; see "Security Ownership of
Management and Principal Stockholders" and "Description of Capital Stock --
Additional Stock Issuances") (the "Outstanding Common Stock") and KKR and its
affiliates have beneficial ownership of 8% or more of the Outstanding Common
Stock at such time, then, in each case, KKR shall have the right to compel one
Lehman Director selected by Lehman to resign as a director and to appoint as a
successor an additional KKR Director. If, at any time during the Initial Three
Year Term, there are two KKR Directors and KKR and its affiliates fail to have
beneficial ownership of 8% or more of the Outstanding Common Stock while Lehman
and its affiliates have beneficial ownership of 8% or more of the Outstanding
Common Stock, then Lehman shall have the right to compel one KKR Director
selected by KKR to resign as a director and to appoint as a successor an
additional Lehman Director. If, at any time during the Initial Three Year Term,
either Lehman and its affiliates or KKR and its affiliates fail to have
beneficial ownership of 5% or more of the Outstanding Common Stock, then the
Lehman Directors or the KKR Director(s), as the case may be, shall resign and
the remaining directors shall appoint their successor(s) for the remainder of
the Initial Three Year Term; provided, however, that KKR shall be entitled to
have one KKR Director during the Initial Three Year Term if the number of shares
of Common Stock beneficially owned by KKR and its affiliates, together with
shares of Common Stock held in escrow pursuant to the Plan of Reorganization
that would be distributed to KKR or its affiliates upon release from escrow,
constitutes 5% or more of the Outstanding Common Stock and shares held in escrow
pursuant to the Plan of Reorganization.

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After the Initial Three Year Term, all the directors of the Company shall
be elected by the stockholders of the Company annually for a term of one year
each.

Committees of the Board of Directors

The Board of Directors of the Company has established an Audit Committee,
a Compensation Committee, a Finance Committee, a Nominating Committee, an
Environmental, Health and Safety Committee and one special committee, the Tax
Oversight Committee. The Board may, from time to time, establish certain other
committees to facilitate the management of the Company.

The Audit Committee is responsible for meeting with representatives of the
Company's independent certified public accountants and financial management to
review accounting, internal control, auditing and financial reporting matters,
and is also responsible, among other things, for maintaining liaison with and
exercising such supervision of the actions of said accountants in whatever
manner and to whatever extent shall be deemed, at its discretion, necessary,
proper and in the best interest of the Company and its stockholders. The Audit
Committee consists of five Directors who are not and never have been employees
of the Company (initially Eliot M. Fried, Chairman, James B. Farley, James L.
Johnson, Robert I. Shapiro and Michael T. Tokarz).

The Compensation Committee is responsible for reviewing and approving
officer and executive salaries in amounts over $100,000 annually and for
reviewing and recommending for approval by the Board of Directors executive and
key employee compensation plans, including incentive compensation, stock
incentives and other benefits, and consists of five Directors who are not and
never have been employees of the Company (initially James L. Johnson, Chairman,
Howard L. Clark, Jr., James B. Farley, Eliot M. Fried and Michael T. Tokarz).

The Finance Committee is responsible for recommendations to the Board of
Directors concerning financings, dividends, discretionary contributions by the
Company under the Company's employee benefit plans and other financial matters,
approval of the designation of the investment fund managers for the Company's
employee benefit plans, and approval of investment of the Company's funds, by
establishment of policies for investment of funds by the Company's officers. The
Finance Committee consists of five Directors (initially James B. Farley,
Chairman, Howard L. Clark, Jr., Eliot M. Fried, Michael T. Tokarz and James W.
Walter).

The Environmental, Health and Safety Committee is responsible for receiving
environmental, health and safety reports from the Company's and its
subsidiaries' environmental counsel and engineers and health and safety
personnel; examining the Company's and its subsidiaries' compliance with
environmental, reclamation, health and safety requirements and the policies
pertaining thereto; reporting the same to the Board of Directors; approving
the proposed scope of internal and independent environmental and health and
safety audits; and periodically evaluating and recommending to the Board of
Directors changes in the Company's and its subsidiaries' environmental,
health and safety policies. The Environmental, Health and Safety Committee
consists of three Directors (initially Michael T. Tokarz, Chairman, James L.
Johnson and Robert I. Shapiro).

The Nominating Committee is responsible for establishing the criteria for
and the qualifications of persons suitable for nomination as Directors,
including nominees recommended by stockholders, and reporting its
recommendations to the Board of Directors. During the Initial Three Year Term,
selection of Directors is subject to restrictions discussed in "Board of
Directors" above. The Nominating Committee consists of five Directors (initially
Howard L. Clark, Jr., Chairman, James B. Farley, Eliot M. Fried, James L.
Johnson and Michael T. Tokarz).

The Tax Oversight Committee is a special purpose temporary committee and
is responsible for (i) approving all settlements and agreements by the Company
or any of its subsidiaries regarding all Federal Income Tax Claims and (ii)
determining Veil Piercing Settlement Tax Savings Amounts and related
responsibilities, all as more particularly described under "Description of
Capital Stock -- Additional Stock Issuances." The members of the Tax Oversight
Committee shall consist at all times of two Independent Directors and a
Director (or other person) designated by Lehman (initially Robert I. Shapiro,
Chairman, James B. Farley and James L. Johnson).

Pursuant to the Charter and By-laws, at all times during the Initial Three
Year Term each committee of the Board of Directors (other than the Tax Oversight
Committee, which shall be constituted as described above) shall include such
number of directors (but in any event at least one director) designated by each
of KKR and Lehman so that each of KKR and

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Lehman has representation on each such committee proportionate to the
representation it has on the Board of Directors. The Charter provides that the
foregoing provision of the By-laws and certain other provisions of the By-laws
cannot be amended by the Board of Directors during the Initial Three Year Term
unless 67% of the whole Board of Directors votes in favor of the amendment.
Thereafter, the affirmative vote of a majority of directors will be required to
amend those provisions.

Directors' Compensation

Non-employee Directors of the Company (Messrs. Clark, Farley, Fried,
Johnson, Shapiro and Tokarz) are paid retainer fees of $25,000 per year;
committee chairmen receive an additional retainer fee of $5,000 per year. Each
non-employee Director also receives a fee of $1,500 for each Board or committee
meeting attended. The Company and its subsidiaries do not pay fees to Directors
who are employees of any of the Company and its subsidiaries.

On April 11, 1995, the Board approved and adopted the Walter Industries,
Inc. Directors' Deferred Fee Plan under which non-employee Directors may elect
to defer all or a portion of their Director's fees. The deferred fees, at each
electing Director's option, are credited to either an income account or a stock
equivalent account or divided between the two accounts. The income account is
credited quarterly with interest at the prime rate and the stock equivalent
account is credited with an amount equal to the number of equivalent shares of
Common Stock which could have been purchased with the cash dividend, if any,
which would have been payable had the participant been the actual owner of the
number of shares of Common Stock credited to his account. Payments begin, at
the participant's election, upon the later of the termination of his services
as a Director or the date of retirement from his principal occupation or
employment in such number of annual installments as shall be determined by the
Company. Payments from the income account are in cash and payments from the
stock equivalent account are in cash at the Common Stock's then current market
value, or, at the Company's option, in shares of Common Stock. Mr. Farley has
elected to have all of his Director's fees credited to a stock equivalent
account.

Executive Compensation

The following table sets forth information concerning compensation paid to
or accrued for the account of the Chief Executive Officer of the Company and
each of the next four (4) most highly compensated executive officers of the
Company whose cash compensation exceeded $100,000 (the Chief Executive Officer
and each other such executive officer, the "Named Executive Officers") during
the fiscal years ended May 31, 1995 and 1994 for services rendered in all
capacities:

56
<PAGE>
<TABLE><CAPTION>

SUMMARY COMPENSATION TABLE

Annual Compensation
-----------------------------------------
Name and Year ended All Other
Principal Position May 31,(1) Salary Bonus(2) Compensation(3)
--------------------------- ----------------- -------------------- -------------------- -----------------------
<S> <C> <C> <C> <C>
G. Robert Durham, 1995 $466,764 $1,225,000 N/A
President and CEO 1994 460,214 400,000 $69,275

James W. Walter, Chairman 1995 370,366 1,225,000 N/A
1994 369,603 400,000 53,880

Kenneth J. Matlock, 1995 258,351 840,000 N/A
Executive Vice President 1994 248,992 235,000 36,000
and Chief Financial
Officer

William H. Weldon, Senior 1995 183,618 565,000 N/A
Vice President--Finance 1994 173,688 160,000 25,798
and Chief Accounting
Officer

William N. Temple, Senior 1995 205,202 287,000 N/A
Vice President and Group 1994 180,608 120,000 8,815
Executive; President of
U.S. Pipe
</TABLE>

(1) Disclosure is only provided as to the last two full fiscal years of the
Company because prior thereto it was not a "reporting company" pursuant to
Section 13(a) or 15(d) of the Exchange Act.

(2) For fiscal 1995, the amounts shown in this column include bonuses paid to
the Named Executive Officers pursuant to the Plan of Reorganization in
addition to incentive bonus compensation. At the time of filing of the
Chapter 11 Cases, accounting professionals for the official committees in
the Chapter 11 Cases recommended that the Company adopt a retention bonus
arrangement, a common method of assuring retention of key personnel during
bankruptcy proceedings. The Company decided not to adopt such a retention
bonus plan, but determined instead to pay bonuses informally upon
completion of the reorganization to key personnel who continued their
employment with the Company and its subsidiaries during the pendency of the
Chapter 11 Cases (which were initiated on December 27, 1989 and concluded
on March 17, 1995) despite the unavailability of long-term incentive
compensation plans and the limitations on salaries and incentive
compensation imposed by the Bankruptcy Court during such time. The
Company's proposal to make such informal payments was incorporated in the
Plan of Reorganization and approved by the Bankruptcy Court. Such bonuses
were paid upon the Effective Date of the Plan of Reorganization in the
amounts of $800,000, $800,000, $600,000, $400,000 and $175,000 for Messrs.
Durham, Walter, Matlock, Weldon and Temple, respectively.

(3) The amounts shown in this column for fiscal 1994 represent the Company's
contributions for the account of each of the Named Executive Officers to
the Walter Industries Profit Sharing Plan (the "Profit Sharing Plan") and
accruals for the related Supplemental Profit Sharing Plan (the
"Supplemental Profit Sharing Plan") which provides benefits which would
have been provided under the tax-qualified Profit Sharing Plan but for
restrictions on such benefits imposed by the Internal Revenue Code of 1986,
as amended (the "IRC"). The Profit Sharing Plan and the Supplemental Profit
Sharing Plan amounts are for the plan year ended August 31, 1994. Amounts
for the plan year ending August 31, 1995 are not currently available, but
are anticipated not to be materially different from amounts for the plan
year ended August 31, 1994.

In its fiscal year ended May 31, 1995, the Company was not subject to
Section 162(m) of the IRC, which limits the deduction for compensation of
certain officers to one million dollars annually unless certain stated
performance goals are met.

Pension Plans

The table below sets forth the aggregate estimated annual retirement
benefits payable under the Pension Plan for Salaried Employees of Subsidiaries,
Divisions and/or Affiliates of Walter Industries (the "Pension Plan") and under
the Company's unfunded, non-qualified, Supplemental Pension Plan (the
"Supplemental Pension Plan" and together with the Pension Plan, the "Pension
Plans") for employees retiring at normal retirement age (65) on June 1, 1995 and
is based on social security covered compensation in effect on June 1, 1995:

57
<PAGE>
<TABLE><CAPTION>
PENSION PLAN TABLE

Years of Service
Remuneration 15 20 25 30 35
--------------------------------------------------------------

Benefit payments under the Pension Plans are based on final average annual
compensation (including overtime pay, incentive compensation and certain other
forms of compensation reportable as wages taxable for federal income tax
purposes) for the five (5) consecutive years within the final ten (10) years of
employment prior to normal retirement date (65) which produce the highest
average. This is equivalent to the sum of the amounts included under the Salary
and Bonus column headings in the Summary Compensation Table above. Benefit
amounts are shown on a straight-line annuity basis, payable annually upon
retirement at age 65. No offsets are made for the value of any social security
benefits earned. In the case of the Supplemental Pension Plan, the applicable
company may, in its sole discretion, elect to furnish any and all benefits due
by purchasing annuities, or by other means at its disposal, including payment of
the present value of such benefits.

Only employees of the Company's subsidiaries (except Jim Walter Homes,
Mid-State Homes, Best Insurors, Inc. ("Best Insurors"), Best Insurors of
Mississippi, Inc., JW Insurance Services, Inc., Dixie Building Supplies, Inc.
("Dixie Building Supplies") and Coast to Coast Advertising, Inc.) participate in
the Pension Plans. Of the Named Executive Officers, only Messrs. Matlock (due to
his past service with a subsidiary of the Company) and Temple are participants
in the Pension Plans with six (6) and ten (10) years of credited service,
respectively; Messrs. Durham, Walter and Weldon are not participants in the
Pension Plans.

Certain Compensation Arrangements

Durham Employment Agreement. The Company has an employment agreement with
G. Robert Durham dated June 19, 1993 (the "Durham Employment Agreement"),
pursuant to which the Company agreed to employ Mr. Durham as, and Mr. Durham
agreed to serve as, President and Chief Executive Officer and a member of the
Board of Directors of the Company until May 31, 1995. The Durham Employment
Agreement was automatically renewed on June 1, 1995 and shall be automatically
renewed from year to year on each June 1 thereafter until terminated by either
Mr. Durham or the Company on 60 days' written notice to the other party. The
Durham Employment Agreement provides that Mr. Durham will receive a base annual
salary of $450,000, with additional incentive compensation to be determined by
the Company's Board of Directors in accordance with past practices. Under the
Durham Employment Agreement, Mr. Durham is entitled to be indemnified for his
acts as an officer of the Company, and is entitled to participate in other
Company employee benefit plans, including the Profit Sharing Plan and the
Supplemental Profit Sharing Plan.

If Mr. Durham's employment is terminated, Mr. Durham shall be entitled to
receive his then current base salary for the balance of the Company's fiscal
year in which employment is terminated plus, if such termination is without
cause, a pro rata amount of incentive compensation for that year. In the case of
Mr. Durham's death during any period of renewal of the Durham Employment
Agreement, his executor, administrator, testamentary trustee, legatees or
beneficiaries, as the case may be, shall be entitled to receive his then current
base salary during the nine-month period following the date of death.

Profit Sharing Plans. Under the Profit Sharing Plan and the Supplemental
Profit Sharing Plan, amounts contributed by the Company for the benefit of the
participants become payable upon termination of employment. In the case of the
Supplemental Profit Sharing Plan, accrued amounts are payable, at the discretion
of the Company, in either a lump sum or in sixty (60) equal monthly
installments. While the Profit Sharing Plan

58
<PAGE>
provides retirement benefits for all salaried employees of the Company and
certain of its subsidiaries not covered by the Pension Plans, the Company makes
contributions to the Supplemental Profit Sharing Plan only for such employees as
to which the full contribution under the Profit Sharing Plan has been limited by
the IRC. For the Supplemental Profit Sharing Plan year to end August 31, 1995,
only four employees, Messrs. Walter, Durham, Matlock and Weldon, will qualify
for participation in the Supplemental Profit Sharing Plan.

Compensation Committee Interlocks or Insider Participation in Compensation
Decisions

During the fiscal year ended May 31, 1995, James W. Walter, Chairman and
a Director of the Company, and G. Robert Durham, President and Chief Executive
Officer and a Director of the Company, participated in deliberations of the
Company's Board of Directors concerning executive compensation. However, none
of the employee Directors (Messrs. Walter, Durham and Matlock) voted on
executive compensation matters in which they were directly involved; instead
they abstained on such occasions.

Certain Related Transactions

In July 1986, Waltsons, Inc., a family owned corporation in which James W.
Walter, Chairman and a Director of the Company, has a twenty percent (20%)
interest, acquired a fifty percent (50%) interest in the operations of Booker &
Company, Inc. ("Booker"), a wholesale distributor of building supplies and
material headquartered in Tampa, Florida. For over 30 years, Booker has been a
supplier of various building supplies and materials to Dixie Building Supplies.
During the fiscal year ended May 31, 1995, Booker's sales of building supplies
and materials to such subsidiary totaled $5,433,513.

In March 1995, Lehman acted as an underwriter in connection with the
public issuance by Mid-State Trust IV of $959,450,000 of Mid-State Trust IV
Asset Backed Notes, for which it received underwriting commissions and fees of
approximately $5,004,200. See "Business and Properties -- Mid-State Homes."

The Company believes that the terms of the transactions between the
Company and each of Booker and Lehman, respectively, are at least as favorable
to the Company as those that could be obtained from unaffiliated third parties.

On January 2, 1990, after filing for protection under Chapter 11 of the
Bankruptcy Code, the Company filed a declaratory judgment action in the
Bankruptcy Court. The suit named Celotex, Jim Walter Corporation (the company
by that name that was, in 1990, the parent of Celotex), and certain Asbestos
Claimants who had filed suits against, inter alia, the Company. The Company
sought a declaration, among other things, that the Company could not be held
liable for asbestos-related liabilities of Celotex under any theory, including
veil-piercing, alter ego, fraudulent conveyance or otherwise. On April 18, 1994
the Bankruptcy Court entered judgment in favor of the Company on all counts.
The judgment was affirmed by the District Court for the Middle District of
Florida on October 13, 1994. Thereafter, as part of an overall settlement
leading to the Plan of Reorganization, the Company entered into the Veil
Piercing Settlement with Celotex, Jim Walter Corporation, the Class, and various
other parties. As part of the Veil Piercing Settlement the Company paid $375
million to the Celotex Settlement Fund Recipient. That $375 million consisted
of Common Stock, cash, and Notes and will be held and distributed in accordance
with the terms of the Veil Piercing Settlement. See "The Company" and
"Business and Properties -- Legal Proceedings -- Asbestos-Related Litigation
Settlements." Mr. Hyatt, who became the Company's President and Chief Operating
Officer on September 1, 1995 and a Director of the Company on September 12,
1995, was formerly President of Celotex from 1990 until his recent resignation.

The Company has entered into a consulting agreement with Mr. Walter which
will become effective upon his retirement on October 6, 1995. The term of the
agreement is for a period of three years, commencing October 6, 1995, during
which time Mr. Walter will render to the Company such services of an advisory
or consulting nature as the Company may reasonably require. Mr. Walter will be
paid an annual consulting fee of $150,000. The agreement also contains a
restrictive covenant prohibiting, during the term of the agreement and for a
period of three years after its termination, Mr. Walter's employment by any
person, firm or corporation which is engaged in business in competition with
the Company or its subsidiaries, or his engaging in such business on his own
account.

SECURITY OWNERSHIP OF MANAGEMENT AND
PRINCIPAL STOCKHOLDERS

The following tables furnish information, as of September 15, 1995, as to:
(i) shares of Common Stock beneficially owned by each Director and Named
Executive Officer of the Company and shares of Common Stock beneficially owned
by all Directors and executive officers of the Company as a group; and (ii)
shares of Common Stock known by the Company to be beneficially owned by any
person owning beneficially more than five percent (5%) of the outstanding shares
of Common Stock, together with such person's address. (Except as indicated
below, to the knowledge of the Company each person indicated in the following
tables has sole voting and investment power as to the shares shown.)

59
<PAGE>

<TABLE><CAPTION>
Ownership of Directors and Executive Officers
---------------------------------------------

Name of Beneficial Owner Number of Shares Percent of Class(1)
------------------------ ---------------- -------------------
<S> <C> <C>
James W. Walter, 66,044(5) *
Chairman and Director

Howard L. Clark, Jr. (2) (2)
Director

James B. Farley 0 0%
Director

Eliot M. Fried (2) (2)
Director

James L. Johnson 10,000 *
Director

Robert I. Shapiro (2) (2)
Director

Michael T. Tokarz 14,268,589(3) 26.0
Director

G. Robert Durham 10,000 *
Director and Chief Executive Officer

Kenneth E. Hyatt 17,380(5) *
Director, President and Chief
Operating Officer

Kenneth J. Matlock 8,690(5) *
Executive Vice President
and Chief Financial Officer

William H. Weldon, 6,950(5) *
Senior Vice President--Finance
and Chief Accounting Officer

William N. Temple, 3,474(5) *
Senior Vice President and
Group Executive; President of U.S. Pipe

All Directors and executive officers as 14,437,420(4)(5) 26.3
a group
</TABLE>
____________________

* Owns less than 1% of outstanding Common Stock

(1) Unless otherwise indicated, all percentages in the table and the
accompanying footnotes are based on 54,868,766 shares of Common Stock being
issued (which includes 3,880,140 shares of Common Stock issued to an escrow
account on September 13, 1995 (180 days after the Effective Date of the
Plan of Reorganization) pursuant to the Plan of Reorganization; see
Footnote (5) and "Description of Capital Stock -- Additional Stock
Issuances"). As of September 15, 1995, 50,744,426 of such shares of Common
Stock had been delivered, with certain former creditors and stockholders of
the Company and its subsidiaries having the rights to receive delivery of
the remaining 4,124,340 shares of the 54,868,766 shares issued pursuant to
the Plan of Reorganization on the Effective Date of the Plan of
Reorganization promptly following their tender of certain required
documentation on or prior to the second anniversary of the Effective Date
of the Plan of Reorganization.

(2) Messrs. Clark, Fried and Shapiro are the Vice Chairman and Managing
Directors, respectively, of Lehman. See "Ownership of Principal
Stockholders" below for information concerning ownership of shares by
Lehman and its affiliate, Lehman Holdings.

(3) Mr. Tokarz is a general partner of KKR Associates, which is the sole
general partner of each of JWC Associates, L.P., JWC Associates II, L.P.
and KKR Partners II, L.P. (the "KKR Investors") and Channel One, and thus
Mr. Tokarz may be deemed to be a "beneficial owner" of the shares owned by
the KKR Investors and Channel One (see "Ownership of Principal

60
<PAGE>

Stockholders" below) within the meaning of Rule 13d-3 under the Exchange
Act. Mr. Tokarz disclaims beneficial ownership of such shares, except to
the extent of his pecuniary interest therein.

The number of shares of Common Stock indicated includes 3,553,380 shares of
Common Stock issued to an escrow account on September 13, 1995 (180 days
after the Effective Date of the Plan of Reorganization) for the benefit of
the KKR Investors pursuant to the Plan of Reorganization. See Footnote (4)
under "Ownership of Principal Stockholders" below and "Description of
Capital Stock -- Additional Stock Issuances." For so long as the KKR
Investors have the power to exercise voting rights with respect to all such
shares, or if all such shares were distributed to the KKR Investors, Mr.
Tokarz may be deemed to be a "beneficial owner" of such 3,553,380 shares of
Common Stock.

(4) Includes 14,268,589 shares of Common Stock beneficially owned by the KKR
Investors and Channel One which are deemed to be beneficially owned by Mr.
Tokarz. See Footnote (3). Does not include shares of Common Stock owned by
Lehman Holdings. See Footnote (2).

(5) Includes 23,689, 6,234, 3,117, 2,493, 1,246 and 3,604,495 additional shares
of Common Stock required to be issued to an escrow account for the benefit
of Messrs. Walter, Hyatt, Matlock, Weldon and Temple and all Directors and
executive officers as a group (including 3,553,380 shares for the benefit
of the KKR Investors), respectively, on September 13, 1995 (180 days after
the Effective Date of the Plan of Reorganization) pursuant to the Plan of
Reorganization. To the extent that certain contingencies regarding federal
income tax claims of the Company are resolved satisfactorily, such escrowed
shares will be distributed to such persons under the Plan of
Reorganization. To the extent such matters are not settled satisfactorily,
such escrowed shares will be returned to the Company and cancelled. Until
such matters are finally determined, such persons will have the power to
exercise voting rights with respect to such respective escrowed shares of
Common Stock. See "Description of Capital Stock -- Additional Stock
Issuances." For so long as such persons have the power to exercise voting
rights with respect to all such escrowed shares, or if all such escrowed
shares were distributed to such persons, such persons will beneficially own
such 23,689, 6,234, 3,117, 2,493, 1,246 and 3,604,495 escrowed shares of
Common Stock, respectively.

<TABLE><CAPTION>
Ownership of Principal Stockholders
-----------------------------------

Name and Complete
Mailing Address Number of Shares Percent of Class(1)
-------------------- ---------------- -------------------
<S> <C> <C>
The Celotex Settlement Fund Recipient 10,941,326(2) 19.9
1 Metro Center
4010 Boy Scout Boulevard
Tampa, Florida 33607

Lehman Brothers Holdings, Inc. 7,862,639(2)(3)(5) 14.3(5)
3 World Financial Center
New York, NY 10285

The KKR Investors (JWC Associates, L.P., 14,268,589(4) 26.0
JWC Associates II, L.P. and
KKR Partners II, L.P.) and
Channel One Associates, L.P.
c/o Kohlberg Kravis Roberts & Co., L.P.
9 West 57th Street
New York, NY 10009
</TABLE>
____________________

(1) Unless otherwise indicated, all percentages in the table and the
accompanying footnotes are based on 54,868,766 shares of Common Stock being
issued (which includes 3,880,140 shares of Common Stock issued to an escrow
account on September 13, 1995 (180 days after the Effective Date of the
Plan of Reorganization) pursuant to the Plan of Reorganization; see
Footnote (4) and "Description of Capital Stock -- Additional Stock
Issuances"). As of September 15, 1995, 50,744,426 of such shares of Common
Stock had been delivered, with certain former creditors and stockholders of
the Company and its subsidiaries having the rights to receive delivery of
the remaining 4,124,340 shares of the 54,868,766 shares issued pursuant to
the Plan of Reorganization on the Effective Date of the Plan of
Reorganization promptly following their tender of certain required
documentation on or prior to the second anniversary of the Effective Date
of the Plan of Reorganization.

(2) The Celotex Settlement Fund Recipient has agreed to vote and execute
written consents with respect to the shares of Common Stock held by it in
proportion to the votes cast or consents executed and delivered by all
other holders of Common Stock. Identical restrictions on the voting of the
Celotex Settlement Fund Recipient's Common Stock are contained in the
Charter and in the Plan of Reorganization. See "Description of Capital
Stock -- Stockholder's Agreement" and "-- Tag-Along and Voting Rights
Agreement."

(3) Lehman transferred the shares of Common Stock which it received pursuant to
the Plan of Reorganization to its affiliate, Lehman Holdings.

(4) The shares of Common Stock are beneficially owned by the KKR Investors as
follows: 9,610,144 shares are beneficially owned by JWC Associates, L.P.;
63,680 shares are beneficially owned by JWC Associates II, L.P.; and
232,965 shares are beneficially owned by KKR Partners II, L.P., including
3,446,979, 22,841 and 83,560 shares of Common Stock issued to an escrow
account for the benefit of the respective KKR Investors on September 13,
1995 (180 days after the Effective Date of the Plan of Reorganization)

61
<PAGE>

pursuant to the Plan of Reorganization. To the extent that certain
contingencies regarding federal income tax claims of the Company are
resolved satisfactorily, such escrowed shares will be distributed to the
KKR Investors under the Plan of Reorganization. To the extent such matters
are not settled satisfactorily, such escrowed shares will be returned to
the Company and cancelled. Until such matters are finally determined, the
KKR Investors will have the power to exercise voting rights with respect to
such 3,553,380 escrowed shares of Common Stock. See "Description of Capital
Stock -- Additional Stock Issuances." For so long as the KKR Investors have
the power to exercise voting rights with respect to all such escrowed
shares, or if all such shares were distributed to the KKR Investors, the
KKR Investors will beneficially own such 3,553,380 escrowed shares of
Common Stock. The Company has been advised that as of September 15, 1995
Channel One beneficially owned 4,361,800 shares.

KKR Associates is the sole general partner of each of the KKR Investors and
Channel One. The general partners of KKR Associates are Henry R. Kravis,
George R. Roberts, Robert I. MacDonnell, Michael W. Michelson, Saul A. Fox,
Paul E. Raether, Michael T. Tokarz, James H. Greene, Jr., Perry Golkin,
Scott M. Stewart, Clifton S. Robbins and Edward A. Gilhuly.

(5) As a result of errors by the balloting agent in recording elections to
receive cash and Series B Notes in lieu of a portion of Common Stock to be
received under the Plan of Reorganization by holders of subordinated debt
of the Company outstanding prior to the Effective Date of the Plan of
Reorganization, the exact number of shares of Common Stock to be received
by Lehman and other holders of such debt was determined by the Bankruptcy
Court. Appeals have been filed to the Bankruptcy Court's decision, which
appeals, if successful, could cause additional shares of Common Stock to be
delivered to Lehman (in lieu of a portion of the cash and Series B Notes
previously delivered to Lehman) pursuant to the Plan of Reorganization.
When such appeals have been finally adjudicated, such number of shares will
be finally determinable. See Note 11 ("Litigation Related to Chapter 11
Distributions to Certain Holders of Subordinate Notes and/or Debentures")
of Notes to Financial Statements.

DESCRIPTION OF NOTES

General

The Notes being offered hereby are a portion of the Notes issued under an
Indenture dated as of March 17, 1995 (the "Indenture") between the Company and
United States Trust Company of New York, as trustee (the "Trustee"). The terms
of the Notes include those stated in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"), and as in effect on March 9, 1995, the date of the
qualification of the Indenture under the Trust Indenture Act. The Notes are
subject to all such terms, and Holders and prospective Holders are referred to
the Indenture and the Trust Indenture Act for a statement thereof. The following
summary of certain provisions of the Indenture does not purport to be complete
and is subject to, and is qualified in its entirety by reference to, the
Indenture, including definitions therein of certain terms used below. A copy of
the Indenture has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part. The definitions of certain terms used in the
following summary are set forth below under "Certain Definitions."

The Notes are secured by a first priority security interest in the Pledged
Shares described below under "Security". The Notes rank senior in right of
payment to all subordinated indebtedness of the Company and pari passu in right
of payment to all other senior indebtedness of the Company (including
indebtedness under the Bank Revolving Credit Facility described herein). As of
May 31, 1995, the aggregate amount of senior indebtedness of the Company was
$2,220,370,000 (including the Notes). As of May 31, 1995, the Company had no
subordinated indebtedness outstanding. See "Certain Covenants -- Limitation on
Incurrence of Indebtedness" below.

The Notes have been issued in fully registered form only, without coupons,
in denominations of $1,000 and integral multiples of $1,000. The Trustee is
acting as Registrar for the Notes and, together with the Company, as a Co-Paying
Agent. The Notes may be presented for registration of transfer and exchange at
the offices of the Registrar, which initially will be the Trustee's corporate
trust office. The Company may change any Paying Agent or Registrar without
notice to the Holders. The Company or any of its Subsidiaries may act in any
such capacity. The Company will pay principal (and premium, if any) on the Notes
at the Trustee's corporate office in New York, New York.

Principal, Maturity and Interest

The Notes are limited in aggregate principal amount to $490 million and
will mature on March 15, 2000. Interest on the Notes accrues at the rate of
12.19% per annum and is payable semiannually in cash on each September 15 and
March 15, commencing on September 15, 1995, to the Persons who are registered
Holders at the close of business on the September 1 and March 1 immediately
preceding the applicable interest payment

62
<PAGE>
date. The Company is obligated to pay interest (including post-petition interest
in any proceeding under the Bankruptcy Code) on overdue principal and overdue
installments of interest (without regard to any applicable grace period) at the
rate equal to 1% per annum in excess of the then applicable interest rate on the
Notes to the extent lawful.

Security

Pursuant to the Indenture, the Company and each of its Subsidiaries which
directly owns the capital stock of Subsidiaries indirectly owned by the Company
have executed and delivered to the Trustee the Pledge Agreement and the
Subsidiary Pledge Agreements, respectively, which provide, among other things,
that the outstanding Capital Stock of each of the Company's direct and indirect
Subsidiaries (defined with respect to the Company not to include Mid-State Homes
and its Subsidiaries or Cardem Insurance), whether owned on or acquired or
created after the date of the Indenture (the "Pledged Shares"), be pledged to
the Trustee by the Company or the applicable Pledgor Subsidiaries. The payment
and performance when due of all of the obligations of the Company under the
Indenture with respect to the Notes are secured by a first priority security
interest in the Pledged Shares (the "Collateral").

Upon the acceleration of the maturity of the Notes or the failure to pay
principal at maturity or upon redemption or mandatory repurchase of all or any
portion of the Notes, the Pledge Agreement and Subsidiary Pledge Agreements
provide for the foreclosure by the Trustee upon the Pledged Shares. Under the
terms of the Indenture, the proceeds from the Pledged Shares shall be applied
first, to amounts owing to the Trustee in respect of fees and expenses of the
Trustee and second, to the obligations under the Notes and the Indenture.

Optional Redemption

The Notes will be subject to redemption at any time at the option of the
Company, in whole or in part, upon not less than 30, nor more than 60, days'
notice, at a redemption price equal to 101% of the principal amount of the Notes
to be redeemed, plus accrued and unpaid interest thereon, if any, to the date of
redemption; provided, however, that if a redemption is made from the Excess
Proceeds of any Asset Sales as discussed below under "Certain Covenants --
Limitation on Asset Sales", the redemption price will be 100% of the principal
amount of the Notes to be redeemed, plus accrued and unpaid interest thereon, if
any, to the date of redemption; and provided, further, however, that if such
redemption is in part, not less than $150 million aggregate principal amount of
Notes shall be outstanding immediately after giving effect to such redemption.

