UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT ~~UNDER~~PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~June 30, ~~2003~~2005

ORor

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-1511

FEDERAL-MOGUL CORPORATION

(Exact name of Registrant as specified in its charter)

Michigan		38-0533580
(State or other jurisdiction ofincorporation or organization)		(IRS employeridentification number)
(State or other jurisdiction of incorporation or organization)		(IRS employer identification number)
26555 Northwestern Highway, Southfield, Michigan		48034
(Address of principal executive offices)		(Zip Code)

26555 Northwestern Highway, Southfield, Michigan		48034
(Address of principal executive offices)		(Zip Code)

(248) 354-7700

(Registrant’s telephone number, including area code)

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

AsIndicate by ofcheck ~~November~~mark 3,whether ~~2003,~~the ~~there~~registrant ~~were~~is ~~87,131,298~~an ~~outstanding~~accelerated ~~shares~~filer of(as ~~the registrant’s~~defined ~~$5.00~~in ~~stated~~Rule ~~value~~12b-2 ~~common~~of ~~stock~~the Exchange Act). Yes ¨ No x

As of July 22, 2005, there were 89,057,987 outstanding shares of the registrant’s $5.00 stated value common stock.

FEDERAL-MOGUL CORPORATION

Form 10-Q

For the ~~Quarter~~Quarterly Period Ended ~~September~~June 30, ~~2003~~2005

INDEX

		Page No.
Forward-Looking Statements		2
Part I – Financial Information
Item 1 – Consolidated Financial Statements
Item 1 – Financial Statements
Consolidated Statements of Operations		4
Consolidated Balance Sheets		5
Consolidated Statements of Cash Flows		6
Notes to the Consolidated Financial Statements		7
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations		3646
Item 3 – Quantitative and Qualitative Disclosures about Market Risk		4263
Item 4 – Disclosure Controls and Procedures		42
Item 4 – Controls and Procedures		65
Part II – Other Information
Item 1 – Legal Proceedings		4366
Item 3 – Defaults Upon Senior Securities		4366
Item 6 – Exhibits and Reports on Form 8-K		43
Item 6 – Exhibits		66
Signatures		4467
Exhibits		4568

FORWARD-LOOKING STATEMENTS

Certain statements contained or incorporated in this Quarterly Report on Form 10-Q which are not statements of historical fact constitute “Forward-Looking Statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”).

Forward-looking statements give current expectations or forecasts of future events. Words such as “anticipate”, “~~expect~~believe”, “~~intend~~estimate”, “~~plan~~expect”, “~~believe~~intend”, “~~seek~~plan”, “~~estimate~~seek” and other words and terms of similar meaning in connection with discussions of future operating or financial performance signify forward-looking statements. From time to time, Federal-Mogul Corporation (the “Company”) also may provide oral or written forward-looking statements in other materials released to the public. Such statements are made in good faith by the Company pursuant to the “Safe Harbor” provisions of the Reform Act.

Any or all forward-looking statements included in this report or in any other public statements may ultimately be incorrect. Forward-looking statements may involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance, experience or achievements of the Company to differ materially from any future results, performance, experience or achievements expressed or implied by such forward-looking statements. The Company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise.

These are some of the factors that could potentially cause actual results to differ materially from expected and historical results. Other factors besides those listed here could also materially affect the Company’s business.

Chapter 11 Filing

• Factors relating to ~~the Company~~Federal-Mogul’s filing for Chapter 11 in the U.S. and the filing for Administration by certain of Federal-Mogul’s subsidiaries in the U.K. such as: the possible disruption of relationships with creditors, customers, and employees; the Company’s ability to ~~develop and~~ implement aits plan of reorganization in the U.S. and ~~scheme~~schemes of arrangement in the U.K.; the outcome of asbestos litigation proceedings; and the Company’s compliance with its debtor-in-possession credit facility.

Legal and Environmental Proceedings

• Legal actions and claims of undetermined merit and amount involving, among other things, product liability, warranty, recalls of products manufactured or sold by the Company, and environmental and safety issues involving the Company’s products or facilities.

• The merit and amount of claims to reinsurance carriers for asbestos -related claims, and the financial viability of and resources available to the reinsurance carriers to meet these claims.

Business Environment and Economic Conditions

• The Company’s ability to generate cost savings or manufacturing efficiencies to offset or exceed contractually or competitively required price reductions or price reductions to obtain new business.

• Variations in the financial or operational condition of the Company’s significant customers, particularly the world’s original equipment ~~(“OE”)~~ manufacturers of commercial and personal vehicles.

• ~~Material~~Fluctuations ~~shortages,~~in ~~transportation~~the ~~system~~price ~~delays,~~and oravailability ~~other~~of ~~difficulties~~raw inmaterials ~~markets~~and ~~where~~other ~~the Company purchases~~ supplies ~~for~~used in the manufacturing and distribution of ~~its~~the Company’s products.

• ~~Significant~~Material ~~work stoppages~~shortages, ~~disputes~~transportation system delays, or ~~any~~ other difficulties in ~~labor~~ markets where the Company ~~obtains~~purchases ~~materials~~supplies ~~necessary~~ for the ~~manufacture~~manufacturing of its products ~~or where its products are manufactured, distributed or sold~~.

• ~~Increased~~Significant ~~development~~work ~~of fuel cells~~stoppages, ~~hybrid-electric~~disputes, or any other ~~non-combustion~~difficulties ~~engine~~in ~~technologies~~labor markets where the Company obtains materials necessary for the manufacturing of its products or where its products are manufactured, distributed or sold.

• ~~The~~Increased ~~Company’s~~development ~~ability~~of tofuel ~~obtain cash adequate to fund its needs~~cells, ~~including the borrowings available under its debtor~~hybrid-~~in-possession~~electric ~~credit facility and the availability of financing for the Company’s subsidiaries not included under the voluntary filing for Chapter 11 in the U.S.~~ or ~~Administration~~other innon-combustion ~~the~~engine Utechnologies.K.

• ~~Fluctuations~~The inCompany’s ability to obtain cash adequate to fund its needs, including the ~~global~~borrowings ~~securities~~available ~~markets~~under ~~which~~its ~~directly~~debtor-in-possession ~~impact~~credit facility and the ~~valuation~~availability of ~~assets~~financing ~~supporting~~for the Company’s ~~pension~~subsidiaries ~~plans~~not included under the voluntary filing for Chapter 11 in the U.S. or Administration in the U.K.

•

Changes in actuarial assumptions, interest costs and discount rates, and fluctuations in the global securities markets which directly impact the valuation of assets and liabilities associated with the Company’s pension and other postemployment benefit plans.

Other Factors

• Various worldwide economic, political and social factors, changes in economic conditions, currency fluctuations and devaluations, credit risks in emerging markets, or political instability in foreign countries where the Company has significant manufacturing operations, customers, or suppliers.

• ~~New~~Physical ordamage ~~expanded~~to ~~litigation~~or ~~activity~~loss ~~regarding~~of ~~alleged~~significant ~~asbestos~~manufacturing ~~claims~~or ~~against~~distribution ~~subsidiaries~~property, ofplant ~~the~~and ~~Company~~equipment ~~not~~due ~~included~~to infire, ~~either~~weather ~~the~~or ~~U.S.~~other ~~Chapter~~factors 11beyond or the ~~U.K.~~Company’s ~~Administration Proceedings~~control.

• ~~Legislative~~New ~~activities~~or ofexpanded ~~governments,~~litigation ~~agencies,~~activity ~~and~~regarding ~~similar~~alleged ~~organizations,~~asbestos ~~both~~claims inagainst subsidiaries of the ~~United~~Company ~~States~~not ~~and~~included in ~~foreign~~either ~~countries,~~the ~~that~~U.S. ~~may~~Chapter ~~affect~~11 or the ~~Company~~U.K. ~~and~~Administration ~~its operations~~Proceedings.

• ~~Possible~~Legislative ~~terrorist~~activities ~~attacks~~of orgovernments, ~~acts~~agencies, ofand ~~aggression~~similar ~~or war~~organizations, ~~which~~both ~~could~~in ~~exacerbate~~the ~~other~~United ~~risks~~States ~~such~~and asin ~~reduced~~foreign ~~vehicle~~countries, ~~production~~that ormay ~~interruptions~~affect inthe operations of the ~~transportation~~Company, ~~system~~including the Fairness in Asbestos Injury Resolution Act of 2005.

•

Possible terrorist attacks or acts of aggression or war, that could exacerbate other risks such as slowed vehicle production or the availability of supplies for the manufacturing of the Company’s products.

PART I ~~– FINANCIAL INFORMATION~~

~~Item~~FINANCIAL 1.INFORMATION ~~Financial Statements~~

ITEM 1. FINANCIAL STATEMENTS

FEDERAL-MOGUL CORPORATION

Consolidated Statements of Operations (Unaudited)

(Millions of Dollars, Except Per Share Amounts)


	Three Months Ended June 30						Six Months Ended June 30
	2005			2004			2005			2004
	(Millions of Dollars, Except Per Share Amounts)
Net sales	$	1,665.4		$	1,571.2		$	3,298.6		$	3,117.7
Cost of products sold		1,373.6			1,251.2			2,731.9			2,501.2

Gross margin		291.8			320.0			566.7			616.5

Selling, general and administrative expenses		226.3			234.0			476.0			475.8
Adjustment of long-lived assets to fair value		1.0			20.0			4.0			23.1
Interest expense, net		33.8			24.3			62.6			49.9
Chapter 11 and Administration related reorganization expenses		20.2			34.4			50.2			60.4
Equity earnings of unconsolidated affiliates		(12.0	)		(10.7	)		(21.3	)		(20.2	)
Other expense, net		9.5			3.4			3.9			12.1

Earnings (loss) from continuing operations before income tax expense		13.0			14.6			(8.7	)		15.4
Income tax expense		24.6			20.6			51.2			40.6

Loss from continuing operations		(11.6	)		(6.0	)		(59.9	)		(25.2	)
Loss from discontinued operations, net of income tax expense		—			(3.0	)		—			(4.2	)

Net loss	$	(11.6	)	$	(9.0	)	$	(59.9	)	$	(29.4	)

Basic and diluted loss per common share:
Loss from continuing operations	$	(0.13	)	$	(0.07	)	$	(0.67	)	$	(0.29	)
Loss from discontinued operations, net of income tax expense		—			(0.04	)		—			(0.05	)

Net loss per common share	$	(0.13	)	$	(0.11	)	$	(0.67	)	$	(0.34	)

	Three Months Ended September 30						Nine Months Ended September 30
	2003			2002			2003			2002
Net sales	$	1,346.4		$	1,345.2		$	4,200.9		$	4,133.6
Cost of products sold		1,095.8			1,095.5			3,374.7			3,331.3
Gross margin		250.6			249.7			826.2			802.3
Selling, general and administrative expenses		212.7			206.4			667.7			623.6
Restructuring charges		8.1			17.0			28.3			28.0
Adjustment of assets held for sale and other long-lived assets to fair value		0.9			24.6			4.5			27.2
Interest expense, net		23.1			29.8			74.4			90.0
Chapter 11 and Administration related reorganization expenses		25.7			33.4			85.4			76.4
Other (income) expense, net		(2.9	)		2.5			(16.9	)		(4.2	)
Loss before income tax expense and cumulative effect of change in accounting principle		(17.0	)		(64.0	)		(17.2	)		(38.7	)
Income tax expense		12.5			9.3			51.6			59.8
Loss before cumulative effect of change in accounting principle		(29.5	)		(73.3	)		(68.8	)		(98.5	)
Cumulative effect of change in accounting principle, net of applicable income tax benefit		—			—			—			1,417.9
Net loss attributable to common shareholders	$	(29.5	)	$	(73.3	)	$	(68.8	)	$	(1,516.4	)
Loss Per Common Share:
Basic and Diluted
Loss per common share before cumulative effect of change in accounting principle	$	(0.34	)	$	(0.89	)	$	(0.79	)	$	(1.19	)
Net loss per common share	$	(0.34	)	$	(0.89	)	$	(0.79	)	$	(18.41	)

See accompanying notes to unaudited consolidated financial statements.

See accompanying notes.

FEDERAL-MOGUL CORPORATION

Consolidated Balance Sheets

(Millions of Dollars)


	(Unaudited) June 30 2005			December 31 2004
	(Millions of Dollars)
ASSETS
Current assets:
Cash and equivalents	$	756.1		$	700.6
Accounts receivable, net		1,115.5			1,049.5
Inventories, net		908.8			952.9
Prepaid expenses and other current assets		230.0			230.9

Total current assets		3,010.4			2,933.9

Property, plant and equipment, net		2,143.5			2,363.9
Goodwill and indefinite-lived intangible assets		1,278.7			1,283.7
Definite-lived intangible assets, net		312.4			335.3
Asbestos-related insurance recoverable		810.2			853.8
Prepaid pension costs		178.6			257.4
Other noncurrent assets		214.1			237.2

	$	7,947.9		$	8,265.2

LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Short-term debt, including current portion of long-term debt	$	398.2		$	309.6
Accounts payable		407.4			435.9
Accrued liabilities		539.1			559.7
Other current liabilities		136.6			145.6

Total current liabilities		1,481.3			1,450.8

Liabilities subject to compromise		5,999.8			6,018.5

Long-term debt		7.5			10.1
Postemployment benefits		2,239.9			2,355.9
Long-term portion of deferred income taxes		107.9			102.0
Other accrued liabilities		210.2			221.2
Minority interest in consolidated affiliates		31.2			32.4

Shareholders’ deficit:
Series C ESOP preferred stock		28.0			28.0
Common stock		445.3			445.3
Additional paid-in capital		2,150.7			2,148.0
Accumulated deficit		(3,327.8	)		(3,267.9	)
Accumulated other comprehensive loss		(1,426.1	)		(1,279.1	)

Total shareholders’ deficit		(2,129.9	)		(1,925.7	)

	$	7,947.9		$	8,265.2

	(Unaudited) September 30 2003			December 31 2002
ASSETS
Cash and equivalents	$	472.8		$	395.1
Accounts receivable, net		978.2			954.0
Inventories, net		801.9			800.1
Prepaid expenses and other current assets		223.4			209.9
Total Current Assets		2,476.3			2,359.1
Property, plant and equipment, net		2,323.3			2,273.0
Goodwill and indefinite-lived intangible assets		1,592.9			1,565.2
Definite-lived intangible assets, net		347.5			351.6
Asbestos-related insurance recoverable		801.3			780.6
Prepaid pension costs		294.2			361.5
Other noncurrent assets		216.8			222.3
Total Assets	$	8,052.3		$	7,913.3
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Short-term debt, including current portion of long-term debt	$	14.3		$	346.1
Accounts payable		340.4			318.9
Accrued compensation		236.8			242.1
Restructuring reserves		63.9			90.8
Accrued income taxes		52.5			43.1
Other accrued liabilities		362.8			363.4
Total Current Liabilities		1,070.7			1,404.4
Liabilities subject to compromise		6,063.1			6,053.2
Long-term debt		321.8			14.3
Postemployment benefits		1,589.7			1,541.2
Deferred income taxes		61.0			52.4
Other accrued liabilities		211.5			205.7
Minority interest in consolidated subsidiaries		48.6			45.7
Shareholders’ Deficit:
Series C ESOP preferred stock		28.0			28.0
Common stock		435.6			435.6
Additional paid-in capital		2,060.5			2,060.5
Accumulated deficit		(2,812.7	)		(2,743.9	)
Accumulated other comprehensive loss		(1,025.5	)		(1,183.7	)
Other		—			(0.1	)
Total Shareholders’ Deficit		(1,314.1	)		(1,403.6	)
Total Liabilities and Shareholders’ Deficit	$	8,052.3		$	7,913.3

See accompanying notes to unaudited consolidated financial statements.

See accompanying notes.

FEDERAL-MOGUL CORPORATION

Consolidated Statements of Cash Flows (Unaudited)

(Millions of Dollars)


	Six Months Ended June 30
	2005			2004
	(Millions of Dollars)
Cash provided from (used by) operating activities
Net loss	$	(59.9	)	$	(29.4	)
Adjustments to reconcile net loss to net cash provided from operating activities:
Depreciation and amortization		178.6			166.7
Adjustment of long-lived assets to fair value		4.0			23.1
Change in postemployment benefits, including pensions		68.8			45.8
Change in deferred taxes		19.1			11.9
Changes in operating assets and liabilities:
Increase in accounts receivable		(114.7	)		(91.7	)
Increase in inventories, net of involuntary conversion in 2004		(2.7	)		(91.3	)
(Decrease) increase in accounts payable		(1.9	)		88.2
Changes in other assets and liabilities, net of involuntary conversion in 2004		(13.3	)		102.5
Insurance proceeds from involuntary conversion		—			55.0

Net cash provided from operating activities		78.0			280.8

Cash provided from (used by) investing activities
Expenditures for property, plant and equipment		(84.9	)		(132.1	)
Net proceeds from the sale of property, plant and equipment		10.4			13.0

Net cash used by investing activities		(74.5	)		(119.1	)

Cash provided from (used by) financing activities
Proceeds from borrowings on DIP credit facility		85.1			—
Principal payments on DIP credit facility		—			(41.7	)
Increase (decrease) in short-term debt		7.2			(3.5	)
Decrease in other long-term debt		(1.6	)		(1.7	)

Net cash provided from (used by) financing activities		90.7			(46.9	)

Effect of foreign currency exchange rate fluctuations on cash		(38.7	)		3.7

Increase in cash and equivalents		55.5			118.5

Cash and equivalents at beginning of period		700.6			472.4

Cash and equivalents at end of period	$	756.1		$	590.9

	Nine Months EndedSeptember 30
	2003			2002
Cash Provided From (Used By) Operating Activities
Net loss	$	(68.8	)	$	(1,516.4	)
Adjustments to reconcile net loss to net cash provided from operating activities:
Cumulative effect of change in accounting principle		—			1,464.5
Depreciation and amortization		227.5			206.9
Restructuring charges		28.3			28.0
Chapter 11 and Administration related reorganization expenses		85.4			76.4
Adjustment of assets held for sale and other long-lived assets to fair value		4.5			27.2
Loss (gain) on sales of businesses		7.9			(4.7	)
Change in postemployment benefits, including pensions		87.0			58.5
Deferred taxes		26.0			(21.1	)
Decrease (increase) in accounts receivable		11.7			(67.1	)
Decrease (increase) in inventories		19.0			(60.9	)
(Decrease) increase in accounts payable		(2.0	)		16.2
Changes in other assets and liabilities		(34.2	)		66.0
Payments against restructuring reserves		(59.1	)		(27.0	)
Payments for Chapter 11 and Administration related reorganization expenses		(64.1	)		(57.7	)
Net Cash Provided From Operating Activities		269.1			188.8
Cash Provided From (Used By) Investing Activities
Expenditures for property, plant and equipment		(214.8	)		(228.1	)
Net proceeds from sales of businesses		23.6			25.5
Net Cash Used By Investing Activities		(191.2	)		(202.6	)
Cash Provided From (Used By) Financing Activities
(Decrease) increase in short-term debt		(17.1	)		3.3
Borrowings on DIP credit facility		105.5			—
Principal payments on DIP credit facility		(110.2	)		(10.0	)
(Decrease) increase in other long-term debt		(2.5	)		0.4
Net Cash Used By Financing Activities		(24.3	)		(6.3	)
Effect of Foreign Currency Exchange Rate Fluctuations on Cash		24.1			12.5
Increase (Decrease) in Cash and Equivalents		77.7			(7.6	)
Cash and Equivalents at Beginning of Period		395.1			346.9
Cash and Equivalents at End of Period	$	472.8		$	339.3

See accompanying notes to unaudited consolidated financial statements.

