Combine gelatin and 1/2 cup of the water in measuring cup; set aside to soften.
In 2-quart glass measuring cup with handle, combine remaining 3/4 cup water and sugar.
Microwave at High for 5 minutes.
Stir well until sugar dissolves.
Microwave at High for 7 to 8 minutes or until mixture reaches 234°.
Stir in softened gelatin; let stand until slightly cooled (about 130°).
Stir in vanilla. Empty mixture into large bowl of electric mixer.
Beat at high speed until mixture is very fluffy and increased 4 to 5 times in volume, about 12 to 15 minutes.
Turn into walnut-coated pan and sprinkle remaining walnuts on top.
Let stand at room temperature several hours or overnight until mixture is firm and set.
Use a sharp knife dipped in powdered sugar to cut mixture into 1-inch squares. Roll sides in walnuts remaining in pan and additional powdered sugar, if desired.