If less than all of the Notes are to be redeemed, selection of Notes for
redemption will be made by the Trustee in compliance with legal and stock
exchange requirements, if any, or, if the Notes are not so listed, on a pro rata
basis, by lot or by such method as the Trustee shall deem fair and appropriate.
Notes and portions of Notes selected shall be in amounts of $1,000 or whole
multiples of $1,000, except that if all of the Notes of a Holder are to be
redeemed, the entire outstanding amount of Notes held by such Holder, even if
not a multiple of $1,000, shall be redeemed. Notice of redemption shall be
mailed by first class mail at least 30 but not more than 60 days before the
redemption date to each Holder of Notes to be redeemed at its registered
address. If any Note is to be redeemed in part only, the notice of redemption
that relates to such Note shall state the portion of the principal amount to be
redeemed. A new Note or Notes in principal amount equal to the unredeemed
portion will be issued in the name of the Holder thereof upon surrender of the
original Note.

Change of Control Offer to Purchase

Upon the occurrence of a Change of Control, each Holder will have the right
to require the Company to repurchase all or any part (equal to $1,000 or an
integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at a price equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the date
of purchase (the "Change of Control Payment"). Within 30 days following the date
on which the Company has actual knowledge that a Change of Control has occurred,
the Company will mail a notice to each Holder stating: (1) that the Change of
Control Offer is being made pursuant to such provisions under the Indenture and
that all Notes tendered will be accepted for payment; (2) the purchase price and
the purchase date, which will be no earlier than 30 days nor later than 60 days
from the date such notice is mailed (the "Change of Control Payment Date"); (3)
that any Note not tendered will continue to accrue interest; (4) that, unless
the Company defaults in the payment of the Change of Control Payment, all Notes
accepted for payment pursuant to the Change of Control Offer will cease to
accrue interest after the Change of Control Payment Date; (5) that Holders
electing to have any Notes purchased pursuant to a Change of Control

63
<PAGE>
Offer will be required to surrender the Notes, with the form entitled "Option of
Holder to Elect Purchase" on the reverse of the Notes completed, to the Paying
Agent at the address specified in the notice prior to the close of business on
the third Business Day preceding the Change of Control Payment Date; (6) that
Holders will be entitled to withdraw their election if the Paying Agent
receives, not later than the close of business on the third Business Day
preceding the Change of Control Payment Date, a telegram, telex, facsimile
transmission or letter setting forth the name of the Holder, the principal
amount of Notes delivered for purchase, and a statement that such Holder is
withdrawing his election to have such Notes purchased; and (7) that Holders
whose Notes are being purchased only in part will be issued new Notes equal in
principal amount to the unpurchased portion of the Notes surrendered, which
unpurchased portion must be equal to $1,000 in principal amount or an integral
multiple thereof. Notwithstanding anything to the contrary elsewhere in the
Indenture, the Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other laws and regulations thereunder to the extent such
laws and regulations are applicable in connection with the purchase of the Notes
in connection with a Change of Control.

If the Change of Control Payment Date is on or after an interest record
date and on or before the related interest payment date, any accrued and unpaid
interest shall be paid to the Person in whose name a Note is registered at the
close of business on such record date, and no additional interest shall be
payable to Holders who tendered pursuant to the Change of Control Offer.

On the Change of Control Payment Date, the Company shall (1) accept for
payment Notes or portions thereof tendered pursuant to the Change of Control
Offer, (2) deposit with the Paying Agent an amount equal to the Change of
Control Payment in respect of all Notes or portions thereof so tendered and (3)
deliver or cause to be delivered to the Trustee the Notes so accepted together
with an Officers' Certificate stating the Notes or portions thereof tendered to
the Company. The Paying Agent shall promptly mail to each Holder of Notes so
accepted the Change of Control payment for such Notes, and the Trustee shall
promptly authenticate and mail to each Holder a new Note equal in principal
amount to any unpurchased portion of the Notes surrendered, if any; provided,
that each such new Note shall be in a principal amount of $1,000 or an integral
multiple thereof. The Company will publicly announce the results of the Change
of Control Offer on or as soon as practicable after the Change of Control
Payment Date.

Not all highly leveraged transactions, reorganizations, restructurings,
recapitalizations, mergers, consolidations or similar transactions involving the
Company will constitute "Change of Control" transactions. For example, neither
(i) the acquisition by a Permitted Holder or a group consisting of one or more
Permitted Holders of Voting Stock of the Company representing more than 50% of
the voting power of all Voting Stock of the Company then outstanding, nor (ii) a
merger of the Company with another Person pursuant to which no Disqualified
Stock is issued and holders of Voting Stock of the Company prior to the merger
beneficially own a majority of the Voting Stock of the surviving corporation of
the merger outstanding immediately after the merger, will constitute a Change of
Control. See "Certain Definitions -- Change of Control," below.

The Indenture does not provide the Company's Board of Directors or the
Trustee with the right to waive the Company's obligations under the Indenture
upon the occurrence of a Change of Control. However, the Change of Control
purchase feature of the Notes may in certain circumstances make more difficult
or discourage a takeover of the Company and thus the removal of incumbent
management. In addition, a repurchase of Notes upon a Change of Control would
constitute an event of default under the Bank Revolving Credit Facility (see
"Description of Certain Other Indebtedness -- Bank Revolving Credit Facility")
and may also be prohibited under the terms of the Company's other financing
instruments. Finally, there can be no assurance that the Company will have the
financial ability to repurchase Notes upon a Change of Control.

Certain Covenants

Limitation on Asset Sales

The Company shall not, and shall not permit any of its Subsidiaries
(defined with respect to the Company not to include Mid-State Homes and its
Subsidiaries or Cardem Insurance) to, consummate any Asset Sale, unless: (i) the
Company (or its Subsidiaries, as the case may be) receives consideration at the
time of such sale or other disposition at least equal to the Fair Market Value
thereof; (ii) not less than 75% of the consideration received by the Company (or
its Subsidiaries, as the case may be) is in the form of cash or Cash
Equivalents; provided, however, that the amount of (a) any liabilities (as shown
on the Company's or such Subsidiary's most recent balance sheet or in the notes
thereto) of the Company or any Subsidiary (other than

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liabilities that are by their terms subordinated to the Notes) that are assumed
by the transferee of any such assets, (b) any notes or other obligations
received by the Company or its Subsidiaries from such transferee that are
converted by the Company or such Subsidiary into cash within 90 days following
receipt (to the extent of the cash received) and (c) any Marketable Securities
received by the Company or its Subsidiaries from such transferee that are
converted by the Company or such Subsidiary into cash within 90 days following
receipt (to the extent of the cash received), shall be deemed to be cash for
purposes of this clause (ii); and (iii) the Net Cash Proceeds received by the
Company (or its Subsidiaries, as the case may be) from such Asset Sale are
applied in accordance with the following paragraphs.

The Company may, (i) within 60 days following the receipt of Net Cash
Proceeds from any Asset Sale, apply such Net Cash Proceeds to the repayment of
Indebtedness of the Company under the Bank Revolving Credit Facility and to cash
collateralize letters of credit outstanding thereunder, in each case to the
extent required by (A) the terms of the Bank Revolving Credit Facility as in
effect on the Issue Date in connection with an Asset Sale not prohibited by the
Bank Revolving Credit Facility as in effect on the Issue Date, or (B) the terms
of a consent granted by the lenders under the Bank Revolving Credit Facility to
an Asset Sale prohibited by the Bank Revolving Credit Facility as in effect on
the Issue Date, provided that (x) any such repayment of Indebtedness shall
result in a permanent reduction in the revolving credit or other commitment
relating thereto in an amount equal to the principal amount so repaid, and (y)
at such time as any such letters of credit are not longer required to be cash
collateralized, any such cash collateralization shall be (1) utilized to repay
Indebtedness under the Bank Revolving Credit Facility which repayment shall
result in a permanent reduction in the revolving credit or other commitment
relating thereto in an amount equal to the principal amount so repaid or (2)
released to the Company and applied as Excess Proceeds in accordance with the
following paragraph; or (ii) in the case of the sale of Non-Core Assets or
Capital Stock of Non-Core Subsidiaries to the extent the aggregate proceeds are
less than $25 million in any twelve consecutive months, within 180 days
following the receipt of Net Cash Proceeds from any such Asset Sale, apply such
Net Cash Proceeds to make an investment in a Related Business.

If, upon completion of the applicable period, any portion of the Net Cash
Proceeds of any Asset Sale shall not have been applied by the Company as
described in clause (i) or (ii) above (the "Excess Proceeds") and such Excess
Proceeds, together with any remaining unapplied Excess Proceeds from any prior
Asset Sale, exceed $25 million, then the Company will be obligated either to
(A) redeem the Notes (on a pro rata basis if the amount available for such
redemption is less than the outstanding principal amount of the Notes plus
accrued and unpaid interest, if any, to the date of redemption) at a redemption
price of 100% of the principal amount thereof plus accrued and unpaid interest,
if any, to the date of redemption or (B) make an offer to purchase the Notes by
application of Excess Proceeds (on a pro rata basis if the amount available for
such purchase is less than the outstanding principal amount of the Notes plus
accrued and unpaid interest, if any, to the date of purchase) at a purchase
price of 100% of the principal amount thereof plus accrued and unpaid interest,
if any, to the date of purchase; provided, however, that if following such a
redemption or an offer to purchase, assuming 100% acceptance, the outstanding
principal amount of the Notes would be less than $150 million in the aggregate,
the Company shall be obligated to either redeem or offer to purchase Notes to
the extent that following such a redemption or an offer to purchase, assuming
100% acceptance, the outstanding principal amount of the Notes would be equal to
$150 million in the aggregate, and the remaining Excess Proceeds shall be
utilized as provided in the following paragraph until such time as the aggregate
of all unapplied Excess Proceeds from all Asset Sales is sufficient to redeem or
purchase 100% of the outstanding principal amount of the Notes, at which time
the Company will be obligated to either redeem or offer to purchase the Notes as
provided above. If the aggregate principal amount of Notes surrendered by
Holders thereof in any Asset Sale Offer plus accrued and unpaid interest, if
any, is less than the amount of Excess Proceeds, then the unused portion of such
Excess Proceeds (exclusive of any Excess Proceeds which could not be utilized in
such Asset Sale Offer as a result of the proviso in the next preceding sentence)
may be used by the Company for general corporate purposes. Upon completion of an
Asset Sale Offer, the amount of Excess Proceeds shall be reset to the greater of
zero or the amount of Excess Proceeds whose application would result in the
aggregate principal amount of Notes outstanding being greater than zero and less
than $150 million. Such provisions under the Indenture do not apply to a
transaction described under "Change of Control Offer to Purchase" above or
"Limitations on Mergers, Consolidations or Sales of Assets" below.

Pending application as described in the above paragraphs, including to the
extent unapplied Excess Proceeds do not exceed $25 million or application of
Excess Proceeds would result in the aggregate principal amount of Notes
outstanding being greater than zero and less than $150 million, Net Cash
Proceeds shall be

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either invested in Cash Equivalents or remitted to the applicable lender to pay
down any Indebtedness outstanding under the Bank Revolving Credit Facility.

In the event that, pursuant to the provisions described above, the Company
commences an offer to all Holders to purchase Notes (an "Asset Sale Offer"), it
shall follow the procedures described below. The Asset Sale Offer shall remain
open for a period of 20 Business Days following its commencement and no longer,
except to the extent that a longer period is required by applicable law (the
"Offer Period"). No later than five Business Days after the termination of the
Offer Period (the "Purchase Date"), the Company shall purchase the principal
amount of Notes required to be purchased pursuant to the provisions described
above (the "Offer Amount") or, if less than the Offer Amount has been tendered,
all Notes tendered in response to the Asset Sale Offer. Payment for any Notes so
purchased shall be made in the same manner as interest payments are made.

If the Purchase Date is on or after an interest record date and on or
before the related interest payment date, any accrued and unpaid interest shall
be paid to the Person in whose name a Note is registered at the close of
business on such record date, and no additional interest shall be payable to
Holders who tender Notes pursuant to the Asset Sale Offer.

Within 10 days of each date on which the aggregate amount of Excess
Proceeds exceeds $25 million, the Company shall send, by first class mail, a
notice to the Trustee and each of the Holders, which notice shall specify the
Purchase Date, which shall be no earlier than 30 days nor later than 60 days
from the date such notice is mailed. The notice shall contain all instructions
and materials necessary to enable such Holders to tender Notes pursuant to the
Asset Sale Offer. The Asset Sale Offer shall be made to all Holders. The notice,
which shall govern the terms of the Asset Sale Offer, shall state: (a) that the
Asset Sale Offer is being made pursuant to the provisions under the Indenture
described above and the length of time the Asset Sale Offer shall remain open;
(b) the Offer Amount, the purchase price and the Purchase Date; (c) that any
Note not tendered or accepted for payment shall continue to accrue interest; (d)
that, unless the Company defaults in making such payment, any Note accepted for
payment pursuant to the Asset Sale Offer shall cease to accrue interest after
the Purchase Date; (e) that Holders electing to have a Note purchased pursuant
to an Asset Sale Offer shall be required to surrender the Note, with the form
entitled "Option of Holder to Elect Purchase" on the reverse of the Note
completed, to the Company, a depositary if appointed by the Company, or a Paying
Agent at the address specified in the notice at least three Business Days before
the Purchase Date; (f) that each Holder shall be entitled to withdraw his
election if the Company, the depositary or the Paying Agent, as the case may be,
receives, not later than the expiration of the Offer Period, a telegram, telex,
facsimile transmission or letter setting forth the name of such Holder, the
principal amount of the Note such Holder delivered for purchase and a statement
that such Holder is withdrawing his election to have such Note purchased; (g)
that, if the aggregate principal amount of Notes surrendered by Holders exceeds
the Offer Amount, the Company shall select the Notes to be purchased on a pro
rata basis (with such adjustments as may be deemed appropriate by the Company so
that only Notes in denominations of $1,000, or integral multiples thereof, shall
be purchased); and (h) that Holders whose Notes are purchased only in part shall
be issued new Notes equal in principal amount to the unpurchased portion of the
Notes surrendered. Notwithstanding anything to the contrary in the Indenture,
the Company will comply with the requirements of Rule 14e-1 under the Exchange
Act and any other laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the purchase of the Notes in
connection with an Asset Sale Offer.

On the Purchase Date, the Company shall, to the extent lawful, accept for
payment, on a pro rata basis to the extent necessary, the Offer Amount of Notes
or portions thereof tendered pursuant to the Asset Sale Offer, or if less than
the Offer Amount has been tendered, all Notes (or portions thereof) tendered,
and shall deliver to the Trustee an Officers' Certificate stating that such
Notes or portions thereof were accepted for payment by the Company in accordance
with the such provisions under the Indenture. The Company or the Paying Agent,
as the case may be, shall promptly (but in any case not later than five Business
Days after the Purchase Date) mail or deliver to each tendering Holder an amount
equal to the purchase price of the Notes tendered by such Holder and accepted by
the Company for purchase, and the Company shall promptly issue a new Note, and
the Trustee shall authenticate and mail or deliver such new Note to such Holder,
in a principal amount equal to any unpurchased portion of the Note surrendered.
Any Note not so accepted shall be promptly mailed or delivered by the Company to
the Holder thereof. The Company shall publicly announce the results of the Asset
Sale Offer on the Purchase Date.

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Limitation on Restricted Payments

The Indenture provides that the Company shall not, and shall cause each of
its Subsidiaries not to, directly or indirectly, make any Restricted Payment
unless: (i) no Default or Event of Default shall have occurred and be continuing
at the time of or immediately after giving effect to such Restricted Payment;
(ii) at the time of and immediately after giving effect to such Restricted
Payment, at least $1.00 of additional Indebtedness could be incurred under the
Consolidated EBITDA to Consolidated Fixed Charges test applicable to
Indebtedness incurred by the Company (other than Subordinated Indebtedness) or a
Subsidiary pursuant to the provisions described under "Limitation on Incurrence
of Indebtedness" below; and (iii) immediately after giving effect to such
Restricted Payment, the aggregate amount of all Restricted Payments declared or
made after the Issue Date does not exceed the sum of (a) 50% of the Consolidated
Net Income of the Company (or if such Consolidated Net Income shall be a
deficit, minus 100% of such deficit) during the period (treated as one
accounting period) beginning on June 1, 1995 and ending on the last day of the
fiscal quarter immediately preceding the date of declaration or making of such
Restricted Payment plus (b) 100% of the aggregate Net Equity Proceeds received
by the Company from the issue or sale, after the Issue Date, of Capital Stock of
the Company (other than the issue or sale of (1) Disqualified Stock or (2)
Capital Stock of the Company to any Subsidiary of the Company or (3) Capital
Stock issued pursuant to the Plan of Reorganization) and any Indebtedness or
other securities of the Company (other than the issue or sale to any Subsidiary
of the Company) convertible into or exercisable for Qualified Capital Stock of
the Company which has been so converted or exercised, as the case may be plus
(c) 100% of the aggregate amount of cash and Cash Equivalents received by the
Company or any Subsidiary in repayment and termination of (x) any Investment (or
portion thereof) made after the Issue Date which was a Restricted Payment or (y)
any Mid-State Advance (or portion thereof) made after the Issue Date, net in
each case of the payment of commissions and other costs and expenses incurred by
the Company or such Subsidiary in connection therewith, and not to exceed the
amount of such Restricted Payment or Mid-State Advance, as the case may be, and
less any such amounts included in Consolidated Net Income of the Company; minus
(d) 100% of the aggregate amount of Mid-State Advances; plus (e) $25 million.

Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph do not prohibit: (i) the payment of any dividend within 60
days after the date of declaration thereof, if at such date of declaration such
payment complied with the provisions of the Indenture; (ii) the purchase,
redemption, acquisition or retirement of any shares of Capital Stock of the
Company in exchange for, or out of the net proceeds of the substantially
concurrent sale (other than to a Subsidiary of the Company) of, shares of
Qualified Capital Stock of the Company; (iii) the redemption or retirement of
Indebtedness of the Company which is subordinate in right of payment to the
Notes, in exchange for, by conversion into, or out of the net proceeds of the
substantially concurrent issue or sale (other than to a Subsidiary of the
Company) of Qualified Capital Stock of the Company or Permitted Refinancing
Indebtedness; (iv) the declaration or payment of a regular quarterly Common
Stock dividend at a rate not to exceed $.025 per share; provided that no Default
or Event of Default has occurred and is continuing at the time, or shall occur
under any provision of the Indenture other than the provision of the Indenture
described herein (subject to the following proviso) as a result of any of the
actions contemplated in clauses (i) through (iv) above, and provided further, in
the case of clause (iv) above, at the time of and immediately after giving
effect to such Restricted Payment, at least $1.00 of additional indebtedness
could be incurred under the Consolidated EBITDA to Consolidated Fixed Charges
test applicable to Indebtedness incurred by the Company (other than Subordinated
Indebtedness) or a Subsidiary pursuant to certain provisions described below
under "Limitation on Incurrence of Indebtedness."

The Company shall cause Mid-State Homes and each of its Subsidiaries not
to, directly or indirectly, make any Restricted Payment except to the Company,
Mid-State Homes or to a Wholly Owned Subsidiary of the Company or Mid-State
Homes.

Limitation on Incurrence of Indebtedness

The Company will not, and will not permit any Subsidiary to, directly or
indirectly, incur any Indebtedness (including Acquired Indebtedness); provided
the Company or any Subsidiary may incur Indebtedness, including Acquired
Indebtedness, at any time after September 1, 1995, if (i) at the time of such
incurrence, the ratio of Consolidated EBITDA to Consolidated Fixed Charges for
the period of the four consecutive fiscal quarters then ended immediately prior
to such incurrence, taken as one period and calculated on a pro forma basis as
if such Indebtedness had been incurred and the proceeds therefrom applied on the
first day of such four-quarter period and, in the case of Acquired Indebtedness,
as if the related acquisition (whether by means of purchase, merger or
otherwise) also had occurred on such date with the appropriate adjustments

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with respect to such acquisition being included in such pro forma calculation,
would have been, in the case of an incurrence of Subordinated Indebtedness by
the Company, greater than 2.25 to 1 and, in the case of an incurrence of any
other Indebtedness by the Company or of any Indebtedness by a Subsidiary,
greater than 3.0 to 1 and (ii) no Default or Event of Default shall have
occurred and be continuing at the time or as a consequence of the incurrence of
such Indebtedness; provided, however, that prior to June 1, 1996, the ratio of
Consolidated EBITDA to Consolidated Fixed Charges shall be calculated for the
period consisting of the number of complete fiscal quarters commencing with the
quarter beginning June 1, 1995 and ending immediately prior to such incurrence,
taken as one period, and all other above-described provisions shall remain
applicable. For purposes of making the computation referred to above,
acquisitions and divestitures that have been made by the Company or any of its
Subsidiaries, including all mergers or consolidations, during such four-quarter
(or, if applicable, shorter) period or subsequent to such four-quarter (or, if
applicable, shorter) period and on or prior to the time of such incurrence shall
be calculated on a pro forma basis assuming that all such acquisitions,
divestitures, mergers and consolidations had occurred on the first day of such
four-quarter (or, if applicable, shorter) period.

The foregoing limitation does not apply to the incurrence of Permitted
Indebtedness.

Limitation on Issuance of Capital Stock

The Company will not permit any of its Subsidiaries to issue any Capital
Stock (other than to the Company or to a Wholly Owned Subsidiary of the
Company). The Company will not issue Disqualified Stock. The Company will not
permit Mid-State Homes or any of its Subsidiaries to issue any Capital Stock to
any Person other than the Company or Mid-State Homes or any of their respective
Wholly Owned Subsidiaries.

Limitation on Liens

The Indenture provides that the Company shall not, and shall not permit any
of its Subsidiaries to, create, incur, assume or otherwise cause or suffer to
exist or become effective any Lien of any kind (other than Permitted Liens) upon
any property or assets of the Company or of any Subsidiary of the Company or any
Indebtedness of any Subsidiary of the Company, other than assets are not
governed by the Pledge Agreement or any Subsidiary Pledge Agreement, owned on or
acquired after the date of the Indenture unless all payments due under the
Indenture and the Notes are secured on an equal and ratable basis with the
obligations so secured until such time as such obligations are no longer secured
by a Lien.

Limitation on Dividend and Other Payment Restrictions Affecting Subsidiaries.

The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any consensual encumbrance or restriction on
the ability of any Subsidiary of the Company to (i) pay dividends or make any
other distributions on its Capital Stock, or any other interest or participation
in or measured by its profits, owned by the Company or a Subsidiary; (ii) pay
any Indebtedness owed to the Company or a Subsidiary of the Company; (iii) make
loans or advances to the Company or a Subsidiary of the Company or Guarantee
Indebtedness of the Company or a Subsidiary; or (iv) transfer any of its
properties or assets to the Company or a Subsidiary of the Company, except for
(a) restrictions contained in the Bank Revolving Credit Facility as of the Issue
Date; (b) consensual encumbrances binding upon any Person at the time such
Person becomes a Subsidiary of the Company (unless the agreement creating such
consensual encumbrance was entered into in connection with, or in contemplation
of, such entity becoming a Subsidiary); (c) consensual encumbrances or
restrictions under any agreement that refinances or replaces any agreement
described in clauses (a) or (b) above, provided that the terms and conditions of
any such restrictions are no less favorable to the Holders than those under the
agreement so refinanced or replaced; (d) customary non-assignment provisions in
leases, purchase money financings and any encumbrance or restriction due to
applicable law; (e) restrictions imposed by law; (f) restrictions imposed on a
Subsidiary pursuant to a bona fide contract for disposition of all or
substantially all of the assets or 100% of the Capital Stock of such Subsidiary
by the Company; and (g) restrictions on the transfer of assets subject to Liens
permitted by the Indenture.

Limitation on Transactions with Affiliates

The Company will not, and will not permit any of its Subsidiaries to,
directly or indirectly, enter into any transaction or series of transactions
(including, without limitation, the sale, purchase or lease of any assets or
properties or the rendering of any services) with any Affiliate or holder of 5%
or more of the Company's or any

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Subsidiary's common stock (other than with the Company or a Wholly Owned
Subsidiary of the Company) (an "Affiliate Transaction"), on terms that are less
favorable to the Company or such Subsidiary, as the case may be, than would be
available in a comparable transaction negotiated on an arm's length basis with
an unrelated Person. In addition, the Company will not, and will not permit any
Subsidiary of the Company to, enter into an Affiliate Transaction, or any series
of related Affiliate Transactions, unless (i) with respect to such Affiliate
Transaction or Transactions involving or having a value of more than $1 million,
the Company has obtained the approval of a majority of the Board of Directors of
the Company (including a majority of the Company's disinterested directors) and
(ii) with respect to such Affiliate Transaction or Transactions involving or
having a value of more than $5 million (other than Affiliate Transactions
relating to the rendering of services, including, without limitation,
underwriting, financial advisory and similar services), the Company has
delivered to the Trustee an opinion of an independent investment banking firm or
appraisal firm of national standing to the effect that such Affiliate
Transaction or Transactions are fair to the Company or such Subsidiary, as the
case may be, from a financial point of view. Notwithstanding the foregoing, the
foregoing provision will not apply to Mid-State Advances to the extent permitted
by the provisions of the Indenture described under the second paragraph of
"Taxes" below or to the sale of mortgages by Jim Walter Homes to Mid-State Homes
and the servicing of such mortgages by Jim Walter Homes, in each case in the
ordinary course of business consistent with past practice.

The Company will not permit Mid-State Homes or any of its Subsidiaries to,
directly or indirectly, enter into any transaction or series of transactions
(including, without limitation, the sale, purchase or lease of any assets or
properties or the rendering of any services) with any Affiliate or holder of 5%
or more of the Company's or any of its Subsidiaries' common stock or of
Mid-State Homes' or any of its Subsidiaries' common stock (other than the
Company or Mid-State Homes or a Wholly Owned Subsidiary of the Company or of
Mid-State Homes) (a "Mid-State Affiliate Transaction") on terms that are less
favorable to Mid-State Homes or its Subsidiary, as the case may be, than would
be available in a comparable transaction negotiated on an arm's length basis
with an unrelated Person. In addition, the Company will not permit Mid-State
Homes or any of its Subsidiaries to enter into a Mid-State Affiliate Transaction
or any series of related Mid-State Affiliate Transactions unless (i) with
respect to such Mid-State Affiliate Transaction or Transactions involving or
having a value of more than $1 million, the Company has obtained the approval of
a majority of the Board of Directors of the Company (including a majority of the
Company's disinterested directors) and (ii) with respect to such Mid-State
Affiliate Transaction or Transactions involving or having a value of more than
$5 million (other than Mid-State Affiliate Transactions relating to the
rendering of services, including, without limitation, underwriting, financial
advisory and similar services), the Company has delivered to the Trustee an
opinion of an independent investment banking firm of national standing to the
effect that such Mid-State Affiliate Transaction or Transactions are fair to
Mid-State Homes or its Subsidiary, as the case may be, from a financial point of
view.

Limitation on Sale and Leaseback Transactions

Except to the extent included in clause (vii) of the definition of
Permitted Indebtedness (see "Certain Definitions" below), the Company will not,
and will not permit any of its Subsidiaries to, enter into any sale and
leaseback transaction with respect to any property (whether now owned or
hereafter acquired) unless (i) the sale or transfer of the property to be leased
complies with the requirements described above under "Limitation on Asset Sales"
and (ii) the Company or such Subsidiary would be entitled pursuant to the
provisions of the Indenture described above in clause (i) under "Limitation on
Incurrence of Indebtedness" to incur additional Indebtedness under the
Consolidated EBITDA to Consolidated Fixed Charges test applicable to
Indebtedness incurred by the Company (other than Subordinated Indebtedness) or a
Subsidiary in an amount at least equal to the Attributable Debt in respect of
such sale and leaseback transaction.

Limitation on Sale of Capital Stock of Subsidiaries

The Company will not, and will not permit any of its Subsidiaries to, sell,
pledge, hypothecate or otherwise convey or dispose of any Capital Stock of the
Company's Subsidiaries (other than pursuant to the Pledge Agreement or
Subsidiary Pledge Agreement governing the Pledged Shares) except for the sale by
the Company or a Subsidiary of all or part of the Capital Stock of a Non-Core
Subsidiary and except for the sale of 100% of the Capital Stock of any other
Subsidiary owned collectively by the Company and/or its Subsidiaries; provided
that in either case such sale complies with the provisions described above under
"Limitation on Asset Sales."

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The Company will not permit Mid-State Homes or any of its Subsidiaries to
sell, pledge, hypothecate or otherwise convey or dispose of any Capital Stock of
the Subsidiaries of Mid-State Homes to any Person other than the Company or Mid-
State Homes or any of their respective Wholly Owned Subsidiaries.

Limitation on Mergers, Consolidations and Sales of Assets

The Company will not consolidate or merge with any other Person, or permit
any other Person to consolidate or merge with the Company, nor will the Company
sell, lease, convey or otherwise dispose of all or substantially all of its
assets unless (i) the entity formed by or surviving any such consolidation or
merger, or to which such sale, lease, conveyance or other sale shall have been
made (the "Surviving Entity"), is a corporation organized and existing under the
laws of the United States, any state thereof, or the District of Columbia; (ii)
if the Company is not the Surviving Entity, the Surviving Entity assumes by
supplemental indenture all of the obligations of the Company under the Notes and
the Indenture; (iii) immediately after giving effect to such transaction, no
Default or Event of Default shall have occurred and be continuing; (iv)
immediately after giving effect to such transaction (but prior to any purchase
accounting adjustments resulting from the transaction), the Consolidated Net
Worth of the Surviving Entity would be at least equal to the Consolidated Net
Worth of the Company immediately prior to such transaction; and (v) immediately
after giving effect to such transaction, the Surviving Entity could incur at
least $1.00 of additional Indebtedness under the Consolidated EBITDA to
Consolidated Fixed Charges test applicable to Indebtedness incurred by the
Company (other than Subordinated Indebtedness) or a Subsidiary pursuant to
certain provisions described above under "Limitation on Incurrence of
Indebtedness."

The Company shall deliver to the Trustee prior to the consummation of the
proposed transaction an Officers' Certificate to the foregoing effect, an
Opinion of Counsel stating that the proposed transaction and such supplemental
indenture comply with such provisions under the Indenture and an Accountants'
Certificate setting forth the computations necessary to confirm the satisfaction
of the conditions set forth in clauses (iv) and (v) of such provisions under the
Indenture and certifying the accuracy thereof. The Trustee shall be entitled to
rely conclusively upon such Officers' Certificate, Opinion of Counsel and
Accountants' Certificate.

Payments For Consents

Neither the Company nor any of its Subsidiaries shall, directly or
indirectly, pay or cause to be paid any consideration, whether by way of
interest, fee or otherwise, to any Holder for any consent, waiver or amendment
of any of the provisions of the Indenture, the Notes, the Pledge Agreement or
any Subsidiary Pledge Agreement unless such consideration is offered to be paid
to all Holders which so consent, waive or agree to amend in the time frame set
forth in solicitation documents relating to such consent, waiver or agreement.

Stay, Extension and Usury Laws

The Company has agreed (to the extent that it may lawfully do so) that it
shall not at any time claim or take the benefit of any stay, extension or usury
law wherever enacted, now or at any time hereafter in force, that may affect the
covenants, or the performance, of the Indenture.

Provision of Information

The Company, whether or not required by the rules and regulations of the
SEC, so long as any Notes are outstanding, will furnish to the Holders (i) all
reports that would be required to be contained in a filing with the SEC on Forms
10-Q and 10-K if the Company were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and, with respect to the annual information only, a report thereon
by the Company's certified independent accountants and (ii) all reports that
would be required to be filed with the SEC on Form 8-K if the Company were
required to file such reports. In addition, whether or not required by the rules
and regulations of the SEC, the Company will file a copy of all such information
and reports with the SEC for public availability (unless the SEC will not accept
such a filing) for so long as any Notes are outstanding. The Company will also
make such information available to investors who request it in writing. In
addition, the Company agrees that, for so long as any Notes remain outstanding,
it will furnish to the Holders and to beneficial holders of Notes and to
prospective purchasers of Notes designated by the Holders, upon their request,
the information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.

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Taxes

The Company must pay, and must cause each of its Subsidiaries to pay, prior
to delinquency, all material taxes, assessments and governmental levies, except
such as are being contested in good faith and by appropriate proceedings or
where the failure to effect such payment is not adverse in any material respect
to the Holders.

The Company also must, and must cause each Person which is a member of the
Company's consolidated group for tax purposes to, calculate, pay and receive for
each taxable period the tax liability owed by and tax refunds (or credits for
losses utilized) due to each of the Company and each Person which is a member of
the Company's consolidated group for tax purposes, individually, and not in the
aggregate, consistent with past practice (i.e., each Person computes its tax
liability as if it had always filed a separate return, except that a Person that
incurs a net operating loss or capital loss is credited with the tax benefit of
such loss at the time such loss is utilized by any member of the consolidated
group), provided that so long as no Default or Event of Default shall have
occurred and be continuing at the time or immediately after giving effect to any
Mid-State Advance, the Company may advance to Mid-State Homes and its
Subsidiaries up to $7 million per year solely for purposes of payment of taxes
(each, a "Mid-State Advance") to the extent Mid-State Homes and its Subsidiaries
have no other source of payment available; provided, however, that the aggregate
amount of Mid-State Advances not previously repaid in cash or Cash Equivalents
may not exceed $21 million.