See accompanying notes.

FEDERAL-MOGUL CORPORATION

Notes to Consolidated Financial Statements (Unaudited)

~~September~~June 30, ~~2003~~2005

1. ~~BASIS~~Basis OFof ~~PRESENTATION~~Presentation

Interim Financial Statements: The unaudited consolidated financial statements of Federal-Mogul Corporation (“Federal-Mogul” or the “Company”) have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. These statements include all adjustments (consisting of normal recurring adjustments) that management believes are necessary to present a fair statement of the results of operations, financial position and cash flows. The Company’s management believes that the disclosures are adequate to make the information presented not misleading when read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, as filed with the Securities and Exchange Commission.

The accompanying unaudited consolidated financial statements of Federal-Mogul Corporation (“Federal-Mogul” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2003~~2005 are not necessarily indicative of the results that may be expected for the year ended December ~~31, 2003. For further information, refer to the consolidated financial~~ ~~statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December~~ 31, ~~2002~~2005. Certain items in the ~~2002~~2004 consolidated financial statements have been reclassified to conform to the presentation used in ~~2003~~the current period.

~~New~~Financial ~~Accounting~~Statement ~~Pronouncements~~Presentation: On October 1, 2001 (the “Petition Date”), the Company and all of its wholly-owned United States subsidiaries filed voluntary petitions for reorganization (the “U.S. Restructuring”) under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). Also on October 1, 2001, certain of the Company’s United Kingdom subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court, and filed petitions for Administration (the “U.K. Restructuring”) under the United Kingdom Insolvency Act of 1986 (the “Act”) in the High Court of Justice, Chancery division in London, England (the “High Court”). The Company and its U.S. and U.K. subsidiaries included in the U.S. Restructuring or the U.K. Restructuring are herein referred to as the “Debtors.” The U.S. Restructuring and U.K. Restructuring are herein referred to as the “Restructuring Proceedings.” The Chapter 11 cases of the Debtors (collectively, the “Chapter 11 Cases”) have been consolidated for purposes of joint administration as In re: Federal-Mogul Global Inc., T&N Limited, et al (Case No. 01-10578(RTL)). Subsidiaries outside of the aforementioned U.S. and U.K. subsidiaries are not party to any insolvency proceeding and, therefore, are not currently provided protection from creditors by any insolvency court and are operating in normal course. The Chapter 11 Cases are further discussed in Note 2 to the consolidated financial statements.

~~Accounting~~The accompanying ~~for~~consolidated ~~Costs~~financial ~~Associated~~statements have been prepared in accordance with ~~Exit~~AICPA Statement of Position 90-7 (“SOP 90-7”), “Financial Reporting by Entities in Reorganization under the Bankruptcy Code” and on a going concern basis, which contemplates continuity of operations and realization of assets and liquidation of liabilities in the ordinary course of business. However, as a result of the Restructuring Proceedings, such realization of assets and liquidation of liabilities, without substantial adjustments to amounts and/or ~~Disposal~~changes ~~Activities~~of ownership, is highly uncertain. While operating as debtors-in-possession (“DIP”) under the protection of Chapter 11 of the Bankruptcy Code and Administration under the Act, and subject to approval of the Bankruptcy Court, Administrators or the High Court or otherwise as permitted in the ordinary course of business, the Debtors, or some of them, may sell or otherwise dispose of assets and liquidate or settle liabilities for some amounts other than those reflected in the consolidated financial statements. Further, a confirmed plan of reorganization, scheme of arrangement, or company voluntary arrangement could materially change the amounts and classifications in the historical consolidated financial statements.

~~In June 2002, the Financial Accounting Standards Board~~The ~~(FASB)~~appropriateness ~~issued Statement~~ of ~~Financial~~using ~~Accounting~~the ~~Standards~~going ~~(“SFAS”)~~concern ~~No.~~basis ~~146, “Accounting~~ for ~~Costs~~the ~~Associated~~Company’s ~~with Exit or Disposal Activities”. This pronouncement addresses accounting and~~ financial ~~reporting~~statements ~~for~~is ~~costs~~dependent ~~associated with~~upon, anamong ~~exit~~other ~~activity~~things: (~~including restructuring~~i) ~~or with~~ the ~~disposal~~Company’s ofability ~~long-lived~~to ~~assets~~comply ~~and~~with ~~supersedes~~the ~~Emerging~~terms ~~Issues~~of ~~Task~~the ~~Force~~DIP ~~Issue~~credit ~~(“EITF”)~~facility ~~No.~~and ~~94-3.~~any ~~Under~~cash ~~SFAS~~management ~~No.~~order entered ~~146,~~by athe ~~liability~~Bankruptcy isCourt ~~recorded~~in ~~for~~connection ~~a cost associated~~ with anthe ~~exit activity~~Chapter ~~when~~11 ~~that~~Cases; ~~liability~~(ii) isthe ~~incurred~~ability ~~and~~of ~~can~~the beCompany ~~measured~~to atmaintain ~~fair~~adequate ~~value.~~cash ~~SFAS~~on ~~No.~~hand; ~~146~~(iii) isthe ~~effective~~ability ~~prospectively~~of ~~for~~the ~~exit~~Company ~~and~~to ~~disposal~~generate ~~activities~~cash ~~initiated~~from ~~after~~operations; ~~December~~(iv) ~~31,~~confirmation ~~2002.~~of ~~SFAS~~a ~~No.~~plan(s) ~~146 does not allow for the restatement~~ of ~~previously~~ ~~issued~~reorganization ~~financial~~under ~~statements and grandfathers~~ the ~~accounting~~Bankruptcy ~~for~~Code; ~~liabilities~~(v) ~~previously~~confirmation ~~recorded~~of ~~under~~a ~~EITF~~scheme(s) ~~Issue~~of ~~No.~~arrangement ~~94-3.~~or ~~The~~company ~~Company~~voluntary ~~adopted~~arrangement(s) ~~SFAS~~in ~~No.~~the ~~146 effective January 1, 2003~~U.K. ~~The~~under ~~adoption~~Administration; ofand ~~SFAS~~(vi) ~~No.~~the ~~146~~Company’s ~~had~~ability noto ~~material~~achieve ~~effect~~profitability onfollowing ~~the Company’s~~such ~~financial statements~~confirmations.

Consolidation of Variable Interest Entities

In January 2003, the FASB issued FASB Interpretation Number 46 (FIN No. 46), “Consolidation of Variable Interest Entities”, an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”. FIN No. 46 provides guidance regarding the identification of, and financial reporting for entities over which control is achieved through means other than voting rights; such entities are considered variable interest entities. FIN No. 46 requires the consolidation of variable interest entities in which an enterprise is deemed to be the primary beneficiary, which is determined by the obligation to absorb a majority of the entity’s expected losses, the right to receive a majority of an entity’s expected residual returns or both. For variable interest entities entered into prior to February 1, 2003, the provisions of FIN No. 46 are to be applied for the first quarterly or annual period ending after December 15, 2003.

The Company is involved with various entities that may meet the criteria of a variable interest entity, principally, its joint ventures and operating leases. Management is currently evaluating such entities to determine whether consolidation is required under FIN No. 46 and to quantify the effect that adoption of FIN No. 46 will have on its consolidated financial statements.

Principles of Consolidation: The consolidated financial statements include the accounts of the Company and all domestic and international subsidiaries that are more than 50% owned. Investments in ~~Non-Consolidated~~affiliates ~~Entities~~of 50% or less but greater than 20% are accounted for using the equity method, while investments in affiliates of 20% or less are accounted for under the cost method. The Company does not hold a controlling interest in an entity based on exposure to economic risk and potential rewards (variable interest) for which it is the primary beneficiary. Further, the Company’s joint ventures are businesses established and maintained in connection with its operating strategy and are not special purpose entities.

~~Equity~~The ~~investments~~Company ~~that~~continues ~~comprise~~to ~~more~~consolidate ~~than~~all ~~20% but less than 50%~~ of ~~the outstanding~~its ~~equity~~Debtor ofsubsidiaries ~~the~~that ~~investee~~ are ~~accounted~~more ~~for~~than by50% ~~the~~owned ~~equity~~in ~~investment~~accordance ~~method~~with ~~and~~Company ~~are~~policy ~~not~~and ~~consolidated.~~with ~~Such~~Accounting ~~investments~~Research ~~aggregated $141~~Bulletin No.5 ~~million and $129.7 million at September 30~~51, ~~2003~~“Consolidated ~~and~~Financial ~~December~~Statements.” ~~31,~~The ~~2002,~~Debtors ~~respectively, and~~ are ~~included in~~operating ~~the~~their ~~consolidated~~businesses ~~balance sheets~~ as ~~“other~~debtors-in-possession ~~noncurrent~~subject ~~assets”.~~to ~~Net~~the ~~income~~provisions ~~from~~of ~~non-consolidated~~the ~~equity~~Bankruptcy ~~investments was $6~~Code.2 ~~million~~The ~~and $4~~U.9K. ~~million~~Debtors ~~for~~are ~~the~~continuing ~~quarters~~to ~~ended~~manage ~~September~~their ~~30,~~operations ~~2003~~under ~~and~~the supervision ~~2002,~~of ~~respectively.~~Administrators ~~Net~~approved ~~income~~by ~~from non-consolidated~~the ~~equity~~High ~~investments was $20~~Court.7 ~~million~~The ~~and~~Company ~~$15.9~~believes ~~million~~that ~~for~~ the ~~nine-month~~facts ~~periods ended September 30, 2003~~ and ~~2002,~~circumstances ~~respectively.~~related ~~Net~~to ~~income~~the ~~from~~Restructuring ~~non-consolidated~~Proceedings ~~equity~~continue ~~investments~~to isrequire ~~included~~consolidation inof the ~~statements~~U.K. ofDebtors ~~operations~~ as ~~“other~~ ~~income~~follows: ~~(expense), net”.~~

2• Pursuant to an agreement (“Protocol”) between the Administrators and the Company, the Company is currently in control of the day-to-day business of all U.K. ~~VOLUNTARY~~Debtors. ~~REORGANIZATION~~Additionally, ~~UNDER~~the ~~CHAPTER~~Company 11is ~~AND~~operating ~~ADMINISTRATION~~the U.K. Debtor businesses as debtors-in-possession subject to the provisions of the Bankruptcy Code. Accordingly, the Company determines the operating and financial policies and directs the on-going economic activities of the U.K. Debtors.

On• ~~October~~The 1,current ~~2001~~proposed ~~(the~~Plan ~~“Petition Date”), Federal-Mogul Corporation and all~~ of ~~its~~Reorganization ~~wholly-owned~~provides ~~United~~that ~~States subsidiaries filed voluntary petitions for reorganization (~~the “U.S. Restructuring”) under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). Also on October 1parent, ~~2001,~~which ~~certain~~is ofalso ~~the~~a ~~Company’s~~Debtor United Kingdom subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code and petitions for Administration (the “U.K. Restructuring”) under the United Kingdom Insolvency Act of 1986 (the “Act”) in the High Court of Justiceentity, ~~Chancery~~will ~~division~~emerge infrom ~~London, England (~~the ~~“High Court”). The Company and its~~ U.S. ~~and U.K. subsidiaries included in the U.S.~~ Restructuring ~~and~~concurrently ~~U.K.~~with ~~Restructuring~~all ~~are~~Debtor herein referred to as the “Debtors”. The U.S. Restructuring and U.K. Restructuring are herein referred to as the “Restructuring Proceedings”. The Chapter 11 cases of the Debtors (collectively, the “Chapter 11 Cases”) have been consolidated for purposes of joint administration as In re: Federal-Mogul Global Inc., T&N Limited, et. al (Case No. 01-10578(SLR)). The Chapter 11 Cases do not include any of the Company’s non-U.S. subsidiaries ~~outside of the U~~.~~K. subsidiaries mentioned above.~~

• The ~~Restructuring~~U.K. ~~Proceedings~~Debtor ~~were~~subsidiaries ~~initiated~~filed infor ~~response~~the toU.K. aRestructuring ~~sharply~~Proceedings ~~increasing~~to ~~number~~resolve of asbestos~~-related~~ claims. ~~and~~To ~~their~~the ~~related~~extent ~~demand~~any onsuch ~~the~~U.K. ~~Company’s~~Debtor ~~cash~~subsidiary ~~flows.~~is ~~Under~~unable to emerge from the Restructuring Proceedings, in accordance with the ~~Debtors~~ ~~expect~~Bankruptcy toCode, ~~develop~~that ~~and~~subsidiary ~~implement~~would anot ~~plan~~receive ~~for~~the ~~addressing~~benefit from the permanent channeling of asbestos~~-related~~ ~~claims~~personal ~~against~~injury ~~them.~~claimants to a trust or series of trusts established pursuant to section 524(g) of the Bankruptcy Code.

~~Consequences~~Use of Estimates: The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the ~~Restructuring~~amounts ~~Proceedings~~reported therein. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts that differ from these estimates.

~~The~~Discontinued ~~U.S.~~Operations: ~~Debtors~~During ~~are~~2004, ~~operating~~the ~~their~~Company ~~businesses~~completed ~~as debtors-in-possession subject to~~ the ~~provisions~~divestitures of ~~the~~its ~~Bankruptcy~~large ~~Code.~~bearings ~~The U.K. Debtors are continuing to manage their~~ operations ~~under~~in ~~the~~Pinetown, ~~supervision~~South ofAfrica ~~an Administrator approved by the High Court. All vendors will be paid for all goods furnished~~ and ~~services~~Uslar, ~~provided after the Petition Date. However~~Germany, asand aits ~~consequence~~transmission ofoperation ~~the~~located ~~Restructuring~~in ~~Proceedings~~Dayton, ~~pending~~Ohio. ~~litigation~~The ~~against~~aggregate ~~the~~net losses ~~Debtors as~~ of ~~the Petition~~these ~~Date~~divestitures isare ~~stayed~~reported ~~(subject~~as todiscontinued ~~certain~~operations ~~exceptions~~ in the ~~case~~Company’s ofconsolidated ~~governmental~~statements ~~authorities),~~of ~~and~~operations nofor ~~party~~the ~~may~~three ~~take~~and ~~any~~six-month ~~action~~periods toended ~~pursue~~June or30, ~~collect~~2004. ~~pre-petition~~Additional ~~claims~~financial ~~except~~information ~~pursuant~~related to ~~an order of~~ the ~~Bankruptcy Court or the High Court as~~Company’s ~~applicable.~~discontinued Itoperations is ~~the~~presented ~~Debtors’~~in ~~intention~~Note 6, to ~~address all pending and future asbestos-related claims and all other pre-petition claims through a unified plan of reorganization under~~ the ~~Bankruptcy~~Company’s ~~Code~~consolidated orfinancial ~~scheme~~statements, of“Discontinued ~~arrangement under the Act~~Operations. ”

InNew ~~the~~Accounting ~~U.S.,~~Pronouncement: ~~four~~On ~~committees~~December 16, ~~representing asbestos claimants~~2004, ~~asbestos~~ ~~property~~the ~~damage~~Financial ~~claimants,~~Accounting ~~unsecured~~Standards ~~creditors~~Board ~~and~~issued ~~equity~~Statement ~~security~~of ~~holders~~Financial ~~(collectively,~~Accounting ~~the~~Standards (“~~Committees~~SFAS”) No. ~~have~~123(R), ~~been~~“Share-Based ~~appointed~~Payment”. asSFAS ~~official~~No. ~~committees~~123(R) inrevises ~~the~~SFAS ~~Chapter~~No. ~~11 Cases and~~123, in“Accounting ~~accordance~~for ~~with~~Stock-Based ~~the~~Compensation” ~~provisions~~and ofrequires ~~the Bankruptcy~~companies ~~Code,~~to ~~have~~expense the ~~right~~fair tovalue beof ~~heard~~employee onstock ~~all~~options ~~matters~~and ~~that~~other ~~come~~forms ~~before~~of stock-based ~~the Bankruptcy Court~~compensation. The ~~Committees,~~Company ~~together~~adopted ~~with~~SFAS ~~the~~No. ~~legal~~123(R) ~~representative~~effective ~~for~~January ~~the future asbestos claimants~~1, ~~play~~2005. ~~important~~Additional ~~roles~~financial ininformation ~~the~~related ~~Restructuring~~to ~~Proceedings. In~~ the ~~U.K.,~~ ~~the~~Company’s ~~Administrator~~share-based ~~has~~payments ~~appointed~~is apresented ~~creditors~~in ~~committee~~Note 17, ~~representing~~to ~~both~~the ~~asbestos~~Company’s ~~claimants~~consolidated ~~and~~financial statements, ~~general~~“Stock-Based ~~unsecured creditors~~Compensation.”

As provided by the Bankruptcy Code, the Debtors initially had the exclusive right to propose a plan of reorganization within 120 days following the Petition Date with the Bankruptcy Court. Through subsequent court orders, the Bankruptcy Court extended the exclusivity period through March 6, 2003, on which date a plan of reorganization was filed. The filing of the initial plan of reorganization was followed by the April 21, 2003 filing of a related plan disclosure statement, which detailed the initial reorganization transaction and the U.K. scheme of arrangement. With the filing of the plan of reorganization, the Bankruptcy Court extended the exclusivity period until August 11, 2003. On July 30, 2003, the Bankruptcy Court further extended this exclusivity period until October 13, 2003.