Events of Default and Remedies

Each of the following constitutes an "Event of Default" under the
Indenture:

(i) the failure by the Company to pay interest on the Notes when the
same becomes due and payable and such default continues for a period of 5
Business Days;

(ii) the failure by the Company to pay the principal or premium, if
any, on the Notes whether at maturity, upon redemption, upon acceleration
or otherwise (including the failure to purchase the Notes tendered pursuant
to a Change of Control Offer or Asset Sale Offer);

(iii) failure by the Company to perform any of its obligations under
certain provisions of the Pledge Agreement relating to the pledging of
additional capital stock of, and the limiting of the issuance of new shares
by, existing or new Subsidiaries of the Company, or failure by any
Subsidiary to perform any of its obligations under certain provisions of
any Subsidiary Pledge Agreement relating to the pledging of additional
capital stock of existing or new Subsidiaries of the Company or of such
Subsidiary and the limiting of the issuance of new shares by Subsidiaries
of such Subsidiary or the Trustee becoming entitled to exercise any
remedies pursuant to certain provisions of the Pledge Agreement or any
Subsidiary Pledge Agreement;

(iv) failure by the Company or any of its Subsidiaries to comply with
the provisions described above under "Change of Control Offer to Purchase"
and "Certain Covenants -- Limitation on Asset Sales" and "-- Limitation on
Mergers, Consolidations and Sales of Assets";

(v) failure by the Company or any of its Subsidiaries to comply with
the provisions described above under "Certain Covenants -- Taxes,"
"-- Limitation on Restricted Payments," "-- Limitation on Incurrence of
Indebtedness," "-- Limitation on Issuance of Capital Stock," "-- Limitation
on Liens," "-- Limitation on Dividend and Other Payment Restrictions
Affecting Subsidiaries," "-- Limitation on Transaction with Affiliates,"
"-- Limitation on Sale and Leaseback Transactions," "-- Limitation on Sale
of Capital Stock of Subsidiaries" and "-- Payments for Consents" for 30
days after written notice specifying the failure and that the same is a
Default shall have been given to the Company by the Trustee or Holders of
25% in principal amount of the Notes outstanding;

(vi) failure by the Company or any of its Subsidiaries to comply with
any of its covenants or the breach by the Company or any of its
Subsidiaries of any of its representations or warranties under the
Indenture, the Pledge Agreement or any Subsidiary Pledge Agreement (other
than a breach of a covenant, representation or warranty which is
specifically described in clauses (i) - (v) above or (vii)-(x) below) for
60 days after written notice specifying the failure and that the same is a
Default shall have

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been given to the Company by the Trustee or Holders of 25% in principal
amount of the Notes outstanding;

(vii) default or defaults (including a payment default) under one or
more agreements, instruments, mortgages, bonds, debentures or other
evidence of Indebtedness under which the Company or any of its Significant
Subsidiaries has an outstanding principal amount of Indebtedness in excess
of $25 million individually or $50 million in the aggregate for all such
issues of all such Persons and either (x) such Indebtedness is already due
and payable in full or (y) such default or defaults have resulted in the
acceleration of the maturity of such Indebtedness;

(viii) any final judgment or order (not covered by insurance) is entered
against the Company or any Significant Subsidiary in excess of $25 million
individually or $50 million in the aggregate for all such final judgements
or orders against all such Persons and remains undischarged or are unstayed
for 60 days;

(ix) certain events of bankruptcy or insolvency with respect to the
Company or any of its Subsidiaries; or

(x) any Lien granted or purported to be granted pursuant to the
Pledge Agreement or any Subsidiary Pledge Agreement shall be or become
unenforceable or invalid, or the priority thereof shall become diminished
or, the Company or any Subsidiary shall contest or disaffirm any such Lien.

If an Event of Default occurs and is continuing, the Trustee by written
notice to the Company, or the Holders of at least 25% of the aggregate principal
amount of the then outstanding Notes, by written notice to the Company and the
Trustee, may declare all of the Notes to be due and payable immediately. Upon
such declaration, the unpaid principal of, premium, if any, and accrued interest
on the Notes shall be due and payable. Notwithstanding the foregoing, in the
case of an Event of Default arising from certain events of bankruptcy or
insolvency with respect to the Company or any Significant Subsidiary, such an
amount shall ipso facto become immediately due and payable without any
declaration, notice or other act on the part of the Trustee or any Holder.

If an Event of Default occurs and is continuing, the Trustee may pursue any
available remedy to collect the payment of the principal of, premium, if any,
and interest on the Notes and to enforce the performance of any provision of the
Notes or the Indenture.

The Trustee may maintain a proceeding even if it does not possess any of
the Notes or does not produce any of them in the proceeding. A delay or omission
by the Trustee or any Holder of a Note in exercising any right or remedy
accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. All remedies are
cumulative to the extent permitted by law.

The Indenture provides that subject to certain exceptions, the Holders of
not less than a majority in aggregate principal amount of the then outstanding
Notes, by written notice to the Trustee, may on behalf of the Holders of all of
the Notes (a) waive any existing Default or Event of Default and its
consequences, except a continuing Default or Event of Default in the payment of
interest on, premium, if any, or the principal of, the Notes and/or (b) rescind
an acceleration and its consequences, including any related payment default that
resulted from such acceleration, if the rescission would not conflict with any
judgment or decree of a court of competent jurisdiction. Upon any such waiver or
rescission, such Default shall cease to exist, and any Event of Default arising
therefrom shall be deemed to have been cured for every purpose of the Indenture;
but no such waiver shall extend to any subsequent or other Default or impair any
right consequent thereon.

Holders of a majority in aggregate principal amount of the then outstanding
Notes may direct the time, method and place of conducting any proceeding for
exercising any remedy available to the Trustee or exercising any trust or power
conferred on it under the Indenture; provided that the Trustee may take any
other actions it deems proper that are not inconsistent with these directions.
However, the Trustee may refuse to follow any direction that conflicts with law
or the Indenture or that the Trustee determines may be unduly prejudicial to the
rights of other Holders or that may involve the Trustee in personal liability.

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The Indenture provides that a Holder may pursue a remedy with respect to
the Indenture or the Notes only if: (i) the Holder gives to the Trustee written
notice of a continuing Event of Default; (ii) the Holders of at least 25% in
principal amount of the then outstanding Notes make a written request to the
Trustee to pursue the remedy; (iii) such Holder or Holders offer and, if
requested, provide to the Trustee indemnity satisfactory to the Trustee against
any loss, liability or expense; (iv) the Trustee does not comply with the
request within 60 days after receipt of the request and the offer and, if
requested, the provision of indemnity; and (v) during such 60-day period the
Holders of a majority in principal amount of the then outstanding Notes do not
give the Trustee a direction inconsistent with the request.

A Holder may not use the Indenture to prejudice the rights of another
Holder or to obtain a preference or priority over another Holder.

Notwithstanding any other provision of the Indenture, the right of any
Holder to receive payment of principal of and premium, if any, and interest on
the Notes, on or after the respective due dates expressed in the Notes
(including in connection with an offer to purchase), or to bring suit for the
enforcement of any such payment on or after such respective dates, shall not be
impaired or affected without the consent of such Holder.

Legal Defeasance and Covenant Defeasance

The Company may, at the option of its Board of Directors and at any time,
elect to have its obligations discharged with respect to the outstanding Notes
("Legal Defeasance"). Such Legal Defeasance means that the Company shall be
deemed to have paid and discharged the entire indebtedness represented by the
outstanding Notes, except for certain obligations as more fully described in the
Indenture regarding the rights of Holders of Notes to receive payments in
respect of principal of, premium, if any, and interest on such Notes from trust
funds, certain continuing obligations of the Company, the Trustee and the Paying
Agent and provisions in the Indenture regarding discharge and defeasance. In the
event of a Legal Defeasance, the security interests described above under
"Security" will be released.

In addition, the Company may, at the option of its Board of Directors and
at any time, elect to have the obligations of the Company released with respect
to certain covenants that are described in the Indenture ("Covenant Defeasance")
and thereafter any omission to comply with such obligations shall not constitute
a Default or Event of Default with respect to the Notes.

In order to exercise either Legal Defeasance or Covenant Defeasance, the
Company must satisfy certain conditions including: (a) irrevocably depositing
with the Trustee cash, Government Securities or a combination thereof sufficient
to pay the principal of, premium, if any, and interest on the outstanding Notes
on the stated date for payment thereof or on the applicable redemption date, (b)
delivering to the Trustee an Opinion of Counsel confirming that the Holders of
the outstanding Notes will not recognize income, gain or loss for federal
income tax purposes as a result of such defeasance and will be taxed on the
same amounts, in the same manner and at the same time as would have been the
case if such defeasance had not occurred (which Opinion of Counsel, in the
case of a Legal Defeasance, will contain a description of an IRS ruling or
change in applicable federal income tax law to such effect), (c) no Default
or Event of Default (other than as a result of incurring Indebtedness in order
to fund the defeasance) (i) shall have occurred and be continuing on the date
of such deposit or (ii) regarding bankruptcy or insolvency events shall have
occurred and be continuing at any time during the period ending on the 91st
day after the date of deposit (it being understood that the condition
described in this clause (ii) is a condition subsequent and shall not be
deemed satisfied until the expiration of such period), (d) such defeasance
not resulting in a breach, violation or default under the Indenture or any
other material agreement to which the Company or any of its Subsidiaries is
a party or is bound, (e) delivering to the Trustee an Opinion of Counsel to
the effect that certain actions taken by the Company in accordance with the
provisions described in (a)-(g) will not have adverse consequences under
certain Sections of the Bankruptcy Code or the New York Debtor and Creditor
Law, or any successor to such Sections, (f) delivering to the Trustee an
Officers' Certificate stating that the deposit was not made by the Company
with the intent of defeating, hindering, delaying or defrauding any actual
creditors of the Company, and (g) delivering to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent provided for relating to the Legal Defeasance or the Covenant
Defeasance have been complied with.

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Satisfaction and Discharge

The Indenture will cease to be of further effect (except that the Company's
obligations relating to compensation and indemnity and the Company's, the
Trustee's and any Paying Agent's obligation relating to repayment to the Company
of unclaimed amounts shall survive) as to all outstanding Notes when (i) either
(a) all the Notes theretofore outstanding, authenticated and delivered (except
lost, stolen or destroyed Notes that have been replaced or paid) have been
delivered to the Trustee for cancellation and the Company has paid all sums
payable thereunder or (b) the Company, at the option of its Board of Directors,
elects to have either Legal Defeasance or Covenant Defeasance be applied to all
outstanding Notes upon compliance with the conditions set forth in the Indenture
and described above under "Legal Defeasance and Covenant Defeasance."

Transfer and Exchange

A holder may transfer the Notes in accordance with the Indenture. The
Trustee may require a Holder, among other things, to furnish appropriate
endorsements and transfer documents and the Company may require a Holder to pay
any taxes and fees required by law or permitted by the Indenture. The Company is
not required to transfer or exchange any Note selected for redemption. Also, the
Company is not required to transfer or exchange any Note for a period of 15 days
before a selection of Notes to be redeemed.

Amendment, Supplement and Waiver

The Company and the Trustee may amend or supplement the Indenture, the
Pledge Agreement, any Subsidiary Pledge Agreement or the Notes without the
consent of the Holders for certain specified purposes, including: curing any
ambiguities, defects or inconsistencies and making any change that does not
adversely affect the rights of any of the Holders under the Indenture.

Other amendments of or supplements to the Indenture, the Pledge Agreement
or any Subsidiary Pledge Agreement and the Notes may be made with the consent of
the Holders of at least a majority in principal amount of the Notes then
outstanding, except that, without the consent of each Holder of the Notes
affected thereby, no amendment or waiver (with respect to any Notes held by a
non-consenting Holder) may: (i) reduce the principal amount of Notes whose
Holders must consent to an amendment, supplement or waiver of any provision of
the Indenture, the Pledge Agreement or any Subsidiary Pledge Agreements or the
Notes; (ii) reduce the principal of or change the fixed maturity of any Note;
(iii) alter any of the provisions permitting or requiring the redemption of the
Notes, except with respect to permitting or requiring redemption or repurchase
of Notes pursuant to provisions described above under "Change of Control Offer
to Purchase" and "Certain Covenants -- Limitation on Asset Sales," or reduce the
purchase price payable or change the time for payment in connection with
repurchases or redemptions of Notes pursuant to provisions described above under
"Change of Control Offer to Purchase" and "Certain Covenants -- Limitation on
Asset Sales;" (iv) reduce the rate of or change the time for payment of
interest, including default interest, on any Notes; (v) waive a Default or Event
of Default in the payment of principal of or premium, if any, or interest on the
Notes (except a rescission of acceleration of the Notes by the Holders of at
least a majority in aggregate principal amount of the Notes and a waiver of the
payment default that resulted from such acceleration); (vi) make the principal
of or the interest on any Note payable in money other than that stated in the
Notes; (vii) make any change in the provisions of the Indenture relating to
waivers of past Defaults or the rights of Holders to receive payments of
principal of premium, if any, or interest on the Notes; (viii) waive a
redemption payment with respect to any Note (other than a payment required
pursuant to provisions described above under "Change of Control Offer to
Purchase" and "Certain Covenants -- Limitation on Asset Sales"); (ix) alter the
ranking of the Notes relative to other Indebtedness of the Company; (x) release
any Pledged Shares which are the Capital Stock of a Significant Subsidiary,
except in connection with a sale, transfer or other disposition permitted by the
Indenture and the Pledge Agreement and Subsidiary Pledge Agreements, as the case
may be; (xi) waive or amend provisions in the Indenture regarding payments for
consents; or (xii) make any change in the provisions of the Indenture dealing
with the waiver of past defaults and the rights of holders of Notes to receive
payment or in the above-described amendment and waiver provisions.

In determining whether the Holders of the required principal amount of
Notes have concurred in any direction, waiver or consent, Notes owned by the
Company or by any Subsidiary thereof or by any other Affiliate controlled by the
Company will not be considered outstanding. In determining whether Holders of
the required principal amount of Notes have (i) directed the time, method or
place of conducting any proceeding for any remedy available to the Trustee under
the Indenture, or exercising any trust or power conferred upon the

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Trustee, (ii) consented to the waiver of any past Event of Default and its
consequences or (iii) consented to the postponement of any interest payment,
Notes owned by Affiliates of the Company will be disregarded.

Governing Law

The Indenture provides that it and the Notes will be construed and
interpreted, and the rights of the parties determined, in accordance with the
law of the State of New York without reference to its choice of law provisions.

Trustee

The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. The Trustee will be permitted to engage in other transactions
with the Company; however, if the Trustee acquires any conflicting interest, it
must eliminate such conflict within 90 days, apply to the Commission for
permission to continue as Trustee or resign.

Additional Information

Anyone who receives this Prospectus may obtain a copy of the Indenture
without charge by writing to the Company at 1500 North Mabry Highway, Tampa,
Florida 33607, Attention: Secretary.

Certain Definitions

Set forth below are certain defined terms used herein and in the Indenture.
Reference is made to the Indenture for a full disclosure of all such terms, as
well as any other capitalized terms used herein for which no definition is
provided.

"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Subsidiary of the Company (or such Person is merged with
the Company or one of its Subsidiaries) or assumed in connection with the
acquisition of assets from any such Person and not incurred in connection with,
or in the contemplation of, such Person becoming a Subsidiary or such
acquisition.

"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise.

"Asset Sale" means any sale, lease, transfer or other disposition or series
of related sales, leases, transfers or other dispositions, including, without
limitation, by merger or consolidation, pursuant to any sale and leaseback
transaction (other than to the extent included in clause (vii) of the definition
of Permitted Indebtedness) or by exchange of assets and whether by operation of
law or otherwise (other than sales in the ordinary course of business consistent
with past practice, including, without limitation, sales of mortgages by Jim
Walter Homes to Mid-State Homes in the ordinary course of business consistent
with past practice), made by the Company or any of its Subsidiaries to any
Person other than the Company or one of its Wholly Owned Subsidiaries of any
assets of the Company or any of its Subsidiaries including, without limitation,
assets consisting of any Capital Stock or other securities held by the Company
or any of its Subsidiaries, to the extent that any such sale, lease, transfer,
or other disposition or series of related sales, leases, transfers or other
dispositions relates to properties or assets having a Fair Market Value in
excess of $5 million or results in net proceeds in excess of $5 million.

"Attributable Debt" means, in respect of a sale and leaseback transaction,
at the time of determination, the greater of (a) the Fair Market Value of the
property subject to such transaction and (b) the present value (discounted at
the actual rate of interest implicit in such transaction) of the obligation of
the lessee for net rental payments during the remaining term of the lease
included in such sale and leaseback transaction (including any period for which
such lease has been extended or may, at the option of the lessor, be extended).

"Board of Directors" means the Board of Directors of the Company, or any
authorized committee of the Board of Directors.

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"Business Day" means any day other than a Legal Holiday.

"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be so required to be capitalized on the balance sheet in accordance
with GAAP.

"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of such
Person's capital stock whether outstanding on or issued after the Issue Date,
including, without limitation, all Preferred Stock, and any warrants, options or
rights to purchase any of the foregoing.

"Cash Equivalents" means (i) United States dollars, (ii) securities issued
directly or fully Guaranteed or insured by the United States government or any
agency or instrumentality thereof having maturities of not more than six months
from the date of acquisition, (iii) certificates of deposit and eurodollar time
deposits with maturities of six months or less from the date of acquisition,
bankers' acceptances with maturities not exceeding six months and overnight bank
deposits, in each case with any domestic commercial bank having capital and
surplus in excess of $500 million and a Thomson Watch Rating of "B" or better,
(iv) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (ii) and (iii) entered
into with any financial institution meeting the qualifications specified in
clause (iii) above, (v) any security maturing not more than six months after the
date of acquisition, backed by standby or direct-pay letters of credit issued by
a bank meeting the qualifications described in clause (iii) above, (vi) any
security maturing not more than six months after the date of acquisition, issued
directly or fully Guaranteed or insured by any state, commonwealth or territory
of the United States, or by any political subdivision thereof, and rated at
least "A" by either Standard & Poor's Corporation or Moody's Investors Service
Inc. or rated in at least an equivalent rating category of another nationally
recognized securities rating agency and (vii) commercial paper having the
highest rating obtainable from Moody's Investors Service, Inc. or Standard &
Poor's Corporation and in each case maturing within six months after the date of
acquisition.

"Change of Control" means (i) any sale, lease or other transfer of all or
substantially all of the assets of the Company to any Person (other than a
Wholly Owned Subsidiary of the Company) in one transaction or a series of
related transactions; (ii) the Company consolidates or merges with another
Person pursuant to a transaction in which the outstanding Voting Stock of the
Company is changed into or exchanged for cash, securities or other property,
other than any such transaction where (a) no Disqualified Stock is issued and
(b) holders of Voting Stock of the Company immediately prior to such transaction
beneficially own (as defined in Rules 13d-3 and 13d-5 under the Exchange Act as
in effect on the date of the Indenture), directly or indirectly, not less than a
majority of the Voting Stock of the surviving corporation of such merger or
consolidation outstanding immediately after such transaction; (iii) a Person or
group (other than a Permitted Holder or a group consisting of one or more
Permitted Holders) becomes the beneficial owner (as defined in Rules 13d-3 and
13d-5 under the Exchange Act as in effect on the date of the Indenture) of
Voting Stock of the Company representing more than 50% of the voting power of
all Voting Stock of the Company then outstanding; (iv) Continuing Directors
cease to constitute at least a majority of the Board of Directors of the
Company; provided, however, that this clause (iv) shall not be applicable if the
Continuing Directors do not constitute at least a majority of the Board of
Directors as a result of the election of directors nominated by any of the
Permitted Holders; or (v) the stockholders of the Company shall approve any plan
or proposal for the liquidation or dissolution of the Company.

"Commodity Agreement" means any commodity purchase agreement, commodity
swap agreement or other similar agreement of any Person designed to protect such
Person or any of its Subsidiaries against fluctuations in commodity values.

"Consolidated Depreciation and Amortization Expense" of the Company and its
Subsidiaries means, for any period for which the determination thereof is to be
made, the depreciation and amortization expense (including, without limitation,
amortization of goodwill, other intangibles, debt discount and debt issue costs)
of the Company and such Subsidiaries for such period, determined on a
consolidated basis in accordance with GAAP.

"Consolidated EBITDA" means, for any period, on a consolidated basis for
the Company and its Subsidiaries, the sum (without duplication) for such period
of (i) Consolidated Net Income plus, to the extent deducted in determining
Consolidated Net Income, each of (ii) Consolidated Income Tax Expense, (iii)

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Consolidated Depreciation and Amortization Expense, (iv) Consolidated Fixed
Charges and (v) Consolidated Post Retirement Benefits Other Than Pensions.

"Consolidated Fixed Charges" means, for the Company and its Subsidiaries,
for any period, the sum (without duplication) of (i) the aggregate amount of
interest, whether expensed or capitalized, paid, accrued or scheduled to be paid
or accrued during such period (including any non-cash interest payments or
accruals, the interest portion of Capital Lease Obligations, all amortization of
original issue discount, net cash costs pursuant to Interest Rate Agreements,
Currency Agreements and Commodity Agreements (including amortization of fees)
and the interest component of any deferred payment obligation) of the Company
and its Subsidiaries, determined on a consolidated basis in accordance with GAAP
and (ii) dividends in respect of Preferred Stock and Disqualified Stock.

"Consolidated Income Tax Expense" of the Company and its Subsidiaries
means, for any period for which the determination thereof is to be made, the
aggregate of the income tax expense of the Company and such Subsidiaries for
such period, determined on a consolidated basis in accordance with GAAP;
provided, however, that amounts payable for any period by Mid-State Homes and
its Subsidiaries or any other member of the Company's consolidated group for tax
purposes which is not a Subsidiary of the Company, pursuant to the provision of
the Indenture described above in the second paragraph under "Certain
Covenants -- Taxes", shall be excluded from the foregoing to the extent
excluded in determining Consolidated Net Income of the Company and its
Subsidiaries.

"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided,
that (i) the Net Income of any Person that is not a Subsidiary or that is
accounted for by the equity method of accounting shall be included only to the
extent of the amount of dividends or distributions paid in cash to the Person
whose Consolidated Net Income is being determined or a Wholly Owned Subsidiary
thereof, (ii) the Net Income of any Subsidiary that is subject to any Payment
Restriction shall be excluded to the extent such Payment Restriction would limit
the amount that otherwise could be paid to, or received by, the Person whose
Consolidated Net Income is being determined or a Wholly Owned Subsidiary of such
Person not subject to any Payment Restriction, (iii) the Net Income of any
Person acquired by the Person whose Consolidated Net Income is being determined
or a Subsidiary thereof in a pooling of interests transaction for any period
prior to the date of such acquisition shall be excluded and (iv) the cumulative
effect of a change in accounting principles shall be excluded.

"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such Person
and its consolidated Subsidiaries as of such date plus (ii) the respective
amounts reported on such Person's balance sheet as of such date with respect to
any series of Preferred Stock (other than Disqualified Stock) that by its terms
is not entitled to the payment of dividends unless such dividends may be
declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such Preferred Stock, less (x) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern business made within 12 months after the acquisition
of such business) subsequent to the Issue Date in the book value of any asset
owned by such Person or a consolidated Subsidiary of such Person, (y) all
Investments as of such date in unconsolidated Subsidiaries and in Persons that
are not Subsidiaries (except, in each case, Permitted Investments), and (z) all
unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.

"Consolidated Post Retirement Benefits Other Than Pensions" means the
noncash portion of retirement benefits other than pensions as defined in FASB
Statements Numbers 88, 106 and 112, determined in accordance with GAAP.

"Continuing Directors" means, with respect to the Company, a director who
either was a member of the Board of Directors of the Company on the Issue Date
or who became a director of the Company subsequent to such date and whose
election, or nomination for election by the Company's stockholders, was duly
approved by a majority of the Continuing Directors then on the Board of
Directors of the Company, either by a specific vote or by approval of the proxy
statement issued by the Company on behalf of the entire Board of Directors of
the Company in which such individual is named as nominee for director.

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"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement of any Person designed to
protect such Person or any of its Subsidiaries against fluctuations in currency
values.

"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.

"Disqualified Stock" means any Capital Stock of the Company or any
Subsidiary of the Company which, by its terms (or by the terms of any security
into which it is convertible or for which it is exchangeable), or upon the
happening of any event or with the passage of time, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable
at the option of the holder thereof, in whole or in part, on or prior to the
maturity date of the Notes, or which is exchangeable or convertible (whether at
the option of the Company or the holder thereof or upon the happening of any
event) into debt securities of the Company or any Subsidiary of the Company,
except to the extent and only to the extent that such exchange or conversion
rights cannot be exercised prior to the maturity of the Notes.

"Existing Indebtedness" means Indebtedness of the Company and its
Subsidiaries outstanding on the Issue Date, until such Indebtedness is repaid.

"Fair Market Value" means with respect to any asset, property or Capital
Stock, the price which could be negotiated in an arm's length, free market
transaction between a willing seller and a willing buyer, neither of whom is
under undue pressure or compulsion to complete the transaction. "Fair Market
Value" shall be determined by the Board of Directors of the Company acting in
good faith and shall be evidenced by a duly and properly adopted resolution of
the Board of Directors set forth in an Officers' Certificate delivered to the
Trustee.

"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect from time to time.

"Government Securities" means securities which are (i) direct obligations
of the United States of America for the payment of which the full faith and
credit of the United States is pledged or (ii) obligations of a Person
controlled or supervised by and acting as an agency or instrumentality of the
United States of America the payment of which is unconditionally Guaranteed as a
full faith and credit obligation by the United States of America which, in
either case, are not callable or redeemable at the option of the issuer thereof.

"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness or other liabilities.

"Holder" means the registered owner of the Notes as reflected on the books
of the Company.

"incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise), assume,
Guarantee (including the Guarantee of the Indebtedness of a Subsidiary or other
Affiliate) or otherwise become liable in respect of such Indebtedness or other
obligation or the recording, as required pursuant to GAAP or otherwise, of any
such Indebtedness or other obligation on the balance sheet of such Person (and
"incurrence", "incurred," "incurrable" and "incurring" shall have meanings
correlative to the foregoing), provided that the accrual of interest (whether
such interest is payable in cash or in kind) and the accretion of original issue
discount shall not be deemed an incurrence of Indebtedness, provided, further
that (a) any Indebtedness or Disqualified Stock of a Person existing at the time
such Person becomes (after the Issue Date) a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) of the Company shall be deemed to be
incurred or issued for purposes of the provision of the Indenture described
above under "Certain Covenants -- Limitation on Issuance of Capital Stock", as
the case may be, by such Subsidiary at the time it becomes a Subsidiary of the
Company and (b) any amendment, modification or waiver of any document pursuant
to which Indebtedness was previously incurred shall be deemed to be an
incurrence of Indebtedness unless such amendment, modification or waiver does
not (i) increase the principal or premium thereof or interest rate thereon
(including by way of original issue discount), (ii) change to an earlier date
the stated maturity thereof or the date of any scheduled or required principal
payment thereon or the time or circumstances under

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which such Indebtedness may or shall be redeemed or the Weighted Average Life to
Maturity thereof, (iii) if such Indebtedness is subordinated to the Notes,
modify or affect, in any manner adverse to the holders, such subordination, (iv)
if the Company is the obligor thereon, provide that a Subsidiary of the Company
not already an obligor thereon shall be an obligor thereon or (v) violate, or
cause the Indebtedness to violate, the provisions of the Indenture described
above under "Certain Covenants -- Limitation on Liens" and "-- Limitation on
Dividend and Other Payment Restrictions Affecting Subsidiaries."

"Indebtedness" means, with respect to any Person, without duplication, (i)
all liabilities, contingent or otherwise, of such Person (a) for borrowed money
(whether or not the recourse of the lender is to the whole of the assets of such
Person or only to a portion thereof), (b) evidenced by bonds, notes, debentures,
drafts accepted or similar instruments or letters of credit or representing the
balance deferred and unpaid of the purchase price of any property or (c) for the
payment of money relating to a Capital Lease Obligation; (ii) obligations under
reimbursement agreements of such Person with respect to letters of credit; (iii)
obligations of such Person with respect to Interest Rate Agreements, Currency
Agreements or Commodity Agreements; (iv) all liabilities of others of the kind
described in the preceding clause (i), (ii) or (iii) that (a) such Person has
Guaranteed, (b) have been incurred by a partnership in which it is a general
partner (to the extent such Person is liable, contingently or otherwise
therefor) or (c) are otherwise its legal liability (other than endorsements for
collection in the ordinary course of business); and (v) all obligations of
others secured by a Lien to which any of the properties or assets (including,
without limitation, leasehold interests and any other tangible or intangible
property rights) of such Person are subject, whether or not the obligations
secured thereby shall have been assumed by such Person or shall otherwise be
such Person's legal liability; provided, however, that notwithstanding anything
in the foregoing that may be deemed to be to the contrary, Indebtedness shall
not include (i) liabilities arising from agreements providing for
indemnification or adjustment of purchase price or from Guarantees securing any
obligations of the Company or any Subsidiary pursuant to such agreements,
incurred or assumed in connection with the disposition of any business, assets
or Subsidiary of the Company (other than Guarantees or similar credit support by
the Company or any Subsidiary of Indebtedness incurred by any Person acquiring
all or any portion of such business, assets or Subsidiary for the purpose of
financing such acquisition or Indebtedness relating to any sale and leaseback
transaction), provided that the maximum aggregate liability in respect of the
foregoing permitted pursuant to this clause (i) shall at no time exceed the net
proceeds actually received from the sale of such business, assets or Subsidiary;
(ii) any Trade Payables and any other accrued current liabilities incurred in
the ordinary course of business as the deferred purchase price of property
acquired in the ordinary course of business; (iii) liabilities arising from
Guarantees to suppliers, lessors, licensees, contractors, franchisees or
customers incurred in the ordinary course of business (exclusive of obligations
for the payment of money borrowed); (iv) liabilities in respect of performance
bonds provided by the Company or its Subsidiaries in the ordinary course of
business; (v) liabilities from the honoring by a bank or other financing
institution of a check, draft or similar instrument drawn against insufficient
funds in the ordinary course of business, provided that such liabilities are
extinguished within two Business Days of their incurrence; (vi) liabilities
under workers' compensation laws and similar legislation; (vii) Tax Claims
Indebtedness and (viii) borrowings under life insurance policies in effect on
the Issue Date to pay premiums under such policies, which borrowings shall not
exceed the cash surrender value thereof. The amount of Indebtedness of any
Person at any date shall be, without duplication, (i) the outstanding balance at
such date of all unconditional obligations as described above and the maximum
liability of any such contingent obligations at such date and (ii) in the case
of Indebtedness of others secured by a Lien to which the property or assets
owned or held by such Person is subject but which is otherwise nonrecourse to
such Person, the lesser of the Fair Market Value at such date of any assets
subject to a Lien securing the Indebtedness of others and the amount of the
Indebtedness secured.

"Interest Rate Agreement" means any swap agreement, interest rate collar
agreement or other similar agreement or arrangement of any Person designed to
protect such Person or any of its Subsidiaries against fluctuations in interest
rates.

"Investment" of any Person means (i) all investments by such Person in any
other Person in the form of loans, advances (other than advances to customers in
the ordinary course of business which are recorded as accounts receivable on the
balance sheet of the Company or its Subsidiaries not to exceed $1 million in the
aggregate at any one time outstanding) or capital contributions, (ii) all
Guarantees of Indebtedness or other obligations of any other Person by such
Person, (iii) all purchases (or other acquisitions for consideration) by such
Person of Indebtedness, Capital Stock or other securities of any other Person
and (iv) all other items that would be classified as investments (including,
without limitation, purchases of assets outside the ordinary course of business)
on a balance sheet of such Person prepared in accordance with GAAP; provided,
that notwithstanding anything in the foregoing that may be deemed to be to the
contrary, Investment shall not include

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(i) sales of goods or services on trade credit terms consistent with the
Company's and its Subsidiaries' past practices or otherwise consistent with
trade credit terms in common use in the industry and recorded as accounts
receivable on the balance sheet of the Person making such sale; (ii) loans and
advances to employees of the Company in the ordinary course of business and
consistent with past practices, including travel, moving and other like
advances; (iii) loans and advances to vendors or contractors in the ordinary
course of business not to exceed $1 million in the aggregate at any one time
outstanding; (iv) lease, utility and other similar deposits in the ordinary
course of business; (v) obligations or securities received in the ordinary
course of business in settlement of debts owing to the Company or a Subsidiary
thereof as a result of foreclosure, perfection or enforcement of any Lien; (vi)
Investments in existence on the Issue Date; (vii) Investments in securities not
consisting of cash or Cash Equivalents and received in connection with an Asset
Sale or other disposition of assets; and (viii) growth in accumulated earnings
of Persons who are not Subsidiaries of the Company.

"Issue Date" means March 17, 1995, the date on which Notes were issued
under the Indenture.

"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions in the City of New York or the city in which the Trustee has its
Corporate Trust Office are not required to be open. If a payment date is a Legal
Holiday at a place of payment, payment may be made at that place on the next
succeeding day that is not a Legal Holiday, and no interest shall accrue for the
intervening period.

"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell (excluding options or
agreements for sales of assets not prohibited by the Indenture) or give a
security interest in and any filing of or agreement to give any financing
statement under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).

"Marketable Securities" means securities listed and trading on any national
securities exchange or listed and trading on the National Market System of the
National Association of Securities Dealers Automated Quotation System; provided,
however, that (a) either any such security is freely tradable under the
Securities Act upon issuance or the holder thereof has contractual registration
rights that will permit the sale of such Marketable Security pursuant to an
effective registration statement not later than ninety days after issuance to
the Company or one of its Wholly Owned Subsidiaries and (b) such securities also
are so listed for trading privileges.

"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds of
such Asset Sale in cash or Cash Equivalents, including payments in respect of
deferred payment obligations (to the extent corresponding to the principal, but
not interest, component thereof) when received in the form of cash or Cash
Equivalents (except to the extent such obligations are financed or sold with
recourse to the Company or any Subsidiary of the Company) and proceeds from the
conversion of other property received when converted to cash or Cash
Equivalents, net of (a) third-party brokerage commissions, sales commissions and
other third-party fees and expenses (including fees and expenses of counsel and
investment bankers) related to such Asset Sale, (b) provisions for all cash
taxes as a result of such Asset Sale, (c) payments made to repay Indebtedness
(other than Indebtedness under the Bank Revolving Credit Facility, repayment of
which is governed by the provision of the Indenture described above under
"Certain Covenants -- Limitation on Asset Sales") or any other obligation
outstanding at the time of such Asset Sale the incurrence of which was not
prohibited by the Indenture and that is secured by a Lien, the incurrence of
which was not prohibited by the Indenture, on the property or assets sold to the
extent required by the terms of such Lien and actually repaid in cash or Cash
Equivalents, and (d) amounts provided by the Company or any Subsidiary as a
reserve, to the extent required by GAAP, against any liabilities associated with
such Asset Sale and retained by the Company or any Subsidiary, as the case may
be, after such Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale; provided however, that the amounts of any such reserves, to the
extent not utilized for the foregoing purposes or no longer required from time
to time to be retained as reserves, shall be Net Cash Proceeds at such times
when any such amounts cease to be retained as reserves.

"Net Equity Proceeds" means (a) in the case of any sale by the Company of
Qualified Capital Stock of the Company, the aggregate net cash proceeds received
by the Company, after payment of expenses, commissions and the like incurred in
connection therewith, and (b) in the case of any exchange, exercise, conversion
or surrender of any outstanding Indebtedness of the Company or any Subsidiary
for or into shares of Qualified Capital Stock of the Company, the amount of such
Indebtedness (or, if such Indebtedness was issued at

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an amount less than the stated principal amount thereof, the accrued amount
thereof as determined in accordance with GAAP) as reflected in the consolidated
financial statements of the Company prepared in accordance with GAAP as of the
most recent date next preceding the date of such exchange, exercise, conversion
or surrender (plus any additional cash amount required to be paid by the holder
of such Indebtedness to the Company or to any Wholly Owned Subsidiary of the
Company upon such exchange, exercise, conversion or surrender and less any and
all payments made to the holders of such Indebtedness, and all other expenses
incurred by the Company in connection therewith), in the case of each of clauses
(a) and (b) to the extent consummated after the Issue Date.

"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP, excluding, however, (i) any
gain (but not loss), together with any related provisions for taxes on such gain
(but not loss), realized in connection with (a) any Asset Sale (including,
without limitation, dispositions pursuant to sale and leaseback transactions
and, for purposes of this definition only, disregarding limitations in the
definition of "Asset Sale" with respect to Fair Market Value and net proceeds),
or (b) the disposition of any securities or the extinguishment of any
Indebtedness of such Person or any of its Subsidiaries, (ii) any extraordinary
gain (but not loss), together with any related provision for taxes on such
extraordinary gain (but not loss), (iii) for purposes of the provisions
described above under "Certain Covenants -- Limitation on Restricted Payments"
only, amortization of existing goodwill of the Company on the Issue Date in the
amount of $450 million and (iv) in the case of the Company and its Subsidiaries,
income tax expense payable pursuant to the provisions of the Indenture described
above in the second paragraph under "Certain Covenants -- Taxes" for any period
by Mid-State Homes and its Subsidiaries or any other member of the Company's
consolidated group for tax purposes which is not a Subsidiary of the Company, so
long as the Company is not in default under the provisions of the Indenture
described above in the second paragraph under "Certain Covenants -- Taxes"
(which income tax expense shall be included, if not excluded pursuant to
this clause (iv)), but including any cash payments with respect to
Consolidated Post Retirement Benefits Other Than Pensions.

"Non-Core Assets" means any assets other than those used directly or
indirectly in the same or a similar line of business (other than land held by
Walter Land, Hamer Properties, Inc. and J.W. Walter on the Issue Date) as the
Company and Homes Holdings Corporation, Jim Walter Homes, Jim Walter Resources,
Jim Walter Window Components, Inc., JW Aluminum, JW Resources, Land Holdings
Corporation, Mid-State Homes, Mid-State Holdings Corporation, Railroad Holdings
Corporation, Sloss Industries, Southern Precision, U.S. Pipe, United Land and
Vestal Manufacturing were engaged in on the Issue Date.

"Non-Core Subsidiary" means any Subsidiary substantially all of whose
assets consist of Non-Core Assets.

"Opinion of Counsel" means an opinion in writing signed by legal counsel
reasonably satisfactory to the Trustee.

"Other Permitted Liens" means (i) Liens for taxes, assessments,
governmental charges or claims which are not yet delinquent or which are being
contested in good faith by appropriate proceedings, which proceedings have the
effect of preventing the forfeiture or sale of the property or assets subject to
such Lien, and for which a reserve or other appropriate provision, if any, as
shall be required in conformity with GAAP shall have been made; (ii) statutory
Liens of landlords, vendors and laborers and carriers', warehousemen's,
mechanics', suppliers', materialmen's, repairmen's, or other like Liens arising
in the ordinary course of business and with respect to amounts which are not yet
delinquent or which are being contested in good faith by appropriate
proceedings, which proceedings have the effect of preventing the forfeiture or
sale of the property or assets subject to such Lien, and for which a reserve or
other appropriate provision, if any, as shall be required by GAAP shall have
been made; (iii) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance and
other types of social security; (iv) Liens incurred or deposits made to secure
the performance of tenders, bids, leases, statutory obligations, surety and
appeal bonds, government contracts, performance and return-of-money bonds and
other obligations of a like nature incurred in the ordinary course of business
(exclusive of obligations for the payment of borrowed money); (v) easements,
rights-of-way, restrictions, minor defects or irregularities in title and other
similar charges or encumbrances not interfering in any material respect with the
business of the Company or any Subsidiary incurred in the ordinary course of
business; (vi) Liens arising in the ordinary course of business upon specific
items of inventory or other goods and proceeds of any Person securing such
Person's obligations in respect of bankers' acceptances issued or created in
accordance with the Indenture for the account of such Person to facilitate the
purchase, shipment or storage of such inventory or other goods; (vii) Liens
incurred in the ordinary

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course of business securing reimbursement obligations with respect to commercial
letters of credit permitted under the Indenture which encumber documents and
other property relating to such letters of credit and products and proceeds
thereof; (viii) Liens incurred in the ordinary course of business in favor of
bona fide lessors of real or personal property; and (ix) leases or subleases
granted to others in the ordinary course of business and not materially
interfering with the ordinary course of business.

"Payment Restriction" means with respect to a Subsidiary of any Person, any
encumbrance, restriction or limitation, whether by operation of the terms of its
charter or by reason of any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation, on the ability of (i) such Subsidiary
to (a) pay dividends or make other distributions on its Capital Stock or make
payments on any obligation, liability or Indebtedness owed to such Person or any
other Subsidiary of such Person, (b) make loans or advances to such Person or
any other Subsidiary of such Person, or (c) transfer any of its properties or
assets to such Person or any other Subsidiary of such Person, or (ii) such
Person or any other Subsidiary of such Person to receive or retain any such (a)
dividends, distributions or payments, (b) loans or advances, or (c) transfer of
properties or assets.

"Permitted Holders" means Lehman and its Affiliates, KKR, KKR Associates,
KKR Partners II, L.P., JWC Associates, L.P., JWC Associates II, L.P. and their
respective Affiliates and any group (as defined in Rules 13d-3 and 13d-5 under
the Exchange Act as in effect on the date of the Indenture) including any of the
foregoing.

"Permitted Indebtedness" means (i) Indebtedness of the Company and its
Subsidiaries in respect of the Bank Revolving Credit Facility not to exceed
$150,000,000 in aggregate principal amount at any one time outstanding as
reduced in accordance with the provisions described above under "Certain
Covenants - Limitation on Asset Sales"; (ii) Existing Indebtedness; (iii)
Indebtedness pursuant to the Notes; (iv) unsecured Indebtedness of the Company
to any Wholly Owned Subsidiary of the Company and unsecured Indebtedness of any
Subsidiary of the Company to the Company or another Wholly Owned Subsidiary of
the Company to the extent permitted by the provisions described above under
"Certain Covenants -- Limitation on Restricted Payments"; (v) obligations with
respect to Interest Rate Agreements, Currency Agreements and Commodity
Agreements; (vi) Permitted Refinancing Indebtedness; and (vii) the incurrence by
the Company or any Subsidiary of Indebtedness represented by Capital Lease
Obligations, Attributable Debt, mortgage financings or Purchase Money
Obligations, in each case incurred for the purpose of financing all or any part
of the purchase price or cost of construction of property (including additions
or replacements to or refurbishments or renovations of existing property) newly
acquired or constructed for use in the business of the Company or such
Subsidiary, in an aggregate principal amount not to exceed $25 million at any
time outstanding.

"Permitted Investments" means (i) any Investments in the Company or in a
Wholly Owned Subsidiary of the Company that is engaged primarily in a Related
Business; (ii) any Investments in Cash Equivalents; (iii) Investments by the
Company or any Wholly Owned Subsidiary of the Company in a Person, if as a
result of such Investment (a) such Person becomes a Wholly Owned Subsidiary of
the Company that is engaged primarily in a Related Business; or (b) such Person
is merged, consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Company or a
Wholly Owned Subsidiary of the Company (which remains a Wholly Owned Subsidiary
following consummation of the transaction) and such Person is engaged primarily
in a Related Business; (iv) Mid-State Advances to the extent permitted by the
provision of the Indenture described above in the second paragraph under
"Certain Covenants -- Taxes" and (v) other Investments in one or more Persons
that do not exceed $25 million in the aggregate at any time outstanding.

"Permitted Liens" means (i) Liens existing on the Issue Date; (ii) Liens
existing on or after the date of the Indenture securing Indebtedness outstanding
under the Bank Revolving Credit Facility; (iii) Liens existing on or after the
date of the Indenture securing any obligations with respect to Interest Rate
Agreements, Currency Agreements or Commodity Agreements; (iv) Liens on property
of a Person existing at the time such Person is merged or consolidated with the
Company or any Subsidiary of the Company or at the time such Person becomes a
Subsidiary of the Company; provided that such Liens were not created in
connection with, or in contemplation of, such merger or consolidation and do not
extend to any assets other than those of the Person merged or consolidated with
the Company or the Subsidiary of the Company; (v) Liens on property existing at
the time of acquisition thereof by the Company or any Subsidiary of the Company;
provided that such Liens were not created in connection with, or in
contemplation of, such acquisition; (vi) Purchase Money Liens and Liens to
secure Capital Lease Obligations and mortgage financings included in
clause (vii) of the definition of Permitted Indebtedness covering only the
property acquired with such Indebtedness; (vii) Liens on assets of

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Subsidiaries securing Indebtedness of Subsidiaries (other than Permitted
Indebtedness) incurred in compliance with the provisions described above under
"Certain Covenants -- Limitation on Incurrence of Indebtedness" and
"-- Limitation on Issuance of Capital Stock"; (viii) Liens securing Permitted
Refinancing Indebtedness; provided that such Liens extend to or cover only the
property or assets then securing the Indebtedness being refinanced; and (ix)
Other Permitted Liens.

"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Subsidiaries issued in exchange for, or the net proceeds of which
are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Company or any of its Subsidiaries; provided that, except in
the case of the redemption of all of the outstanding Notes, in which case none
of the following shall be applicable, (i) the principal amount of such
Indebtedness does not exceed the principal amount of the Indebtedness so
extended, refinanced, renewed, replaced, defeased or refunded (plus the amount
of reasonable expenses incurred in connection therewith), (ii) such Indebtedness
has a Weighted Average Life to Maturity equal to or greater than and a final
maturity no earlier than the Weighted Average Life to Maturity and final
maturity of the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded, (iii) with respect to Subordinated Indebtedness, such
Indebtedness is subordinated in right of payment pursuant to terms at least as
favorable to the Holders as those, if any, contained in the documentation
governing the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded, and (iv) no such Indebtedness incurred by the Company is
extended, refinanced, renewed, replaced, defeased or refunded with Indebtedness
incurred by a Subsidiary.

"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or other agency or political subdivision thereof.

"Pledge Agreement" means the Pledge Agreement dated as of the date of the
Indenture, as amended, amended and restated or otherwise modified from time to
time, pursuant to which the Company pledged the Pledged Shares owned by it to
the Trustee.

"Preferred Stock" means, with respect to any Person, all Capital Stock of
such Person which has a preference in liquidation or a preference with respect
to the payment of dividends to another class of Capital Stock.

"Purchase Money Liens" means Liens to secure or securing Purchase Money
Obligations permitted to be incurred under the Indenture.

"Purchase Money Obligations" means Indebtedness representing, or incurred
to finance, the cost (a) of acquiring any assets and (b) of construction or
improvement of property, in each case for use in the business of the Company and
its Subsidiaries (including Purchase Money Obligations of any other Person at
the time such other Person is merged with or is otherwise acquired by the
Company or a Subsidiary), provided that (i) the principal amount of such
Indebtedness does not exceed 100% of such cost, including construction or
improvement costs, (ii) any Lien securing such Indebtedness does not extend to
or cover any other asset or property other than the asset or property being so
acquired, constructed or improved and (iii) such Indebtedness is incurred, and
any Liens with respect thereto are granted, within 180 days of the acquisition
of such property or asset.

"Qualified Capital Stock" means, with respect to any Person, any Capital
Stock of such Person that is not Disqualified Stock.

"Related Business" means (1) a business engaged in on the Issue Date by any
of the Company, its Subsidiaries, Cardem Insurance, Mid-State Homes, Black
Warrior Methane and Black Warrior Transmission or (2) the business of mining or
manufacturing and/or selling products and/or providing services (other than
brokerage, investment advisory, investment banking, commercial lending or other
similar financial services not related to the primary business of Mid-State
Homes, Best Insurors or Cardem Insurance on the Issue Date) relating to building
products, water and waste water transmission, residential and/or non-residential
construction, coal, coke, methane gas, specialty chemicals and iron and aluminum
industrial and original equipment manufacture products.

"Restricted Investment" means an Investment other than a Permitted
Investment.

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"Restricted Payment" means, with respect to any Person, any of the
following: (i) any dividend or other distribution in respect of such Person's
Capital Stock (other than (a) dividends or distributions payable solely in
Capital Stock (other than Disqualified Stock) and (b) in the case of
Subsidiaries of a Person, dividends or distributions payable to such Person or
to a Wholly Owned Subsidiary of such Person); (ii) the purchase, redemption or
other acquisition or retirement for value of any Capital Stock of such Person or
any of its Subsidiaries (other than the surrender of Qualified Capital Stock of
the Company in payment of the exercise price of employee stock options to
purchase Qualified Capital Stock of the Company issued pursuant to plans
approved by the stockholders of the Company); (iii) the making of any principal
payment on, or the purchase, defeasance, repurchase, redemption or other
acquisition or retirement for value, prior to any scheduled maturity, scheduled
repayment or scheduled sinking fund payment, of any Indebtedness which is
subordinated in right of payment to the Notes; and (iv) the making of any
Restricted Investment.

"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule l-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date
hereof.

"Subordinated Indebtedness" means any Indebtedness of the Company that
(i) has a final maturity date after, and a Weighted Average Life to Maturity
longer than, that of the Notes, (ii) is subordinated in right of payment to the
Notes pursuant to subordination provisions contained in the agreements or
instruments evidencing such Indebtedness or pursuant to which such Indebtedness
is issued, which subordination provisions are not less favorable to the Holders
than the subordination provisions set forth in Exhibit D to the Indenture and
(iii) is not Guaranteed by any Subsidiary of the Company.

"Subsidiary" means, with respect to any Person, (i) a corporation a
majority of whose Capital Stock with voting power, under ordinary circumstances,
to elect directors is at the time, directly or indirectly, owned by such Person,
by one or more Subsidiaries of such Person or by such Person and one or more
Subsidiaries thereof or (ii) any other Person (other than a corporation) in
which such Person, one or more Subsidiaries thereof or such Person and one or
more Subsidiaries thereof, directly or indirectly, at the date of determination
thereof has at least a majority ownership interest; provided, however, that Mid-
State Homes and its Subsidiaries and Cardem Insurance shall not be deemed to be
Subsidiaries of the Company for purposes of the Indenture. For purposes of this
definition, any directors' qualifying shares or investments by foreign nationals
mandated by applicable law shall be disregarded in determining the ownership of
a Subsidiary.

"Subsidiary Pledge Agreements" means the Subsidiary Pledge Agreements dated
as of the date of the Indenture as amended, amended and restated or otherwise
modified from time to time pursuant to which the Subsidiaries of the Company
pledged the Pledged Shares owned by them to the Trustee.

"Tax Claims Indebtedness" means obligations of the Company and its
Subsidiaries to the IRS arising out of consolidated tax returns filed by the
Company and its Subsidiaries or their predecessors for fiscal years ended August
31, 1980, 1983, 1984, 1985, 1986, 1987 and May 31, 1988 (nine months), 1989,
1990 and 1991, as agreed to by the Company and the IRS and approved by a final
nonappealable order of the Bankruptcy Court to the extent required by the
Bankruptcy Code or, failing agreement, the amount determined by a final
nonappealable order of the Bankruptcy Court, in either case in an aggregate
amount of principal, interest and penalties not to exceed $40 million at any
time outstanding.

"Trade Payables" means any accounts payable or any other indebtedness or
monetary obligation to trade creditors created, assumed or Guaranteed by a
Person arising in the ordinary course of business of such Person in connection
with the acquisition of goods and services.

"Voting Stock" means, with respect to any Person, (i) one or more classes
of the Capital Stock of such Person having general voting power to elect at
least a majority of the board of directors, managers or trustees of such Person
(irrespective of whether or not at the time Capital Stock of any other class or
classes have or might have voting power by reason of the happening of any
contingency) and (ii) any Capital Stock of such Person convertible or
exchangeable without restriction at the option of the holder thereof into
Capital Stock of such Person described in clause (i) above.

"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the sum of the
products obtained by multiplying (x) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at

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final maturity, in respect thereof, by (y) the number of years (calculated to
the nearest one-twelfth) that will elapse between such date and the making of
such payment, by (b) the then outstanding principal amount of such Indebtedness.

"Wholly Owned Subsidiary" means, with respect to any Person, a Subsidiary
of such Person all of the outstanding Capital Stock of which shall at the time
be owned by such Person or by one or more Wholly Owned Subsidiaries of such
Person or by such Person and one or more Wholly Owned Subsidiaries of such
Person.

Senior Note Registration Rights Agreement

The Company has entered into a Registration Rights Agreement, dated as of
the Effective Date of the Plan of Reorganization (the "Senior Note Registration
Rights Agreement"), with certain holders ("Note Holders") of Notes pursuant to
which the Company agreed to file the Registration Statement of which this
Prospectus forms a part (the "Initial Senior Note Shelf Registration") and use
its reasonable best efforts to keep such Initial Senior Note Shelf Registration
continuously effective for up to one year.

After the expiration of the Initial Senior Note Shelf Registration, one or
more Note Holders may request to have all or part of their Notes as to which
registration pursuant to the Securities Act is required for public sale
("Registrable Notes") registered under the Securities Act, and all other Note
Holders have the right to participate in any such registration; provided that
(i) the Company is not required to effect more than two such registrations, (ii)
no such registration may be requested within 180 days of the effectiveness of
any such earlier registration or a registration as to which Note Holders have
"piggyback" registration rights (as discussed below), (iii) the Company is not
required to effect any such registration unless at least 20% of the principal
amount of Registrable Notes outstanding at the time of such request is to be
included in such registration and (iv) if the intended method of distribution is
an underwritten public offering, the Company may require the underwriting to be
conducted on a "firm commitment" basis. Any such requested registration may be
effected pursuant to a shelf registration statement under Rule 415 of the
Securities Act (a "Shelf Registration"); any such registration (other than a
Shelf Registration, which must be kept effective by the Company for up to one
year, if made pursuant to the first demand under the provisions described in
this paragraph, or nine months otherwise) need not be kept effective by the
Company for more than 90 days. If the intended method of distribution is an
underwritten public offering, the underwriters must be nationally recognized,
selected by Note Holders owning at least a majority of the aggregate principal
amount of Registrable Notes to be included in such registration (the "Majority
Selling Note Holders") and reasonably acceptable to the Company. In addition, if
the managing underwriter advises the Company in writing that, in its opinion,
the aggregate principal amount of Registrable Notes requested to be registered
exceeds the aggregate principal amount of such securities that can be sold
within a price range specified by the Majority Selling Note Holders, the
Registrable Notes requested to be included by Note Holders shall be included in
the registration on a pro rata basis in preference to any other Notes which the
Company or any person wishes to include in such registration.

If the Company at any time following the termination of the Initial Senior
Note Shelf Registration proposes to register any of its securities under the
Securities Act (other than any registration of Common Stock pursuant to the
Common Stock Registration Rights Agreement or any registration of any securities
on Form S-4 or Form S-8), the Note Holders have the right pursuant to a written
request submitted within 20 days (10 days in certain circumstances) of receipt
of notice thereof from the Company, to participate in such registration.

Upon a request of the Holders of a majority of the aggregate principal
amount of Registrable Notes requested to be included in a demand or "piggyback"
registration made at any time on or after March 17, 1996, the Company has agreed
to use its best efforts to (i) cause the Notes covered by such registration to
be listed on a national securities exchange or to be quoted through NASDAQ or
(ii) provide for at least two market makers for the Notes.

All expenses of the Company in connection with the performance of its
obligations under the Senior Note Registration Rights Agreement and the
reasonable fees, disbursements and other charges of one firm of counsel (per
registration) selected by the Majority Selling Note Holders (but excluding
underwriting discounts and commissions and transfer taxes) shall be borne by the
Company, except where some or all of the Note Holders withdraw or terminate
their requests prior to the registration statement becoming effective, in which
case such Note Holders shall be required to bear some or all of such expenses,
provided that if the Company elects not to proceed with a registration as to
which Note Holders have "piggyback" registration rights as described above or
elects not to proceed with any registration as described in the second
succeeding paragraph, the

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Company must bear all reasonable out-of-pocket costs (other than counsel fees,
disbursements and other charges not specifically referred to above) incurred by
a Note Holder in connection with such terminated registration. In addition,
pursuant to the Senior Note Registration Rights Agreement, the Company has
agreed to indemnify each offeror of Registrable Notes covered by a registration
statement filed pursuant to the Senior Note Registration Rights Agreement, each
other person who participates as an underwriter in such offering, each other
person who controls such offerors or underwriters and their respective
directors, officers, partners, agents and affiliates against certain
liabilities, including liabilities under the Securities Act.

The Company is not obligated to file any registration statement under the
Senior Note Registration Rights Agreement or any amendment or supplement thereto
(other than the Registration Statement of which this Prospectus forms a part and
amendments and supplements thereto) and may suspend any seller's rights to make
sales pursuant to any effective registration statement (provided that the right
to effect sales pursuant to the Registration Statement of which this Prospectus
forms a part may not be suspended prior to the ninetieth day following the date
hereof) at any time when the Company, in the good faith judgment of its Board of
Directors, reasonably believes that the filing thereof at the time requested, or
the offering of securities thereto, would adversely affect a pending or proposed
public offering of the Company's securities, a material financing, or a material
acquisition, merger, recapitalization, consolidation, reorganization or similar
transaction, or negotiations, discussions or pending proposals with respect
thereto. Such a deferral of the filing of a registration statement or an
amendment or supplement thereto or suspension of a seller's right to effect
sales may continue for no more than 10 days after the abandonment or
consummation of any of the foregoing proposals or transactions or 60 days after
the date of the Board's determination referred to in the preceding sentence. In
the event of such a suspension, the applicable registration period will be
extended by the number of days of the suspension.

Lock-Up Agreements

Pursuant to the Senior Note Registration Rights Agreement, each Note Holder
has agreed, if required by the managing underwriter of any underwritten offering
and except as required otherwise under applicable law, not to sell any debt
securities of the Company during the 10 days preceding or 120 days following the
effective date of an underwritten registration under the Senior Note
Registration Rights Agreement. The Company has agreed not to (and to cause
certain other holders of debt securities acquired after the Effective Date of
the Plan of Reorganization to agree not to) effect any public offering and sale
of any debt securities pursuant to an effective registration statement during
such period of time.

DESCRIPTION OF CERTAIN OTHER INDEBTEDNESS

Bank Revolving Credit Facility

The Company and certain of its subsidiaries have entered into a revolving
credit facility (the "Bank Revolving Credit Facility") with Citicorp USA, Inc.,
NationsBank of Florida, N.A. and Merrill Lynch Capital Corporation. The Bank
Revolving Credit Facility is a three-year non-amortizing senior working capital
revolving credit facility pursuant to which borrowings not in excess of $150
million may be outstanding at any time, with a sublimit for trade and standby
letters of credit in an amount not in excess of $40,000,000 at any time
outstanding and a sub-facility for swingline advances in an amount not in excess
of $15,000,000 at any time outstanding, subject to compliance with a borrowing
base test comprised of eligible equipment, inventory and receivables. The
facility is secured by certain collateral, including equipment of JW Aluminum,
U.S. Pipe and Jim Walter Resources as well as the bank accounts, inventory and
accounts receivable of all of the borrowers and inter-company indebtedness.
Subject to certain exceptions, the net cash proceeds from the sale of collateral
must be applied to permanently reduce the facility. Under the facility each
borrower guarantees the obligations of each other borrower, subject to certain
limitations. As of May 31, 1995, there were no borrowings outstanding under this
facility; however, letters of credit in the aggregate face amount of $22,727,000
have been issued thereunder. The facility contains a number of covenants,
including restrictions on liens, indebtedness, leases, mergers, sales or
disposition of assets, investments, dividends, repurchases of shares of capital
stock, prepayment of indebtedness and capital expenditures, as well as financial
covenants with respect to leverage ratios, interest coverage, fixed charge
coverage ratios and earnings. Mid-State Homes and Cardem Insurance are not
parties to or governed by this facility. The borrowers are required to maintain
a leverage ratio (the ratio of indebtedness of the borrowers to EBITDA of the
borrowers) not more than a ratio ranging from 3.80 to 1 to 3.50 to 1 for
measurement periods in the year ending May 31, 1996, 3.35 to 1 for each
measurement period in the year ending May 31, 1997 and 3.30 to 1 thereafter. The
borrowers' interest coverage ratio (the ratio of EBITDA to interest

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expense) for all measurement periods is required to be at least 2.40 to 1. The
borrowers' fixed charge coverage ratio (the ratio of (a) EBITDA minus capital
expenditures to (b) the sum of all required principal payments on outstanding
indebtedness, interest expense and dividends paid) is required to be at least
1.0 to 1 for the measurement period ending August 31, 1995, 1.10 to 1 in each of
the remaining measurement periods in the year ending May 31, 1996 and 1.25 to 1
thereafter. The minimum EBITDA of the borrowers is $175 million for the year
ending May 31, 1996 and $180 million for the four most recently completed fiscal
quarters at each measurement period thereafter.

DESCRIPTION OF CAPITAL STOCK

Authorized Capital Stock

The Company's authorized capital stock consists of 200,000,000 shares of
Common Stock, par value $.01 per share. At September 15, 1995 there were
54,868,766 shares of Common Stock issued and outstanding. See "Additional
Stock Issuances" below. Harris Trust and Savings Bank is the transfer agent
and registrar for the Common Stock.

Common Stock

The holders of the Common Stock are entitled to one vote for each share
held of record on all matters as to which stockholders are entitled to vote.
There are no cumulative voting rights in the election of directors. The quorum
required at any stockholders' meeting for consideration of any matter is a
majority of the issued and outstanding shares of Common Stock, represented in
person or by proxy.

Holders of the Common Stock are entitled to receive dividends when, as and
if declared by the Board of Directors out of funds legally available for
dividends. In the event of any liquidation, dissolution or winding up of the
Company, the holders of the Common Stock are entitled to receive pro rata any
assets distributable to stockholders in respect of shares held by them, after
payment of all obligations of the Company.

The outstanding shares of the Common Stock are duly authorized, validly
issued, fully paid and nonassessable.

Additional Stock Issuances

Pursuant to the Plan of Reorganization, the Company was or may be required
to issue additional Common Stock to the holders of common stock of the Company
immediately prior to the Effective Date of the Plan of Reorganization ("Original
Stockholders") on the dates and in the amounts described below, in each case on
a pro rata basis. Solely for the purpose of calculating the number of shares to
be issued in these issuances, such additional Common Stock will be valued at a
price per share of $22.86 (the "Common Stock Value Per Share"). Original
Stockholders will be entitled receive shares of Common Stock as follows:

(a) On the date on which a final, non-appealable order is entered
resolving the total amount of claims of the IRS against the Company or any
of its subsidiaries (other than Cardem Insurance and J.W. Railroad) arising
prior to the Effective Date of the Plan of Reorganization and entitled to
priority under Section 507(a)(7) of the Bankruptcy Code ("Federal Income
Tax Claims"), the Original Stockholders will receive Common Stock with an
aggregate Common Stock Value Per Share equal to the amount by which the
total amount of the Federal Income Tax Claims are reduced to below $27
million (the "Federal Income Tax Claims Differential"). Such Common Stock
shall be, first, issued by the Company directly to the Original
Stockholders up to a number of shares having an aggregate Common Stock
Value Per Share equal to the excess, if any, of (A) $88.7 million over (B)
the aggregate Common Stock Value Per Share of all shares of Common Stock
theretofore issued into escrow as described in the next paragraph, and
second, be satisfied by the release from such escrow of any remaining
shares of Common Stock issuable to Original Stockholders pursuant to such
provisions.

(b) As soon as practicable after the Tax Oversight Committee of the
Board of Directors has determined that a tax return for a tax year ending
on or after May 31, 1995 or a claim for refund or deduction for a tax year
ending prior to May 31, 1995 has been filed by the Company's consolidated
tax group or any member thereof on which a Veil Piercing Settlement Tax
Savings Amount (as defined below) is claimed (each such filing, a "Veil
Piercing Settlement Tax Savings Event"), the Company will issue and place
in escrow with an

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escrow agent selected by the Company, Lehman and AIF II, L.P., certain of
its affiliates and certain accounts controlled or managed by such
affiliates (AIF II, L.P., such affiliates and accounts, collectively,
"Apollo") shares of Common Stock having an aggregate Common Stock Value
Per Share equal to the difference between (a) the aggregate amount of
federal, state and local tax payable by members of the Company's
consolidated group as reported on such members' relevant tax returns and
(b) the aggregate amount of federal, state and local income tax that
would have been reported on such returns if the distribution under the
Veil Piercing Settlement Agreement had not been made (the "Veil Piercing
Settlement Tax Savings Amount"). This amount will be determined by the
Tax Oversight Committee upon such Veil Piercing Settlement Tax Savings
Event. The Company intends to deduct in full in the year of payment the
payment made under the Plan of Reorganization to Celotex, in its capacity
as the Celotex Settlement Fund Recipient. The Company believes that such
payment is properly deductible, but there can be no assurance that the
IRS will not challenge the deduction and if it does so whether such
challenge will succeed. The issued shares will be released from escrow as
soon as practicable after the Tax Oversight Committee determines that the
applicable Veil Piercing Settlement Tax Savings Amount is no longer
subject to adjustment because (i) the statutory period during which
assessments (or denial of a refund claim) can be made with respect to
such Veil Piercing Settlement Tax Savings Amount has passed, (ii) the
Company and the IRS or other relevant taxing authority have entered into
a closing or similar agreement governing the years or issues in question
with respect to such Veil Piercing Settlement Tax Savings Amount, or (iii)
a court decision determining the income tax liability (or the right
to such refund) with respect to such Veil Piercing Settlement Tax Savings
Amount has been rendered and the time period for the filing of an appeal
has passed. Notwithstanding and in addition to the foregoing, the Plan
of Reorganization provides that if, on or prior to August 24, 1995 (the
160th day following the Effective Date of the Plan of Reorganization), (i)
one or more Veil Piercing Settlement Tax Savings Events shall not have
occurred in respect of (and the Tax Oversight Committee shall not have
determined) the maximum Veil Piercing Settlement Tax Savings Amount that
could result from a good faith claim by the Company's consolidated tax
group of both (a) a refund with respect to tax years prior to the tax year
in which the Effective Date of the Plan of Reorganization occurs, and (b)
a deduction with respect to the tax year in which the Effective Date of
the Plan of Reorganization occurs (collectively, the "Initial Claim"), or
(ii) the Company shall not have issued and delivered into escrow
certificates representing shares of Common Stock having an aggregate
Common Stock Value Per Share equal to the full amount of such maximum
Veil Piercing Settlement Tax Savings Amount, then not later than
September 13, 1995 (the 180th day after the Effective Date of the Plan
of Reorganization) the Company shall issue and deliver into escrow
certificates representing Common Stock having an aggregate Common Stock
Value Per Share equal to the sum of (i) that part of the Veil Piercing
Settlement Tax Savings Amount arising from the Initial Claim in respect
of which shares of Common Stock had not theretofore been issued into
escrow, as such Veil Piercing Settlement Tax Savings Amount (whether or
not a Veil Piercing Settlement Tax Savings Event shall previously
have occurred) shall be estimated in good faith by the Chief Financial
Officer of the Company and set forth in a certificate delivered to the
Tax Oversight Committee (and such amount shall be the Veil Piercing
Settlement Tax Savings Amount for purposes of provisions described in this
sentence) and (ii) an additional amount equal to the lesser
of (A) $13 million and (B) an amount that would cause the total number of
shares of Common Stock to be issued into escrow to have an aggregate
Common Stock Value Per Share equal to $88.7 million. On August 23, 1995,
the Chief Financial Officer of the Company delivered such certificate
to the Tax Oversight Committee, and on September 13, 1995 the Company
delivered 3,880,140 shares of Common Stock into escrow. Notwithstanding
and in addition to the foregoing, the Plan of Reorganization provides
that $11.3 million of Common Stock (using the Common Stock Value Per
Share) will be issued directly to the Original Stockholders on a pro
rata basis at the same time as shares of Common Stock are first issued
into escrow; accordingly, on September 13, 1995, the Company issued
494,313 shares of Common Stock to the Original Stockholders on a pro rata
basis. The Original Stockholders, on a pro rata basis, are entitled to
exercise all voting rights of, and receive all dividends and other
distributions on, Common Stock held in escrow. The amount of such
dividends and other distributions must be returned to the Company if such
shares are subsequently cancelled prior to release from escrow.