On2. ~~August~~Voluntary ~~27,~~Reorganization ~~2003,~~under ~~the~~Chapter ~~Company~~11 ~~announced a proposed $350 million investment in the Company by CitiGroup Venture Capital Equity Partners L.P.~~ and ~~its~~Administration affiliates (“CVC”) and filed a motion with the Bankruptcy Court requesting an exclusive 90 day negotiation period with CVC in order to pursue the potential transaction. This motion was denied by the Bankruptcy Court on August 29, 2003.

On October 1, ~~2003~~2001, ~~the~~ ~~Bankruptcy~~Federal-Mogul ~~Court~~and ~~issued~~all ~~an order ending the Company’s exclusivity period. The effect~~ of ~~ending~~its ~~this~~wholly-owned ~~exclusivity~~United ~~period~~States issubsidiaries filed tovoluntary ~~permit~~petitions ~~the~~for ~~Committees,~~reorganization orunder ~~other~~Chapter ~~parties-in-interest,~~11 ~~to file alternative plans~~ of ~~reorganization. Subsequently,~~ the ~~Company~~ ~~reached~~United aStates ~~consensual~~Bankruptcy ~~agreement~~Code ~~with~~in the ~~Unsecured~~Bankruptcy ~~Creditors~~Court. ~~Committee,~~Also ~~the~~on ~~Asbestos~~October ~~Claimants Committee~~1, ~~the Future Asbestos Claimants Representative~~2001, ~~the~~certain ~~Agent~~of ~~for~~ the ~~Prepretion~~Company’s ~~Bank~~United ~~Lenders~~Kingdom ~~and~~subsidiaries ~~the~~filed ~~Equity~~voluntary ~~Committee~~petitions ~~(collectively referred~~for toreorganization asunder ~~the~~Chapter ~~“Co-Proponents”)~~11 ~~on an amended plan~~ of ~~reorganization~~the ~~that~~Bankruptcy isCode ~~consistent~~ with the ~~principal~~Bankruptcy ~~terms~~Court, ofand ~~the~~filed ~~plan~~petitions ~~filed~~for onAdministration ~~March~~under 6,the ~~2003.~~United ~~The~~Kingdom ~~next~~Insolvency ~~steps~~Act ~~for~~of 1986 in the ~~Co-Proponents~~High ~~will~~Court. beSubsidiaries ~~completion~~outside of the ~~documentation~~aforementioned ofU.S. ~~the~~and ~~amended~~U.K. ~~plan~~subsidiaries ofare ~~reorganization~~not ~~and~~party ~~related~~to ~~disclosure~~any ~~statement~~insolvency proceedings and, ~~the~~therefore, ~~joint~~are ~~filing~~not ofcurrently ~~those~~provided ~~documents~~protection ~~with~~from ~~the~~creditors ~~Bankruptcy~~by ~~Court.~~any ~~The~~insolvency ~~Bankruptcy~~court ~~Court~~and ~~has~~are ~~scheduled~~operating ain ~~hearing to approve~~ the ~~disclosure~~normal ~~statement prior to year-end~~course.

~~Although~~The ~~technical~~Restructuring ~~issues~~Proceedings ~~remain~~were toinitiated bein ~~resolved,~~response ~~the~~to ~~amended~~a ~~plan~~sharply ~~of reorganization~~increasing ~~will~~number ~~provide that the noteholders and~~ of asbestos-related ~~claimants,~~claims ~~present~~ and ~~future, will convert all of~~ their ~~claims~~demand ~~into~~on ~~equity of~~ the ~~reorganized~~ Company.’s ~~Specifically,~~cash ~~49.9%~~flows ~~of newly authorized~~ and ~~issued stock will be distributed to the noteholders, and 50~~liquidity.1% ofUnder ~~newly authorized and issued stock will be distributed to a trust or series of trusts established pursuant to Section 524(g) of~~ the ~~Bankruptcy~~Restructuring ~~Code~~Proceedings, ~~for~~ the ~~benefit~~Debtors ofexpect ~~existing and future asbestos claimants. United States trade creditors are expected~~ to ~~receive~~develop ~~yet~~and toimplement bea ~~determined distributions under the consensual~~ plan. ~~Additionally, the amended plan of reorganization will provide~~ for addressing the ~~cancellation of pre~~asbestos-~~petition~~related ~~equity~~claims ~~interests~~against ~~in exchange for warrants in the reorganized Company~~them.

~~There~~Consequences ~~are two possible types~~ of ~~U.K. schemes of arrangements. The first is under Section 425 of~~ the ~~Companies~~Restructuring ~~Act~~Proceedings of 1985, which may involve a scheme for the reconstruction of the Company. If a majority in number representing three-fourths in value of the creditors or members or any class of them agree to the compromise or arrangement, it is binding if sanctioned by the High Court. Section 425 may be invoked where there is an Administration order in force in relation to the Company. The other possible type of scheme arises under Section 1 of the Insolvency Act of 1986 in relation to Company Voluntary Arrangements (“CVA”). If a majority in value representing more than three-fourths of the creditors agrees to the compromise or arrangement set out in the CVA proposal, it will be approved.

The ~~Company~~Debtors isare ~~unable~~operating ~~to predict~~their ~~with~~businesses aas ~~high~~debtors-in-possession ~~degree~~subject to the provisions of ~~certainty~~the atBankruptcy ~~this~~Code. ~~time~~The ~~what~~U.K. ~~treatment~~Debtors ~~will~~are becontinuing ~~accorded~~to ~~under~~manage ~~any~~their ~~such~~operations ~~plan~~under the supervision of ~~reorganization~~Administrators toapproved ~~intercompany~~by ~~indebtedness,~~the ~~licenses,~~High ~~executory~~Court. ~~contracts,~~All ~~transfers~~vendors ofare being paid for all goods furnished and services, ~~and~~provided ~~other~~after ~~intercompany~~the ~~arrangements~~Petition Date. However, ~~transactions~~as ~~and~~a ~~relationships~~consequence ~~that~~of ~~were~~the ~~entered~~Restructuring ~~into~~Proceedings, ~~prior~~pending tolitigation against the Debtors as of the Petition Date. ~~Various~~is ~~parties~~stayed (subject to certain exceptions in the ~~Chapter~~case 11of ~~Cases~~governmental authorities), and no party may ~~challenge~~take ~~these~~any action ~~arrangements,~~to ~~transactions,~~pursue ~~and~~or ~~relationships,~~collect ~~and~~pre-petition ~~the~~claims ~~outcome~~except pursuant to an order of ~~those~~the ~~challenges,~~Bankruptcy ifCourt ~~any~~or the High Court, ~~may~~ ~~have~~as anapplicable. ~~impact~~It onis the ~~treatment~~Debtors’ ofintention ~~various~~to address pending and future asbestos-related claims ~~under~~and ~~such~~other ~~plan~~pre-petition claims through plans of reorganization under the Bankruptcy Code and/or schemes of arrangement or company voluntary arrangements under the Act.

~~The~~In ~~Bankruptcy~~the ~~Court~~U.S., ~~may~~four ~~confirm~~committees, arepresenting ~~plan~~asbestos ofclaimants, ~~reorganization~~asbestos ~~only~~property ~~upon~~damage ~~making~~claimants, ~~certain~~unsecured ~~findings~~creditors ~~required~~and byequity ~~the~~security ~~Bankruptcy~~holders ~~Code~~(collectively, ~~and~~the “Committees”) ahave ~~plan~~been ~~may~~appointed beas ~~confirmed~~official ~~over~~committees in the ~~dissent~~Chapter of11 ~~non-accepting~~Cases ~~creditors~~ and, ~~equity~~in ~~security holders~~accordance ifwith ~~certain~~the ~~requirements~~provisions of the Bankruptcy Code, ~~are~~have ~~met.~~the ~~The~~right ~~payment~~to ~~rights and other entitlements of pre-petition creditors and equity security holders may~~ be ~~substantially~~heard ~~altered~~on byall ~~any~~matters ~~plan~~that ofcome ~~reorganization~~before ~~confirmed in~~ the ~~Chapter~~Bankruptcy ~~11 Cases~~Court. ~~There~~The Committees, istogether nowith ~~assurance~~the ~~that~~legal ~~there~~representative ~~will~~for bethe ~~sufficient~~future ~~assets~~asbestos toclaimants, ~~satisfy~~play ~~the~~important ~~Debtors’~~roles ~~pre-petition~~in ~~liabilities~~the inRestructuring ~~whole~~Proceedings. orIn inthe ~~part~~U.K., ~~and~~ the ~~pre-petition~~Administrators ~~creditors~~have ofappointed ~~some~~creditors ~~Debtors~~committees, ~~may~~representing beboth ~~treated~~asbestos ~~differently~~claimants and ~~than~~general ~~those~~unsecured ~~of other Debtors~~creditors.

~~Chapter~~On 11June ~~Financing~~4, 2004, the Third Amended Joint Plan of Reorganization (the “Plan”) for the Company and the other U.S. and U.K. Debtors was filed with the Bankruptcy Court. The Plan was jointly proposed by the Company, the Unsecured Creditors Committee, the Asbestos Claimants Committee, the Future Asbestos Claimants Representative, the Agent for the Prepetition Bank Lenders and the Equity Security Holders Committee (collectively referred to as the “Plan Proponents”). Also on June 4, 2004, a Disclosure Statement to be used in soliciting votes to accept or reject the Plan (the “Disclosure Statement”) was approved by the Bankruptcy Court and a December 2004 hearing was scheduled to determine whether the Bankruptcy Court should approve the Plan. In part due to opposition to the Plan by the Administrators based on their view of asbestos claims, on December 7, 2004, the Bankruptcy Court delayed this confirmation hearing pending a hearing to estimate asbestos personal injury claims against the U.K. Debtors. This estimation hearing began June 14, 2005. Closing arguments were held on July 14, 2005. A ruling is pending. It is unclear whether or not the estimation will be accepted in the U.K.

InOn ~~connection~~July ~~with~~12, ~~the Restructuring Proceedings~~2004, ~~the~~solicitation ~~Company~~packages ~~entered~~containing ~~into~~the ~~a $675~~Plan ~~million~~and ~~debtor-in-possession~~Disclosure ~~(“DIP”)~~Statement, ~~credit~~various ~~facility~~supporting todocuments ~~supplement liquidity~~ and ~~fund~~a ~~operations~~ballot, ~~during~~if appropriate, ~~the~~were ~~restructuring~~mailed ~~proceedings.~~to Inknown ~~August~~creditors ~~2003,~~of the ~~DIP~~Company ~~credit~~and ~~facility~~holders ~~was~~of ~~amended~~common ~~to expire during February 2005,~~ and ~~the interest~~preferred ~~rate~~stock ~~was~~interests ~~reduced~~in ~~to either~~ the ~~alternate~~Company. ~~base~~All ~~rate~~votes ~~(“ABR”)~~were ~~plus~~due 2by ~~percentage~~the ~~points~~close orof abusiness ~~formula based~~ on ~~the~~November ~~London Inter-Bank Offered Rate (“LIBOR”) plus~~ 3, ~~percentage points~~2004. The ~~ABR~~overwhelming ismajority of the ~~greatest~~classes of ~~either~~claims ~~the~~and ~~bank’s~~interests ~~prime~~have ~~rate~~voted orto accept the ~~base~~Plan. CDFor ~~rate plus 1 percentage point or~~ the ~~federal~~few ~~funds~~classes ~~rate~~of ~~plus~~claims ½that ~~percentage~~voted ~~point.~~to ~~The~~reject ~~original~~the ~~$675~~Plan, ~~million~~the ~~commitment~~Plan ~~was~~Proponents ~~reduced~~intend to ~~$600~~either ~~million~~amend ~~in connection with~~ the ~~August~~Plan ~~2003~~so ~~facility~~as ~~amendment,~~to ~~and~~obtain ~~is mandatorily~~such ~~reduced~~classes’ byaccepting avotes ~~portion~~or ofseek ~~proceeds~~to ~~received~~confirm ~~from~~the ~~future~~Plan ~~asset~~over orthe objection ~~business~~of ~~divestitures~~such classes.

~~The~~On February 2, 2005, the Company’s ~~available~~entered ~~borrowings~~into ~~under~~an employment ~~the~~agreement ~~DIP~~with ~~credit~~José ~~facility~~Maria ~~are~~Alapont ~~determined~~under bywhich Mr. Alapont has become the ~~underlying~~Company’s ~~collateral~~president atand ~~any~~chief ~~point~~executive inofficer. ~~time,~~As ~~consisting~~part of ~~its domestic~~this ~~inventories~~employment agreement, ~~domestic~~the ~~accounts~~Plan ~~receivable,~~Proponents ~~and~~have ~~domestic~~agreed ~~property,~~to ~~plant,~~amend ~~and~~the ~~equipment~~Plan to provide Mr. Alapont ~~The~~with ~~DIP~~non-qualified ~~lenders~~stock ~~received~~options ~~permission~~to ~~from~~purchase ~~the~~common ~~lenders~~stock of the ~~Senior~~reorganized ~~Credit~~Company. ~~Agreements~~Significant toterms ~~have~~and ~~priority~~conditions ~~over~~of ~~their~~the ~~collateral~~contemplated ~~interest.~~stock ~~The~~options ~~borrowing~~are ~~base available~~outlined toin the ~~Company~~employment isagreement previously filed with the SEC on Form 8-K dated February 2, 2005.

The Plan provides that asbestos personal injury claimants, both present and future, will be permanently channeled to a ~~calculated~~trust ~~weekly~~or ~~based~~series ~~upon~~of ~~the~~trusts ~~value~~established pursuant to Section 524(g) of ~~this~~the ~~underlying~~Bankruptcy ~~collateral~~Code, thereby protecting the Company and its affiliates in the Chapter 11 Cases from existing and future asbestos liability. ~~The~~Although ~~total~~certain ~~commitment~~issues remain to be resolved, including the issues of the quantity and ~~amounts~~amount of asbestos and pension claims against the U.K. Debtors, the Plan provides that all currently outstanding onstock of the ~~DIP~~Company ~~credit~~will ~~facility~~be ~~are~~cancelled, asand ~~follows~~50.1% of newly authorized and issued ~~(in~~common ~~millions~~stock of ~~dollars):~~reorganized Federal-Mogul will be distributed to the asbestos trusts, and 49.9% of the newly authorized and issued common stock will be distributed pro rata to the noteholders. In addition, the holders of currently outstanding common and preferred stock of the Company will receive warrants that may be used to purchase shares of reorganized Federal-Mogul at a predetermined exercise price.

	September 302003		December 312002
Contractual commitment	$	600.0	$	675.0
Mandatory commitment reductions – divestitures		—		(27.0	)
Current commitment	$	600.0	$	648.0
Outstanding:
Current borrowings	$	310.0	$	314.7
Letters of credit		17.9		14.0
Total outstanding		327.9		328.7
Available to borrow		240.5		200.3
Total borrowing base	$	568.4	$	529.0

Unsecured creditors, including trade creditors, of the U.S. Debtors are projected to receive cash distributions under the Plan equal to 35% of their allowed claims, payable in three annual installments, provided that the aggregate of all allowed unsecured claims against the U.S. Debtors does not exceed $258 million. Any excess above this amount could result in a reduction in the percentage distribution that the unsecured creditors of the U.S. Debtors ultimately receive. Unsecured creditors, including trade creditors, of the U.K. Debtors will receive distributions that vary according to terms specified within the Plan and Disclosure Statement.

~~The~~There ~~DIP~~are ~~credit facility~~two ~~contains~~possible ~~restrictive~~types ~~covenants~~of U.K. schemes of arrangements. The ~~more~~first ~~significant~~is under Section 425 of ~~these~~the ~~covenants~~Companies ~~include~~Act of 1985, which may involve a scheme for the ~~maintenance~~reconstruction of ~~certain~~the ~~levels~~Company. ofIf ~~earnings~~a ~~before~~majority ~~interest,~~in ~~taxes,~~number ~~depreciation~~representing ~~and~~three-fourths ~~amortization~~in ~~and~~value ~~limitations~~of onthe ~~quarterly~~creditors ~~capital~~or ~~expenditures. Additional~~members ~~covenants~~or ~~include,~~any ~~but~~class ~~are~~of ~~not~~them ~~limited~~agree to the compromise or arrangement, it ~~limitations~~is onbinding if sanctioned by the ~~early~~High ~~retirement~~Court. ofSection ~~debt,~~425 ~~additional~~may ~~borrowings,~~be ~~payment~~invoked where there is an Administration order in force in relation to the Company. The other possible type of ~~dividends~~scheme ~~and~~arises under Section 1 of the ~~sale~~Insolvency Act of ~~assets~~1986 in relation to Company Voluntary Arrangements (“CVA”). If a majority in value representing more than three-fourths of the creditors agrees to the compromise or ~~businesses~~arrangement set out in the CVA proposal, it will be approved.

~~Financial~~The ~~Statement~~Plan ~~Presentation~~Proponents have prepared forms of Schemes of Arrangement and CVAs to be submitted for the U.K. Debtors in the U.K. Restructuring proceedings. These forms of Schemes of Arrangement and CVAs parallel the provisions of the Plan to the fullest extent possible under English and Scottish insolvency law. Under English and Scottish law, the Administrators are the only persons with authority to recommend and submit Schemes of Arrangement and/or CVAs. The Administrators have not yet agreed to recommend the Schemes of Arrangement and CVAs that parallel the Plan. If an agreement on the Schemes of Arrangements and CVAs cannot be reached, the Plan Proponents will work toward an agreement with the Administrators to retain the businesses of those U.K. Debtors that are valuable to Federal-Mogul and its customers and to jointly market those U.K. Debtors that are not valuable to Federal-Mogul and its customers. This process is consistent with the Company’s strategy to focus on core business segments, and to consider for divestiture or other exit activities those non-core operations determined by management not to have a sustainable competitive advantage.