The Plan of Reorganization limits the number of shares issuable under the
provisions described in (a) and (b) above to that number of shares of Common
Stock that, when added to the shares issued to the Original Stockholders on the
Effective Date of the Plan of Reorganization, has an aggregate Common Stock
Value Per Share of $250 million. The Plan of Reorganization contains an
arbitration provision for the final determination of any dispute that may arise
between KKR (the principal Original Stockholder) and the Tax Oversight Committee
with respect to any determination made by the Tax Oversight Committee regarding
the provisions of the Plan of Reorganization described in (b) above. The Plan of
Reorganization also provides that, for purposes of the Federal Income Tax Claims
Differential, the amount of Federal Income Tax Claims shall not be reduced by
any Veil Piercing Settlement Tax Savings Amount and that any terms of any
settlement or agreement regarding Federal

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Income Tax Claims shall not be agreed to by the Company or any subsidiary
thereof without the prior consent of the Tax Oversight Committee.

The Company is authorized to issue additional shares of capital stock from
time to time. There are no specific restrictions upon such issuances, except
that the Charter prohibits the issuance of non-voting equity securities if, and
only to the extent that and so long as, Section 1123 of the Bankruptcy Code is
applicable and would prohibit such issuance. The Company's stockholders will not
have preemptive rights to purchase additional shares of capital stock of the
Company upon any issuance of such shares authorized by the Board.

Stockholder's Agreement

Pursuant to the Stockholder's Agreement dated as of the Effective Date of
the Plan of Reorganization (the "Stockholder's Agreement") between the Company
and the Celotex Settlement Fund Recipient, the Celotex Settlement Fund Recipient
has agreed, in any vote or action by written consent by holders of Common Stock
on any matter submitted to a vote of holders of Common Stock, to vote, and
execute written consents with respect to, the shares of Common Stock held by it
for and/or against such matter in proportion to the votes cast or consents
executed and delivered by all other holders of Common Stock. Identical
restrictions on the voting of the Celotex Settlement Fund Recipient's Common
Stock are contained in the Charter and in the Plan of Reorganization. Pursuant
to the Stockholder's Agreement, the Celotex Settlement Fund Recipient further
agreed not to, and to cause its affiliates not to, offer, sell, assign, give,
pledge, encumber or otherwise dispose of any shares of its Common Stock or any
interest therein or right thereto to any person that is a successor to or
creditor of the Celotex Settlement Fund Recipient or a creditor of Celotex (any
such creditor, a "Celotex Settlement Fund Beneficiary"), in such person's
capacity as such, unless such person executes and delivers an instrument, in
form and substance reasonably satisfactory to the Company, pursuant to which it
agrees to be bound by the Stockholder's Agreement to the same extent as the
Celotex Settlement Fund Recipient.

Tag-Along and Voting Rights Agreement

Pursuant to the Tag-Along and Voting Rights Agreement dated as of the
Effective Date of the Plan of Reorganization (the "Tag-Along and Voting Rights
Agreement") among Celotex, on behalf of the Celotex Settlement Fund Recipient,
Apollo and Lehman (collectively, the "Tag-Along Stockholders") each Tag-Along
Stockholder agreed that if it proposes to dispose of any Common Stock held by it
on the Effective Date of the Plan of Reorganization to any third party (other
than transactions described below), the other Tag-Along Stockholders will have
the right to include the shares of Common Stock held by them on the Effective
Date of the Plan of Reorganization in such disposition transaction on the same
terms and conditions, provided, however, that if the initiating Tag-Along
Stockholder is Lehman or Apollo, then Lehman or Apollo, respectively, will not
be entitled to participate in such disposition transaction. If the Tag-Along
Stockholders collectively desire to sell more shares of Common Stock than the
proposed purchaser desires to purchase, each Tag-Along Stockholder shall sell a
pro rata number of its shares. The foregoing does not apply to any transaction
effected on a national securities exchange, on NASDAQ or through a registered-
broker dealer or made pursuant to a public offering under an effective
registration statement under the Securities Act. The foregoing also does not
apply to any disposition by a Tag-Along Stockholder to an affiliate or by the
Celotex Settlement Fund Recipient to a successor or a Celotex Settlement Fund
Beneficiary. The parties have agreed that any of their transferees which is an
affiliate or, in the case of the Celotex Settlement Fund Recipient, a successor
or a Celotex Settlement Fund Beneficiary must, prior to such transfer, agree in
writing to be bound by the Tag-Along and Voting Rights Agreement as if it had
been an original party thereto.

The Celotex Settlement Fund Recipient also has agreed to, and to cause each
of its affiliates to, vote and execute written consents with respect to their
shares of Common Stock in proportion to the votes cast or consents executed and
delivered by all other holders of Common Stock, in any vote or action by written
consent by holders of Common Stock.

Common Stock Registration Rights Agreement

The Company has entered into a Registration Rights Agreement, dated as of
the Effective Date of the Plan of Reorganization (the "Common Stock Registration
Rights Agreement"), with certain holders ("Common Stock Holders") of Common
Stock pursuant to which the Company agreed to file the registration statement
referred to under "Prospectus Summary -- Contemporaneous Common Stock Offering"
(the "Initial Common

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Stock Shelf Registration") and use its reasonable best efforts to keep such
Common Stock Shelf Registration continuously effective for up to one year.

After the expiration of the Initial Common Stock Shelf Registration, one or
more Common Stock Holders may request to have all or part of their Common Stock
as to which registration pursuant to the Securities Act is required for public
sale ("Registrable Common Stock") registered under the Securities Act, and all
other Common Stock Holders have the right to participate in any such
registration; provided that (i) the Company is not required to effect more than
two such registrations, (ii) no such registration may be requested within 180
days of the effectiveness of any such earlier registration or a registration as
to which Common Stock Holders have "piggyback" registration rights (as discussed
below), (iii) the Company is not required to effect any such registration unless
at least 5% of the shares of Registrable Common Stock outstanding at the time of
such request is to be included in such registration and (iv) if the intended
method of distribution is an underwritten public offering, the Company may
require the underwriting to be conducted on a "firm commitment" basis. Any such
requested registration may be effected pursuant to a Shelf Registration; any
such registration (other than a Shelf Registration, which must be kept effective
by the Company for up to one year, if made pursuant to the first demand under
the provisions described in this paragraph or nine months otherwise) need not be
kept effective by the Company for more than 90 days.

If the Company at any time following the termination of the Initial Common
Stock Shelf Registration proposes to register any of its securities under the
Securities Act (other than any registration of Notes pursuant to the Senior Note
Registration Rights Agreement or any registration of any securities on Form S-4
or Form S-8), the Common Stock Holders have the right to participate in such
registration.

Upon a request of Common Stock Holders owning at least a majority of the
shares of Registrable Common Stock requested to be included in a demand or
"piggyback" registration made at any time on or after March 17, 1996, the
Company has agreed to use its best efforts to (i) cause the Common Stock covered
by such registration to be listed on a national securities exchange or to be
quoted through NASDAQ or (ii) provide for at least two market makers for the
Common Stock.

All expenses of the Company in connection with the performance of its
obligations under the Common Stock Registration Rights Agreement and the
reasonable fees, disbursements and other charges of one firm of counsel (per
registration) selected by the Common Stock Holders owning at least a majority of
the shares of Registrable Common Stock being registered (but excluding
underwriting discounts and commissions and transfer taxes) shall be borne by the
Company, except where some or all of the Common Stock Holders withdraw or
terminate their requests prior to the registration statement becoming effective,
in which case such Common Stock Holders shall be required to bear some or all of
such expenses, provided that if the Company elects not to proceed with a
registration as to which Common Stock Holders have "piggyback" registration
rights as described above or elects not to proceed with any registration as
described in the second succeeding paragraph, the Company must bear all
reasonable out-of-pocket costs (other than counsel fees, disbursements and other
charges not specifically referred to above) incurred by a Common Stock Holder in
connection with such terminated registration. In addition, pursuant to the
Common Stock Registration Rights Agreement, the Company has agreed to indemnify
each offeror of Registrable Common Stock covered by a registration statement
filed pursuant to the Common Stock Registration Rights Agreement, each other
person who participates as an underwriter in such offering, each other person
who controls such offerors or underwriters and their respective directors,
officers, partners, agents and affiliates against certain liabilities, including
liabilities under the Securities Act.

The Company is not obligated to file any registration statement under the
Common Stock Registration Rights Agreement or any amendment or supplement
thereto (other than the Initial Common Stock Shelf Registration Statement and
amendments and supplements thereto) and may suspend any seller's rights to make
sales pursuant to any effective registration statement (provided that the right
to effect sales pursuant to the Initial Common Stock Shelf Registration
Statement may not be suspended prior to the ninetieth day following the date
hereof) at any time when the Company, in the good faith judgment of its Board of
Directors, reasonably believes that the filing thereof at the time requested, or
the offering of securities thereto, would adversely affect a pending or proposed
public offering of the Company's securities, a material financing, or a material
acquisition, merger, recapitalization, consolidation, reorganization or similar
transaction, or negotiations, discussions or pending proposals with respect
thereto. Such a deferral of the filing of a registration statement or an
amendment or supplement thereto or suspension of a seller's right to effect
sales may continue for no more than 10 days after the abandonment or
consummation of any of the foregoing proposals or transactions or 60 days after
the date of

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the Board's determination referred to in the preceding sentence. In the event of
such a suspension, the applicable registration period will be extended by the
number of days of the suspension.

Lock-Up Agreements

Pursuant to the Common Stock Registration Rights Agreement, each Common
Stock Holder has agreed, if required by the managing underwriter of any
underwritten offering and except as required otherwise under applicable law, not
to sell any equity securities of the Company during the 10 days preceding or 120
days following the effective date of an underwritten registration under the
Common Stock Registration Rights Agreement. The Company has agreed not to (and
to cause certain other holders of equity securities acquired after the Effective
Date of the Plan of Reorganization to agree not to) effect any public offering
and sale of Common Stock pursuant to an effective registration statement during
such period of time.

Channel One Registration Rights Agreement

The Company has entered into a Registration Rights Agreement dated as of
September 12, 1995 (the "Channel One Registration Rights Agreement") with
Channel One pursuant to which the Company has agreed to include in the Initial
Common Stock Shelf Registration all shares of Common Stock owned by Channel One.
The Company has also agreed to include all shares of Common Stock owned by
Channel One in each registration statement filed by the Company subsequent to
the filing of the Initial Common Stock Shelf Registration which includes shares
of Registrable Common Stock to the extent that the Company may do so without
breaching any of its obligations under the Common Stock Registration Rights
Agreement and otherwise on the terms and subject to the conditions of the Common
Stock Registration Rights Agreement that are applicable to the holders of the
shares of Registrable Common Stock included in such registration statement. The
Channel One Registration Rights Agreement provides that certain provisions of
the Common Stock Registration Rights Agreement are binding upon and applicable
to the parties thereto, including those provisions described above relating to
expenses, indemnification, postponements and suspensions.

Antitakeover Legislation

Section 203 of the DGCL provides that, subject to certain exceptions
specified therein, an "interested stockholder" of a Delaware corporation shall
not engage in any business combination, including mergers or consolidations or
acquisitions of additional shares of the corporation, with the corporation for a
three-year period following the date on which such stockholder becomes an
"interested stockholder" unless (i) prior to such date, the board of directors
of the corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an "interested stockholder," (ii)
upon consummation of the transaction which resulted in the stockholder becoming
an "interested stockholder," the interested stockholder owned at least 85% of
the voting stock of the corporation outstanding at the time the transaction
commenced (excluding certain shares), or (iii) on or subsequent to such date,
the business combination is approved by the board of directors of the
corporation and authorized at an annual or special meeting of stockholders by
the affirmative vote of at least 66-2/3% of the outstanding voting stock which
is not owned by the "interested stockholder." Except as otherwise specified in
Section 203, an "interested stockholder" is defined to include (x) any person
that is the owner of 15% or more of the outstanding voting stock of the
corporation, or is an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation at any
time within three years immediately prior to the relevant date and (y) the
affiliates and associates of any such person. For purposes of Section 203, the
Board has approved the transaction (the consummation of the Plan of
Reorganization) which resulted in Lehman and the Celotex Settlement Fund
Recipient becoming "interested stockholders" and, accordingly, the Company
believes that neither of them will be subject to the restrictions of Section 203
unless it ceases to be the owner of 15% or more of the outstanding voting stock
of the Company and seeks to reattain such level of ownership. The Board also
approved the purchase of Common Stock by Channel One and its affiliates and
associates of 15% or more of the outstanding voting stock of the Company through
open market purchases or otherwise. Accordingly, the Company believes that none
of Channel One and its affiliates and associates (including the KKR Investors)
will be subject to the restrictions of Section 203. In connection with the
above-described Board approval, Channel One and the KKR Investors agreed with
the Company that they will not, and will not permit any of their affiliates to,
vote any shares of Common Stock of the Company or otherwise take any other
action to modify the composition of the Board of Directors of the Company prior
to April 6, 1998 other than as expressly provided for in the Company's Charter
and the Plan of Reorganization and that during such period they will not
participate in the solicitation of proxies to vote, or seek to advise or

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influence any person with respect to, voting securities of the Company to modify
the composition of the Board of Directors, or propose, assist in or encourage
any person in connection with any of the foregoing.

CERTAIN FEDERAL INCOME TAX CONSEQUENCES

The following summary describes certain United States federal income tax
consequences of the ownership of Notes as of the date hereof. Except where
noted, it deals only with Notes held as capital assets by United States Holders
and does not deal with special situations, such as those of dealers in
securities or currencies, financial institutions, life insurance companies,
persons holding Notes as a part of a hedging or conversion transaction or a
straddle or United States Holders whose "functional currency" is not the U.S.
dollar. Furthermore, the discussion below is based upon the provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), and regulations, rulings
and judicial decisions thereunder as of the date hereof, and such authorities
may be repealed, revoked or modified so as to result in federal income tax
consequences different from those discussed below. This summary is also based
upon Treasury regulations issued under section 1273 and related sections of the
Code relating to original issue discount ("OID") (the "OID Regulations").
Persons considering the purchase, ownership or disposition of Notes should
consult their own tax advisors concerning the federal income tax consequences in
light of their particular situations as well as any consequences arising under
the laws of any other taxing jurisdiction.

As used herein, a "United States Holder" of a Note means a Holder that is a
citizen or resident of the United States, a corporation, partnership or other
entity created or organized in or under the laws of the United States or any
political subdivision thereof, or an estate or trust the income of which is
subject to United States federal income taxation regardless of its source. A
"Non-United States Holder" of a Note is a Holder that is not a United States
Holder.

Payments of Interest

The Company believes that the Notes will not be issued with OID within the
meaning of section 1273 of the Code and the OID Regulations and will report
payments to holders accordingly. Thus, payments of interest on a Note will
generally be taxable to a United States Holder as ordinary income from domestic
sources at the time it is paid or accrued in accordance with the United States
Holder's method of accounting for tax purposes.

Market Discount

If a United States Holder purchases a Note for an amount that is less than
its stated redemption price at maturity, the amount of the difference will be
treated as "market discount" for federal income tax purposes, unless such
difference is less than a specified de minimis amount. Under the market discount
rules, a United States Holder will be required to treat any principal payment
on, or any gain on the sale, exchange, retirement or other disposition of, a
Note as ordinary income to the extent of the market discount which has not
previously been included in income and is treated as having accrued on such Note
at the time of such payment or disposition. In addition, the United States
Holder may be required to defer, until the maturity of the Note or its earlier
disposition in a taxable transaction, the deduction of all or a portion of the
interest expense on any indebtedness incurred or continued to purchase or carry
such Note.

Any market discount will be considered to accrue ratably during the period
from the date of acquisition to the maturity date of the Note, unless the United
States Holder elects to accrue on a constant interest method. A United States
Holder of a Note may elect to include market discount in income currently as it
accrues (on

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either a ratable or constant interest method), in which case the rule described
above regarding deferral of interest deductions will not apply. This election to
include market discount in income currently, once made, applies to all market
discount obligations acquired on or after the first taxable year to which the
election applies and may not be revoked without the consent of the IRS.

Amortizable Bond Premium

A United States Holder that purchases a Note for an amount in excess of the
sum of all amounts payable on the Note after the purchase date other than
qualified stated interest (as defined in the OID Regulations) will be considered
to have purchased the Note at a "premium." A United States Holder generally may
elect to amortize the premium over the remaining term of the Note on a constant
yield method. The amount amortized in any year will be treated as a reduction of
the United States Holder's interest income from the Note. Bond premium on a Note
held by a United States Holder that does not make such an election will decrease
the gain or increase the loss otherwise recognized on disposition of the Note.
The election to amortize premium on a constant yield method once made applies to
all debt obligations held or subsequently acquired by the electing United States
Holder on or after the first day of the first taxable year to which the election
applies and may not be revoked without the consent of the IRS.

Sale, Exchange and Retirement of Notes

A United States Holder's tax basis in a Note will, in general, be the
United States Holder's cost therefor, increased by any market discount
previously included in income by the United States Holder and reduced by any
amortized premium and any cash payments on the Note other than qualified stated
interest. Upon the sale, exchange or retirement of a Note, a United States
Holder will recognize gain or loss equal to the difference between the amount
realized upon the sale, exchange or retirement (less any accrued interest, which
will be taxable as such) and the adjusted tax basis of the Note. In general,
such gain or loss will be capital gain or loss and will be long-term capital
gain or loss if at the time of sale, exchange or retirement the Note has been
held for more than one year. Under current law, net capital gains of individuals
are, under certain circumstances, taxed at lower rates than items of ordinary
income. The deductibility of capital losses is subject to limitations.

Non-United States Holders

Under present United States federal income and estate tax law, and subject
to the discussion below concerning backup withholding:

(a) no withholding of United States federal income tax will be
required with respect to the payment by the Company or any paying agent of
principal or interest on a Note owned by a Non-United States Holder,
provided (i) that the beneficial owner does not actually or constructively
own 10% or more of the total combined voting power of all classes of stock
of the Company entitled to vote within the meaning of section 871(h)(3) of
the Code and the regulations thereunder, (ii) the beneficial owner is not a
controlled foreign corporation that is related to the Company through stock
ownership, (iii) the beneficial owner is not a bank whose receipt of
interest on a Note is described in section 881(c)(3)(A) of the Code and
(iv) the beneficial owner satisfies the statement requirement (described
generally below) set forth in section 871(h) and section 881(c) of the Code
and the regulations thereunder;

(b) no withholding of United States federal income tax will be
required with respect to any gain or income realized by a Non-United States
Holder upon the sale, exchange or retirement of a Note; and

(c) a Note beneficially owned by an individual who at the time of
death is a Non-United States Holder will not be subject to United States
federal estate tax as a result of such individual's death, provided that
such individual does not actually or constructively own 10% or more of the
total combined voting power of all classes of stock of the company entitled
to vote within the meaning of section 871(h)(3) of the Code and provided
that the interest payments with respect to such Note would not have been,
if received at the time of such individual's death, effectively connected
with the conduct of a United States trade or business by such individual.

To satisfy the requirement referred to in (a)(iv) above, the beneficial
owner of such Note, or a financial institution holding the Note on behalf of
such owner, must provide, in accordance with specified procedures, a paying
agent of the Company with a statement to the effect that the beneficial owner is
not a U.S. person, citizen

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or resident. Pursuant to current temporary Treasury regulations, these
requirements will be met if (1) the beneficial owner provides his name and
address, and certifies, under penalties of perjury, that he is not a U.S.
person, citizen or resident (which certification may be made on an IRS Form W-8
(or successor form) or (2) a financial institution holding the Note on behalf of
the beneficial owner certifies, under penalties of perjury, that such statement
has been received by it and furnishes a paying agent with a copy thereof.

Payments to Non-United States Holders not meeting the requirements of
paragraph (a) above and thus subject to withholding of United States federal
income tax may nevertheless be exempt from such withholding if the beneficial
owner of the Note provides the Company with a properly executed (1) IRS Form
1001 (or successor form) claiming an exemption from withholding under the
benefit of a tax treaty or (2) IRS Form 4224 (or successor form) stating that
interest paid on the Note is not subject to withholding tax because it is
effectively connected with the owner's conduct of a trade or business in the
United States.

Backup Withholding and Information Reporting

In general, information reporting requirements will apply to certain
payments of principal and interest paid on the Notes and to the proceeds of sale
of a Note made to United States Holders other than certain exempt recipients
(such as corporations). A 31 percent backup withholding tax will apply to such
payments if the United States Holder fails to provide a taxpayer identification
number or certification of foreign or other exempt status or fails to report in
full dividend and interest income.

No information reporting or backup withholding will be required with
respect to payments made by the Company or any paying agent to Non-United States
Holders if a statement described in (a)(iv) under "Non-United States Holders"
has been received and the payor does not have actual knowledge that the
beneficial owner is a United States person.

In addition, backup withholding and information reporting will not apply if
payments of the principal or interest on a Note are paid or collected by a
foreign office of a custodian, nominee or other foreign agent on behalf of the
beneficial owner of such Note, or if a foreign office of a broker (as defined in
applicable Treasury regulations) pays the proceeds of the sale of a Note to the
owner thereof. If, however, such nominee, custodian, agent or broker is, for
United States federal income tax purposes, a U.S. person, a controlled foreign
corporation or a foreign person that derives 50% or more of its gross income for
certain periods from the conduct of a trade or business in the United States,
such payments will not be subject to backup withholding but will be subject to
information reporting, unless (1) such custodian, nominee, agent or broker has
documentary evidence in its records that the beneficial owner is not a U.S.
person and certain other conditions are met or (2) the beneficial owner
otherwise establishes an exemption. Temporary Treasury regulations provide that
the Treasury is considering whether backup withholding will apply with respect
to such payments of principal or interest or the proceeds of a sale that are not
subject to backup withholding under the current regulations. Under proposed
Treasury regulations not currently in effect backup withholding will not apply
to such payments absent actual knowledge that the payee is a United States
person.

Payments of principal and interest on a Note paid to the beneficial owner
of a Note by a United States office of a custodian, nominee or agent, or the
payment by the United States office of a broker of the proceeds of sale of a
Note, will be subject to both backup withholding and information reporting
unless the beneficial owner provides the statement referred to in (a)(iv) above
and the payor does not have actual knowledge that the beneficial owner is a
United states person or otherwise establishes an exemption.

Any amounts withheld under the backup withholding rules will be allowed as
a refund or a credit against such holder's U.S. federal income tax liability
provided the required information is furnished to the IRS.

PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
PARTICULAR TAX CONSEQUENCES TO THEM OF ANY INVESTMENT IN THE NOTES, INCLUDING
THE APPLICATION OF FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS.

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SELLING SECURITY HOLDERS

The following table sets forth information with respect to the Notes
offered hereby beneficially owned by each of the Selling Security Holders as of
September 15, 1995 (rounded to the nearest dollar). The Notes offered hereby may
be offered in whole or in part from time to time by or on behalf of the Selling
Security Holders named below.

Principal Amount of Notes Percentage of
Selling Security Holder Owned and Registered Hereunder Outstanding Notes
----------------------- ------------------------------ -----------------

Lehman Brothers Holdings, Inc. $ 72,114,000 14.7%
Harch Capital Management, Inc. 13,750,000 2.8%
Offit Bank 8,000,000 1.6%
The Celotex Corporation, in
its capacity as the Celotex
Settlement Fund Recipient ... 124,745,000 25.5%
-------------- ---------
Total ........................ $ 218,609,000 44.6%
================ =========

PLAN OF DISTRIBUTION

The Company will receive no proceeds from this offering. The Notes may be
sold from time to time to purchasers directly by any of the Selling Security
Holders. Alternatively, any of the Selling Security Holders may from time to
time offer the Notes through underwriters, dealers or agents, who may receive
compensation in the form of underwriting discounts, concessions or commissions
from the Selling Security Holders and/or the purchasers of Notes for whom they
may act as agent. The Selling Security Holders and any underwriters, dealers or
agents that participate in the distribution of Notes may be deemed to be
underwriters, and any profit on the sale of Notes by them and any discounts,
commissions or concessions received by any such underwriters, dealers or agents
might be deemed to be underwriting discounts and commissions under the
Securities Act. If the Company is advised that an underwriter has been engaged
with respect to the sale of any Notes offered hereby, or in the event of any
other material change in the plan of distribution, the Company will cause
appropriate amendments to the Registration Statement of which this Prospectus
forms a part to be filed with the Commission reflecting such engagement or
other change. See "Additional Information."

At the time a particular offer of Notes is made, to the extent required, a
Prospectus Supplement will be provided by the Company and distributed by the
relevant Selling Security Holder which will set forth the aggregate amount and
type of Notes being offered and the terms of the offering, including the name
or names of any underwriters, dealers or agents, any discounts, commissions and
other items constituting compensation from the Selling Security Holders and any
discounts, commissions or concessions allowed or reallowed or paid to dealers.

The Notes may be sold from time to time in one or more transactions at a
fixed offering price, which may be changed, or at varying prices determined at
the time of sale or at negotiated prices. Such prices will be determined by the
Selling Security Holders or by agreement between the Selling Security Holders
and underwriters or dealers. To the extent not prohibited by applicable
securities laws, Selling Security Holders may sell Notes covered by the
Registration Statement of which this Prospectus forms a part other than
pursuant to such Registration Statement.

The Notes are not, and it is not anticipated that they will be, listed on
any exchange or quoted on NASDAQ or any other quotation system; however,
certain Holders of Notes have the right to require the Company to use its best
efforts to list their Notes on a national securities exchange or to otherwise
provide for the quotation of the Notes through NASDAQ in connection with the
exercise on or after March 17, 1996, by such Holders of certain registration
rights with respect to the Notes. See "Description of Notes -- Senior Notes
Registration Rights Agreement." To the Company's knowledge, no established
public market for the Notes currently exists and no assurances can be given
that any public market will develop for the Notes. Lehman has advised the
Company that it presently intends to make a market in the Notes, but it is not
obligated to do so and it may discontinue any such market making activity at
any time in its sole discretion. See "Certain Risk Factors -- Liquidity;
Absence of Public Market" and "-- Effect of Future Sales of Notes."

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Under applicable rules and regulations under the Exchange Act any person
engaged in a distribution of the Notes may not simultaneously engage in market
making activities with respect to such Notes for a period of nine business days
prior to the commencement of such distribution and ending upon the completion
of such distribution. In addition to and without limiting the foregoing, each
Selling Security Holder will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including without
limitation rules 10b-2, 10b-6 and 10b-7, which provisions may limit the timing
of purchases and sales of any of the Notes by the Selling Security Holders. All
of the foregoing may affect the marketability of the Notes and the ability of
any person or entity to engage in market-making activities with respect to the
Notes.

Under guidelines adopted by the National Association of Securities Dealers,
Inc. (the "NASD"), the maximum commission that any NASD member firm can receive
in connection with a distribution of the Notes, without further clearance from
the NASD, is 8%.

Pursuant to the Senior Note Registration Rights Agreement, the Company is
obligated to pay substantially all of the expenses incident to the
registration, offering and sale of the Notes to the public other than
commissions and discounts of underwriters, dealers or agents, and the Selling
Security Holders, and any underwriter they may utilize, and their respective
controlling persons are entitled to be indemnified by the Company against
certain liabilities, including liabilities under the Securities Act. See
"Description of Notes -- Senior Note Registration Rights Agreement".

LEGAL MATTERS

The validity of the Notes offered hereby has been passed upon for the
Company by Simpson Thacher & Bartlett (a partnership which includes professional
corporations), New York, New York.

EXPERTS

The consolidated financial statements as of May 31, 1995 and 1994 and for
each of the three years in the period ended May 31, 1995 included in this
Prospectus have been so included in reliance on the report of Price Waterhouse
LLP, independent certified public accountants, given on the authority of said
firm as experts in auditing and accounting.

<PAGE>

INDEX TO DEFINED TERMS Page
Defined Term Number
------------ ------

ACO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Acquired Indebtedness . . . . . . . . . . . . . . . . . . . . 75
Adversary Proceeding . . . . . . . . . . . . . . . . . . . . . 7
Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Affiliate Transaction . . . . . . . . . . . . . . . . . . . . 68
Alabama Power . . . . . . . . . . . . . . . . . . . . . . . . 25
Apollo . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Asbestos Claimants . . . . . . . . . . . . . . . . . . . . . . 7
Asset Sale . . . . . . . . . . . . . . . . . . . . . . . . . 75
Asset Sale Offer . . . . . . . . . . . . . . . . . . . . . . 66
Attributable Debt . . . . . . . . . . . . . . . . . . . . . . 75
Bank Revolving Credit Facility . . . . . . . . . . . . . . . 86
Bankruptcy Code . . . . . . . . . . . . . . . . . . . . . . . . 1
Bankruptcy Court . . . . . . . . . . . . . . . . . . . . . . . 7
Best Insurors . . . . . . . . . . . . . . . . . . . . . . . . 58
Black Warrior Methane . . . . . . . . . . . . . . . . . . . . 41
Black Warrior Transmission . . . . . . . . . . . . . . . . . 41
Board of Directors . . . . . . . . . . . . . . . . . . . . . 75
Booker . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Business Day . . . . . . . . . . . . . . . . . . . . . . . . 76
Capital Lease Obligation . . . . . . . . . . . . . . . . . . 76
Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . 76
Cardem Insurance . . . . . . . . . . . . . . . . . . . . . . . 1
Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . 76
Celotex . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Celotex Action . . . . . . . . . . . . . . . . . . . . . . . 48
Celotex Settlement Fund . . . . . . . . . . . . . . . . . . . 49
Celotex Settlement Fund Beneficiary . . . . . . . . . . . . . 89
Celotex Settlement Fund Recipient . . . . . . . . . . . . . . 49
CERCLA . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Change of Control . . . . . . . . . . . . . . . . . . . . . . 76
Change of Control Offer . . . . . . . . . . . . . . . . . . . 63
Change of Control Payment . . . . . . . . . . . . . . . . . . 63
Change of Control Payment Date . . . . . . . . . . . . . . . 63
Channel One . . . . . . . . . . . . . . . . . . . . . . . . . 18
Channel One Registration Rights Agreement . . . . . . . . . . 91
Chapter 11 . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Chapter 11 Cases . . . . . . . . . . . . . . . . . . . . . . . 7
Charter . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Class . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Class Representative . . . . . . . . . . . . . . . . . . . . 49
Class U-7 . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Collateral . . . . . . . . . . . . . . . . . . . . . . . . . 63
Commission . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Commodity Agreement . . . . . . . . . . . . . . . . . . . . . 76
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . 5
Common Stock Holders . . . . . . . . . . . . . . . . . . . . 90
Common Stock Registration Rights Agreement . . . . . . . . . 90
Common Stock Value Per Share . . . . . . . . . . . . . . . . 87
Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Depreciation and Amortization Expense . . . . . 76
Consolidated EBITDA . . . . . . . . . . . . . . . . . . . . . 76
Consolidated Financial Statements . . . . . . . . . . . . . . . 6

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Page
Defined Term Number
------------ ------
Consolidated Fixed Charges . . . . . . . . . . . . . . . . . 77
Consolidated Income Tax Expense . . . . . . . . . . . . . . . 77
Consolidated Net Income . . . . . . . . . . . . . . . . . . . 77
Consolidated Net Worth . . . . . . . . . . . . . . . . . . . 77
Consolidated Post Retirement Benefits Other Than Pensions . . 77
Continuing Directors . . . . . . . . . . . . . . . . . . . . 77
Covenant Defeasance . . . . . . . . . . . . . . . . . . . . . 73
Currency Agreement . . . . . . . . . . . . . . . . . . . . . 78
Default . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
DGCL . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Disqualified Stock . . . . . . . . . . . . . . . . . . . . . 78
Dixie Building Supplies . . . . . . . . . . . . . . . . . . . 58
Durham Employment Agreement . . . . . . . . . . . . . . . . . 58
Effective Date of the Plan of Reorganization . . . . . . . . . 1
EPA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Event of Default . . . . . . . . . . . . . . . . . . . . . . 71
Excess Proceeds . . . . . . . . . . . . . . . . . . . . . . . 65
Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . . 5
Existing Indebtedness . . . . . . . . . . . . . . . . . . . . 78
Fair Market Value . . . . . . . . . . . . . . . . . . . . . . 78
FAS 106 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
FAS 109 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Federal Income Tax Claims . . . . . . . . . . . . . . . . . . 87
Federal Income Tax Claims Differential . . . . . . . . . . . 87
Fraudulent Conveyance Lawsuit . . . . . . . . . . . . . . . . . 7
GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Government Securities . . . . . . . . . . . . . . . . . . . . 78
Guarantee . . . . . . . . . . . . . . . . . . . . . . . . . . 78
HAC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Holder . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Incur . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . 79
Indemnitees . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Independent Directors . . . . . . . . . . . . . . . . . . . . 54
Initial Claim . . . . . . . . . . . . . . . . . . . . . . . . 88
Initial Common Stock Shelf Registration . . . . . . . . . . . 90
Initial Senior Note Shelf Registration . . . . . . . . . . . 85
Initial Settlement . . . . . . . . . . . . . . . . . . . . . 48
Initial Three Year Term . . . . . . . . . . . . . . . . . . . 54
Interest Rate Agreement . . . . . . . . . . . . . . . . . . . 79
Interested Stockholder . . . . . . . . . . . . . . . . . . . 54
Investment . . . . . . . . . . . . . . . . . . . . . . . . . 79
IRC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
IRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Issue Date . . . . . . . . . . . . . . . . . . . . . . . . . 80
J.W. Railroad . . . . . . . . . . . . . . . . . . . . . . . . . 7
J-II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Jim Walter Corporation . . . . . . . . . . . . . . . . . . . . 7
Jim Walter Homes . . . . . . . . . . . . . . . . . . . . . . 13
Jim Walter Resources . . . . . . . . . . . . . . . . . . . . 15
JW Aluminum . . . . . . . . . . . . . . . . . . . . . . . . . 44
JW Window Components . . . . . . . . . . . . . . . . . . . . 25
Kaneb . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
KKR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