~~The~~In ~~accompanying~~October ~~consolidated~~2004, ~~financial~~the ~~statements~~Administrators ~~have~~applied ~~been~~to ~~prepared~~the inHigh ~~accordance~~Court ~~with~~for ~~AICPA~~directions ~~Statement~~related ofto: ~~Position~~1) ~~90-7 (“SOP~~questions ~~90-7”),~~of ~~“Financial~~fairness ~~Reporting~~of bythe ~~Entities~~Plan; in2) ~~Reorganization~~the ~~under~~approach of the ~~Bankruptcy~~High ~~Code”~~Court to CVAs and onschemes aof ~~going~~arrangement ~~concern~~designed ~~basis,~~to ~~which~~implement ~~contemplates~~the ~~continuity~~Plan ofwithin ~~operations~~the U.K.; ~~and~~3) ~~realization~~the ofcompatibility ~~assets~~with ~~and~~English ~~liquidation~~pension laws of ~~liabilities~~the inproposals for the ~~ordinary~~ ~~course~~trustees of ~~business.~~pension ~~However,~~schemes asof athe ~~result~~U.K. ofdebtors; ~~the~~and ~~Restructuring~~4) ~~Proceedings,~~the ~~such~~impact ~~realization~~under ofEnglish ~~assets~~insolvency ~~and~~law ~~liquidation~~should ofthe ~~liabilities,~~Administrators ~~without~~not ~~substantial~~propose ~~adjustments~~CVAs and~~/or~~ ~~changes~~schemes of ~~ownership,~~arrangement. isIn response ~~highly~~to ~~uncertain.~~the ~~Given~~application ~~this~~for ~~uncertainty~~directions, ~~there~~ isthe ~~substantial~~High ~~doubt~~Court ~~about~~directed the ~~ability~~Administrators to not propose schemes of ~~the~~arrangement ~~Company~~and toCVAs ~~continue~~consistent aswith athe ~~going~~draft ~~concern.~~schemes ~~While~~and ~~operating~~draft asCVAs ~~debtors-in-possession~~included ~~under~~within the ~~protection~~currently offiled ~~Chapter~~Plan 11without offurther order of the ~~Bankruptcy~~High ~~Code~~Court. ~~and~~In ~~Administration~~addition, ~~under~~ the ~~Act,~~High ~~and~~Court ~~subject~~directed the Administrators to ~~approval~~ not convene meetings of creditors of the ~~Bankruptcy~~U.K. ~~Court,~~Companies ~~Administrator~~pursuant to any demands or ~~the~~requisitions ~~High~~made ~~Court~~pursuant orto ~~otherwise~~the asPlan. ~~permitted~~Additionally, inthe High Court granted the Administrators ~~ordinary~~leave ~~course~~to ofmodify ~~business~~their consent, ~~the~~if ~~Debtors~~necessary, orto ~~some~~the directors of the U.K. Debtors, ~~may~~exercising ~~sell~~any orpowers ~~otherwise~~they ~~dispose~~might ofhave ~~assets~~to ~~and~~a) ~~liquidate~~promote and/or ~~settle~~confirm ~~liabilities~~the ~~for~~Plan; ~~some~~or ~~amounts other~~b) ~~than~~file ~~those~~or ~~reflected~~continue any motion in the ~~consolidated~~Bankruptcy ~~financial~~Court ~~statements.~~which ~~Further,~~seeks relief ain ~~plan~~relation ofto ~~reorganization~~the Administrators or ~~scheme~~the ofU.K. ~~arrangement~~Debtors. ~~could~~This ~~materially~~was ~~change~~part of the ~~amounts~~Administrators efforts, and ~~classifications~~those inof certain creditors of the ~~historical~~U.K. ~~consolidated~~Debtors, ~~financial~~to ~~statements~~oppose the Plan.

Virtually all of the Company’s pre-petition debt is in default. At September 30, 2003, the Debtors’ pre-petition debt is classified under the caption “Liabilities subject to compromise”. This includes debt outstanding of $1,905.3 million under the pre-petition Senior Credit Agreements and $2,118.1 million of other outstanding debt, primarily notes payable at various unsecured rates, less capitalized debt issuance fees of $33.0 million. The carrying value of the pre-petition debt will be adjusted once it has become an allowed claim by the Bankruptcy Court to the extent the related carrying value differs from the amount of the allowed claim. Such adjustment may be material to the consolidated financial statements.

As a result of the Restructuring Proceedings, the Company is in default to its affiliate holder of its convertible junior subordinated debentures and is no longer accruing interest expense or making interest payments on the debentures. As a result, the affiliate no longer has the funds available to pay distributions on the Company-Obligated Mandatorily Redeemable Preferred Securities and stopped accruing and paying such distributions on October 1, 2001. The affiliate is in default on the Company-Obligated Mandatorily Redeemable Preferred Securities. The Company is a guarantor on the outstanding debentures and, as a result of the default, the Company has become a debtor to the holders of the debentures directly. This liability is a pre-petition liability. As a result, the Company has classified these securities as “Liabilities subject to compromise” in the consolidated balance sheets.

As reflected in the consolidated financial statements, “Liabilities subject to compromise” refers to Debtors’ liabilities incurred prior to the commencement of the Restructuring Proceedings. The amounts of the various liabilities that are subject to compromise are set forth below. These amounts represent the Company’s estimate of known or potential pre-petition claims to be resolved in connection with the Restructuring Proceedings. Such claims

If the Plan Proponents and the Administrators cannot reach an agreement regarding either Schemes of Arrangement and CVAs ~~remain~~that ~~subject~~parallel tothe ~~future~~Plan ~~adjustments.~~or ~~Future~~the ~~adjustments~~means ~~may~~by ~~result~~which ~~from~~the ~~(i)~~Company ~~negotiations;~~will ~~(ii)~~retain ~~actions~~the businesses of those U.K. Debtors that are valuable to the ~~Bankruptcy~~Company ~~Court~~and its customers, ~~High~~then ~~Court~~the Company believes one or ~~Administrator;~~more of the following may occur with respect to each U.K. Debtor: (~~iii~~a) ~~further~~the ~~developments~~High Court may be asked by the Plan Proponents to approve the Plan with respect to ~~disputed~~the ~~claims~~U.K. Debtors as a matter of comity; or (ivb) ~~rejection~~the Company may bid for those businesses and/or assets of ~~executory~~the ~~contracts~~U.K. Debtors that are valuable to the Company and ~~unexpired~~its ~~leases;~~customers ~~(v)~~and any actual or deemed transfer of assets to the ~~determination~~Company asin connection therewith shall be entitled to the ~~value~~benefits of ~~any~~the ~~collateral~~injunction ~~securing~~pursuant ~~claims;~~to Section 524(vig) ~~proofs~~ of ~~claim;~~the orBankruptcy Code. The Plan provides that if the Company is not the successful bidder, the injunction pursuant to Section 524(~~vii~~g) of the Bankruptcy Code shall not apply to the transfer of any assets to any entity other ~~events~~than the Company or its designee. ~~Payment~~As a result, the Company believes that, in the event ~~terms~~the assets of the U.K. debtors are marketed for ~~these~~public ~~claims~~sale, the Company ultimately will be ~~established~~the insuccessful ~~connection~~bidder for those assets that are valuable to the Company and its customers. Any remaining assets would be liquidated. The Company believes that such a non-consensual process with the ~~Restructuring~~Administrators ~~Proceedings~~is not in the best interest of the creditors of the U.K. Debtors, including pension creditors, and employees of the U.K. Debtors, and that the failure to arrive at a consensual plan could be damaging to the interests of such parties.

~~Liabilities~~The ~~subject~~Administrators have applied to the ~~compromise~~High ~~are~~Court ~~comprised~~for a direction to terminate the Protocol at such time when the Administrators deem it appropriate as part of ~~(in~~a ~~millions~~process to realize the business and assets of ~~dollars~~the U.K. Debtors. The Company and the other Plan Proponents have not consented to a realization of the assets of the U.K. Debtors and do not believe that a realization (absent approval by the U.S. Court, by agreement or otherwise): is consistent with U.S. law as Chapter 11 cases exist for each of the U.K. Debtors. The Company and Plan Proponents continue to work to resolve disagreements with the Administrators and accommodate the difference between U.K. and U.S. law.

	September 302003		December 312002
Debt	$	3,990.4	$	3,982.7
Asbestos liabilities		1,571.2		1,565.1
Company-obligated mandatorily redeemable securities		211.0		211.0
Accounts payable		199.8		211.9
Interest payable		43.0		43.9
Environmental liabilities		27.3		22.9
Other liabilities		20.4		15.7
Subtotal		6,063.1		6,053.2
Intercompany payables to Affiliates		3,128.1		3,092.7
Liabilities subject to compromise	$	9,191.2	$	9,145.9

The Company cannot predict at this time the outcome of the court proceedings or the discussion between the Company and the Administrators or the effect on the viability of the Plan. The Company is also unable to predict at this time what treatment will be accorded to claims arising against the U.K. Debtors arising from intercompany indebtedness, licenses, executory contracts, transfers of goods and services, and other intercompany arrangements, transactions and relationships that were entered into prior to the Petition Date.

~~Chapter~~The 11Bankruptcy ~~and Administration~~Court ~~related~~may ~~reorganization~~confirm ~~expenses~~a inplan ~~the~~of ~~consolidated~~reorganization ~~statements~~only ofupon ~~operations~~making ~~for~~certain findings required by the ~~three~~Bankruptcy Code, and ~~nine-month~~a ~~periods~~plan ~~ended~~may ~~September~~be ~~30,~~confirmed ~~2003~~over the dissent of non-accepting creditors and ~~2002,~~equity ~~respectively,~~security ~~consist~~holders if certain requirements of ~~legal,~~the ~~financial~~Bankruptcy ~~and~~Code ~~advisory~~are ~~fees,~~met. ~~critical~~The ~~employee retention~~payment ~~costs~~rights and other ~~directly~~entitlements ~~related~~of ~~internal~~pre-petition ~~costs~~creditors asand ~~follows~~equity (security holders may be substantially altered by any plan of reorganization confirmed in ~~millions~~the Chapter 11 Cases. The pre-petition creditors of ~~dollars):~~some Debtors may be treated differently than those of other Debtors.

	Three Months Ended September 30				Nine Months Ended September 30
	2003		2002		2003		2002
Professional fees directly related to the filing	$	23.5	$	24.2	$	72.4	$	54.1
Critical employee retention costs		1.4		4.8		5.5		14.4
Other directly related costs		0.8		4.4		7.5		7.9
Total	$	25.7	$	33.4	$	85.4	$	76.4

Chapter 11 Financing

In ~~December~~connection ~~2001~~with the Restructuring Proceedings, the Company ~~filed~~entered ~~with~~into ~~the~~a ~~Bankruptcy~~DIP ~~Court~~credit ~~its~~facility ~~schedules~~to ofsupplement ~~assets~~liquidity and ~~liabilities.~~fund ~~Subsequently,~~operations during the ~~Bankruptcy~~restructuring ~~Court~~proceedings. ~~scheduled~~The ~~March~~Company’s 3existing DIP credit facility expires in December 2005, ~~2003~~and asthe interest rate is either the ~~property~~alternate ~~and~~base ~~general~~rate ~~bar~~(“ABR”) ~~date~~plus ~~for~~1¼ percentage points or the ~~filing~~London ofInter-Bank ~~proofs~~Offered Rate (“LIBOR”) plus 2¼ percentage points. The ABR is the greater of ~~claim~~either ~~against~~the bank’s base rate or the Ufederal funds rate plus ½ percentage point.S. ~~Debtors~~In addition, the commitment available under the DIP credit facility is mandatorily reduced by a portion of proceeds received from future asset or business divestitures.

~~Approximately~~The 10Company’s available borrowings under the existing DIP credit facility are determined by the underlying collateral at any point in time,~~500~~ ~~proofs~~consisting of ~~claim~~domestic ~~totaling~~inventories ~~approximately~~and ~~$158~~domestic accounts receivable.5 ~~billion alleging~~The aDIP ~~right~~lenders toreceived ~~payment~~permission from athe ~~Debtor~~lenders ~~were~~of ~~filed~~the inSenior ~~connection~~Credit ~~with~~Agreements to have priority over their collateral interest. Amounts available and outstanding on the ~~March~~DIP 3,credit ~~2003~~facility ~~bar~~are ~~date~~further asdiscussed ~~follows:~~in Note 10 to the consolidated financial statements, “Debt.”

•As ~~Approximately~~a ~~2,000~~condition ~~claims,~~of ~~totaling~~granting ~~approximately~~the ~~$141.5~~DIP ~~billion,~~credit ~~which~~facility priority over the ~~Company~~collateral ~~believes~~interest ~~should~~of the beSenior ~~disallowed~~Credit byAgreements, the Bankruptcy Court ~~primarily~~ordered ~~because~~that ~~these~~the ~~claims~~noteholders ~~appear~~receive, in cash, adequate protection payments equal to beone-half ~~duplicate~~of orone ~~unsubstantiated~~percent ~~claims~~(0.5%) of the outstanding notes per year. These cash payments, which approximate $2.6 million per quarter, are recorded as interest expense in the statement of operations. All cash adequate protection

• Approximately 400 claims, totaling approximately $8.4 billion, associated with asbestos-related contribution, indemnity, or reimbursement claims. Based upon its preliminary review, the Company believes that a large number of these claims should be disallowed as contingent contribution or reimbursement claims.

• Approximately 100 claims, totaling approximately $7.1 billion, represent bank and note-holder debt claims. The Company has previously recorded approximately $4.2 billion for these claims. The Company anticipates any amounts in excess of its books and records are duplicative and will ultimately be resolved in the consensual plan of reorganization.

• payments ~~Approximately~~made ~~3,800~~to ~~claims,~~the ~~totaling~~noteholders ~~approximately~~are ~~$200~~provisional ~~million,~~in ~~alleging~~nature ~~asbestos-related~~and ~~property~~are ~~damage.~~subject ~~Based~~to onrecharacterization, ~~its~~credit ~~review~~against allowed claims, or other relief if the Bankruptcy ~~Company~~Court ~~believes~~were ~~most~~to ofultimately ~~these~~conclude ~~claims~~that ~~are~~the ~~duplicative~~noteholders orwere ~~unsubstantiated~~not entitled to such payments.

•In ~~Approximately~~the 2U.S.,~~000~~ the Bankruptcy Court further ordered additional adequate protection to the noteholders in the form of either cash payment of one-half of one percent (0.5%) of the outstanding notes per year or the granting of an administrative expense claim pursuant to Section 507(b) of the Bankruptcy Code in the amount of one percent (1.0%) of the outstanding notes per year. The Company has elected to grant an administrative expense claim in favor of the noteholders for this additional adequate protection. All adequate protection administrative expense claims inured in favor of the noteholders are provisional in nature and subject to challenge by all parties-in-interest to the Restructuring Proceedings. Thus, ~~totaling~~the ~~approximately~~ultimate amount and related payment terms, if any, for these administrative expense claims will be established in connection with the Restructuring Proceedings. Accordingly, such additional administrative expense claims, approximating $4078 million, ~~which~~as ~~have~~of ~~been~~June ~~reviewed~~30, ~~and~~2005, ~~are~~have ~~deemed~~not ~~allowed~~been byrecorded in the ~~Company~~accompanying financial statements.

~~The~~Financial ~~Company~~Statement ~~has~~Classification not completed its evaluation of the approximate remaining 2,200 claims, totaling approximately $1.3 billion, alleging rights to payment for financing, environmental, trade accounts payable and other matters. The Company continues to investigate these unresolved proofs of claim, and intends to file objections to the claims that are inconsistent with its books and records. To date, the Debtors have filed objections to more than 5,100 proofs of claim, and have obtained stipulations or orders involving more than 1,000 claims, which either (i) reduce the filed claims to an amount that is consistent with the Debtors books or records, or (ii) completely disallow the claims.

~~The~~Virtually ~~Debtors~~all ~~continue~~of ~~to review and analyze~~ the ~~proofs~~Company’s ofpre-petition ~~claim~~debt ~~filed~~is toin ~~date~~default. InAt ~~addition~~June 30, 2005, the Debtors’ ~~continue~~pre-petition todebt ~~file~~is ~~objections~~classified ~~and~~under ~~seek~~the ~~stipulations~~caption to“Liabilities ~~certain~~subject ~~claims~~to compromise.” ~~Additional~~This ~~claims~~includes ~~may~~debt beoutstanding ~~filed~~of ~~after~~$1,962.1 million under the ~~general~~pre-petition ~~bar~~Senior ~~date~~Credit Agreements and $2,117.4 ~~which~~million ~~could~~of beother ~~allowed~~outstanding bydebt, ~~the~~primarily ~~Bankruptcy~~notes ~~Court.~~payable ~~Accordingly,~~at ~~the~~various ~~ultimate~~unsecured ~~number~~rates, less ~~and~~capitalized ~~allowed~~debt ~~amount~~issuance fees of ~~such~~$29.1 ~~claims~~million. ~~are~~The ~~not~~carrying ~~presently~~value ~~known~~of ~~and~~the ~~cannot~~pre-petition debt will be ~~reasonably estimated~~adjusted atonce ~~this~~it ~~time.~~has ~~The~~become ~~resolution~~an ofallowed ~~such~~claim ~~claims~~by ~~could~~the ~~result~~Bankruptcy inCourt ato ~~material~~the extent the related carrying value differs from the amount of the allowed claim. Such adjustment may be material to the ~~Company’s~~consolidated financial statements.

~~The~~As ~~appropriateness~~a result of ~~using~~ the ~~going~~Restructuring ~~concern~~Proceedings, ~~basis for~~ the Company’s ~~financial~~is ~~statements~~in isdefault ~~dependent~~to ~~upon,~~its ~~among~~affiliate ~~other~~holder ~~things:~~of ~~(i)~~its ~~the Company’s~~convertible ~~ability~~junior tosubordinated ~~comply~~debentures ~~with~~and ~~the~~is ~~terms~~no oflonger ~~the~~accruing ~~DIP~~interest ~~credit~~expense ~~facility~~or ~~and~~making ~~any~~interest ~~cash~~payments on ~~management~~the ~~order~~debentures. ~~entered~~As bya result, the ~~Bankruptcy~~affiliate ~~Court~~no inlonger ~~connection~~has ~~with~~ the ~~Chapter~~funds 11available ~~Cases;~~to ~~(ii)~~pay ~~the~~distributions ~~ability~~on of the Company-Obligated toMandatorily ~~maintain~~Redeemable ~~adequate~~Preferred ~~cash~~Securities and stopped accruing and paying such distributions on ~~hand;~~October 1, 2001. The ~~(iii)~~affiliate ~~the~~is ~~ability~~in ofdefault on the Company-Obligated toMandatorily ~~generate~~Redeemable ~~cash~~Preferred ~~from~~Securities. ~~operations;~~The ~~(iv)~~Company ~~confirmation~~is ofa guarantor on the outstanding debentures and, as a ~~plan(s)~~result of ~~reorganization~~the ~~under~~default, the ~~Bankruptcy~~Company ~~Code;~~has ~~(v)~~become ~~confirmation~~a ofdebtor adirectly ~~scheme(s)~~to ofthe ~~arrangement~~holders inof the U debentures.K. ~~under~~This ~~Administration;~~liability is a pre-petition liability and ~~(vi)~~has ~~the Company’s~~been ~~ability~~classified as “Liabilities subject to ~~achieve~~compromise” ~~profitability~~in ~~following~~the ~~such~~accompanying ~~confirmations~~balance sheets.

As reflected in the consolidated financial statements, “Liabilities subject to compromise” refers to Debtors’ ~~Financial~~liabilities incurred ~~Statements~~prior to the commencement of the Restructuring Proceedings. The amounts of the various liabilities that are subject to compromise are set forth below. These amounts represent the Company’s estimate of known or potential pre-petition claims to be resolved in connection with the Restructuring Proceedings. Such claims remain subject to future adjustments. Future adjustments may result from (i) negotiations; (ii) actions of the Bankruptcy Court, High Court or Administrators; (iii) further developments with respect to disputed claims; (iv) rejection of executory contracts and unexpired leases; (v) the determination as to the value of any collateral securing claims; (vi) proofs of claim; or (vii) other events. Payment terms for these claims will be established in connection with the Restructuring Proceedings.

The condensed combined financial statements of the Debtors are presented below. These statements reflect the financial position, results of operations and cash flows of the combined Debtor subsidiaries, including certain amounts and activities between Debtors and non-Debtor subsidiaries of the Company, which are eliminated in the consolidated financial statements.

~~Federal-Mogul~~Liabilities ~~Corporation~~subject to compromise include the following:

Debtors’ Condensed Consolidated Statements of Operations (Unaudited)


	June 30 2005		December 31 2004
	(Millions of Dollars)
Debt	$	4,050.4	$	4,026.9
Asbestos liabilities		1,541.5		1,584.0
Accounts payable		203.7		204.5
Company-obligated mandatorily redeemable securities		114.6		114.6
Interest payable		44.0		43.9
Environmental liabilities		24.8		23.6
Other accrued liabilities		20.8		21.0

		5,999.8		6,018.5
Intercompany payables to affiliates		3,222.7		3,301.3

	$	9,222.5	$	9,319.8

~~(Millions~~On May 2, 2005, the Company entered into a Surety Claims Settlement Agreement with the CCR and various surety bondholders whereby in fulfillment of ~~Dollars)~~all claims made by the CCR, $29 million was placed into escrow for use by the CCR to fund settlements that have already occurred or have yet to occur up to $26 million and CCR expenses of $3 million. In exchange for a secured claim against the Company and in connection with the pre-petition lenders, the surety bondholders allowed the exercise of the surety bonds in the amount of $28 million. The remaining $1 million was funded from an outstanding letter of credit. The settlement agreement cancels the remaining face amount of the surety bonds and gives the surety bondholders an entitlement to adequate protection upon full payment of the net bond draw of $28 million. Accordingly, the surety bondholders will receive monthly payments of interest on the net bond draw at a rate of LIBOR plus 200 basis points until the earlier of the effective date of the Plan or the occurrence of certain specified termination events.

	Three Months Ended September 30						Nine Months Ended September 30
	2003			2002			2003			2002
Net sales	$	850.8		$	906.2		$	2,640.2		$	2,837.8
Cost of products sold		717.5			763.4			2,188.1			2,352.9
Gross margin		133.3			142.8			452.1			484.9
Selling, general and administrative expenses		138.8			134.7			448.5			421.2
Restructuring charges		—			17.0			—			22.4
Adjustment of assets held for sale and other long-lived assets to fair value		0.6			24.6			0.7			27.2
Interest expense, net		21.8			30.8			72.4			92.4
Chapter 11 and Administration related reorganization expenses		25.7			33.4			85.4			76.4
Intercompany interest income from non-filers		(80.3	)		(86.0	)		(240.1	)		(244.5	)
Other (income) expense, net		0.5			(4.5	)		(16.4	)		(11.4	)
Earnings (loss) before income taxes, equity loss of non-Debtor subsidiaries, and cumulative effect of change in accounting principle		26.2			(7.2	)		101.6			101.2
Income tax (benefit) expense		3.3			(1.2	)		15.0			27.0
Earnings (loss) before equity loss of non-Debtor subsidiaries and cumulative effect of change in accounting principle		22.9			(6.0	)		86.6			74.2
Equity loss of non-Debtor subsidiaries before cumulative effect of change in accounting principle		(52.4	)		(67.3	)		(155.4	)		(172.7	)
Loss before cumulative effect of change in accounting principle		(29.5	)		(73.3	)		(68.8	)		(98.5	)
Cumulative effect of change in accounting principle, Debtors, net of applicable income tax benefit		—			—			—			1,100.7
Cumulative effect of change in accounting principle, non-Debtors, net of applicable income tax benefit		—			—			—			317.2
Net Loss	$	(29.5	)	$	(73.3	)	$	(68.8	)	$	(1,516.4	)

The Debtors have received approval from the Bankruptcy Court to pay or otherwise honor certain of their pre-petition obligations, including employee wages, salaries, benefits and other employee obligations and from limited available funds, pre-petition claims of certain critical vendors, certain customer programs and warranty claims, adequate protection payments on the Company’s notes, and certain other pre-petition claims.

Cash in the United Kingdom is available only for the use by the debtor entities within the United Kingdom and is not available for use outside of such entities. At June 30, 2005 and December 31, 2004, such cash balances were approximately $420 million and $425 million, respectively.

Chapter 11 and Administration related reorganization expenses in the consolidated statements of operations consist of legal, financial and advisory fees, including fees of the U.K. Administrators, critical employee retention costs, and other directly related internal costs as follows:


	Three Months Ended June 30				Six Months Ended June 30
	2005		2004		2005		2004
	(Millions of Dollars)
Professional fees directly related to the filing	$	17.2	$	30.7	$	44.4	$	53.9
Critical employee retention costs		2.8		2.0		5.6		4.0
Other direct costs		0.2		1.7		0.2		2.5

	$	20.2	$	34.4	$	50.2	$	60.4

Pursuant to the Bankruptcy Code, the Debtors have filed schedules with the Bankruptcy Court setting forth the assets and liabilities of the Debtors as of the Petition Date. On October 4, 2002, the Debtors issued approximately 100,000 proof of claim forms to its current and prior employees, known creditors, vendors and other parties with

~~Federal-Mogul~~ whom ~~Corporation~~the Debtors have previously conducted business. To the extent that recipients disagree with the claims as quantified on these forms, the recipient may file discrepancies with the Bankruptcy Court. Differences between amounts recorded by the Debtors and claims filed by creditors will be investigated and resolved as part of the Restructuring Proceedings. The Bankruptcy Court ultimately will determine liability amounts that will be allowed for these claims in the Chapter 11 Cases. A March 3, 2003 bar date was set for the filing of proofs of claim against the Debtors. Because the Debtors have not completed evaluation of the claims received in connection with this process, the ultimate number and allowed amount of such claims are not presently known. The resolution of such claims could result in a material adjustment to the Company’s financial statements.

~~Debtors’~~Approximately ~~Condensed~~10,600 ~~Consolidated~~proofs ~~Balance~~of ~~Sheets~~claim totaling approximately $158.5 billion alleging a right to payment from a Debtor were filed in connection with the March 3, 2003 bar date as follows:

~~(Millions~~• ofApproximately ~~Dollars)~~2,200 claims, totaling approximately $142.1 billion, which the Company believes should be disallowed by the Bankruptcy Court primarily because these claims appear to be duplicative or unsubstantiated claims.

	(Unaudited)September 30 2003			December 31 2002
ASSETS
Cash and equivalents	$	242.4		$	189.6
Accounts receivable, net		580.2			573.1
Accounts receivable, non-Debtors		402.4			345.4
Inventories, net		430.6			472.6
Prepaid expenses and other current assets		104.4			116.7
Total Current Assets		1,760.0			1,697.4
Property, plant and equipment, net		1,131.3			1,171.5
Goodwill and indefinite-lived intangible assets		1,378.0			1,376.9
Definite-lived intangible assets, net		293.9			300.6
Asbestos-related insurance recoverable		801.3			780.6
Loans receivable and investments in non-Debtors		4,514.0			4,337.2
Other noncurrent assets		448.3			519.2
Total Assets	$	10,326.8		$	10,183.4
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Short-term debt, including current portion of long-term debt	$	—		$	314.7
Accounts payable and accrued compensation		260.4			268.9
Accounts payable, non-Debtors		148.0			129.6
Other accrued liabilities		251.5			281.0
Total Current Liabilities		659.9			994.2
Postemployment benefits		1,357.5			1,336.9
Long-term debt		310.0			—
Other accrued liabilities		122.3			110.0
Liabilities subject to compromise		9,191.2			9,145.9
Shareholders’ Deficit		(1,314.1	)		(1,403.6	)
Total Liabilities and Shareholders’ Deficit	$	10,326.8		$	10,183.4

•

Approximately 400 claims, totaling approximately $8.1 billion, are associated with asbestos-related contribution, indemnity, or reimbursement claims. Based upon its preliminary review, the Company believes that a large number of these claims should be disallowed as contingent contribution or reimbursement claims.

•

Approximately 100 claims, totaling approximately $7.1 billion, represent bank and note-holder debt claims. The Company has previously recorded approximately $4.2 billion for these claims, which is included in the financial statement caption “Liabilities subject to compromise.” The Company believes amounts in excess of its books and records are duplicative and will ultimately be resolved in the consensual plan of reorganization.

•

Approximately 3,800 claims, totaling approximately $200 million, are alleging asbestos-related property damage. The Company entered into a stipulation with certain claimants that resulted in the withdrawal of approximately 1,200 of these claims with prejudice. Based on its review, the Company believes most of the remaining claims are duplicative or unsubstantiated.

•

Approximately 2,000 claims, totaling approximately $40 million, have been reviewed and are deemed allowed by the Company. The liability for such claims is included within the financial statement caption “Liabilities subject to compromise.”

The Company has not completed its evaluation of the approximate remaining 2,100 claims, totaling approximately $1.0 billion, alleging rights to payment for financing, environmental, trade accounts payable and other matters. The Company continues to investigate these unresolved proofs of claim, and intends to file objections to the claims that are inconsistent with its books and records. As of June 30, 2005, the Debtors have filed objections to more than 5,600 proofs of claim, and have obtained stipulations or orders involving more than 3,800 claims, which (i) reduce the filed claims to an amount that is consistent with the Debtors books or records, (ii) completely disallow the claims, or (iii) withdraw the claims.

The Debtors continue to review and analyze the proofs of claim filed to date. In addition, the Debtors continue to file objections and seek stipulations to certain claims. Additional claims may be filed after the general bar date, which could be allowed by the Bankruptcy Court. Accordingly, the ultimate number and allowed amount of such claims are not presently known and cannot be reasonably estimated at this time. The resolution of such claims could result in a material adjustment to the Company’s financial statements.

~~Federal-Mogul~~Debtors’ ~~Corporation~~Financial Statements

The condensed consolidated financial statements of the Debtors’ ~~Condensed~~are ~~Consolidated~~presented ~~Statement~~below. These statements reflect the financial position, results of ~~Cash~~operations ~~Flows~~and ~~(Unaudited)~~cash flows of the combined Debtor subsidiaries, including certain amounts and activities between Debtor and non-Debtor subsidiaries of the Company, which are eliminated in the consolidated financial statements. Certain amounts in the 2004 Debtor financial statements have been reclassified to conform to the presentation used in the current period. In 2005, the Company finalized the push down of the Sealing Systems goodwill impairment charge resulting in a reclassification of goodwill from the Debtor subsidiaries to the Non-debtor subsidiaries in the December 31, 2004 balance sheet.

(Millions of Dollars)

	Nine Months Ended September 30
	2003			2002
Net Cash Provided From Operating Activities	$	145.4		$	59.7
Cash Provided From (Used By) Investing Activities
Expenditures for property, plant and equipment		(109.8	)		(100.7	)
Net proceeds from sales of businesses		16.0			25.5
Net Cash Used By Investing Activities		(93.8	)		(75.2	)
Cash Provided From (Used By) Financing Activities
Borrowings on DIP credit facility		105.5			—
Principal payments on DIP credit facility		(110.2	)		(10.0	)
Net Cash Used By Financing Activities		(4.7	)		(10.0	)
Effect of Foreign Currency Exchange Rate Fluctuations on Cash		5.9			12.5
Increase (Decrease) in Cash and Equivalents		52.8			(13.0	)
Cash and Equivalents at Beginning of Period		189.6			146.5
Cash and Equivalents at End of Period	$	242.4		$	133.5

3.FEDERAL-MOGUL ~~INCOME~~CORPORATION ~~TAXES~~

~~For~~Debtors’ ~~the~~Condensed ~~nine~~Consolidated ~~months~~Statements ~~ended September 30, 2003, the Company recorded income tax expense~~ of ~~$51.6~~Operations ~~million~~(Unaudited) on a loss of $17.2 million before income taxes. This compares to income tax expense of $59.8 million on a loss of $38.7 million before income taxes and cumulative effect of change in accounting principle in the same period of 2002. Income tax expense for the nine month period ended September 30, 2003 resulted primarily from the recognition of income tax expense on earnings in certain foreign jurisdictions without the recognition of income tax benefits on current losses in the U.K. and other countries.

Net deferred tax assets/(liabilities) are as follows (in millions of dollars):


	Three Months Ended June 30						Six Months Ended June 30
	2005			2004			2005			2004
	(Millions of Dollars)
Net sales	$	991.9		$	927.4		$	1,963.1		$	1,831.6
Cost of products sold		850.7			759.1			1,690.6			1,507.7

Gross margin		141.2			168.3			272.5			323.9

Selling, general and administrative expenses		143.9			155.8			311.3			318.5
Interest expense, net		32.5			22.2			60.4			46.7
Chapter 11 and Administration related reorganization expenses		20.2			34.4			50.2			60.4
Intercompany interest income from non-filers		(76.2	)		(88.1	)		(159.1	)		(179.6	)
Other income, net		(6.3	)		(3.9	)		(21.0	)		(13.8	)

Earnings from continuing operations before income taxes and equity loss of non-Debtor subsidiaries		27.1			47.9			30.7			91.7
Income tax expense (benefit)		8.7			(4.1	)		15.9			(0.5	)

Earnings from continuing operations before equity loss of non-Debtor subsidiaries		18.4			52.0			14.8			92.2
Equity loss from continuing operations of non-Debtor subsidiaries		(30.0	)		(58.0	)		(74.7	)		(117.4	)

Loss from continuing operations		(11.6	)		(6.0	)		(59.9	)		(25.2	)
Loss from discontinued operations, net of income taxes, Debtors		—			(0.3	)		—			(0.5	)
Loss from discontinued operations, net of income taxes, non-Debtors		—			(2.7	)		—			(3.7	)

Net loss	$	(11.6	)	$	(9.0	)	$	(59.9	)	$	(29.4	)

	September 302003			December 312002
Deferred tax assets	$	1,486.3		$	1,456.8
Valuation allowance		(753.4	)		(701.6	)
Net deferred tax assets		732.9			755.2
Deferred tax liabilities		(810.3	)		(799.0	)
Net deferred tax liability	$	(77.4	)	$	(43.8	)

Deferred tax assets and liabilities are recorded in the consolidated balance sheets as follows (in millions of dollars):

	September 302003			December 312002
Assets
Prepaid expenses and other current assets	$	7.8		$	35.4
Other noncurrent assets		16.8			11.4
Liabilities
Other accrued liabilities - current		(41.0	)		(38.2	)
Deferred income taxes		(61.0	)		(52.4	)
Net deferred tax liability	$	(77.4	)	$	(43.8	)

4. OPERATIONS BY REPORTABLE SEGMENT

The Company’s integrated operations are included in six reportable segments generally corresponding to major product groups: Powertrain, Sealing Systems and Systems Protection, Friction, Aftermarket, Other and Divested Operations. Segment information for the three and nine months ended September 30, 2002 has been reclassified to reflect organizational changes implemented in July 2002 and January 2003.

Powertrain products are used primarily in automotive, light truck, heavy-duty, industrial, marine, agricultural, power generation and small air-cooled engine applications. The primary products of this segment include engine bearings, pistons, piston pins, rings, cylinder liners, sintered products, and connecting rods.

Sealing Systems and Systems Protection products are used in automotive, light truck, heavy-duty, agricultural, off-highway, marine, railroad, high performance and industrial applications. The primary products of this segment include dynamic seals, gaskets, element resistant sleeving systems protection products, and electrical connectors and sockets.

Friction products are used in automotive, heavy-duty and railway applications. The primary products of this segment include disc pads and brake shoes.

Aftermarket distributes products manufactured within the above segments, or purchased, to the independent automotive and heavy-duty aftermarkets. The segment also includes manufacturing operations for brake, chassis, ignition, lighting, fuel and wiper products.

~~Other~~FEDERAL-MOGUL ~~includes~~CORPORATION ~~Asia Pacific and other Corporate functions.~~

~~Divested~~Debtors’ ~~Operations~~Condensed ~~include~~Consolidated ~~the~~Balance ~~historical~~Sheets ~~operating results of the Company’s divestitures.~~

The Company has aggregated certain individual product segments within its six reportable segments. The accounting policies of the segments are the same as that of the Company. Revenues related to Powertrain, Sealing Systems and Systems Protection, and Friction products sold to OE customers are recorded within the respective segments. Revenues from such products sold to aftermarket customers are recorded within the Aftermarket segment.