<PAGE>

Page
Defined Term Number
------------ ------
KKR Director . . . . . . . . . . . . . . . . . . . . . . . . 54
KKR Investors . . . . . . . . . . . . . . . . . . . . . . . . 60
LBO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Legal Defeasance . . . . . . . . . . . . . . . . . . . . . . 73
Legal Holiday . . . . . . . . . . . . . . . . . . . . . . . . 80
Lehman . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Lehman Directors . . . . . . . . . . . . . . . . . . . . . . 54
Lehman Holdings . . . . . . . . . . . . . . . . . . . . . . . 17
Lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Majority Selling Note Holders . . . . . . . . . . . . . . . . 85
Marketable Securities . . . . . . . . . . . . . . . . . . . . 80
Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Mid-State Advance . . . . . . . . . . . . . . . . . . . . . . 71
Mid-State Affiliate Transaction . . . . . . . . . . . . . . . 69
Mid-State Homes . . . . . . . . . . . . . . . . . . . . . . . . 1
Mid-State Trust II Mortgage-Backed Notes . . . . . . . . . . 37
Mid-State Trust III Asset Backed Notes . . . . . . . . . . . 37
Mid-State Trust IV Asset Backed Notes . . . . . . . . . . . . 38
Mid-State Trust V Variable Funding Loan . . . . . . . . . . . 38
Mid-State Trust V Variable Funding Loan Agreement . . . . . . 32
Mine No. 3 . . . . . . . . . . . . . . . . . . . . . . . . . 29
Mine No. 4 . . . . . . . . . . . . . . . . . . . . . . . . . 29
Mine No. 5 . . . . . . . . . . . . . . . . . . . . . . . . . 26
MSHA . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Named Executive Officers . . . . . . . . . . . . . . . . . . 56
NASD . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
NASDAQ . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Net Cash Proceeds . . . . . . . . . . . . . . . . . . . . . . 80
Net Equity Proceeds . . . . . . . . . . . . . . . . . . . . . 80
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . 81
New Alabama Power Contract . . . . . . . . . . . . . . . . . 25
Non-Core Assets . . . . . . . . . . . . . . . . . . . . . . . 81
Non-Core Subsidiary . . . . . . . . . . . . . . . . . . . . . 81
Non-United States Holder . . . . . . . . . . . . . . . . . . 92
Note Holders . . . . . . . . . . . . . . . . . . . . . . . . 85
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
NYSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Offer Amount . . . . . . . . . . . . . . . . . . . . . . . . 66
Offer Period . . . . . . . . . . . . . . . . . . . . . . . . 66
OID . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
OID Regulations . . . . . . . . . . . . . . . . . . . . . . . 92
Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . 81
Original Jim Walter . . . . . . . . . . . . . . . . . . . . . . 6
Original Stockholders . . . . . . . . . . . . . . . . . . . . 87
Other Permitted Liens . . . . . . . . . . . . . . . . . . . . 81
Outstanding Common Stock . . . . . . . . . . . . . . . . . . 54
Payment Restriction . . . . . . . . . . . . . . . . . . . . . 82
Pension Plan . . . . . . . . . . . . . . . . . . . . . . . . 57
Pension Plans . . . . . . . . . . . . . . . . . . . . . . . . 57
Permitted Holders . . . . . . . . . . . . . . . . . . . . . . 82
Permitted Indebtedness . . . . . . . . . . . . . . . . . . . 82
Permitted Investments . . . . . . . . . . . . . . . . . . . . 82
Permitted Liens . . . . . . . . . . . . . . . . . . . . . . . 82
Permitted Refinancing Indebtedness . . . . . . . . . . . . . 83
Person . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Plan of Reorganization . . . . . . . . . . . . . . . . . . . . 1

99
<PAGE>

Page
Defined Term Number
------------ ------
Pledge Agreement . . . . . . . . . . . . . . . . . . . . . . 83
Pledged Shares . . . . . . . . . . . . . . . . . . . . . . . 63
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . 83
Pro Forma Consolidated Statement of Operations . . . . . . . . 9
Profit Sharing Plan . . . . . . . . . . . . . . . . . . . . . 57
Purchase Date . . . . . . . . . . . . . . . . . . . . . . . . 66
Purchase Money Liens . . . . . . . . . . . . . . . . . . . . 83
Purchase Money Obligations . . . . . . . . . . . . . . . . . 83
Qualified Capital Stock . . . . . . . . . . . . . . . . . . . 83
Registrable Common Stock . . . . . . . . . . . . . . . . . . 90
Registrable Notes . . . . . . . . . . . . . . . . . . . . . . 85
Related Business . . . . . . . . . . . . . . . . . . . . . . 83
Released Parties . . . . . . . . . . . . . . . . . . . . . . 48
Restricted Investment . . . . . . . . . . . . . . . . . . . . 83
Restricted Payment . . . . . . . . . . . . . . . . . . . . . 84
Section 203 . . . . . . . . . . . . . . . . . . . . . . . . . 17
Securities Act . . . . . . . . . . . . . . . . . . . . . . . . 4
Selling Security Holders . . . . . . . . . . . . . . . . . . . 1
Senior Note Registration Rights Agreement . . . . . . . . . . 85
Settlement Claims . . . . . . . . . . . . . . . . . . . . . . 15
Shelf Registration . . . . . . . . . . . . . . . . . . . . . 85
Significant Stockholder . . . . . . . . . . . . . . . . . . . 54
Significant Subsidiary . . . . . . . . . . . . . . . . . . . 84
Sloss Industries . . . . . . . . . . . . . . . . . . . . . . 41
SNG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
South Carolina Statute . . . . . . . . . . . . . . . . . . . 50
Southern Precision . . . . . . . . . . . . . . . . . . . . . 44
Stockholder's Agreement . . . . . . . . . . . . . . . . . . . 89
Subordinated Indebtedness . . . . . . . . . . . . . . . . . . 84
Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . 84
Subsidiary Pledge Agreements . . . . . . . . . . . . . . . . 84
Supplemental Pension Plan . . . . . . . . . . . . . . . . . . 57
Supplemental Profit Sharing Plan . . . . . . . . . . . . . . 57
Surviving Entity . . . . . . . . . . . . . . . . . . . . . . 70
Tag-Along and Voting Rights Agreement . . . . . . . . . . . . 89
Tag-Along Stockholders . . . . . . . . . . . . . . . . . . . 89
Tax Claims Indebtedness . . . . . . . . . . . . . . . . . . . 84
Tender Offer . . . . . . . . . . . . . . . . . . . . . . . . . 6
Texas Settlement Agreement . . . . . . . . . . . . . . . . . 50
Trade Payables . . . . . . . . . . . . . . . . . . . . . . . 84
Trust Indenture Act . . . . . . . . . . . . . . . . . . . . . 62
Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
U.S. Pipe . . . . . . . . . . . . . . . . . . . . . . . . . . 15
UMWA . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
United States Holder . . . . . . . . . . . . . . . . . . . . 92
Veil Piercing Claims . . . . . . . . . . . . . . . . . . . . . 7
Veil Piercing Litigation . . . . . . . . . . . . . . . . . . . 7
Veil Piercing Settlement . . . . . . . . . . . . . . . . . . 48
Veil Piercing Settlement Tax Savings Amount . . . . . . . . . 88
Veil Piercing Settlement Tax Savings Event . . . . . . . . . 88
Veil Piercing Trial . . . . . . . . . . . . . . . . . . . . . 48
Vestal Manufacturing . . . . . . . . . . . . . . . . . . . . 25
Voting Stock . . . . . . . . . . . . . . . . . . . . . . . . 84
Walter Industries . . . . . . . . . . . . . . . . . . . . . . . 1
Walter Land . . . . . . . . . . . . . . . . . . . . . . . . . 45
Weighted Average Life to Maturity . . . . . . . . . . . . . . 84

100

<PAGE>

Page
Defined Term Number
------------ ------
Wholly Owned Subsidiary . . . . . . . . . . . . . . . . . . . 85

101

<PAGE>

INDEX TO FINANCIAL STATEMENTS

Pages
-----
Walter Industries, Inc. and Subsidiaries

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

Consolidated Balance Sheet - May 31, 1995 and 1994..........F-3

Consolidated Statement of Operations and Retained
Earnings (Deficit) for the Three Years Ended
May 31, 1995..............................................F-4

Consolidated Statement of Cash Flows for the Three
Years Ended May 31, 1995..................................F-5

Notes To Financial Statements...............................F-6 to F-26

F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

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

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations and retained earnings (deficit) and of
cash flows present fairly, in all material respects, the financial position of
Walter Industries, Inc. and its subsidiaries at May 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended May 31, 1995 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.

Our report dated July 8, 1994 on the May 31, 1994 consolidated financial
statements included a paragraph that raised substantial doubt about the
Company's ability to continue as a going concern due to the Company and
substantially all of its subsidiaries filing a voluntary petition for
reorganization under Chapter 11 of the United States Bankruptcy Code. As
discussed in Note 1, on March 2, 1995 the Bankruptcy Court confirmed the
Company's Consensual Plan dated as of December 9, 1994, as modified on March 1,
1995, which resulted in the discharge of all claims against the Company that
arose before December 27, 1989, other than those claims being litigated in the
Bankruptcy Court, and substantially altered the rights and interests of equity
security holders. The plan became effective on March 17, 1995 and the Company
emerged from bankruptcy.

As discussed in Note 12 to the Financial Statements, the Company changed its
method of accounting for postretirement benefits other than pensions in fiscal
year 1993.

Price Waterhouse LLP
Tampa, Florida
July 12, 1995

F-2

<PAGE>
<TABLE><CAPTION>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET

May 31,
--------------------------
1995 1994
----------- -----------
(in thousands)
<S> <C> <C>
ASSETS
Cash (includes short-term investments of $ 84,872,000
and $177,040,000) (Notes 3 and 13) $ 128,007 $ 203,303
Short-term investments, restricted (Notes 3 and 13) 128,002 107,552
Instalment notes receivable (Notes 1, 4, 8 and 13) 4,256,866 4,176,040
Less - Provision for possible losses ( 26,556) ( 26,301)
Unearned time charges (2,869,282) (2,790,560)
----------- ----------
Net 1,361,028 1,359,179

Trade receivables 160,584 135,431
Less - Provision for possible losses ( 7,998) ( 7,392)
----------- ----------
Net 152,586 128,039
Federal income tax receivable (Note 8) 99,875 -
Other notes and accounts receivable 30,236 10,774
Inventories, at lower of cost (first in, first out or average)
or market:
Finished goods 111,792 95,270
Goods in process 29,593 27,090
Raw materials and supplies 53,453 48,533
Houses held for resale 1,599 1,686
----------- ----------
Total inventories 196,437 172,579

Prepaid expenses 12,694 11,335

Property, plant and equipment, at cost (Note 5) 1,186,407 1,123,939
Less - Accumulated depreciation, depletion and amortization ( 523,615) ( 466,076)
----------- ----------
Net 662,792 657,863

Investments 6,191 5,753
Deferred income taxes (Note 8) 16,544 -
Unamortized debt expense 34,167 31,656
Other assets 43,698 39,936
Excess of purchase price over net assets acquired (Notes 1 and 6) 372,896 412,923
----------- -----------
$ 3,245,153 $ 3,140,892
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Bank overdrafts (Note 3) $ 33,746 $ 29,879
Accounts payable (Note 1) 108,137 59,468
Accrued expenses 150,907 122,665
Income taxes payable (Note 8) 53,261 21,543
Deferred income taxes (Note 8) - 73,152
Long-term senior debt (Notes 1, 7 and 13) 2,220,370 871,970
Accrued interest (Note 7) 37,854 258,032
Accumulated postretirement health benefits obligation (Note 12) 228,411 209,962
Other long-term liabilities 51,693 48,890
Liabilities subject to Chapter 11 proceedings (Notes 1 and 7) - 1,727,684
Stockholders' equity (deficit) (Notes 1, 7, 9 and 10):
Common stock, $.01 par value per share:
Authorized - 200,000,000 shares and 50,000,000 shares
Issued - 50,494,313 shares and 31,120,773 shares 505 311
Capital in excess of par value 1,159,384 155,293
Retained earnings (deficit), per accompanying statement ( 793,165) ( 434,520)
Excess of additional pension liability over
unrecognized prior years service cost ( 5,950) ( 3,437)
----------- -----------
Total stockholders' equity (deficit) 360,774 ( 282,353)
----------- -----------
$ 3,245,153 $ 3,140,892
=========== ===========
</TABLE>

F-3
<PAGE>
<TABLE><CAPTION>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)

For the years ended May 31,
---------------------------------------------------
1995 1994 1993
----------- ----------- ----------
(in thousands except
per share amount)

<S> <C> <C> <C>
Sales and revenues:
Net sales $ 1,181,635 $ 1,068,387 $ 1,072,615
Time charges (Note 4) 222,221 238,097 218,696
Miscellaneous 30,838 17,383 23,160
Interest income from Chapter 11
proceedings (Note 1) 7,628 4,657 4,515
----------- ----------- -----------
1,442,322 1,328,524 1,318,986
----------- ----------- -----------

Cost and expenses:
Cost of sales 951,381 845,061 804,411
Depreciation, depletion and
amortization (Note 5) 72,037 71,035 70,483
Selling, general and administrative 130,616 127,901 124,616
Postretirement health benefits (Note 12) 25,961 25,585 23,474
Provision for possible losses 4,485 4,611 4,236
Chapter 11 costs (Note 1) 442,362 14,254 9,802
Interest and amortization of debt
discount and expense (Notes 1, 5 and 7) 304,548 155,470 171,581
Amortization of excess of purchase price
over net assets acquired (Note 6) 40,027 48,515 39,461
----------- ----------- -----------
1,971,417 1,292,432 1,248,064
----------- ----------- -----------
( 529,095) 36,092 70,922

Income tax benefit (expense) (Note 8):
Current 80,754 ( 41,598) ( 48,141)
Deferred 89,696 12,681 23,813
----------- ----------- -----------

Income (loss) from operations before
cumulative effect of accounting change ( 358,645) 7,175 46,594

Cumulative effect of change in accounting
principle - postretirement benefits other
than pensions (net of income tax benefit
of $61,823,000) (Note 12) - - ( 104,608)
----------- ----------- ----------
Net income (loss) ( 358,645) 7,175 ( 58,014)

Retained earnings (deficit) at
beginning of year ( 434,520) ( 441,695) ( 383,681)
----------- ----------- ----------

Retained earnings (deficit) at end
of year $( 793,165) $( 434,520) $( 441,695)
=========== =========== ===========
Net loss per share (note 9):
- Primary $( 7.10)
===========
</TABLE>
F-4
<PAGE>
<TABLE><CAPTION>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS

For the years ended May 31,
----------------------------------------------------
1995 1994 1993
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
OPERATIONS
Net income (loss) $( 358,645) $ 7,175 $( 58,014)
Charges to income not affecting cash:
Settlement of Chapter 11 claims with
debt and new Common Stock 444,752 - -
Depreciation, depletion and amortization 72,037 71,035 70,483
Provision for deferred income taxes ( 89,696) ( 12,681) ( 23,813)
Accumulated postretirement health benefits
obligation (Note 12) 18,449 20,057 189,905
Adjustment to deferred taxes for accounting change (Note 12) - - ( 61,823)
Provision for other long-term liabilities 294 280 ( 781)
Amortization of excess of purchase price
over net assets acquired (Note 6) 40,027 48,515 39,461
Amortization of debt discount and expense 11,783 17,597 22,148
----------- --------- ---------
139,001 151,978 177,566
Decrease (increase) in:
Short-term investments, restricted ( 20,450) ( 1,932) 1,334
Instalment notes receivable, net (a) ( 1,849) 27,680 ( 23,607)
Trade and other receivables, net ( 44,009) 12,747 1,429
Federal income tax receivable ( 99,875) - -
Inventories ( 23,858) ( 5,940) 627
Prepaid expenses ( 1,359) ( 3,433) 236
Increase (decrease) in:
Bank overdrafts (Note 3) 3,867 11,958 ( 9,758)
Accounts payable 28,925 6,772 ( 1,692)
Accrued expenses 28,242 6,427 ( 1,682)
Income taxes payable ( 15,348) 2,408 9,111
Accrued interest 24,156 47,833 32,605
Liabilities subject to Chapter 11 proceedings (Note 1):
Accounts payable - 1,438 811
Accrued expenses - ( 152) 4
----------- --------- ---------
Cash flows from operations 17,443 257,784 186,984
----------- --------- ---------

FINANCING ACTIVITIES
Issuance of long-term
senior debt (Notes 1 and 7) 974,450 2,000 256,128
Additions to unamortized debt expense ( 17,153) - ( 4,794)
Retirement of long-term senior debt (Note 7) ( 120,250) (178,865) (161,959)
Payment of liabilities subject
to Chapter 11 proceedings ( 604,044)(b) - (121,217)
Payment of accrued postpetition interest on
Chapter 11 secured debt obligations ( 244,334) - -
----------- --------- ---------
Cash flows from financing activities ( 11,331) (176,865) ( 31,842)
----------- --------- ---------

INVESTING ACTIVITIES
Additions to property, plant and equipment,
net of normal retirements ( 76,966) ( 65,858) ( 68,901)
(Increase) in investments ( 438) ( 185) ( 128)
(Increase) in other assets ( 4,004) ( 1,943) ( 1,617)
----------- --------- ---------
Cash flows from investing activities ( 81,408) ( 67,986) ( 70,646)
----------- --------- ---------
Net increase (decrease) in cash and
cash equivalents ( 75,296) 12,933 84,496
Cash and cash equivalents at beginning of year 203,303 190,370 105,874
----------- --------- ---------
Cash and cash equivalents at end of year (Note 3) $ 128,007 $ 203,303 $ 190,370
=========== ========= =========
</TABLE>

(a) Consists of sales and resales, net of repossessions and provision for
possible losses, of $155,236,000, $153,776,000 and $172,707,000 and cash
collections on account and payouts in advance of maturity of
$153,387,000, $181,456,000 and $149,100,000, for the years ended May 31,
1995, 1994 and 1993, respectively.

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

F-5
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS

NOTE 1 - Recent History

Walter Industries, Inc. (formerly Hillsborough Holdings Corporation) (the
"Company") was organized in August 1987 by a group of investors led by Kohlberg
Kravis Roberts & Co. ("KKR") for the purpose of acquiring Jim Walter
Corporation, a Florida corporation ("Original Jim Walter"). Following its
organization, the Company organized and acquired all of the outstanding capital
stock of a group of direct wholly-owned subsidiaries (the "First Tier
Subsidiaries"). The First Tier Subsidiaries (except JWC Holdings Corporation)
and the Company organized and acquired all of the outstanding capital stock of
Walter Industries, Inc. ("Old Walter Industries"). JWC Holdings Corporation, a
Florida corporation and a First Tier Subsidiary ("JWC Holdings"), organized and
acquired all of the outstanding shares of J-II Acquisition Corporation, a
Florida corporation ("J-II"). Old Walter Industries and J-II, in turn,
organized and acquired all of the outstanding capital stock of Hillsborough
Acquisition Corporation ("HAC").

On September 18, 1987, HAC acquired approximately 95% of the outstanding
common stock of Original Jim Walter at a price of $60 per share in cash,
pursuant to an Agreement and Plan of Merger dated as of August 12, 1987 (the
"Acquisition"). On January 7, 1988, the Company caused Original Jim Walter to
be merged (the "Merger") into HAC (which changed its name to "Jim Walter
Corporation") and the remaining 5% of its common stock was converted into the
right to receive $60 in cash for each share. On that same date: (i) HAC
distributed substantially all of its assets (principally excluding the stock of
certain subsidiaries of Original Jim Walter engaged in building materials
businesses) to Old Walter Industries in redemption of all of its shares of
capital stock owned by Old Walter Industries; (ii) HAC merged into J-II; and
(iii) J-II changed its name to "Jim Walter Corporation". On April 1, 1991, Old
Walter Industries merged into Hillsborough Holdings Corporation thereby
completing its previously adopted plan of liquidation. The Company changed its
name to Walter Industries, Inc. in connection with such merger. Prior to
September 18, 1987, the Company had no significant assets or liabilities and
did not engage in any activities other than those related to the Acquisition.
The purchase price of the shares of Original Jim Walter was approximately
$2,425,000,000 plus expenses of the Acquisition and assumption of certain
outstanding indebtedness. For financial statement purposes, the Acquisition
has been accounted for as a purchase as of September 1, 1987 and, accordingly,
the purchase price has been allocated based upon the fair value of assets
acquired and liabilities assumed (see Note 6).

On December 27, 1989, the Company and 31 of its subsidiaries (including the
subsidiary in the next sentence, the "Debtors") each filed a voluntary petition
for reorganization under Chapter 11 of Title 11 of the United States Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the Middle
District of Florida, Tampa Division (the "Bankruptcy Court"). On December 3,
1990, one additional small subsidiary filed a voluntary petition for
reorganization under the Bankruptcy Code. Two other small subsidiaries did not
file petitions for reorganization.

The Debtors' Chapter 11 cases resulted from a sequence of events stemming
primarily from an inability of the Company's interest reset advisors to reset
interest rates on approximately $624 million of outstanding Senior Extendible
Reset Notes and Senior Subordinated Extendible Reset Notes on which interest
rates were scheduled to be reset effective January 2, 1990. The inability to
reset the interest rates was primarily attributable to two factors: (i)
uncertainties arising from the then pending asbestos-related litigation,
including the possibility either that such litigation would lead to the
prohibition of further asset sales and debt repayment or that substantial new
asbestos-related claims might become assertable against the Company, which
uncertainties materially hindered the ability of the Company and its
subsidiaries to pursue a refinancing or sell assets to reduce debt, and (ii)
general turmoil in the high yield bond markets at such time, both of which
depressed the bid value of such notes.

On December 9, 1994, the Supplement to Disclosure Statement For Amended
Joint Plan of Reorganization Dated as of December 9, 1994 (the "Consensual
Plan") was filed with the Bankruptcy Court. The Consensual Plan, as modified
on March 1, 1995, was confirmed by the Bankruptcy Court on March 2, 1995, and
became effective on March 17, 1995 (the "Effective

F-6
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)

Date"). Despite the confirmation and effectiveness of the Consensual Plan, the
Bankruptcy Court continues to have jurisdiction to, among other things, resolve
disputed prepetition claims against the Company and other matters that may
arise in connection with or relate to the Consensual Plan (see Note 8).

The essential terms of the Consensual Plan are as follows: Revolving Credit
Bank Claims, Working Capital Bank Claims, Series B and C Senior Note Claims,
and other unsecured creditors (i.e., trade creditors) received the full allowed
----
amounts of their claims in cash plus interest at negotiated amounts including a
portion in shares of new common stock ("Common Stock"). Subordinated Note
Claims received, depending on elections made, either shares of Common Stock or
a combination of cash, new debt securities and shares of Common Stock, in
either case having an aggregate reorganization value equal to their prepetition
claims. In addition, Pre-LBO Debenture Claims received shares of Common Stock
having an aggregate reorganization value equal to $11.3 million in settlement
of the fraudulent conveyance action commenced by the indenture trustees for the
Pre-LBO Debentures. The asbestos-related veil piercing claimants received
cash, new debt securities and Common Stock with an aggregate reorganization
value of $375 million in settlement of all asbestos-related veil piercing or
fraudulent conveyance claims. In addition, the attorneys for the asbestos-
related veil piercing claimants received a cash payment of $15 million. The
Company's former stockholders received shares of Common Stock having a
reorganization value equal to $150 million. In addition, the former
stockholders will receive shares of Common Stock having a reorganization value
of $11.3 million and have the right to receive additional shares of Common
Stock upon realization of certain future tax benefits (see Note 9).

Pursuant to the Consensual Plan, trade creditors with prepetition allowed
claims in excess of $1,000 received 75% of their allowed claims in cash
following the Effective Date and are entitled to receive the remaining 25% six
months following the Effective Date with additional interest for such period at
the prime rate. At May 31, 1995, the remaining amount to be distributed to
trade creditors approximated $23.5 million.

In connection with the Consensual Plan, on March 16, 1995, pursuant to
approval by the Bankruptcy Court, Mid-State Homes, Inc. ("Mid-State"), a
wholly-owned indirect subsidiary of the Company, sold mortgage instalment notes
having a gross amount of $2,020,258,000 and an economic balance of $826,671,000
to Mid-State Trust IV ("Trust IV"), a business trust in which Mid-State owns
all the beneficial interest. In addition, on such date Mid-State sold its
beneficial interest in Mid-State Trust II ("Trust II") to Trust IV. Trust II
had a total collateral value of $910,468,000 with $605,750,000 of Mortgage-
Backed Notes outstanding. These sales were in exchange for the net proceeds
from the public issuance by Trust IV of $959,450,000 of Asset Backed Notes.
The assets of Trust IV are not available to satisfy claims of general creditors
of Mid-State, or the Company and its subsidiaries. The liabilities of Trust IV
for its publicly issued debt are to be satisfied solely from proceeds of the
underlying instalment notes and are non-recourse to Mid-State and the Company
and its subsidiaries.

On February 27, 1995, Mid-State established Mid-State Trust V ("Trust V"),
a business trust in which Mid-State owns all the beneficial interest, to
provide funds to Mid-State for its current purchases of instalment notes
receivable from Jim Walter Homes, Inc. ("Jim Walter Homes").

As of March 3, 1995, Trust V entered into a Variable Funding Loan Agreement
with Enterprise Funding Corporation, an affiliate of NationsBank N.A., as
lender and NationsBank N.A. (Carolinas), as Administrative Agent. The
agreement provides for a three-year $500 million credit facility secured by the
instalment notes and mortgages Trust V purchases from Mid-State.

On February 27, 1995, the Company and certain of its subsidiaries entered
into a Bank Revolving Credit Facility, providing up to $150 million at any time
outstanding for working capital needs with a sub-limit for trade and standby
letters of credit not in

F-7
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)

excess of $40 million and a sub-facility for swingline advances in an amount
not in excess of $15 million.

The Company recorded approximately $583.8 million of additional expenses
related to consummation of the Consensual Plan, including approximately $141.4
million of additional interest and amortization of debt discount and expense,
$390 million in settlement of all asbestos-related veil piercing claims and
related legal fees and $52.4 million for professional fees, settlement of
various disputed claims and other expenses, in the fiscal year ended May 31,
1995.

The following unaudited pro forma consolidated statement of operations was
prepared to illustrate the estimated effects of the Consensual Plan and related
financings as if they had occurred as of June 1, 1994.

F-8
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)

<TABLE><CAPTION>
Pro Forma Consolidated Statement of Operations
(Unaudited)

For the year ended May 31, 1995
-------------------------------------
As Reported Adjustments Pro Forma
----------- ----------- -----------
(in thousands except
per share amount)
<S> <C> <C> <C>
Sales and Revenues
Net sales $1,181,635 $1,181,635
Time charges 222,221 222,221
Miscellaneous 30,838 30,838
Interest income from Chapter 11 proceedings 7,628 $( 7,628)1 -
---------- --------- ----------
1,442,322 ( 7,628) 1,434,694
---------- --------- ----------
Cost and expenses:
Cost of sales 951,381 951,381
Depreciation, depletion and amortization 72,037 72,037
Selling, general and administrative 130,616 130,616
Postretirement health benefits 25,961 25,961
Provision for possible losses 4,485 4,485
Chapter 11 costs 442,362 (442,362)2 -
Interest and amortization of debt discount
and expense 304,548 ( 81,364)3 223,184
Amortization of excess of purchase price
over net assets acquired 40,027 40,027
---------- --------- ----------
1,971,417 (523,726) 1,447,691
---------- --------- ----------
( 529,095) 516,098 ( 12,997)

Income tax benefit (expense) 170,450 (195,730)4 ( 25,280)
---------- --------- ----------
Net income (loss) $( 358,645) $ 320,368 $( 38,277)
========== ========= ==========

Net loss per share $( .75)5
==========

Weighted average shares outstanding 50,988,626
</TABLE>

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

Changes from the historical financial statement in the pro forma consolidated
statement of operations consist of the following adjustments (all amounts in
thousands):

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

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

(3) Interest and amortization of debt discount and expense has been reduced
$81,364 to give retroactive effect as if all indebtedness to be repaid
pursuant to the Consensual Plan was so done as of June 1, 1994 and the $490
million of Series B Senior Notes had been outstanding for the full year
ended May 31, 1995. Borrowings under the Trust IV Asset Backed Notes were
assumed to increase during the period June 1, 1994 through November 30,
1994 proportionately with the comparable period increase in the
outstanding economic balance of the instalment notes sold by Mid-State
to Trust IV on March 16, 1995.

Borrowings under the Trust V Variable Funding Loan Agreement were based on
78% of Jim Walter Homes' credit sales during the six-month period December
1, 1994 through May 31, 1995. This time period is subsequent to the Trust
IV cut-off date for purchases of instalment notes from Mid-State. No
working capital borrowings were assumed under the Bank Revolving Credit
Facility. Pro forma interest expense, however, includes letter of credit
fees and unused working capital commitment fees.

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

(5) Net loss per share has been computed based on the weighted average number
of common shares outstanding (including 494,313 additional shares
of Common Stock to be issued six months after the Effective Date of the
Consensual Plan, but not including up to 3,880,140 additional shares that
will be issued to an escrow account on September 13, 1995 pursuant to the
Consensual Plan of Reorganization because such issuance is contingent on
future events and would be anti- dilutive).

F-9
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)

NOTE 2 - Principles of Consolidation

The Company through its direct and indirect subsidiaries currently offers a
diversified line of products and services for homebuilding, water and waste
water transmission, residential and non-residential construction, and
industrial markets. The consolidated financial statements include the accounts
of the Company and all of its subsidiaries. All significant intercompany
balances have been eliminated.

NOTE 3 - Cash and Restricted Short-Term Investments

Cash includes short-term investments with original maturities of less than
one year. These investments are readily convertible to cash and are stated at
cost which approximates market. The Company's cash management system provides
for the reimbursement of all major bank disbursement accounts on a daily basis.
Checks issued but not yet presented to the banks for payment are classified as
bank overdrafts.

Restricted short-term investments include temporary investment of reserve
funds and collections on instalment notes receivable owned by Trusts II, III,
IV and V ($103,714,000). These funds are available only to pay expenses of the
Trusts and principal and interest on indebtedness of the Trusts. Miscellaneous
other segregated accounts restricted to specific uses ($24,288,000), are also
included in restricted short-term investments.

NOTE 4 - Instalment Notes Receivable

The instalment notes receivable arise from sales of partially-finished
homes to customers for time payments primarily over periods of twelve to thirty
years and are secured by first mortgages or similar security instruments.
Revenue and income from the sale of homes is included in income upon completion
of construction and legal transfer to the customer. The buyer's ownership of
the land and the improvements necessary to complete the home constitute a
significant equity investment which the Company has access to should the buyer
default on payment of the instalment note obligation. Of the gross amount of
$4,256,866,000 an amount of $3,955,239,000 is due after one year. Instalment
payments estimated to be receivable within each of the five years from May 31,
1995 are $301,627,000, $294,808,000, $289,012,000, $283,044,000 and
$274,370,000, respectively, and $2,814,005,000 after five years. Time charges
are included in equal parts in each monthly payment and are taken into income
as collected. This method approximates the interest method since a much larger
provision for loan losses and other expenses would be required if time charge
income were accelerated. The aggregate amount of instalment notes receivable
having at least one payment ninety or more days delinquent was 3.17% and 3.23%
of total instalment notes receivable at May 31, 1995 and 1994, respectively.

Mid-State purchases instalment notes from Jim Walter Homes on homes
constructed and sold by Jim Walter Homes and services such instalment mortgage
notes. Trust II, Trust III and Trust IV are business trusts organized by Mid-
State, which owns all of the beneficial interest in Trust III and Trust IV.
Trust IV owns all of the beneficial interest in Trust II. The Trusts were
organized for the purpose of purchasing instalment notes receivable from Mid-
State from the net proceeds from the issuance of the Trust II Mortgage-Backed
Notes, the Trust III Asset Backed Notes and the Trust IV Asset Backed Notes
described in Note 7. The assets of Trust II, Trust III and Trust IV, including
the instalment notes receivable, are not available to satisfy claims of general
creditors of the Company and its subsidiaries. The liabilities of Mid-State
Trusts II, III and IV for their publicly issued debt are to be satisfied solely
from the proceeds of the underlying instalment notes and are non-recourse to
the Company and its subsidiaries. Of the gross amount of instalment notes
receivable at May 31, 1995 of $4,256,866,000 with an economic balance of
$2,057,896,000, receivables owned by Trust II had a gross book value of
$1,396,138,000 and

F-10
<PAGE>

WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)

an economic balance of $846,481,000, receivables owned by Trust III had a gross
book value of $472,980,000 and an economic balance of $239,200,000 and
receivables owned by Trust IV had a gross book value of $1,970,887,000 and an
economic balance of $814,182,000. On February 27, 1995, Mid-State established
Trust V (see Note 1). At May 31, 1995, receivables owned by Trust V had a
gross book value of $254,871,000 and an economic balance of $92,466,000.

NOTE 5 - Property, Plant and Equipment

Property, plant and equipment are summarized as follows (see Note 1
regarding purchase accounting):
May 31,
-------------------------
1995 1994
----------- -----------
(in thousands)
Land and minerals $ 196,798 $ 200,337
Land improvements 20,140 18,941
Buildings and leasehold improvements 110,758 104,999
Mine development costs 125,903 123,761
Machinery and equipment 703,138 663,898
Construction in progress 29,670 12,003
----------- -----------
Total $ 1,186,407 $ 1,123,939
=========== ===========

The Company provides depreciation for financial reporting purposes
principally on the straight line method over the useful lives of the assets.
Assets (primarily mine development costs) extending for the full life of a coal
mine are depreciated on the unit of production basis. For federal income tax
purposes accelerated methods are used for substantially all eligible
properties. Depletion of minerals is provided based on estimated recoverable
quantities.

The Company has capitalized interest on qualifying properties in accordance
with Financial Accounting Standards Board Statement No. 34. Interest
capitalized for the years ended May 31, 1995, 1994 and 1993 was immaterial.
Interest paid in cash for the years ended May 31, 1995, 1994 and 1993 was
$437,357,000, $91,293,000 and $117,853,000, respectively.

NOTE 6 - Goodwill

The excess of purchase price over net assets acquired in connection with
the Acquisition is being amortized over periods ranging up to twenty years. At
May 31, 1995, the accumulated amortization of goodwill was approximately $402.1
million. The Company evaluates, on a regular basis, whether events and
circumstances have occurred that indicate the carrying amount of goodwill may
warrant revision or may not be recoverable. The Company measures impairment of
goodwill based on estimated future undiscounted cash flows from operations of
the related business unit. At May 31, 1995, the net unamortized balance of
goodwill is not considered to be impaired.

F-11
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)

NOTE 7 - Debt

Long-term debt, in accordance with its contractual terms, consisted of the
following at each year end:
May 31,
------------------------
1995 1994
---------- -----------
(in thousands)
Senior debt:
Trust II Mortgage-Backed Notes $ 584,000 $ 671,000
Trust III Asset Backed Notes 173,527 200,970
Trust IV Asset Backed Notes 953,843 -
Trust V Variable Funding Loan 15,000 -
Series B Senior Notes Due 2000 490,000 -
Bank Revolving Credit Facility - -
Other 4,000 -
---------- ----------
$2,220,370 $ 871,970
========== ==========

Long-term debt included as liabilities subject to Chapter 11 Proceedings at May
31, 1994 consisted of the following (see Note 1):
(in thousands)

Revolving Credit Agreement $ 228,249
Series B Senior Extendible Reset Notes 176,300
Series C Senior Extendible Reset Notes 5,000
Senior Subordinated Extendible Reset Notes 443,046
Subordinated Notes 350,000
13-1/8% Subordinated Notes 50,000
13-3/4% Subordinated Debentures 100,000
10-7/8% Subordinated Debentures
(less unamortized discount of $7,513,000) 82,487
Other 7,080
----------

$1,442,162
==========

The Trust II Mortgage-Backed Notes (see Note 4) were issued in five
classes in varying principal amounts. Three of the classes have been fully
repaid. The two remaining classes A3 and A4 bear interest at the rates of
9.35% and 9.625%, respectively. Interest on each class of notes is payable
quarterly on each January 1, April 1, July 1 and October 1 (each a "Payment
Date"). On each Payment Date, regular scheduled principal payments will be
made on the Class A3 and Class A4 Notes in order of maturity. Maturities of
the balance of these Mortgage-Backed Notes range from April 1, 1998 for the
Class A3 Notes to April 1, 2003 for the Class A4 Notes. The Class A3 and Class
A4 Notes are subject to special principal payments and the Class A4 Notes may
be subject to optional redemption under specified circumstances. The scheduled
principal amount of notes maturing in each of the five years from May 31, 1995
is $87,000,000, $87,000,000, $87,000,000, $64,600,000 and $64,600,000,
respectively.

The Trust III Asset Backed Notes (see Note 4) bear interest at 7-5/8%,
constitute a single class and have a final maturity date of April 1, 2022.
Payments are made quarterly on January 1, April 1, July 1 and October 1, based
on collections on the underlying collateral less amounts paid for interest on
the notes and Trust III expenses.

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

On March 3, 1995, Mid-State Trust V entered into the three-year $500
million Variable Funding Loan Agreement described in Note 1. It is
contemplated that this facility will be

F-12
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)

an evergreen three-year facility with periodic paydowns from the proceeds of
permanent financings similar to those done by Mid-State Trusts II, III and IV.
Accordingly, the $15 million of borrowings outstanding at May 31, 1995 has been
classified as long-term debt. Interest is based on the cost of A-1 and P-1
rated commercial paper plus 3/4%. Commitment fees on the unused facility are
.55%.

The Series B Senior Notes Due 2000 ("Senior Notes") were issued by the
Company pursuant to the Consensual Plan as part of the distribution made in
payment of claims of holders of certain unsecured indebtedness of the Company
and certain of its subsidiaries (see Note 1). Interest on the Senior Notes is
payable semi-annually on September 15 and March 15 of each year at the rate of
12.19%. The Senior Notes may be redeemed at any time at the option of the
Company, in whole or in part, at a redemption price of 101% of the principal
amount thereof, plus accrued and unpaid interest, if any, to the date of
redemption, provided that no partial redemption may occur which results in less
than $150 million aggregate principal amount of the Senior Notes being
outstanding. Additionally, the Company is obligated in certain circumstances
to apply net cash proceeds from certain asset sales to either redeem or offer
to purchase notes at a price equal to 100% of the principal amount thereof,
plus accrued and unpaid interest, if any, to the date of redemption or
purchase, provided that no such redemption or purchase may occur which results
in less than $150 million aggregate principal amount of Senior Notes
outstanding. The Senior Notes rank pari passu with all other senior
indebtedness of the Company. The Senior Notes are secured by the capital stock
of most of the Company's subsidiaries.

The Bank Revolving Credit Facility is a three-year non-amortizing
senior working capital revolving credit facility pursuant to which borrowings
not in excess of $150 million may be outstanding at any time, with a sub-limit
for trade and standby letters of credit in an amount not in excess of $40
million at any time outstanding and a sub-facility for swingline advances in an
amount not in excess of $15 million at any time outstanding. The facility is
secured by assets of certain subsidiaries of the Company. Subject to certain
exceptions the net cash proceeds from the sale of collateral must be applied to
permanently reduce the facility. Under the facility each borrower guarantees
the obligations of each other borrower, subject to certain limitations.
Interest at the option of the borrowers through November 30, 1995 is at (i) the
Citibank Base Rate plus 3/4% or (ii) a LIBOR rate plus 2-1/4%. The fee for
outstanding letters of credit is 1-3/4%. Thereafter, interest shall be
determined by the Performance Level in effect from time to time ranging from
1/4% to 1% over the Citibank Base Rate, 1-3/4% to 2-1/2% over the LIBOR rate
and 1-1/4% to 2% for letters of credit. A commitment fee of 1/2 of 1% per
annum is required based upon the unutilized commitment. As of May 31, 1995,
there were no borrowings outstanding under this facility; however, letters of
credit in the aggregate face amount of $22,727,000 have been issued thereunder.

The Senior Notes, the Bank Revolving Credit Facility and the Trust V
Variable Funding Loan Agreement contain a number of significant covenants that,
among other things, restrict the ability of the Company and its subsidiaries to
dispose of assets, incur additional indebtedness, make capital expenditures,
pay dividends, create liens on assets, enter into leases, make investments or
acquisitions, engage in mergers or consolidations, or engage in certain
transactions with subsidiaries and affiliates and otherwise restrict corporate
activities (including change of control and asset sale transactions). In
addition, under the Bank Revolving Credit Facility, the Company is required to
maintain specified financial ratios and comply with certain financial tests,
including minimum interest coverage, fixed charge coverage ratios and maximum
leverage ratios, some of which become more restrictive over time.

F-13
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)

NOTE 8 - Income Taxes

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

<TABLE><CAPTION>
May 31, 1995 May 31, 1994 May 31, 1993
------------------------ ------------------------- ----------------------
Current Deferred Current Deferred Current Deferred
-------- -------- -------- -------- -------- ---------
(in thousands)

<S> <C> <C> <C> <C> <C> <C>
United States $(80,445) $(88,815) $ 38,712 $(11,716) $ 44,093 $(22,682)
State and local ( 309) ( 881) 2,886 ( 965) 4,048 ( 1,131)
-------- -------- -------- -------- -------- --------
Total $(80,754) $(89,696) $ 41,598 $(12,681) $ 48,141 $(23,813)
======== ======== ======== ======== ======== ========
</TABLE>

Federal income tax paid in fiscal 1995, 1994 and 1993 was
approximately $30.6 million, $37.1 million and $35.9 million. State income
taxes paid in fiscal 1995, 1994 and 1993 were approximately $4.0 million, $2.1
million and $3.1 million, respectively.

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

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

<TABLE><CAPTION>
For the years ended May 31,
-----------------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Statutory tax rate ( 35.0)% 35.0% 34.0%
Effect of:
Adjustment to deferred taxes - 5.3 -
State and local income tax ( .2) 3.3 2.7
Percentage depletion ( .5) ( 1.7) ( 8.3)
Enacted tax rate change - 9.4 -
Amortization of net investment tax credit - - ( .3)
Nonconventional source fuel credit - ( 10.8) ( 7.7)
Amortization of excess of purchase price over
net assets acquired 2.7 47.1 19.0
Benefit of capital loss carryforward ( 1.5) ( 8.5) ( 4.7)
Effect of rate change and loss of credits
on loss carryback 2.3 - -
Other, net - 1.0 ( .4)
--------- --------- ---------

Effective tax rate ( 32.2)% 80.1% 34.3%
========= ========= =========
</TABLE>

F-14
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)

On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 was
signed into law raising the federal corporate income tax rate to 35% from 34%,
retroactive to January 1, 1993. FAS 109 requires that deferred tax
liabilities and assets be adjusted in the period of enactment for the effect
of an enacted change in the tax laws or rates. The effect of the change was
$2,833,000 and such amount is included in the provision for deferred income
taxes for the year ended May 31, 1994. Deferred tax liabilities (assets)
are comprised of the following:

<TABLE><CAPTION>
May 31,
--------------------------
1995 1994
---------- ----------
(in thousands)
<S> <C> <C>
Instalment sales method for
instalment notes receivable
in prior years $ 43,312 $ 52,549
Depreciation 116,625 117,053
Difference in basis of assets
under purchase accounting 23,894 27,269
Capital loss carryforward ( 7,977) ( 12,600)
Tax credit carryforward ( 31,488) -
Accrued expenses ( 81,855) ( 43,716)
Postretirement benefits other
than pensions ( 87,032) ( 80,003)
Valuation allowance 7,977 12,600
--------- ---------

Total deferred tax (asset) liability $( 16,544) $ 73,152
========= =========
</TABLE>

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

The Company has a capital loss carryforward of approximately $22.8
million which expires in fiscal 1997. The Company has established a valuation
allowance of approximately $8.0 million to offset the deferred tax asset
related to the carryforward since the Company cannot predict whether capital
gains sufficient to offset the carryforward will be realized in the two-year
carryforward period.

As a result of the loss incurred in the 1995 fiscal year, the Company
has recorded a federal income tax receivable of approximately $99.9 million.
The Company has also recorded as an asset, in the deferred tax accounts, the
benefit of an alternative minimum tax credit carryover of approximately $31.5
million.

Under the Internal Revenue Code, if certain substantial changes in the
Company's ownership occur, there are annual limitations on the amount of loss
and credit carryforwards. The Reorganization created an ownership change;
however, the Company believes that the annual limitation will not affect the
realization of the capital loss carryforward and the alternative minimum tax
credit carryforward.

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

A substantial controversy exists with regard to federal income taxes
allegedly owed by the Company. Proofs of claim have been filed by the Internal
Revenue Service in the amounts of $110,560,883 with respect to fiscal years
ended August 31, 1980 and August 31, 1983 through August 31, 1987, $31,468,189
with respect to fiscal years ended May 31, 1988 (nine months) and May 31, 1989
and $44,837,693 with respect to fiscal years ended May 31, 1990 and May 31,
1991. Objections to the proofs of claim have been filed by the Company and the
various issues are being litigated in the Bankruptcy Court. The Company
believes that such proofs of claim are substantially without merit and intends
to defend such claims against the Company vigorously.

F-15
<PAGE>

WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)

NOTE 9 - Stockholders' Equity

As of the Effective Date, the outstanding old common stock issued in
connection with the Acquisition was cancelled and all stock option plans were
terminated. Pursuant to the Consensual Plan, the Company is authorized to
issue 200,000,000 shares of Common Stock, $.01 par value. All 50,494,313
shares outstanding at May 31, 1995 were issued in connection with the
Consensual Plan.

Pursuant to the Consensual Plan, 494,313 additional shares of Common
Stock will be issued to all former stockholders as of the Effective Date six
months after the Effective Date of the Consensual Plan. In addition, up to
3,880,140 additional shares of Common Stock will be issued to an escrow account
six months after the Effective Date of the Consensual Plan. To the extent that
certain federal income tax matters of the Company are resolved satisfactorily,
up to a maximum 3,880,140 of the escrowed shares will be distributed to all
former stockholders of the Company as of the Effective Date. To the extent
such matters are not resolved satisfactorily, the escrowed shares will be
returned to the Company and cancelled.

Primary net loss per share has been computed using the weighted
average number of common shares outstanding, assuming the new capital structure
had been effective as of June 1, 1994. In management's opinion, per share
information for fiscal years 1994 and 1993 is not relevant given the
significant change in the Company's capital structure which occurred as a
result of the Company's reorganization pursuant to the Consensual Plan (see
Note 1).

NOTE 10 - Stock Options

The Company has reserved 3,000,000 shares of its Common Stock for
issuance under the 1995 Long-Term Incentive Stock Plan of Walter Industries,
Inc. This plan was established pursuant to the Consensual Plan which provided
that 6% of the shares to be outstanding on the Effective Date could be so
reserved. As of May 31, 1995, no options had been granted.

NOTE 11 - Litigation and Other Matters

Veil-Piercing Suits
-------------------

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

On December 27, 1989, the Company and certain of its subsidiaries
filed for protection (the "Bankruptcy Case"), under Chapter 11 of Title 11 of
the United States Bankruptcy Code in the United States Bankruptcy Court for the
Middle District of Florida, Tampa Division, which stayed all Veil-Piercing
Suits pursuant to the automatic stay. On January 2, 1990, the Company filed a
declaratory judgment action ("Adversary Proceeding") against all Asbestos
Claimants who had filed Veil-Piercing Suits seeking a ruling that the Company
could not be held liable for any asbestos-related liabilities of Celotex or JWC
on any grounds, asserting that the corporate veil separating Original Jim
Walter and Celotex was intact, and asserting that the LBO could not be deemed a
fraudulent conveyance.

F-16
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)

On April 18, 1994, the Bankruptcy Court ruled in favor of the Company
on all of the claims asserted in the Adversary Proceeding. The ruling was
affirmed by the District Court for the Middle District of Florida on October
13, 1994. Thereafter, a settlement (the "Veil- Piercing Settlement") was
entered into among the Company, certain of its creditors, Celotex, JWC and
representatives of the Asbestos Claimants pursuant to which all the Veil-
Piercing Suits would be dismissed and the Company and its officers, directors
and relevant stockholders would be released from all liabilities relating to
the LBO or associated with asbestos-related liabilities of Celotex or JWC. The
Veil-Piercing Settlement is embodied in the Consensual Plan that was confirmed
by the Bankruptcy Court pursuant to an order signed on March 2, 1995. The
Consensual Plan binds all known and unknown claimants and enjoins such persons
or entities from bringing any suits against the Company in the future for
asbestos or LBO related claims. Dismissal of the Veil-Piercing Suits is in
process and all of these suits will be dismissed in the near future pursuant to
the terms of the Veil-Piercing Settlement and the Consensual Plan.

South Carolina Class Actions
----------------------------

On December 6, 1994, three South Carolina homeowners filed an amended
petition in the United States District Court for the District of South
Carolina, Columbia Division, (the "South Carolina District Court") seeking to
certify a class against Jim Walter Homes and Mid-State for alleged violations
of a South Carolina statute, which provided, among other things, that
homeowners, under certain circumstances, were to be informed that they could
employ attorneys to represent them in the closing of the purchase of their
homes. The petition sought to certify a class of homeowners who purchased
their homes subsequent to the filing of the Bankruptcy Case.

On January 18, 1995, counsel for the South Carolina homeowners filed
in the Bankruptcy Case a Notice of Class Demand for Recoupment or, in the
Alternative, Class Claim for Administrative Expense Priority and/or Class Claim
for Setoff for an estimated amount in excess of $122 million. At the same
time, counsel for the South Carolina homeowners also filed an objection to the
Consensual Plan asserting that payment of the Administrative Claim would render
the Consensual Plan not feasible.

Following extensive negotiations among counsel for the South Carolina
homeowners, the Debtors and the various creditor committees and constituencies,
a stipulation and settlement agreement (the "Homeowners Settlement Agreement")
was entered into. After two noticed hearings, the Bankruptcy Court entered a
preliminary order on February 28, 1995 and a final order on May 16, 1995
approving the Homeowners Settlement Agreement, as amended, and authorized the
Debtors to take such action and to execute such documents as are necessary to
consummate the agreement. On May 25, 1995, the South Carolina District Court
held a Fairness Hearing and found that the proposed settlement as set forth in
the Homeowners Settlement Agreement was fair, reasonable and adequate and in
the best interests of the settlement class. The settlement, which related to
the postpetition claims of the South Carolina homeowners, essentially provided
for (i) a reduction in the mortgage notes covering the property owned by the
homeowners in the aggregate principal amount of approximately $15.5 million
(less the allocated portion of any class members who "opt out" of the class);
(ii) cash disbursements of $1,000 each (with an aggregate cap of $300,000) to
certain classes of former homeowners who no longer have mortgage balances;
(iii) waiver of the first two months' mortgage payments after implementation of
the settlement; and (iv) legal fees and expenses for the South Carolina
homeowners' counsel in an amount as determined by the South Carolina District
Court, but not to exceed $3 million. The South Carolina District Court in
entering its order and final judgment on May 25, 1995, among other things,
authorized and approved the consummation of the Homeowners Settlement Agreement
in accordance with its terms and conditions, which included the release and
satisfaction of all actions, claims and demands against the Company, its past
and present directors, officers, employees, and others, including Jim Walter
Homes and Mid-State (except claims for construction defects and claims for
breach of express written warranties made by Jim Walter Homes), and approved
payment of fees, costs and expenses in the amount of $3 million to the
homeowners' South Carolina counsel.

F-17
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)

On February 28, 1995, Jim Walter Homes and Mid-State filed an
adversary action for declaratory judgment against all South Carolina homeowners
who purchased their homes between July 1, 1982 and December 27, 1989, and who
might assert prepetition claims against Jim Walter Homes and Mid-State for
alleged violation of the above mentioned South Carolina statute. The complaint
seeks, among other things, a declaration that Jim Walter Homes and Mid-State
did not violate the above mentioned South Carolina statute or, for other
enumerated reasons, should not be responsible for any damages alleged to the
South Carolina homeowners. The Debtors and homeowners have negotiated a
proposed settlement with prospective counsel for the South Carolina prepetition
claimants which will require a cash payment of approximately $3 million, which
after application of these settlement proceeds to pay existing arrearages on
the homeowners' mortgages, will result in a net cash outlay of approximately
$1,050,000. In addition, legal fees of approximately $360,000 will be paid.
The proposed settlement is subject to the Bankruptcy Court's approval upon
submission of an appropriate motion.

Texas Litigation
----------------

Since May 1991, Jim Walter Homes and Mid-State, together with Trust II
and certain other parties (collectively, the "Debtor/Mid-State Parties"), have
been involved in various lawsuits, primarily in the Bankruptcy Court, with
approximately 750 owners of houses constructed by Jim Walter Homes in south
Texas. The homeowners seek damages based upon alleged construction defects,
common law fraud, and violations of the Texas Deceptive Trade Practices Act,
the Texas Consumer Credit Code, federal and state debt collections statutes and
the Racketeering Influence Corruptions and Practices Act. Although Jim Walter
Homes and Mid-State believe that the litigation is substantially without merit,
a settlement agreement ("Settlement Agreement") has been reached with the
attorney for the homeowner claimants. The anticipated settlement figure will
be approximately $3,600,000 in account balance reductions (of which
approximately $1,250,000 represents a principal reduction), plus an approximate
aggregate of $27,500 cash to certain clients and $2,900,000 as attorney's fees
(of which $900,000 may be deferred and payable over the next five years). The
consummation of the Settlement Agreement is subject to various conditions,
including approval by all of the parties thereto. It also contains provisions
allowing claimants to "opt out" or not participate in the agreement and for the
Debtor/Mid-State Parties to avoid the settlement in its entirety if, in their
judgment, the number of claimants who opt out is so large as to make the
settlement of little value. It also has a provision for the attorney for the
homeowner claimants to indemnify and hold harmless Jim Walter Homes, Mid-State,
Trust II, and the other parties, from any and all claims, demands, causes of
actions, lawsuits and settlements by the homeowners. Further, it provides for
the Bankruptcy Court to retain jurisdiction over any claims which are not
resolved by the Settlement Agreement.

At a hearing in the Bankruptcy Court, held on June 27, 1995, on
Debtors' Motion to Approve Compromise and Settlement Agreement, the Bankruptcy
Court instructed the Debtors to prepare an Order to be sent to the creditors of
the Company, providing that any objections to the settlement be filed with the
Bankruptcy Court by July 12, 1995.

Suit by the Company and Jim Walter Resources, Inc. for Business
---------------------------------------------------------------
Interruption Losses
-------------------

On May 31, 1995 the Company and Jim Walter Resources, Inc. ("JWR")
commenced a lawsuit in the Circuit Court for Tuscaloosa County, Alabama (Civil
Action No. CV-95-625) against certain insurers claiming damages for loss from
interruption of JWR's business resulting from a fire on or about November 17,
1993 in JWR's underground coal mine No. 5, which caused the mining of coal to
become impossible because of blockage of corridors and passageways resulting
from efforts to extinguish or control the fire. After JWR believed that it had
taken the necessary steps to extinguish or control the fire, it resumed its
longwall mining. JWR learned, however, that the intensity of the fire, which
it believed to have been isolated and controlled, increased substantially,
making it necessary to seal off portions of the mine and to lose permanently
the corridors and passageways without which the longwall panel currently being
mined could not be completed. JWR's longwall mining was interrupted until
another longwall panel could be prepared. In addition to the

F-18
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)

mining of coal, JWR produced natural gas from wells drilled into the mine,
production from which was lost because of the loss of the longwall panel. As a
proximate consequence of the fire on November 17, 1993, the Company and JWR
claimed losses compensable under the business interruption coverage of the
policies in excess of $25 million, for which judgment was demanded, together
with interest and costs.

Additionally, the complaint is for a declaratory judgment concerning
the insurers' contention that the risk which caused the loss was not insured
because it was not fortuitous, but was spontaneous combustion known to occur in
JWR's mines. Further, the insurers contend the Company failed to disclose the
risk of loss from spontaneous combustion and that the policies are void or
voidable because of such failure. Plaintiffs seek declaratory judgment in
their favor on these contentions and that each defendant is liable to
plaintiffs for its pro rata part of plaintiffs' business interruption loss.

The suit is in its initial stages, but the Company and JWR believe the
claim is meritorious and intend to pursue it vigorously.

Litigation Related to Chapter 11 Distributions to Certain
---------------------------------------------------------
Holders of Subordinated Notes and/or Debentures.
------------------------------------------------

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

Subsequent to September 23, 1994, the balloting agent filed with the
Bankruptcy Court two (2) separate voting certifications. The voting
certification with respect to the Creditors' Plan not only set forth the voting
results but also listed the names of subordinated bondholders who made the
Subordinated Note Claim Election.

The Consensual Plan ultimately confirmed by the Bankruptcy Court
(which technically constituted a modification of the Creditors' Plan), (a) kept
in place the Subordinated Note Claim Election provisions and prior elections,
(b) contained as Exhibit 8 a schedule prepared by the balloting agent which set
forth the names of the subordinated bondholders who made the Subordinated Note
Claim Election (the "Exhibit 8 Schedule"), and (c) contained a new election
(the "Class U-4 Exchange Election") which provided that those subordinated
bondholders who made the Subordinated Note Claim Election were eligible to make
the Class U-4 Exchange Election whereby they could essentially "exchange"
shares of Common Stock for new senior notes which Lehman Brothers Inc. was
otherwise entitled to receive.

In February 1995, the balloting agent filed a voting certification
with the Bankruptcy Court which listed those subordinated bondholders who made
the Class U-4 Exchange Election (the "Exchange Election Schedule").

In preparing to make distributions to subordinated bondholders, it
came to the attention of the Company that the Exhibit 8 Schedule and the
Exchange Election Schedule were inaccurate. As a result, the Company reviewed
all ballots that the balloting agent claimed to be in its possession and
determined that discrepancies existed between the Exhibit 8 Schedule and
Exchange Election Schedule and certain of the ballots cast by subordinated
bondholders.

On or about April 5, 1995, the Company filed a motion with the
Bankruptcy Court seeking to amend the Exhibit 8 Schedule and the Exchange
Election Schedule. On April 28, 1995, an order reflecting the Bankruptcy
Court's decision was entered (the "April 28 Order").

F-19
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)

Four bondholders each filed a motion with the Bankruptcy Court seeking
a stay of the April 28 Order pending appeal to the United States District Court
in Tampa, Florida (the "District Court"). On May 10, 1995 the Bankruptcy Court
denied each of the stay motions. Two of such bondholders then each filed
emergency motions for a stay pending appeal with the District Court. On May
11, 1995 the District Court issued an order denying the emergency motions.

On May 14, 1995, one of such bondholders filed a petition for a writ
of mandamus with the Eleventh Circuit Court of Appeals which was denied on May
15, 1995.

Appeals from the April 28 Order were filed with the District Court by
six bondholders. The appeals raise similar issues and ultimately seek the same
relief - reversal of the April 28 Order as it applies to appellants and the
modification of the consideration that appellants are to be provided under the
Consensual Plan, so that a portion of their distribution would be comprised of
Qualified Securities, instead of Common Stock of the Company.

The Company has filed motions to consolidate the appeals and intends
to file motions to dismiss as moot the appeals of the appellants. At this time
the Company is unable to predict whether or not the appeals will be dismissed,
or the ultimate outcome of such appeals.

Chapter 11 Adversary Proceeding Filed by Certain Holders of
------------------------------------------------------------
Series B & C Senior Notes
-------------------------

On June 15, 1995, certain holders of Series B & C Notes (the
"Noteholders") commenced an adversary proceeding in the Bankruptcy Court
against the Company, as Disbursing Agent, and its subsidiaries (the "Debtors")
seeking payment of interest for the period from the Effective Date (March 17,
1995) until the date distribution was received by such Noteholders. The Debtors
believe there is no merit to the complaint and intend to vigorously oppose the
relief requested therein. Given the early stage of this proceeding, the
Debtors cannot predict the ultimate outcome of the litigation.

Environmental Matters
---------------------

A Company subsidiary, United States Pipe and Foundry Company ("U.S.
Pipe"), was issued a revised New Jersey Pollutant Discharge Elimination System
("NJPDES") Permit in May 1991 relating to its facility in Burlington, New
Jersey, authorizing the discharge of storm water runoff to the Delaware River.
U.S. Pipe filed a timely appeal of the Permit to challenge certain effluent
limitations. In July 1992, the New Jersey Department of Environmental
Protection ("NJDEP") issued to U.S. Pipe an Administrative Order and Notice of
Civil Administrative Penalty Assessment ("Order"), assessing a penalty in the
amount of $545,000 for alleged failure to comply with the effluent limitations
in the Permit. U.S. Pipe filed a timely appeal of the Order.

Extensive negotiations with the NJDEP were undertaken over the next
three years. On May 16, 1995, U.S. Pipe entered into an Administrative Consent
Order ("ACO") with NJDEP settling both the permit appeal and the penalty case.
Under the ACO, U.S. Pipe will pay a civil penalty of $187,000 over a twelve-
month period to resolve all outstanding alleged permit violations through the
date of the ACO. In addition, U.S. Pipe will conduct studies of its Burlington
facility and will design and build a storm water treatment system to improve
the quality of storm water discharged to the Delaware River. During the time
that U.S. Pipe conducts these activities, it will not be required to meet
effluent limitations, but is obligated to monitor and report the quality of
storm water discharges. By executing the ACO, U.S. Pipe withdraws its appeals
of the Permit and the Order. The ACO is presently undergoing public review and
comment; if no significant changes are made to the ACO as a result of public
input, the agreement should be finalized in July.

F-20
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)

The cost to construct the storm water treatment system required under
the ACO has not yet been ascertained but is estimated by the engineers to range
from $500,000 - $1,000,000. Work on this project is expected to take three
years or more.

The Company is a party to a number of other lawsuits arising in the
ordinary course of its business. The Company provides for costs relating to
these matters when a loss is probable and the amount is reasonable estimable.
The effect of the outcome of these matters on the Company's future results of
operations cannot be predicted because any such effect depends on future results
of operations and the amount and timing of the resolution of such matters.
While the results of litigation cannot be predicted with certainty, the Company
believes that the final outcome of such other litigation will not have a
materially adverse effect on the Company's consolidated financial condition.

NOTE 12 - Pension and Other Employee Benefits

The Company has various pension and profit sharing plans covering
substantially all employees. In addition to its own pension plans, the Company
contributes to certain multi-employer plans. Total pension expense for the
years ended May 31, 1995, 1994 and 1993, was $8.2 million, $9.7 million and
$16.5 million, respectively. The funding of retirement and employee benefit
plans is in accordance with the requirements of the plans and, where
applicable, in sufficient amounts to satisfy the "Minimum Funding Standards" of
the Employee Retirement Income Security Act of 1974 ("ERISA"). The plans
provide benefits based on years of service and compensation or at stated
amounts for each year of service.

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

For the years ended May 31,
-------------------------------
1995 1994 1993
-------- -------- -------
(in thousands)

Service cost-benefits earned during the period $ 5,817 $ 5,334 $ 5,233
Interest cost on projected benefit obligation 16,174 16,333 15,634
Actual loss (return) on assets 4,304 (19,352) (18,131)
Net amortization and deferral (21,377) 3,145 3,174
-------- -------- ----------
Net pension costs $ 4,918 $ 5,460 $ 5,910
======== ======== ========

F-21
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)

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

<TABLE><CAPTION>
May 31, 1995 May 31, 1994
-------------------------- -------------------------------
Plans in which Plans in which
-------------------------- -------------------------------
Assets exceed Accumulated Assets exceed Accumulated
accumulated benefits accumulated benefits
benefits exceed assets benefits exceed assets
----------- ------------- ----------- -------------

<S> <C> <C> <C> <C>
Actuarial present value of
accumulated benefit obligations:
Vested benefits $ 134,589 $ 47,474 $ 133,348 $ 41,353
Non-vested benefits 5,849 1,207 5,599 1,604
---------- --------- ---------- ----------
$ 140,438 $ 48,681 $ 138,947 $ 42,957
========== ========= ========== ==========
Plan assets at fair value, primarily
stocks and bonds $ 169,635 $ 31,023 $ 187,443 $ 27,012
Projected benefit obligations 169,984 49,681 166,386 42,957
---------- --------- ---------- ----------
Plan assets in excess of (less than)
projected benefit obligations ( 349) ( 18,658) 21,057 ( 15,945)
Unamortized portion of transition
(asset) obligation at June 1, 1986 ( 10,507) 4,785 ( 11,281) 5,002
Unrecognized net loss from actual
experience different from
that assumed 20,545 6,610 808 2,903
Prior service cost not recognized 696 2,269 836 2,487
Contribution to plans after
measurement date - 667 879 819
---------- --------- ---------- ----------
Prepaid (accrued) pension cost 10,385 ( 4,327) 12,299 ( 4,734)
Additional liability - ( 12,664) - ( 10,393)
---------- --------- ---------- ----------
Prepaid pension cost (pension
liability) recognized in the
balance sheet $ 10,385 $( 16,991) $ 12,299 $( 15,127)
========== ========= ========== ==========
</TABLE>

The projected benefit obligations were determined using an assumed
discount rate of 8% in fiscal 1995 and 1994 and, where applicable, an
assumed 5% rate of increase in future compensation levels. The assumed
long-term rate of return on plan assets is 8%.

Under the labor contract with the United Mine Workers of America, Jim
Walter Resources makes payments into multi-employer pension plan trusts
established for union employees. Under ERISA, as amended by the
Multiemployer Pension Plan Amendments Act of 1980, an employer is liable
for a proportionate part of the plans' unfunded vested benefits
liabilities. The Company estimates that its allocated portion of the
unfunded vested benefits liabilities of these plans amounted to
approximately $48.7 million at May 31, 1995. However, although the net
liability can be estimated, its components, the relative position of each
employer with respect to actuarial present value of accumulated benefits
and net assets available for benefits, are not available to the Company.

The Company adopted Statement of Financial Accounting Standards No.
106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" in fiscal 1993. Upon adoption, the Company elected to record
the transition obligation of $166.4 million pre-tax ($104.6 million
after tax) as a one-time charge against earnings, rather than amortize
it over a longer period. This obligation is primarily related to the
health benefits for eligible retirees. Post-retirement benefit costs
were $26.0 million in 1995, $25.6 million in 1994 and $23.5 million in
1993. Amounts paid for postretirement benefits were $7.5 million in
1995, $5.5 million in 1994 and $6.5 million in 1993.