	(Unaudited) June 30 2005			December 31 2004
	(Millions of Dollars)
ASSETS
Current assets:
Cash and equivalents	$	424.2		$	433.5
Accounts receivable, net		625.3			582.8
Accounts receivable, non-Debtors		485.5			458.0
Inventories, net		478.8			483.6
Prepaid expenses and other current assets		99.7			101.9

Total current assets		2,113.5			2,059.8

Property, plant and equipment, net		985.4			1,016.4
Goodwill and indefinite-lived intangible assets		1,177.1			1,183.5
Definite-lived intangible assets, net		265.0			280.3
Asbestos-related insurance recoverable		810.1			853.8
Loans receivable from and investments in non-Debtors		4,683.8			4,803.6
Other noncurrent assets		307.5			402.1

	$	10,342.4		$	10,599.5

LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Short-term debt, including current portion of long-term debt	$	362.7		$	277.8
Accounts payable and accrued compensation		271.6			269.1
Accounts payable, non-Debtors		300.3			249.0
Other accrued liabilities		246.3			256.4

Total current liabilities		1,180.9			1,052.3

Postemployment benefits		1,951.7			2,033.5
Other accrued liabilities		117.2			119.6
Liabilities subject to compromise		9,222.5			9,319.8
Shareholders’ deficit		(2,129.9	)		(1,925.7	)

	$	10,342.4		$	10,599.5

The Company evaluates segment performance principally on a non-GAAP Operational EBIT basis. Operational EBIT is defined as earnings before interest, income taxes, cumulative effect of change in accounting principle and certain nonrecurring items such as restructuring and impairment charges, Chapter 11 and Administration related reorganization expenses, and gains or losses on the sales of businesses. Operational EBIT for each segment is shown below, as it is most consistent with the corresponding consolidated financial statements.

Net Sales and Gross Margin information by reportable segment is as follows (in millions of dollars):

	Net Sales
	Three Months Ended September 30				Nine Months EndedSeptember 30
	2003		2002		2003		2002
Powertrain	$	426.6	$	412.8	$	1,366.9	$	1,246.2
Sealing Systems and Systems Protection		142.4		158.1		469.4		489.3
Friction		101.5		95.5		316.2		278.1
Aftermarket		643.8		603.8		1,912.2		1,872.3
Other, including Asia Pacific and Corporate		23.4		19.7		68.6		56.3
Divested Operations		8.7		55.3		67.6		191.4
Total	$	1,346.4	$	1,345.2	$	4,200.9	$	4,133.6

	Gross Margin
	Three MonthsEndedSeptember 30					Nine MonthsEnded September 30
	2003			2002		2003			2002
Powertrain	$	58.2		$	60.3	$	195.6		$	199.8
Sealing Systems and Systems Protection		18.7			29.8		79.8			98.4
Friction		26.9			23.8		90.7			76.0
Aftermarket		149.9			130.1		457.1			417.4
Other, including Asia Pacific and Corporate		(3.7	)		0.9		(6.2	)		(1.0	)
Divested Operations		0.6			4.8		9.2			11.7
Total	$	250.6		$	249.7	$	826.2		$	802.3

~~Operational~~FEDERAL-MOGUL ~~EBIT~~CORPORATION ~~by reportable segment is as follows (in millions of dollars):~~

	Operational EBIT
	Three MonthsEnded September 30						Nine Months Ended September 30
	2003			2002			2003			2002
Powertrain	$	27.5		$	24.5		$	107.8		$	90.9
Sealing Systems and Systems Protection		0.4			11.1			25.1			43.0
Friction		12.3			13.2			45.4			42.0
Aftermarket		86.5			69.2			266.3			228.5
Other, including Asia Pacific and Corporate		(82.4	)		(80.2	)		(260.4	)		(234.7	)
Divested Operations		(2.0	)		4.4			(0.7	)		7.9
Total Operational EBIT		42.3			42.2			183.5			177.6
Items required to reconcile Operational EBIT to loss before income tax expense and cumulative effect of change in accounting principle:
Interest expense, net		(23.1	)		(29.8	)		(74.4	)		(90.0	)
Restructuring charges		(8.1	)		(17.0	)		(28.3	)		(28.0	)
Chapter 11 and Administration related reorganization expenses		(25.7	)		(33.4	)		(85.4	)		(76.4	)
Other		(2.4	)		(26.0	)		(12.6	)		(21.9	)
Loss before income tax expense and cumulative effect of change in accounting principle	$	(17.0	)	$	(64.0	)	$	(17.2	)	$	(38.7	)

Debtors’ Condensed Consolidated Statements of Cash Flows (Unaudited)

Total assets by reportable segment are as follows (in millions of dollars):


	Six Months Ended June 30
	2005			2004
	(Millions of Dollars)
Net cash provided from (used by) operating activities	$	(29.7	)	$	120.2

Cash provided from (used by) investing activities
Expenditures for property, plant and equipment		(38.1	)		(68.2	)
Net proceeds from the sale of property, plant and equipment		—			13.0

Net cash used by investing activities		(38.1	)		(55.2	)

Cash provided from (used by) financing activities
Proceeds from borrowings on DIP credit facility		85.1			—
Principal payments on DIP credit facility		—			(41.7	)

Net cash provided from (used by) financing activities		85.1			(41.7	)

Effect of foreign currency exchange rate fluctuations on cash		(26.6	)		7.4

Increase (decrease) in cash and equivalents		(9.3	)		30.7

Cash and equivalents at beginning of period		433.5			281.5

Cash and equivalents at end of period	$	424.2		$	312.2

	September 302003		December 312002
Powertrain	$	1,883.1	$	1,897.8
Sealing Systems and Systems Protection		1,256.9		1,237.1
Friction		666.5		618.3
Aftermarket		2,826.4		2,661.1
Other, including Corporate		1,419.4		1,499.0
Total Assets	$	8,052.3	$	7,913.3

5. COMPREHENSIVE INCOME (LOSS)

Total comprehensive income (loss) is summarized as follows (in millions of dollars):

	Three MonthsEnded September 30						Nine Months Ended September 30
	2003			2002			2003			2002
Net loss	$	(29.5	)	$	(73.3	)	$	(68.8	)	$	(1,516.4	)
Foreign currency translation adjustments		0.2			(13.1	)		158.2			142.1
Total Comprehensive Income (Loss)	$	(29.3	)	$	(86.4	)	$	89.4		$	(1,374.3	)

63. ~~LOSS~~Adjustment ~~PER~~of ~~SHARE~~Long-Lived Assets to Fair Value

~~The~~During ~~following~~the ~~table~~six ~~sets~~month ~~forth~~periods ended June 30, 2005 and 2004, the ~~computation~~Company recorded charges of ~~basic~~$4.0 million and ~~diluted~~$23.1 ~~loss~~million, ~~per~~respectively, ~~share~~to adjust (property, plant and equipment to their estimated fair values in ~~millions~~accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of ~~dollars~~Long-Lived Assets.” The fair value of property, ~~except~~plant ~~share~~and equipment is based upon estimated discounted future cash flows and ~~per~~estimates ~~share~~of ~~data):~~salvage value. The impairment charge represents the difference between the estimated fair values and the carrying value of the subject assets.

	Three MonthsEndedSeptember 30						Nine MonthsEnded September 30
	2003			2002			2003			2002
Numerator:
Net Loss	$	(29.5	)	$	(73.3	)	$	(68.8	)	$	(1,516.4	)
Cumulative effect of change in accounting principle, net of applicable income tax benefit		—			—			—			1,417.9
Numerator for basic and diluted loss per share – loss attributable to common shareholders before cumulative effect of change in accounting principle	$	(29.5	)	$	(73.3	)	$	(68.8	)	$	(98.5	)
Numerator for basic and diluted loss per share	$	(29.5	)	$	(73.3	)	$	(68.8	)	$	(1,516.4	)
Denominator:
Denominator for basic and diluted loss per share – weighted average shares (in millions)		87.1			82.4			87.1			82.4
Basic and Diluted loss per share before cumulative effect of change in accounting principle	$	(0.34	)	$	(0.89	)	$	(0.79	)	$	(1.19	)
Basic and Diluted loss per share	$	(0.34	)	$	(0.89	)	$	(0.79	)	$	(18.41	)

Impairment charges by reporting segment are as follows:

As a result of the Restructuring Proceedings, the Company stopped accruing and paying dividends on its Series C Preferred Stock.


	Three Months Ended June 30				Six Months Ended June 30
	2005		2004		2005		2004
	(Millions of Dollars)
Powertrain	$	0.8	$	20.0	$	0.8	$	20.2
Sealing Systems		—		—		—		—
Vehicle Safety and Performance		0.2		—		0.2		—
Aftermarket Products and Services		—		—		3.0		2.7
Corporate		—		—		—		0.2

	$	1.0	$	20.0	$	4.0	$	23.1

During the second quarter of 2004, the Company recorded impairment charges of $20.0 million related to its Powertrain transmission operation in France. This operation is comprised of four facilities that manufacture transmission and gear components primarily for sale to OE customers. High labor content, difficulties in commercialization of new product technology, and continued manufacturing inefficiencies resulted in a revaluation of the expected future cash flows of these facilities as compared to the current carrying value of property, plant and equipment.

4. Restructuring

The Company has undertaken various restructuring activities to streamline its operations, consolidate and take advantage of available capacity and resources, and ultimately achieve net cost reductions. Restructuring activities include efforts to integrate and rationalize the Company’s businesses and to relocate manufacturing operations to lower cost markets. The Company defines restructuring expense to include costs directly associated with exit or disposal activities accounted for in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, employee severance costs incurred as a result of an exit or disposal activity accounted for in accordance with SFAS Nos. 88 and 112, and pension and other postemployment benefit costs incurred as a result of an exit or disposal activity accounted for in accordance with SFAS Nos. 87 and 106.

Estimates of restructuring charges are based on information available at the time such charges are recorded. In general, management anticipates that restructuring activities will be completed within a timeframe such that significant changes to the exit plan are not likely. In certain countries where the Company operates, statutory requirements include involuntary termination benefits that extend several years into the future. Accordingly, severance payments continue well past the date of termination at many international locations. Thus, these programs appear to be ongoing when, in fact, terminations and other activities under these programs have been substantially completed.

Due to the inherent uncertainty involved in estimating restructuring expenses, actual amounts paid for such activities may differ from amounts initially estimated. Accordingly, the Company may from time to time record reversals of these reserves. Such reversals are recorded consistent with SEC Staff Accounting Bulletin No. 100, “Restructuring and Impairment Charges” and result from actual costs at program completion being less than costs estimated at the commitment date.

7Management expects to finance these restructuring programs through cash generated from its ongoing operations or through cash available under its existing DIP credit facility, subject to the terms of applicable covenants. ~~INCENTIVE~~Management ~~STOCK~~does ~~PLANS~~not expect that the execution of these programs will have an adverse impact on its liquidity position.

The Company’s ~~has~~restructuring ~~elected~~activities toare ~~follow~~undertaken ~~Accounting~~as ~~Principles~~necessary ~~Board Opinion No. 25, “Accounting for Stock Issued~~ to ~~Employees” (APB 25), and~~execute ~~related interpretations in accounting for its employee stock awards. Accordingly, no compensation cost has been recognized for its stock option grants, as the exercise price of the Company~~management’s ~~employee~~strategy stock options equals the underlying stock price on the date of grant. Had compensation cost for the Company’s stock-based compensation plans been determined based on the fair value at the grant dates for awards granted in 2000 and ~~2001~~generally ~~under~~fall ~~those~~into ~~plans~~one ~~consistent with the method~~ of ~~SFAS~~ ~~No. 123 “Accounting for Stock Based Compensation”,~~ the ~~Company’s~~following ~~net loss and loss per share would have been adjusted to the pro forma amounts below (in millions of dollars, except per share amounts)~~categories:

	Three MonthsEndedSeptember 30						Nine Months Ended September 30
	2003			2002			2003			2002
Net loss as reported	$	(29.5	)	$	(73.3	)	$	(68.8	)	$	(1,516.4	)
Additional compensation expense for fair value of stock options		(0.1	)		(0.9	)		(0.3	)		(4.7	)
Pro forma net loss	$	(29.6	)	$	(74.2	)	$	(69.1	)	$	(1,521.1	)
Basic and diluted loss per share as reported	$	(0.34	)	$	(0.89	)	$	(0.79	)	$	(18.41	)
Pro forma basic and diluted loss per share	$	(0.34	)	$	(0.90	)	$	(0.79	)	$	(18.46	)

1.	Closure of facilities and relocation of production – In connection with the Company’s strategy, certain operations have been closed and related production relocated to low cost countries or to other locations with available capacity.

82. ~~ASBESTOS~~Consolidation ~~LIABILITY~~of ~~AND~~administrative ~~LEGAL~~functions ~~PROCEEDINGS~~and standardization of manufacturing processes – As part of its productivity initiative, the Company has acted to consolidate its administrative functions and change its manufacturing processes to reduce selling, general and administrative costs and improve operating efficiencies through standardization of processes.

The following is a summary of the Company’s consolidated restructuring reserves and related activity as of and for the six months ended June 30, 2005. “SS”, “VSP” and “APS” represent Sealing Systems, Vehicle Safety and Performance and Aftermarket Products and Services, respectively.


	Powertrain			SS			VSP			APS			Corporate			Total
	(Millions of dollars)
Balance of reserves at December 31, 2004	$	18.7		$	3.8		$	1.6		$	2.9		$	0.9		$	27.9
Provisions		2.7			—			—			—			0.9			3.6
Reversals		—			—			—			(0.6	)		(0.2	)		(0.8	)
Payments		(3.1	)		(0.2	)		(0.1	)		(0.2	)		—			(3.6	)
Foreign currency		(1.1	)		(0.2	)		0.1			—			0.2			(1.0	)

Balance of reserves at March 31, 2005		17.2			3.4			1.6			2.1			1.8			26.1
Provisions		2.9			0.3			0.1			2.3			—			5.6
Reversals		(0.1	)		—			(0.4	)		—			(0.3	)		(0.8	)
Payments		(3.1	)		(0.7	)		(0.2	)		(0.2	)		(0.9	)		(5.1	)
Foreign currency		(0.9	)		(0.2	)		(0.1	)		(0.1	)		—			(1.3	)

Balance of reserves at June 30, 2005	$	16.0		$	2.8		$	1.0		$	4.1		$	0.6		$	24.5

The Company’s restructuring reserve balances are principally comprised of severance and employee-related costs. These costs are associated with numerous programs designed to streamline the Company’s operations and reduce overall production costs. While these programs are an important part of the Company’s business strategy, the costs and related savings associated with many of these programs are not individually significant to the Company.

During December 2003, the Company announced the closure of its Bradford, United Kingdom piston facility (Powertrain) and relocation of its operations to other existing European manufacturing facilities with available capacity or with lower cost to manufacture. Expected savings associated with this activity are estimated to be approximately $14 million per annum. Approximately $2 million of severance payments were made against this reserve during the six months ended June 30, 2005. At June 30, 2005, the Company had remaining reserves of approximately $6 million related to this activity. While the closure of the Bradford facility was completed during 2004, severance payments related to this program will extend through 2014.

During 2001, the Company’s German engine bearing operations (Powertrain) announced restructuring programs to transfer certain low volume production with high labor content to low cost countries, specifically Poland. Expected savings associated with this activity are estimated to be approximately $8 million per annum. At June 30, 2005, the Company had remaining reserves of approximately $4 million related to these activities. Payments of approximately $2 million were made against the reserve during the six months ended June 30, 2005. While the transfer of production was completed during 2004, payment of employee severance costs is expected to continue through 2008.

In June 2005, the Company commenced a restructuring of its Aftermarket Products and Services sales and marketing functions designed to drive business growth and to improve customer focus. Through realignment of the sales force on a regional basis, the Company intends to strengthen customer relations particularly in emerging markets. Accordingly, a charge of $2 million related to these activities was recorded during the three month period ended June 30, 2005 and remains outstanding as of June 30, 2005. Expected savings associated with the project are estimated to be approximately $2 million per annum. Payments related to this program are expected to continue through June 2006.

5. Other (Income) Expense, Net

The specific components of “Other (income) expense, net” are as follows:


	Three Months Ended June 30						Six Months Ended June 30
	2005			2004			2005			2004
	(Millions of Dollars)
Amortization of intangible assets	$	4.2		$	3.9		$	8.7		$	8.4
Foreign currency exchange		7.4			2.8			8.6			8.1
Restructuring expense		4.8			—			7.6			—
Minority interest in consolidated subsidiaries		1.1			1.0			1.9			2.5
Royalty income		(0.9	)		(0.6	)		(1.1	)		(1.0	)
Loss (gain) on sale of assets		(0.6	)		0.6			(7.4	)		(0.1	)
Adjustment of 2004 goodwill impairment charge		—			—			(7.7	)		—
Other		(6.5	)		(4.3	)		(6.7	)		(5.8	)

	$	9.5		$	3.4		$	3.9		$	12.1

During the fourth quarter of 2004, the Company performed its annual impairment analysis of goodwill and indefinite-lived intangible assets as required by SFAS No. 142 “Goodwill and Other Intangible Assets.” As a result of this analysis, the Company recorded an impairment charge as of December 31, 2004 in the Sealing Systems reporting unit of $193.7 million to adjust the carrying value of goodwill to its estimated fair value. The 2004 goodwill impairment charge was based upon a Phase I impairment analysis and represented the Company’s best estimate of the fair value of the underlying goodwill at December 31, 2004.

During the first quarter of 2005 the Company completed a Phase II impairment analysis, which included asset valuation and allocation procedures. Based upon this analysis, the goodwill impairment charge recorded during 2004 was reduced by $7.7 million, to $186 million, to reflect the amount of implied goodwill associated with the Sealing Systems reporting unit.