F-22
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)

The net periodic postretirement benefit cost includes the following
components:

<TABLE><CAPTION>
For the years ended May 31,
---------------------------------------
1995 1994 1993
---------- --------- --------
(in thousands)
<S> <C> <C> <C>

Service cost $ 8,491 $ 9,302 $ 8,495
Interest cost 17,470 16,283 14,979
-------- -------- --------
Net periodic postretirement benefit cost $ 25,961 $ 25,585 $ 23,474
======== ======== ========
</TABLE>

The accumulated postretirement benefits obligation at May 31, 1995 and
1994 are as follows:

<TABLE><CAPTION>
May 31,
-----------------------------
1995 1994
---------- ----------
(in thousands)

<S> <C> <C>
Retirees $ 92,550 $ 72,779
Fully eligible, active participants 30,129 26,234
Other active participants 111,084 122,228
--------- ---------
Accumulated postretirement benefit
obligation 233,763 221,241
Unrecognized net loss ( 5,352) ( 11,279)
--------- ---------
Postretirement benefit liability recognized
in the balance sheet $ 228,411 $ 209,962
========= =========
</TABLE>

The principal assumptions used to measure the accumulated
postretirement benefit obligation include a discount rate of 8% in fiscal
1995 and 1994 and a health care cost trend rate of 10% declining to 5.5%
over a ten year period and remaining level thereafter in fiscal 1995 and a
health care cost trend rate of 13% declining to 6% over an eleven year
period in fiscal 1994. A one percent increase in trend rates would
increase the accumulated postretirement benefit obligation by 17% and
increase net periodic postretirement benefit cost for 1995 by 20%.

Certain subsidiaries of the Company maintain profit sharing plans.
The total cost of these plans for the years ended May 31, 1995, 1994 and
1993 was $3.0 million, $3.1 million and $3.0 million, respectively.

NOTE 13 - Fair Value of Financial Instruments

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

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

F-23
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)

Cash (including short-term investments) and short-term investments,
restricted - The carrying amounts reported in the balance sheet
approximates fair value.

Instalment notes receivable - The estimated fair value of instalment
notes receivable at May 31, 1995 was in the range of $2.0 billion to
$2.1 billion. The estimated fair value is based upon valuations
prepared by an investment banking firm as of January 31, 1995 adjusted
to reflect increases in value for the addition of net new mortgages to
May 31, 1995. The value of mortgage-backed instruments such as
instalment notes receivable are very sensitive to changes in interest
rates.

Debt - The estimated fair value of long term debt at May 31, 1995
was $2.332 billion based on current yields for comparable debt
issues or prices for actual transactions.

NOTE 14 - Segment Information

Information relating to the Company's business segments is set forth
on pages F-25 and F-26. Due to the divestiture of several building
materials subsidiaries in recent years, the Company has restructured
certain of its segment information. Prior years' information has been
restated.

F-24
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
SEGMENT INFORMATION

<TABLE><CAPTION>
For the years ended May 31,
-------------------------------------------
1995 1994 1993
---------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Sales and Revenues:

Homebuilding and related financing $ 407,119 $ 424,530 $ 419,378
Industrial and other products 284,230 224,673 212,606
Water and waste water transmission products 412,237 357,189 331,214
Natural resources(e) 332,251 319,410 351,017
Corporate 6,485 2,722 4,771
---------- ---------- ----------
Consolidated sales and revenues(a)(f) $1,442,322 $1,328,524 $1,318,986
========== ========== ==========

Contributions to Operating Income:

Homebuilding and related financing $ 76,525 $ 101,954 $ 88,902
Industrial and other products 11,902 13,851 11,301
Water and waste water transmission products 28,454 25,641 16,040
Natural resources 20,072 ( 1,175) 50,807
---------- ---------- ----------
136,953 140,271 167,050
Less-Unallocated corporate interest and
other expense(b) ( 666,048) ( 104,179) ( 96,128)
Income taxes 170,450 ( 28,917) ( 24,328)
---------- ---------- ----------

Income (loss) from operations (c) $( 358,645) $ 7,175 $ 46,594
========== ========== ==========

Depreciation, Depletion and Amortization:
Homebuilding and related financing $ 3,336 $ 3,093 $ 3,113
Industrial and other products 9,073 9,821 9,390
Water and waste water transmission products 16,520 16,063 15,764
Natural resources 41,434 40,326 40,714
Corporate 1,674 1,732 1,502
---------- ---------- ----------

Total $ 72,037 $ 71,035 $ 70,483
========== ========== ==========

Gross Capital Expenditures:
Homebuilding and related financing $ 4,192 $ 3,210 $ 6,284
Industrial and other products 24,692 10,054 8,605
Water and waste water transmission products 15,538 14,426 12,821
Natural resources 46,214 40,224 42,941
Corporate 681 1,917 1,057
---------- ---------- ----------

Total $ 91,317 $ 69,831 $ 71,708
========== ========== ==========
</TABLE>

F-25
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
SEGMENT INFORMATION

<TABLE><CAPTION>
May 31,
------------------------------------------
1995 1994 1993
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Identifiable Assets:

Homebuilding and related financing $1,789,582 $1,832,919 $1,907,199
Industrial and other products 213,836 173,618 171,672
Water and waste water transmission products 480,617 490,004 493,297
Natural resources 465,680 450,468 475,533
Corporate (d) 295,438 193,883 175,533
---------- ---------- ----------
Total $3,245,153 $3,140,892 $3,223,234
========== ========== ==========
</TABLE>

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

(a) Inter-segment sales (made primarily at prevailing market prices) are
deducted from sales of the selling segment and are insignificant in
amount with the exception of the sales of the Industrial and Other
Products Group to the Water and Waste Water Transmission Products
Group of $13,373,000, $11,480,000 and $10,298,000 and sales of the
Natural Resources Group to the Industrial and Other Products Group of
$5,397,000, $5,650,000 and $7,121,000 in 1995, 1994 and 1993,
respectively.
(b) Excludes interest expense incurred by the Homebuilding and Related
Financing Group of $131,560,000, $128,828,000 and $137,945,000 in
1995, 1994 and 1993, respectively. The balance of unallocated
expenses is attributable to all groups and cannot be reasonably
allocated to specific groups.
(c) Includes postretirement health benefits of $25,961,000, $25,585,000
and $23,474,000 in 1995, 1994 and 1993. A breakdown by segment is as
follows:

<TABLE><CAPTION>
For the years ended May 31,
--------------------------------------
1995 1994 1993
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Homebuilding and related financing $ 2,295 $ 2,170 $ 1,991
Industrial and other products 3,610 3,662 3,284
Water and waste water transmission products 4,362 4,391 4,136
Natural resources 15,004 14,681 13,437
Corporate 690 681 626
--------- -------- --------
$ 25,961 $ 25,585 $ 23,474
========= ======== ========
</TABLE>

(d) Primarily cash and corporate headquarters buildings and equipment.
(e) Includes sales of coal of $297,650,000, $289,279,000 and $321,834,000
in 1995, 1994 and 1993, respectively. Jim Walter Resources' coal
supply contract with Alabama Power Company that had been in effect
since January 1, 1979, as amended, was superceded by a new contract
executed May 10, 1994. The new contract is effective from July 1,
1994 through August 31, 1999 with Jim Walter Resources' option to
extend such contract through August 31, 2004, subject to mutual
agreement on the market pricing mechanism and other terms and
conditions of such extension. Sales to Alabama Power Company in the
years ended May 31, 1995, 1994 and 1993 were 13%, 11% and 12% of net
sales and revenues, respectively.
(f) Export sales, primarily coal, were $129,071,000, $155,966,000 and
$183,188,000 in 1995, 1994 and 1993, respectively. Export sales to
any single geographic area do not exceed 10% of consolidated net
sales and revenues.

F-26

<PAGE>
No dealer, salesman or other
person has been authorized to
give any information or to make
any representations, other than
those contained in this
Prospectus or any Prospectus
Supplement, in connection with
the offering made by this Walter Industries, Inc.
Prospectus and any Prospectus
Supplement, and information or
and representations not herein
contained, if given or made,
must not be relied upon as $218,609,000
having been authorized. This
Prospectus or any Prospectus Principal Amount of
Supplement does not constitute 12.19% Series B Senior Notes
an offer to sell, or a Due 2000
solicitation of an offer to buy,
the securities offered hereby to
any person or by anyone in any
jurisdiction in which such offer ________________________
or solicitation may not be made.
Neither the delivery of this PROSPECTUS
Prospectus or any Prospectus ________________________
Supplement nor any sales made
hereunder or thereunder shall
under any circumstances create
any implication that the
information contained herein is
correct as of any time
subsequent to the date hereof or
thereof or that there has been
no change in the affairs of the September , 1995
Company since the date hereof or
thereof.
___________________________
TABLE OF CONTENTS
Page

Available Information . . 5
Additional Information . . 5
Prospectus Summary . . . . 6
Certain Risk Factors . . . 13
The Company . . . . . . . 18
Recent History . . . . . . 19
Capitalization . . . . . . 21
Pro Forma Consolidated
Statement of Operations 22
Selected Historical
Consolidated Financial
Data . . . . . . . . . . 24
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations . . . . . . . 25
Business and Properties . 35
Management . . . . . . . . 51
Security Ownership of

Management and Principal
Stockholders . . . . . . 60

Description of Notes . . . 62
Description of Certain Other
Indebtedness . . . . . . 86
Description of Capital Stock
87
Certain Federal Income Tax
Consequences . . . . . . 92
Selling Security Holders . 95
Plan of Distribution . . . 95
Legal Matters . . . . . . 96
Experts . . . . . . . . . 96
Index to Defined Terms . . 97
Index to Financial
Statements . . . . . . . F-1
<PAGE>
[ALTERNATE PAGE FOR MARKET-MAKING PROSPECTUS]
---------------------------------------------

PROSPECTUS
----------

WALTER INDUSTRIES, INC.

12.19% Series B Senior Notes Due 2000

______________________________

This Prospectus will be used by Lehman Brothers Inc. in connection with offers
and sales in market-making transactions in the 12.19% Series B Senior Notes Due
2000 (the "Notes") of Walter Industries, Inc. (the "Company"). Lehman Brothers
Inc. may act as principal or agent in such transactions. The Notes may be
offered in negotiated transactions or otherwise. Sales will be at prices related
to prevailing market prices at the time of sale.

______________________________

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

______________________________

The date of this Prospectus is September , 1995

<PAGE>
PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

Registration fee . . . . . . . . . . . . . . . . . . . $ 113,742.23
Blue Sky fees and expenses . . . . . . . . . . . . . . 1,500.00
Printing and engraving expenses . . . . . . . . . . . . 85,000.00
Legal fees and expenses . . . . . . . . . . . . . . . . 230,000.00
Accounting fees and expenses . . . . . . . . . . . . . 50,000.00
Miscellaneous . . . . . . . . . . . . . . . . . . . . . 2,000.00
------------
Total . . . . . . . . . . . . . . . . . . . . . $ 482,242.23
============
____________________

Item 14. Indemnification of Directors and Officers

Section 145 of the DGCL empowers a Delaware corporation to indemnify any
persons who are, or are threatened to be made, parties to any threatened,
pending or completed legal action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of such
corporation), by reason of the fact that such person was an officer or director
of such corporation, or is or was serving at the request of such corporation as
a director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided that such officer or
director acted in good faith and in a manner he reasonably believed to be in or
not opposed to the corporation's best interests, and, for criminal proceedings,
had no reasonable cause to believe his conduct was illegal. A Delaware
corporation may indemnify officers and directors against expenses (including
attorneys' fees) in connection with the defense or settlement of an action by or
in the right of the corporation under the same conditions, except that no
indemnification is permitted without judicial approval if the officer or
director is adjudged to be liable to the corporation. Where an officer or
director is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him against the expenses which
such officer or director actually and reasonably incurred.

Article IV of the By-laws of the Company provides for indemnification of its
officers and directors to the fullest extent permitted by Section 145 of the
DGCL.

Section 102(b)(7) of the DGCL provides that a Delaware corporation may
eliminate or limit the personal liability of a director to a Delaware
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided that such provision shall not eliminate or limit
the liability of a director (i) for any breach of the director's duty of loyalty
to the corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the DGCL relating to the unlawful payment of a
dividend or an unlawful stock purchase or redemption or (iv) for any transaction
from which the director derived an improper personal benefit.

Article 6 of the Restated Certificate of Incorporation of the Company
provides for the elimination of personal liability of its directors for monetary
damages for breach of fiduciary duty as a director, except as otherwise provided
by the DGCL.

The Company has entered into a Directors and Officers Indemnification
Agreement which provides that directors and officers shall be indemnified to the
fullest extent permitted by applicable law and obligates the Company to
indemnify the directors and officers of the Company (a) if any director or
officer is or may become a party to any proceeding against all expenses
reasonably incurred by such director or officer in connection with the defense
or settlement of such proceeding, but only if such director or officer acted in
good faith and in a manner which such director or officer reasonably believed to
be in or not opposed to the best interests of the Company, and in the case of a
criminal action or proceeding, in addition, only if such director or officer had
no reasonable

II-1
<PAGE>
cause to believe that his or her conduct was unlawful, (b) if a director or
officer is or may become a party to any proceeding by or in the name of the
Company to procure a judgement in its favor against all expenses reasonably
incurred by such director or officer in connection with the defense or
settlement of such proceeding, but only if such director or officer acted in
good faith and in a manner which such director or officer reasonably believed to
be in or not opposed to the best interests of the Company, except no
indemnification for expenses need be made in respect of any claim in which such
director or officer shall have been adjudged liable to the Company unless a
court in which the proceeding is brought determines otherwise and (c) if a
director or officer has been successful on the merits or otherwise in defense of
any proceeding or claim.

The Common Stock Registration Rights Agreement and the Senior Note
Registration Rights Agreement each require the Company, on the one hand, and the
Holders referred to therein, on the other hand, under certain circumstances, to
indemnify each other and, in the case of the Company's indemnification
obligations, each other person who participates as an underwriter in an offering
thereunder, and each other person who controls such parties and/or underwriters
and their respective directors, officers, partners, agents and affiliates
against certain liabilities, including liabilities under the Securities Act,
incurred in connection with each registration of securities pursuant to such
registration rights agreement.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described hereunder or otherwise, the
Registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment to the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted against
the Registrant by such director, officer or controlling person, in connection
with the Notes being registered hereby, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.

Item 15. Recent Sales of Unregistered Securities

Pursuant to the Plan of Reorganization, 50,494,313 shares of Common Stock
were issued to certain former creditors and stockholders of the Company and its
subsidiaries and $490,000,000 principal amount of Series B Senior Notes were
issued to certain former creditors of the Company and its subsidiaries on the
Effective Date of the Plan of Reorganization. All such securities were issued in
satisfaction of various prepetition claims allowed by the Bankruptcy Court. In
reliance on the exemption provided by Section 1145 of the Bankruptcy Code, none
of such securities were registered under the Securities Act in connection with
their issuance pursuant to the Plan of Reorganization.

II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules

(a) Exhibits

Exhibit Number Description
-------------- -----------

2(a)(i) -- Amended Joint Plan of Reorganization of Walter
Industries, Inc. and certain of its subsidiaries,
dated as of December 9, 1994 (1)

2(a)(ii) -- Modification to the Amended Joint Plan of
Reorganization of Walter Industries, Inc. and certain
of its subsidiaries, as filed in the Bankruptcy Court
on March 1, 1995 (2)

2(a)(iii) -- Findings of Fact, Conclusions of Law and Order
Confirming Amended Joint Plan of Reorganization of
Walter Industries, Inc. and certain of its
subsidiaries, as modified (3)

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

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

4(a)(i) ** -- 12.19% Series B Senior Note Indenture

4(a)(ii) ** -- Form of Company Pledge Agreement (included as Exhibit
B to Exhibit 4(a)(i))

4(a)(iii) **-- Form of Subsidiary Pledge Agreement (included as
Exhibit C to Exhibit 4(a)(i))

4(a)(iv) ** -- Form of 12.19% Series B Senior Note Certificate
(included as Exhibit A to Exhibit 4(a)(i))

5 * -- Opinion of Simpson Thacher & Bartlett regarding
legality of the securities being registered

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

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

10(b)(ii) **-- Form of Senior Note Registration Rights Agreement

10(b)(iii) -- Channel One Registration Rights Agreement (7)

10(c) -- Durham Employment Agreement (3)

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

10(e) ** -- 12.19% Series B Senior Note Indenture (see Exhibit
4(a))

10(f) ** -- Bank Revolving Credit Facility

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

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

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

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

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

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

II-3
<PAGE>

Exhibit Number Description
-------------- -----------

12 ** -- Computation of Ratio of Earnings to Fixed Charges

21 ** -- Subsidiaries of the Company

23(a) -- Consent of Price Waterhouse LLP

23(b) * -- Consent of Simpson Thacher & Bartlett (included in
their opinion filed as Exhibit 5 hereto)

24 ** -- Powers of Attorney

25 -- Statement on Form T-1 of the Eligibility of the
Senior Trustee (1)

27 -- Financial Data Schedule
_________________

* To be filed by amendment.

**
Previously filed.

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

(2) This Exhibit is incorporated by reference to Amendment No. 2 to the
Application for Qualification of Indenture on Form T-3 filed by the Company
with the Commission on March 7, 1995.

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

(4) Portions of this document have been omitted pursuant to a request for
confidential treatment.

(5) This Exhibit is incorporated by reference to Amendment No. 1 to the
Registration Statement on Form S-1 (File No. 33-59013) filed by the Company
with the Commission on May 2, 1995. (6) This Exhibit is incorporated by
reference to the Proxy Statement on Schedule 14A filed by the Company with the
Commission on September 11, 1995.

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

(b) Financial Statement Schedules

Schedule No.
------------

V Report of Property, Plant and Equipment
VI Report of Accumulated Depreciation, Depletion and Amortization of Property,
Plant and Equipment
VIII Valuation and Qualifying Accounts

Item 17. Undertakings

The undersigned Registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;

(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement;

(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;

(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered

II-4
<PAGE>
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.

II-5
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement Amendment to be signed on its behalf
by the undersigned, hereunto duly authorized in the City of Tampa, State of
Florida on the 14th day of September, 1995.

WALTER INDUSTRIES, INC.

By /s/ William H. Weldon
----------------------------
William H. Weldon
Senior Vice President-Finance and Chief
Accounting Officer

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement Amendment has been signed by the following persons in the
capacities indicated on September 14, 1995.

<TABLE><CAPTION>
Signature Title
--------- -----

<S> <C>
* Chairman of the Board and Director
----------------------------------------------------
James W. Walter

* President, Chief Executive Officer
----------------------------------------------------
G. Robert Durham and Director (Principal Executive Officer)

* Executive Vice President, Chief
----------------------------------------------------
Kenneth J. Matlock Financial Officer and Director (Principal
Financial Officer)

/s/ William H. Weldon Senior Vice President-Finance and Chief
----------------------------------------------------
William H. Weldon Accounting Officer (Principal Accounting Officer)

* Director
----------------------------------------------------
Howard L. Clark, Jr.

* Director
----------------------------------------------------
James B. Farley

* Director
----------------------------------------------------
Eliot M. Fried

* Director
----------------------------------------------------
James L. Johnson

* Director
----------------------------------------------------
Robert I. Shapiro

* Director
----------------------------------------------------
Michael T. Tokarz
</TABLE>

*By /s/ William H. Weldon
--------------------------
William H. Weldon
Attorney-in-fact

II-6
<PAGE>

<TABLE><CAPTION>
INDEX TO FINANCIAL STATEMENT SCHEDULES

Financial Statement Schedules Page
----------------------------- ----

<S> <C> <C>
V Report of Property, Plant and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
VI Report of Accumulated Depreciation, Depletion and Amortization of Property, Plant and Equipment . . . . . . . . . S-5
VIII Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-8
</TABLE>

All other schedules are omitted because the required information is not present
in amounts sufficient to require submission of the schedules, or because the
information required is included in the consolidated financial statements or
notes thereto.

S-1
<PAGE>
<TABLE><CAPTION>
SCHEDULE V

WALTER INDUSTRIES, INC. AND SUBSIDIARIES
PROPERTY, PLANT AND EQUIPMENT
For the Year Ended May 31, 1995

Balance at Balance
Beginning Additions Retirements at End
Classification(1) of Year at Cost or Sales Other of Year
-------------------------------------- -------------- ----------- --------------- -------------- --------------
(in thousands)

<S> <C> <C> <C> <C> <C>
Land and minerals . . . . . . . . . . $ 200,337 $ 1,856 $ 5,534 $ 139 $ 196,798
Land improvements . . . . . . . . . . 18,941 839 91 451 20,140
Building and leasehold improvements . 104,999 3,332 3,607 6,034 110,758
Machinery and equipment . . . . . . . 663,898 14,901 19,617 43,956 703,138
Mine development costs . . . . . . . 123,761 -- -- 2,142 125,903
Construction in progress . . . . . . 12,003 70,389 -- (52,722) 29,670
---------- ------- ------- ------- ----------
$1,123,939 $91,317 $28,849 $ -- $1,186,407
========== ======= ======= ======= ==========
</TABLE>

(1) The Company and its subsidiaries provide depreciation for financial
reporting purposes principally on the straight line method over the useful
lives of the assets. For federal income tax purposes accelerated methods
are used for substantially all eligible properties. The depreciable
property categories and the principal rates for depreciation used are as
follows:

Land Improvements . . . . . . . . . . . . . . . . . 3 1/2% to 10%
Buildings . . . . . . . . . . . . . . . . . . . . . 2 1/2% to 20%
Machinery and equipment . . . . . . . . . . . . 3 1/2% to 33-1/3%
Leasehold improvements . . . . . . . . . . . Over term of leases
Mine development costs . . . . . . . . . . . Over life of mines

Depletion on minerals is based on the estimated recoverable quantities and
the costs of the properties.

S-2
<PAGE>
<TABLE><CAPTION>
SCHEDULE V

WALTER INDUSTRIES, INC. AND SUBSIDIARIES
PROPERTY, PLANT AND EQUIPMENT
For the Year Ended May 31, 1994

Land and minerals . . . . . . . . . . $ 200,000 $ 436 $ 117 $ 18 $200,337
Land improvements . . . . . . . . . . 17,349 886 42 748 18,941
Building and leasehold improvements . 99,597 3,007 720 3,115 104,999
Machinery and equipment . . . . . . . 617,987 6,360 17,819 57,370 663,898
Mine development costs . . . . . . . 116,576 -- 2,262 9,447 123,761
Construction in progress . . . . . . 23,559 59,142 -- (70,698) 12,003
---------- ------- ------- ------- ----------
$1,075,068 $69,831 $20,960 $ -- $1,123,939
========== ======= ======= ======= ==========
</TABLE>

Land Improvements . . . . . . . . . . . . . . . . 3 1/2% to 10%
Buildings . . . . . . . . . . . . . . . . . . . . 2 1/2% to 20%
Machinery and equipment . . . . . . . . . . . 3 1/2% to 33-1/3%
Leasehold improvements . . . . . . . . . . Over term of leases
Mine development costs . . . . . . . . . . Over life of mines

Depletion on minerals is based on the estimated recoverable quantities and
the costs of the properties.

S-3
<PAGE>
<TABLE><CAPTION>
SCHEDULE V

WALTER INDUSTRIES, INC. AND SUBSIDIARIES
PROPERTY, PLANT AND EQUIPMENT
For the Year Ended May 31, 1993

<S> <C> <C> <C> <C> <C>
Land and minerals . . . . . . . . . . $ 198,927 $ 1,219 $ 168 $ 22 $200,000
Land improvements . . . . . . . . . . 16,556 1,122 72 (257) 17,349
Building and leasehold improvements . 98,947 3,712 1,016 (2,046) 99,597
Machinery and equipment . . . . . . . 567,218 7,948 10,867 53,688 617,987
Mine development costs . . . . . . . 116,576 -- -- -- 116,576
Construction in progress . . . . . . 17,259 57,707 -- (51,407) 23,559
---------- ------- ------- ------- ----------
$1,015,483 $71,708 $12,123 $ -- $1,075,068
========== ======= ======= ======= ==========
</TABLE>

Depletion on minerals is based on the estimated recoverable quantities and
the costs of the properties.

S-4
<PAGE>
<TABLE><CAPTION>

SCHEDULE VI

WALTER INDUSTRIES, INC. AND SUBSIDIARIES
ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF
PROPERTY, PLANT AND EQUIPMENT
For the Year Ended May 31, 1995

Balance at Additions Balance
Beginning Charged to Retirements at End
Classification of Year Cost and Expenses or Sales Other of Year
-------------------------------------- -------------- ----------------- --------------- -------------- --------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Land and minerals . . . . . . . . . . $ 42,944 $ 5,671 $ -- $ -- $ 48,615
Land improvements . . . . . . . . . . 5,105 947 61 -- 5,991
Building and leasehold improvements . 35,846 4,562 1,388 59 39,079
Machinery and equipment . . . . . . . 367,152 59,190 13,049 (59) 413,234
Mine development costs . . . . . . . 15,029 1,667 -- -- 16,696
---------- ------- ------- ------- --------
$466,076 $72,037 $14,498 $ -- $523,615
========== ======= ======= ======= ========
</TABLE>

S-5
<PAGE>
<TABLE><CAPTION>
SCHEDULE VI

WALTER INDUSTRIES, INC. AND SUBSIDIARIES
ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF
PROPERTY, PLANT AND EQUIPMENT
For the Year Ended May 31, 1994

Balance at Additions Balance
Beginning Charged to Retirements at End
Classification of Year Cost and Expenses or Sales Other of Year
-------------------------------------- -------------- ----------------- --------------- -------------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Land and minerals . . . . . . . . . . $ 37,961 $ 4,983 $ -- $ -- $ 42,944
Land improvements . . . . . . . . . . 4,272 885 52 -- 5,105
Building and leasehold improvements . 31,671 4,264 89 -- 35,846
Machinery and equipment . . . . . . . 323,557 58,188 14,593 -- 367,152
Mine development costs . . . . . . . 14,567 2,715 2,253 -- 15,029
---------- ------- ------- ------- --------
$412,028 $71,035 $16,987 $ -- $466,076
========== ======= ======= ======= ========
</TABLE>

S-6
<PAGE>
<TABLE><CAPTION>
SCHEDULE VI

WALTER INDUSTRIES, INC. AND SUBSIDIARIES
ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF
PROPERTY, PLANT AND EQUIPMENT
For the Year Ended May 31, 1993

Balance at Additions Balance
Beginning Charged to Retirements at End
Classification of Year Cost and Expenses or Sales Other of Year
-------------------------------------- -------------- ----------------- --------------- -------------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Land and minerals . . . . . . . . . . $ 32,366 $ 5,595 $ -- $ -- $ 37,961
Land improvements . . . . . . . . . . 4,203 729 32 (628) 4,272
Building and leasehold improvements . 30,163 4,410 628 (2,274) 31,671
Machinery and equipment . . . . . . . 270,739 58,572 8,656 2,902 323,557
Mine development costs . . . . . . . 13,390 1,177 -- -- 14,567
---------- ------- ------- ------ --------
$350,861 $70,483 $ 9,316 $ -- $412,028
========== ======= ======= ====== ========
</TABLE>

S-7
<PAGE>
<TABLE><CAPTION>
SCHEDULE VIII

WALTER INDUSTRIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Year Ended May 31, 1995

Additions
Balance at Charged to Balance
Beginning Cost and Deductions at End
Description of Year Expenses from reserves of Year
-------------------------------------------- ---------------- ---------------- ---------------- -----------------
(in thousands)

<S> <C> <C> <C> <C>
Reserves (provision for possible losses)
deducted from instalment notes
receivable . . . . . . . . . . . . . . . $26,301 $1,155 $ 900(1) $26,556
======= ====== ====== =======

Reserve (provision for possible losses)
deducted from trade receivables . . . . . $ 7,392 $3,330 $2,724(1) $ 7,998
======= ====== ====== =======

Accrued workmen's compensation(2) . . . . . $ 3,737 $ 763 $ -- $ 4,500
======= ====== ====== =======

Black lung reserves(2) . . . . . . . . . . $21,997 $ -- $ 130(3) $21,867
======= ====== ====== =======
</TABLE>

____________________
(1) Notes and accounts written off as uncollectible.
(2) Included in other long-term liabilities.
(3) Losses sustained.

S-8
<PAGE>
<TABLE><CAPTION>
SCHEDULE VIII

WALTER INDUSTRIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Year Ended May 31, 1994

Reserves (provision for possible losses)
deducted from instalment notes
receivable . . . . . . . . . . . . . . . $26,579 $ 905 $1,183(1) $26,301
======= ====== ====== =======

Reserve (provision for possible losses)
deducted from trade receivables . . . . . $ 7,324 $3,706 $3,638(1) $ 7,392
======= ====== ====== =======

Accrued workmen's compensation(3) . . . . . $ 2,887 $ 824 $ (26)(2) $ 3,737
======= ====== ====== =======
Black lung reserves(3) . . . . . . . . . . $22,190 $ -- $ 193(4) $21,997
======= ====== ====== =======
</TABLE>

____________________
(1) Notes and accounts written off as uncollectible.
(2) Expenditures or losses sustained and liabilities reclassified from
accounts payable.
(3) Included in other long-term liabilities.
(4) Losses sustained.

S-9
<PAGE>
<TABLE><CAPTION>
SCHEDULE VIII

WALTER INDUSTRIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Year Ended May 31, 1993

<S> <C> <C> <C> <C>
Reserves (provision for possible losses)
deducted from instalment notes
receivable . . . . . . . . . . . . . . . $25,965 $1,303 $ 689(1) $26,579
======= ====== ====== =======

Reserve (provision for possible losses)
deducted from trade receivables . . . . . $ 6,080 $2,940 $1,696(1) $ 7,324
======= ====== ====== =======

Accrued workmen's compensation(3) . . . . . $ 3,411 $ (488) $ 36(2) $ 2,887
======= ====== ====== =======

Black lung reserves(3) . . . . . . . . . . $22,345 $ -- $ 155(4) $22,190
======= ====== ====== =======
</TABLE>

S-10
<PAGE>
EXHIBIT INDEX
-------------

Exhibit Number Description
-------------- -----------

2(a)(i) -- Amended Joint Plan of Reorganization of Walter
Industries, Inc. and certain of its subsidiaries,
dated as of December 9, 1994 (1)

2(a)(ii) -- Modification to the Amended Joint Plan of
Reorganization of Walter Industries, Inc. and certain
of its subsidiaries, as filed in the Bankruptcy Court
on March 1, 1995 (2)

2(a)(iii) -- Findings of Fact, Conclusions of Law and Order
Confirming Amended Joint Plan of Reorganization of
Walter Industries, Inc. and certain of its
subsidiaries, as modified (3)

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

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

4(a)(i) ** -- 12.19% Series B Senior Note Indenture

4(a)(ii) ** -- Form of Company Pledge Agreement (included as Exhibit
B to Exhibit 4(a)(i))

4(a)(iii) **-- Form of Subsidiary Pledge Agreement (included as
Exhibit C to Exhibit 4(a)(i))

4(a)(iv) ** -- Form of 12.19% Series B Senior Note Certificate
(included as Exhibit A to Exhibit 4(a)(i))

5 * -- Opinion of Simpson Thacher & Bartlett regarding
legality of the securities being registered

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

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

10(b)(ii) **-- Form of Senior Note Registration Rights Agreement

10(b)(iii) -- Channel One Registration Rights Agreement (7)

10(c) -- Durham Employment Agreement (3)

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

10(e) ** -- 12.19% Series B Senior Note Indenture (see Exhibit
4(a))

10(f) ** -- Bank Revolving Credit Facility

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

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

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

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

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

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

<PAGE>

Exhibit Number Description
-------------- -----------

12 ** -- Computation of Ratio of Earnings to Fixed Charges

21 ** -- Subsidiaries of the Company

23(a) -- Consent of Price Waterhouse LLP

23(b) * -- Consent of Simpson Thacher & Bartlett (included in
their opinion filed as Exhibit 5 hereto)

24 ** -- Powers of Attorney

25 -- Statement on Form T-1 of the Eligibility of the
Senior Trustee (1)

27 -- Financial Data Schedule
_________________

* To be filed by amendment.

**
Previously filed.

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

(2) This Exhibit is incorporated by reference to Amendment No. 2 to the
Application for Qualification of Indenture on Form T-3 filed by the Company
with the Commission on March 7, 1995.

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

(4) Portions of this document have been omitted pursuant to a request for
confidential treatment.

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

EXHIBIT 23(a)

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated July 12, 1995, relating
to the consolidated financial statements of Walter Industries, Inc. and its
subsidiaries, which appears in such Prospectus. We also consent to the
application of such report to the Financial Statement Schedules for the three
years ended May 31, 1995 listed under Item 16(b) of this Registration Statement
when such schedules are read in conjunction with the financial statements
referred to in our report. The audits referred to in such report also included
these schedules. We also consent to the reference to us under the heading
"Experts" in such Prospectus.

/s/ Price Waterhouse LLP
-----------------------------
Price Waterhouse LLP
Tampa, Florida
September 14, 1995

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Financial Statements and related notes thereto and is qualified in
its entirety by reference to such financial statements and related notes.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-START> JUN-01-1994
<PERIOD-END> MAY-31-1995
<CASH> 128,007
<SECURITIES> 128,002
<RECEIVABLES> 1,678,279
<ALLOWANCES> (34,554)
<INVENTORY> 196,437
<CURRENT-ASSETS> 0<F1>
<PP&E> 1,186,407
<DEPRECIATION> 523,615
<TOTAL-ASSETS> 3,245,153
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 2,220,370
<COMMON> 505
0<F1>
0<F1>
<OTHER-SE> 360,269
<TOTAL-LIABILITY-AND-EQUITY> 3,245,153
<SALES> 1,181,635
<TOTAL-REVENUES> 1,442,322
<CGS> 951,381
<TOTAL-COSTS> 202,653
<OTHER-EXPENSES> 508,350
<LOSS-PROVISION> 4,485
<INTEREST-EXPENSE> 304,548
<INCOME-PRETAX> (529,095)
<INCOME-TAX> (170,450)
<INCOME-CONTINUING> (358,645)
<DISCONTINUED> 0<F1>
<EXTRAORDINARY> 0<F1>
<CHANGES> 0<F1>
<NET-INCOME> (358,645)
<EPS-PRIMARY> (7.10)
<EPS-DILUTED> 0<F1>
<FN>
<F1>This line item is not presented on the Consolidated Financial Statements.
</FN>

</TABLE>