6. Discontinued Operations

During 2004, the Company completed divestitures of its large bearings operations in Pinetown, South Africa and Uslar, Germany, and its transmission operation located in Dayton, Ohio. The aggregate net losses of these divestitures are reported as discontinued operations in the Company’s consolidated statements of operations for the three and six-month periods ended June 30, 2004. Summarized financial information related to the Company’s discontinued operations is as follows:


	Three Months Ended June 30, 2004			Six Months Ended June 30, 2004
	(Millions of Dollars)
Net sales	$	5.3		$	11.8
Cost of products sold		6.6			12.9

Gross margin		(1.3	)		(1.1	)

Selling, general and administrative expenses		1.0			2.2
Other expense, net		1.6			1.9

Loss before income taxes		(3.9	)		(5.2	)
Income tax benefit		(0.9	)		(1.0	)

Loss from discontinued operations	$	(3.0	)	$	(4.2	)

7. Inventories

Inventories are stated at the lower of cost or market. Cost determined by the last-in, first-out (LIFO) method was used for 48% and 45% of inventories at June 30, 2005 and December 31, 2004, respectively. The remaining inventories are recorded using the first-in, first-out (FIFO) method. Inventories are reduced by an allowance for excess and obsolete inventories based on management’s review of on-hand inventories compared to historical and estimated future sales and usage. A summary of inventories is provided in the table below:


	June 30 2005			December 31 2004
	(Millions of Dollars)
Raw materials	$	177.3		$	185.8
Work-in-process		157.6			157.7
Finished products		643.7			680.1

		978.6			1,023.6
Valuation reserves		(69.8	)		(70.7	)

	$	908.8		$	952.9

8. Investments in Non-Consolidated Affiliates

The Company maintains investments in various non-consolidated affiliates, which are located in Turkey, China, Korea, India, Japan, the United States and Mexico. The Company’s direct ownership in such affiliates ranges from approximately 20% to 50%. The aggregate investment in these affiliates approximates $153 million and $160 million at June 30, 2005 and December 31, 2004, respectively, and is included in the consolidated balance sheets as “other noncurrent assets.” The Company’s equity earnings of such affiliates amounted to approximately $21 million and $20 million for the six-month periods ended June 30, 2005 and 2004, respectively. During the six months ended June 30, 2005, these entities generated sales of approximately $348 million, net income of approximately $51 million, and had total net assets at June 30, 2005 of approximately $351 million. The Company does not hold a

controlling interest in an entity based on exposure to economic risks and potential rewards (variable interests) for which it is the primary beneficiary. Further, the Company’s joint ventures are businesses established and maintained in connection with its operating strategy and are not special purpose entities.

The Company holds a 50% non-controlling interest in a joint venture located in Turkey. This joint venture was established for the purpose of manufacturing and marketing automotive parts, including pistons, pins, piston rings, and cylinder liners, to Original Equipment (“OE”) and Aftermarket customers. Pursuant to the joint venture agreement, the Company’s partner holds an option to put its shares to a subsidiary of the Company at the higher of the current fair value or at a guaranteed minimum amount. The guaranteed minimum amount represents a contingent guarantee of the initial investment of the investment partner. The contingent guarantee can be exercised at the discretion of the joint venture partner. The term of the contingent guarantee is indefinite, consistent with the terms of the joint venture agreement. However, the contingent guarantee would not survive termination of the joint venture agreement. As of June 30, 2005, the total amount of the contingent guarantee, were all triggering events to occur, approximated $58 million. Management believes that this contingent guarantee is substantially less than the estimated current fair value of the guarantees’ interest in the affiliate. Management also believes that exercise of the put option is not reasonably likely within the foreseeable future. However, if this put option were exercised at its estimated current fair value, such exercise would have a material effect on the Company’s liquidity. Any value in excess of the minimum guaranteed amount of the put option would be the subject of negotiation between the Company and its investment partner.

In accordance with Statement of Financial Accounting Standards No. 150, the Company has determined that its investments in Chinese joint venture arrangements are considered to be “limited-lived” as such entities have specified durations ranging from 30 to 50 years pursuant to regional statutory regulations. In general, these arrangements call for extension, renewal or liquidation at the discretion of the parties to the arrangement at the end of the contractual agreement. Accordingly, a reasonable assessment cannot be made as to the impact of such arrangements on the future liquidity position of the Company.

9. Accrued Liabilities

Accrued liabilities consisted of the following:


	June 30 2005		December 31 2004
	(Millions of Dollars)
Accrued compensation	$	258.4	$	255.5
Accrued income taxes		71.7		75.9
Accrued rebates		68.1		73.2
Accrued Chapter 11 and Administration expenses		36.0		44.8
Non-income taxes payable		35.3		34.5
Restructuring reserves		24.5		27.9
Accrued product returns		18.5		20.4
Accrued warranty		13.3		14.8
Accrued professional services		13.3		12.7

	$	539.1	$	559.7

10. Debt

Long-term debt consisted of the following:


	June 30 2005			December 31 2004
	(Millions of Dollars)
DIP credit facility	$	362.8		$	277.7
Other		42.9			42.0

		405.7			319.7
Less: current maturities included in short-term debt		(398.2	)		(309.6	)

	$	7.5		$	10.1

The Company’s available borrowings under the DIP credit facility are determined by the underlying collateral at any point in time, consisting of its domestic inventories and domestic accounts receivable. The borrowing base available to the Company is calculated weekly based upon the value of this underlying collateral. The total commitment, amounts outstanding on the DIP credit facility, and the available borrowing base are as follows:


	June 30 2005		December 31 2004
	(Millions of Dollars)
Contractual commitment	$	500.0	$	500.0
Less: current borrowings		362.8		277.7
Less: letters of credit		24.1		45.3

Available to borrow	$	113.1	$	177.0

The DIP credit facility contains restrictive covenants. The more significant of these covenants include the maintenance of certain levels of earnings before interest, taxes, depreciation and amortization and limitations on quarterly capital expenditures. Additional covenants include, but are not limited to, restrictions on the early retirement of debt, additional borrowings, payment of dividends and the sale of assets or businesses.

11. Other Comprehensive Loss

The Company’s comprehensive loss consists of the following:


	Three Months Ended June 30						Six Months Ended June 30
	2005			2004			2005			2004
	(Millions of Dollars)
Net loss	$	(11.6	)	$	(9.0	)	$	(59.9	)	$	(29.4	)
Foreign currency translation adjustments		(73.1	)		(8.1	)		(147.0	)		(13.2	)

	$	(84.7	)	$	(17.1	)	$	(206.9	)	$	(42.6	)

12. Income Taxes

For the six months ended June 30, 2005, the Company recorded income tax expense of $51.2 million on a loss from continuing operations before income taxes of $8.7 million. This compares to income tax expense of $40.6 million on earnings from continuing operations before income taxes of $15.4 million in the same period of 2004. Income tax expense for the six month period ended June 30, 2005 resulted primarily from taxable income generated by certain international subsidiaries, non-recognition of income tax benefits on certain United Kingdom operating losses and certain non-deductible items in various jurisdictions.

13. Loss Per Common Share

The following table sets forth the computation of basic and diluted loss per common share:


	Three Months Ended June 30						Six Months Ended June 30
	2005			2004			2005			2004
	(Millions of Dollars, Except Share and Per Share Amounts)
Numerator:
Loss from continuing operations	$	(11.6	)	$	(6.0	)	$	(59.9	)	$	(25.2	)
Loss from discontinued operations		—			(3.0	)		—			(4.2	)

Numerator for basic and diluted loss per common share	$	(11.6	)	$	(9.0	)	$	(59.9	)	$	(29.4	)

Denominator:
Weighted average shares outstanding, basic and diluted (in millions)		89.1			87.1			89.1			87.1

Loss from continuing operations	$	(0.13	)	$	(0.07	)	$	(0.67	)	$	(0.29	)
Loss from discontinued operations, net of income tax expense		—			(0.04	)		—			(0.05	)

Basic and diluted loss per common share	$	(0.13	)	$	(0.11	)	$	(0.67	)	$	(0.34	)

As a result of the Restructuring Proceedings, the Company stopped accruing and paying dividends on its Series C Preferred Stock.

14. Pensions and Other Postretirement Benefits

The Company sponsors several defined benefit pension plans (“Pension Benefits”) and health care and life insurance benefits (“Other Benefits”) for certain employees and retirees around the world. The Company funds Pension Benefits based on the funding requirements of domestic and international laws and regulations in advance of benefit payments and Other Benefits as benefits are provided to participating employees.

Components of net periodic benefit cost for the three-month periods ended June 30 are as follows:


	Pension Benefits
	United States						International						Other Benefits
	2005			2004			2005			2004			2005			2004
	(Millions of Dollars)
Service cost	$	7.7		$	6.9		$	2.5		$	4.8		$	1.3		$	0.7
Interest cost		14.3			14.5			41.4			34.1			8.5			8.4
Expected return on plan assets		(14.7	)		(13.7	)		(30.8	)		(32.1	)		—			—
Unrecognized transition obligation		—			—			—			—			—			—
Amortization of unrecognized (gain) loss		6.6			6.3			26.6			14.3			(1.0	)		1.5
Amortization of unrecognized prior service cost		1.9			2.1			—			—			3.0			(0.2	)

Net periodic benefit cost	$	15.8		$	16.1		$	39.7		$	21.1		$	11.8		$	10.4

Components of net periodic benefit cost for the six-month periods ended June 30 are as follows:


	Pension Benefits
	United States						International						Other Benefits
	2005			2004			2005			2004			2005			2004
	(Millions of Dollars)
Service cost	$	15.4		$	13.8		$	5.1		$	9.6		$	2.6		$	1.5
Interest cost		28.6			29.0			83.6			68.2			17.0			16.7
Expected return on plan assets		(29.4	)		(27.3	)		(62.2	)		(64.2	)		—			—
Unrecognized transition obligation		2.4			—			—			—			—			—
Amortization of unrecognized (gain) loss		13.2			12.6			53.7			28.7			(2.0	)		3.0
Amortization of unrecognized prior service cost		3.8			4.1			—			—			6.0			(0.4	)

Net periodic benefit cost	$	34.0		$	32.2		$	80.2		$	42.3		$	23.6		$	20.8

In July 2004, the Administrators of the U.K. Debtors took the unilateral action of withdrawing certain of the U.K. Debtors from participating in the T&N Retirement Benefits Scheme (1989) (the “T&N Pension Scheme”). The Administrators indicated that this action was taken to preserve the contributions made by current employees of these debtors into the T&N Pension Scheme and to protect the other creditors of these debtors in the event the independent pension plan trustee rejects the treatment afforded the T&N Pension Scheme in the Plan.

15. Litigation and Environmental Matters

T&N Companies Asbestos Litigation

Background

The Company’s U.K. subsidiary, T&N Ltd., and two U.S. subsidiaries (the “T&N Companies”) are among many defendants named in numerous court actions in the U.S. alleging personal injury resulting from exposure to asbestos or asbestos-containing products. T&N Ltd. is also subject to asbestos-disease litigation, to a lesser extent, in the United Kingdom and France. As of the Petition Date, T&N Ltd. was a defendant in approximately 115,000 pending personal injury claims. The two United States subsidiaries were defendants in approximately 199,000 pending personal injury claims. As a result of the ~~Restructuring~~ Restructuring Proceedings, the Company includes as a pending claim open served claims, settled but not documented claims and settled but not paid claims. Notice of complaints continue to be received post-petition and are in violation of the automatic ~~Automatic Stay~~stay.

Recorded Liability

In 2000, the Company increased its estimate of asbestos-related liability for the T&N Companies by $751 million and recorded a related insurance recoverable asset of $577 million. The revision in the estimate of probable asbestos-related liability principally resulted from a study performed by an econometric firm that specializes in these types of matters. The liability (approximately $1.43 billion as of ~~September~~June 30, ~~2003~~ 2005) represented the Company’s estimate prior to the Restructuring Proceedings for claims currently pending and those which were reasonably estimated to be asserted and paid through 2012. The Company did not provide a liability for claims that may be paid subsequent to this period as it could not reasonably estimate such claims. In estimating the liability prior to the Restructuring Proceedings, the Company made assumptions regarding the total number of claims anticipated to be received in a future period, the typical cost of settlement (which is sensitive to the industry in which the plaintiff claims exposure, the alleged disease type and the jurisdiction in which the action is being brought), the rate of receipt of claims, the settlement strategy in dealing with outstanding claims and the timing of settlements. As a result of the Restructuring Proceedings ~~(see Note 2)~~, pending asbestos-related litigation against the Company in the United States and the U.K. is stayed (subject to certain exceptions in the case of governmental authorities), and no party may take action to pursue or collect on such asbestos claims absent specific authorization of the Bankruptcy Court or the High Court. Since the Restructuring Proceedings, the Company has ceased making payments with respect to asbestos-related lawsuits. An asbestos creditors’ committee has been appointed in the U.S. representing asbestos claimants with pending claims against the Company, and the Bankruptcy Court has appointed a legal representative for the interests of potential future asbestos claimants. In the U.K. a creditors committee consisting in large part of representatives of asbestos claimants has been appointed. The Company’s obligations with respect to present and future claims could be determined through litigation in the Bankruptcy Court, the High Court, and/or through negotiations with each of the official committees appointed.

20In December of 2000, the Company entered into $250 million of surety bonds on behalf of the T&N Companies to meet certain collateral requirements for asbestos indemnity obligations associated with their prior membership in the Center for Claims Resolution (“CCR”). This amount was stepped down by contract to $225 million effective June 2001. As a result of the filing, the Company has sought declaratory and injunctive relief in an adversary proceeding filed in the Bankruptcy Court, in order to enjoin any post-petition payments to asbestos claimants by the CCR and any post-petition draw by the CCR on $225 million in face amount of the surety bonds. The CCR sought to draw on the surety bonds to fund past and future payments although the basis of such draw, the validity of such claims under the pre-petition bond terms, and whether such draw may be utilized to pay obligations of other CCR members were all disputed. On March 28, 2003, the Federal District Court Judge held that, with respect to phase one, the CCR had the right to draw upon the bonds to the extent that a settlement between an individual and the CCR member was consummated as of the Petition Date, i.e., a release had been obtained from such individual. The CCR moved for reconsideration and the ruling was modified to require a state-by-state analysis of what steps were required for the settlement to be binding. The litigation did not progress beyond this stage.

On May 2, 2005, the Company entered into a Surety Claims Settlement Agreement with the CCR and various surety bondholders whereby in fulfillment of all claims made by the CCR, $29 million was placed into escrow for use by the CCR to fund settlements that have already occurred or have yet to occur up to $26 million and CCR expenses of $3 million. In exchange for a secured claim against the Company and in connection with the pre-petition lenders, the surety bondholders allowed the exercise of the surety bonds in the amount of $28 million. The remaining $1 million was funded from an outstanding letter of credit. The settlement agreement cancels the remaining face amount of the surety bonds and gives the surety bondholders an entitlement to adequate protection upon full payment of the net bond draw of $28 million. Accordingly, the surety bondholders will receive monthly payments of interest on the net bond draw at a rate of LIBOR plus 200 basis points until the earlier of the effective date of the Plan or the occurrence of certain specified termination events.

The Company also issued various letters of credit in connection with asbestos lawsuits that had resulted in verdicts against the Company or its subsidiaries prior to its filing for bankruptcy protection. The letters of credit were issued as security for the judgments entered against the Company or its subsidiaries to permit the Company to pursue appeals to those judgments. The Bankruptcy Court lifted the automatic stay with respect to certain cases where letters of credit were in place to allow the appeals of those cases to proceed. During 2003, the final appeal in three of these cases was denied, and draws were made upon the letters of credit of approximately $16 million.

~~respect~~Except tofor ~~asbestos-related lawsuits. An asbestos creditors’ committee has been appointed in~~ the ~~U.S.~~effect ~~representing~~of ~~asbestos~~foreign ~~claimants~~currency, ~~with pending claims against~~ the Company, ~~and the Bankruptcy Court~~ has ~~appointed~~not aadjusted ~~legal~~its ~~representative~~estimate ~~for the interests~~ of ~~potential future asbestos claimants. In~~ the ~~U.K. a creditors committee consisting in large part of representatives of~~ asbestos ~~claimants~~liability since ~~has~~September ~~been appointed. March 3~~30, ~~2003 was the bar date for the filing of all asbestos-related property damage claims~~2001. AsFor ~~part of~~ the ~~Restructuring Proceedings, it will be determined which asbestos claims should be allowed, or compensated, and the aggregate value of such claims. The~~ Company’s ~~obligations~~U.S. ~~with~~and ~~respect~~U.K. tosubsidiaries ~~present~~this ~~and~~liability ~~future~~is ~~claims~~included ~~could~~in bethe ~~determined~~consolidated ~~through~~balance ~~litigation~~sheet inunder ~~Bankruptcy Court,~~ the ~~High~~caption ~~Court,~~“Liabilities ~~and/or~~subject ~~through~~to ~~negotiations~~compromise” ~~with~~as ~~each~~ of ~~the~~June ~~official~~30, ~~committees appointed~~2005.

InWhile ~~December of 2000,~~ the Company ~~entered~~believes ~~into~~that ~~$250 million~~the ofliability ~~surety~~recorded onwas ~~behalf~~appropriate as of ~~the~~October ~~T&N~~1, ~~Companies~~2001 for toanticipated ~~meet~~losses ~~certain~~arising ~~collateral~~from ~~requirements for~~ asbestos-related ~~indemnity~~claims ~~obligations~~against ~~associated with their prior membership in~~ the ~~Center~~T&N ~~for~~Companies ~~Claims~~through ~~Resolution~~2012, ~~(“CCR”).~~it ~~This~~is ~~amount~~the ~~was~~Company’s ~~stepped down~~view ~~by contract to $225 million effective June~~that, ~~2001.~~as As a result of the ~~filing~~Restructuring Proceedings, ~~the~~there ~~Company~~is ~~has~~even ~~sought~~greater ~~declaratory~~uncertainty ~~and injunctive relief~~ in anestimating ~~adversary proceeding filed in~~ the ~~Bankruptcy~~timing ~~Court,~~and amount inof ~~order~~future toasbestos ~~enjoin~~liability ~~any~~and ~~post-petition~~related ~~payments~~insurance ~~to asbestos~~recovery ~~claimants~~for bypending ~~the CCR~~ and ~~any~~future ~~post-petition~~claims. ~~draw~~There byare ~~the~~significant ~~CCR~~differences ~~on $225 million~~ in ~~face~~the ~~amount~~treatment of ~~the~~asbestos ~~surety~~claims ~~bonds.~~in ~~The~~a ~~CCR~~bankruptcy ~~now~~proceeding ~~seeks~~as tocompared ~~draw on the surety bonds~~ to ~~fund past and future payments although~~ the ~~basis~~tort oflitigation ~~such~~system. ~~draw,~~Among ~~the validity of~~other ~~such claims under the pre-petition bond terms~~things, ~~and~~it ~~whether~~is ~~such~~uncertain ~~draw~~at ~~may~~this betime ~~utilized~~as to ~~pay~~the ~~obligations~~number of ~~other~~asbestos-related ~~CCR~~claims ~~members~~that ~~are~~will ~~all~~be ~~disputed.~~filed Onin ~~March~~the ~~28,~~Restructuring ~~2003~~Proceedings, the ~~Federal~~number ~~District~~of ~~Court~~future ~~Judge~~claims ~~held~~ that, ~~with~~will ~~respect~~be toincluded ~~phase~~in ~~one,~~a ~~the~~plan ~~CCR~~of ~~has~~reorganization, ~~the right~~how toclaims ~~draw~~for ~~upon~~punitive ~~the~~damages ~~bonds~~and claims toby ~~the~~persons ~~extent~~with ~~that~~no aasbestos-related ~~settlement~~physical ~~between~~impairment anwill ~~individual~~be treated and ~~the~~whether ~~CCR~~such ~~member~~claims ~~was~~will ~~consummated,~~be ~~i.e.~~allowed, aand ~~release~~the ~~has~~impact ~~been~~that ~~obtained~~historical ~~from~~settlement ~~such~~values ~~individual.~~for ~~The~~asbestos ~~CCR~~claims ~~has~~may ~~appealed~~have ~~and~~on the ~~ruling~~estimation ~~was modified to require a state-by-state analysis~~ of ~~what~~asbestos ~~constitutes~~liability ~~a release. This is~~ in ~~process, as is a yet to be heard phase two, which will ultimately determine~~ the Restructuring ~~amount of any such draw~~Proceedings.

Except for the effect of foreign currency, the Company has not adjusted its estimate of the asbestos liability since September 30, 2001. This liability is included in the consolidated balance sheet under the caption “Liabilities subject to compromise” as of September 30, 2003 for the Company’s U.S. and U.K. subsidiaries.

While the Company believes that the liability recorded was appropriate for anticipated losses arising from asbestos-related claims against the T&N Companies through 2012, it is the Company’s view that, as a result of the Restructuring Proceedings, there is even greater uncertainty in estimating the future asbestos liability and related insurance recovery for pending and future claims. There are significant differences in the treatment of asbestos claims in a bankruptcy proceeding as compared to the tort litigation system. Among other things, it is uncertain at this time as to the number of asbestos-related claims that will be filed in the Restructuring Proceedings, the number of future claims that will be included in a plan of reorganization, how claims for punitive damages and claims by persons with no asbestos-related physical impairment will be treated and whether such claims will be allowed, and the impact that historical settlement values for asbestos claims may have on the estimation of asbestos liability in the Restructuring Proceedings.

No assurance can be given that the T&N Companies will not be subject to material additional liabilities and significant additional litigation relating to asbestos matters through 2012 or thereafter. In the event that such liabilities exceed the amounts recorded by the Company or the remaining insurance coverage, the Company’s results of operations and financial condition could be materially affected.

Insurance Recoverable

In 1996, T&N Ltd. (formerly T&N, plc) purchased for itself and its then defined global subsidiaries a £500 million layer of insurance which will be triggered should the aggregate costs of claims made or brought after June 30, 1996, where the exposure occurred prior to that date, exceed £690 million. During 2000, the Company concluded that the aggregate cost of the claims filed after June 30, 1996 would exceed the trigger point and recorded an insurance recoverable asset under the T&N policy of $577 million. As of ~~September~~June 30, ~~2003~~2005, the recorded insurance recoverable was $~~631.5~~644 million. In December 2001, one of the three reinsurers, European International Reinsurance Company Ltd. (“EIR”), filed suit in a London, England court to challenge the validity of its insurance contract with the T&N Companies. As a result of this lawsuit, a claim was made against the broker (Sedgwick) that assisted in procuring this policy for breach of its duties as a broker. This trial commenced in October 2003. InPrior ~~December~~to ~~2002~~the conclusion of the trial, the ~~remaining~~parties ~~two~~were ~~reinsurers~~able ~~issued~~to ~~separate~~reach ~~declaratory~~a ~~proceedings~~settlement. ~~seeking~~As ~~clarification~~a result of ~~policy~~this ~~requirements~~settlement, ~~related~~the toCompany ~~the~~recorded ~~Asbestos~~a $38.9 million asbestos ~~Liability~~charge ~~Policy~~during the fourth quarter of 2003. ~~The~~Under ~~Company~~the ~~believes~~terms ~~that~~of the settlement, ~~based~~EIR onwould be liable for 65.5% of its ~~review~~one-third share of the ~~insurance~~reinsurance ~~policies~~policy. ~~and~~By ~~advice~~separate ~~from~~agreement, ~~outside~~Sedgwick ~~legal~~agreed ~~counsel,~~to itbe isliable ~~probable~~for ~~that~~an additional 17.25% of the EIR share of the reinsurance policy. T&N ~~Companies~~Ltd. ~~will~~has bealso ~~entitled~~agreed to ~~receive~~indemnify ~~payment~~the ~~from~~insurer for sums paid under the ~~reinsurers~~policy for which the ~~cost~~insurer ofis liable to T&N Ltd. for which the insurer has no recovery from the reinsurers or Sedgwick. The ~~claims~~settlement agreements referenced above are being held in ~~excess~~escrow pending approval by the Bankruptcy Court and the Administrators of T&N Ltd. of those portions of the ~~trigger~~above-described ~~point~~settlement agreements that affect the Debtors. A motion seeking the Bankruptcy Court’s approval of the ~~insurance~~settlement was filed on March 1, 2004.

21Subsequent to this motion, the other two reinsurers, Munchener Ruckversicherungs-Gesellschaft AG (“Munich Re”) and Centre Reinsurance International Co. (“CRIC”), a subsidiary of the Zurich Financial Services Group, notified the Company of their belief that the settlements with EIR and Sedgwick may breach one or more provisions of the Reinsurance Agreement. The hearing to review the March 1, 2004 motion has been adjourned without date as the parties attempt to resolve the issues raised by the two reinsurers. However, these efforts have been unsuccessful, prompting the Administrators to file an action in the London High Court seeking a declaration that the settlements with EIR and Sedgwick do not breach provisions of the Reinsurance Agreement. A hearing was conducted July 13-15, 2005 with a decision expected shortly.

On May 17, 2005, the Administrators of T&N issued an Ordinary Application for declarations regarding (among other things) the principles governing the valuation of pending and future US Asbestos Claims. The Court ordered that questions of law and procedure relating to the Application be heard first and the hearing on factual issues be adjourned. The first hearing was conducted on July 11-12, 2005 and a decision on the first stage of the proceeding is expected shortly. Depending upon how the Court rules on these issues, the asbestos liabilities and corresponding insurance recoverables reflected by the Company in its financial statements may need to be adjusted.

The ultimate realization of insurance proceeds is directly related to the amount of related covered claims paid by the Company. If the ultimate asbestos claims are higher than the recorded liability, the Company expects the ultimate insurance recoverable to be higher than the recorded amount, up to the cap of the insurance layer. If the ultimate asbestos claims are lower than the recorded liability, the Company expects the ultimate insurance recoverable to be lower than the recorded amount. While the Restructuring Proceedings will impact the timing and amount of the asbestos claims and the ~~insurance~~ insurance recoverable, there has been no change, other than to reflect the settlement discussed above and foreign exchange translation, to the recorded amounts since the Company initiated the Restructuring Proceedings. Accordingly, the recorded amounts for this insurance recoverable asset could change significantly based upon events that occur from the Restructuring Proceedings.

~~The~~During ~~Company~~the ~~has reviewed~~first ~~the~~quarter ~~financial~~of ~~viability~~2004, ~~and~~the ~~legal~~security ~~obligations~~rating of ~~the~~Centre ~~three~~Reinsurance ~~reinsurance~~International ~~companies~~Co. ~~involved~~was ~~and~~downgraded ~~has~~by ~~concluded~~several ~~that~~major ~~currently~~credit ~~there~~rating isproviders. ~~little~~As ~~risk~~a ~~that~~result of the downgrade, ~~reinsurers~~the ~~will~~Company ~~not~~obtained bea ~~able~~guarantee toof ~~meet~~all ~~their~~CRIC’s ~~obligation~~obligations tounder ~~pay, once~~ the ~~claims~~policy ~~filed after~~from ~~June~~Centre ~~30,~~Reinsurance ~~1996~~(US) ~~exceed~~Limited ~~the~~(“CRUS”), ~~£690~~an ~~million~~affiliate ~~trigger~~of ~~point~~CRIC. The ~~U.S.~~security ~~claims’~~rating ~~costs~~of ~~applied~~CRUS ~~against~~has ~~this~~not ~~policy~~been ~~are~~affected ~~converted~~by atthe adowngrade ~~fixed exchange rate~~ of ~~$1.69/£.~~CRIC Asand remains ~~such,~~unchanged ifsince the ~~market~~inception ~~exchange~~of ~~rate~~the ispolicy. ~~less~~If ~~then~~the ~~$1.69~~reinsurers and/£,or the ~~Company~~ ~~will~~related ~~effectively~~affiliate ~~have~~are anot ~~discount~~able ~~from~~to ~~100%~~meet ~~recovery~~their onobligations ~~claims~~under ~~paid.~~the ~~As of September 30~~policy, ~~2003,~~ the ~~$631.5~~Company’s ~~million~~results ~~insurance recoverable asset is net~~ of anoperations ~~exchange~~and ~~rate~~financial ~~discount~~condition ofcould ~~approximately~~be ~~$10~~materially affected.6 ~~million.~~

The Company has reviewed the financial viability and legal obligations of the three reinsurance companies involved and has concluded that there is little risk that the reinsurers will not be able to meet their obligations under the policy based upon their financial condition. The U.S. claims’ costs applied against this policy are converted at a fixed exchange rate of $1.69/£. As such, if the market exchange rate is greater than $1.69/£, the Company will effectively have a premium on 100% recovery on claims paid. As of June 30, 2005, the $644 million insurance recoverable asset includes an exchange rate premium of approximately $36.9 million.

Abex and Wagner Asbestos Litigation

Background

Two of the Company’s businesses formerly owned by Cooper Industries, Inc., known as Abex and Wagner, are involved as defendants in numerous court actions in the U.S. alleging personal injury from exposure to asbestos or asbestos-containing products. These claims mainly involve ~~friction~~vehicle safety and performance products. As of the Petition Date, Abex and Wagner were defendants in approximately 66,000 and 33,000 pending claims, respectively. As a result of the Restructuring Proceedings, the Company includes as a pending claim open served claims, settled but not documented claims and settled but not paid claims. Notices of complaints continue to be received post-petition and are in violation of the automatic ~~Automatic Stay~~stay.

The liability of the Company with respect to claims alleging exposure to Wagner products arises from the 1998 stock purchase from Cooper Industries, Inc. of the corporate successor by merger to Wagner Electric Company; the purchased entity is now a wholly-owned subsidiary of the Company and one of the Debtors in the Restructuring Proceedings. As a consequence, all claims against the Debtors, including asbestos-related claims, have been stayed.

The liability of the Company with respect to claims alleging exposure to Abex products arises from a contractual liability entered into in 1994 by the predecessor to the Company whose stock the Company purchased in 1998. Pursuant to that contract, prior to the Restructuring Proceedings, the Company, through the relevant subsidiary, was liable for certain indemnity and defense payments incurred on behalf of an entity known as Pneumo Abex Corporation, the successor in interest to Abex Corporation. Effective as of the Petition Date, the Company has ceased making such payments and is currently considering whether to accept or reject the 1994 contractual liability.

As mentioned above, as of the Petition Date, pending asbestos litigation of Abex (as to the Company only) and Wagner is stayed (subject to certain exceptions in the case of governmental authorities), and no party may take action to pursue or collect on such asbestos claims absent specific authorization of the Bankruptcy Court or the High Court.

~~Recorded~~29 ~~Liability~~

The liability (comprised of $129.5 million in Abex liabilities and $85.0 million in Wagner liabilities as of September 30, 2003) represented the Company’s estimate prior to the Restructuring Proceedings for claims currently pending and those which were reasonably estimated to be asserted and paid through 2012. The Company did not provide a liability for claims that may be brought subsequent to this period as it could not reasonably estimate such claims. In estimating the liability prior to the Restructuring Proceedings, the Company made assumptions regarding

~~the~~Recorded ~~total~~Liability number of claims anticipated to be received in a future period, the typical cost of settlement (which is sensitive to the industry in which the plaintiff claims exposure, the alleged disease type and the jurisdiction in which the action is being brought), the rate of receipt of claims, the settlement strategy in dealing with outstanding claims and the timing of settlements.

AsThe aliability ~~result~~(comprised of $129.5 million in Abex liabilities and $84.1 million in Wagner liabilities as of June 30, 2005) represented the Company’s estimate prior to the Restructuring Proceedings ~~(see~~for ~~Note~~claims ~~2),~~currently pending and those, which were reasonably estimated to be asserted and paid through 2012. The Company did not provide a liability for claims that may be brought subsequent to this period as it ~~asbestos-related~~could ~~litigation~~not reasonably estimate such claims. In estimating the liability prior to the Restructuring Proceedings, the Company made assumptions regarding the total number of claims anticipated to be received in a future period, the typical cost of settlement (which is ~~stayed~~sensitive asto ~~previously~~the ~~described~~industry ~~for~~in which the ~~T&N~~plaintiff ~~Companies~~claims exposure, the alleged disease type and the jurisdiction in which the action is being brought), the rate of receipt of claims, the settlement strategy in dealing with outstanding claims and the timing of settlements.

~~While~~As ~~the~~a ~~Company~~result ~~believes~~of ~~that~~ the Restructuring ~~liability~~Proceedings, ~~recorded~~pending ~~was appropriate for anticipated losses arising from~~ asbestos-related ~~claims~~litigation ~~related to Abex and Wagner through 2012, it~~ is ~~the~~stayed. The Company’s ~~view~~issued ~~that,~~various asletters ~~a result~~ of ~~the~~credit ~~Restructuring~~in ~~Proceedings,~~connection ~~there~~with isasbestos ~~even~~lawsuits ~~greater~~that ~~uncertainty~~had resulted in ~~estimating~~verdicts against the ~~future~~Company ~~asbestos~~prior ~~liability~~to ~~and~~its ~~related~~filing ~~insurance recovery~~ for ~~pending~~bankruptcy protection. ~~and~~The ~~future~~letters ~~claims.~~of ~~There~~credit ~~are~~were ~~significant~~issued ~~differences~~as insecurity ~~the~~for ~~treatment~~judgments ofentered ~~asbestos claims~~against inthe aCompany ~~bankruptcy~~to ~~proceeding~~permit asthe ~~compared~~Company to ~~the~~pursue ~~tort~~appeals ~~litigation~~to ~~system~~these judgments. ~~Among~~The ~~other~~Bankruptcy ~~things,~~Court ithas islifted ~~uncertain~~the atautomatic ~~this~~stay ~~time~~with asrespect to ~~the~~one ~~number~~letter of ~~asbestos-related~~credit for ~~claims~~the ~~that~~Company ~~will~~where ~~be filed in~~ the ~~proceeding,~~letter ~~the number~~ of ~~future~~credit ~~claims~~was ~~that~~in ~~will~~place ~~be included~~to inallow athe ~~plan~~appeal of ~~reorganization,~~this ~~how~~case ~~claims~~to ~~for~~proceed. ~~punitive~~During ~~damages~~2004, ~~and~~the ~~claims~~final byappeal ~~persons~~in ~~with~~this nocase ~~asbestos-related~~was ~~physical~~denied ~~impairment will be treated~~ and ~~whether~~a ~~such~~net ~~claims~~draw ~~will~~was bemade ~~allowed,~~upon ~~and~~this ~~the~~letter ~~impact~~of ~~historical~~credit ~~settlement values for asbestos claims may have on the estimation~~ of ~~asbestos~~approximately ~~liability~~$1 ~~in the Restructuring Proceedings~~million.

While the Company believes that the liability recorded was appropriate as of October 1, 2001 for anticipated losses arising from asbestos-related claims related to Abex and Wagner through 2012, it is the Company’s view that, as a result of the Restructuring Proceedings, there is even greater uncertainty in estimating the timing and amount of future asbestos liability and related insurance recovery for pending and future claims. There are significant differences in the treatment of asbestos claims in a bankruptcy proceeding as compared to the tort litigation system. Among other things, it is uncertain at this time as to the number of asbestos-related claims that will be filed in the proceeding, the number of future claims that will be included in a plan of reorganization, how claims for punitive damages and claims by persons with no asbestos-related physical impairment will be treated and whether such claims will be allowed, and the impact historical settlement values for asbestos claims may have on the estimation of asbestos liability in the Restructuring Proceedings.

No assurance can be given that the Company will not be subject to material additional liabilities and significant additional litigation relating to Abex and Wagner asbestos matters through 2012 or thereafter. In the event that such liabilities exceed the amounts recorded by the Company or the remaining insurance coverage, the Company’s results of operations and financial condition could be materially affected.

Insurance Recoverable

Abex maintained product liability insurance coverage for most of the time that it manufactured products that contained asbestos. This coverage is shared with other third-party companies. The subsidiary of the Company that may be liable for certain indemnity and defense payments with respect to Abex has the benefit of that insurance up to the extent of that liability. Abex has been in litigation since 1982 with the insurance carriers of its primary layer of liability concerning coverage for asbestos claims. Abex also has substantial excess layer liability insurance coverage that is shared with other companies that, barring unforeseen insolvencies of excess carriers or other adverse events, should provide coverage for asbestos claims against Abex. The Abex insurance recoverable was $~~116~~112.36 million as of ~~September~~ June 30, ~~2003~~2005.

Wagner also maintained product liability insurance coverage for some of the time that it manufactured products that contained asbestos. This coverage is shared with other third-party companies. ~~The~~One ~~subsidiary~~ of the ~~Company~~companies, ~~that~~Dresser ~~may~~Industries, beInc. (“Dresser”) ~~liable~~initiated ~~for~~an ~~asbestos~~adversary ~~claims~~action against ~~Wagner~~the ~~has~~Debtors ~~the benefit~~and ofa ~~that~~number of insurance, ~~subject~~carriers toin the ~~rights~~Company’s ofRestructuring ~~other~~Proceedings. ~~potential~~In ~~insureds~~its complaint, Dresser alleged that it has rights under ~~the~~certain ~~policies.~~primary ~~Primary~~and ~~layer~~excess general liability insurance ~~coverage~~policies ~~for~~that ~~asbestos~~may ~~claims~~be ~~against~~shared ~~Wagner~~with isone of the ~~subject~~Debtors, ofFederal-Mogul anProducts ~~agreement~~(“FMP”) ~~with~~as the successor to Wagner’s ~~solvent~~Electric ~~primary carriers~~Corporation. ~~The~~Dresser ~~agreement~~seeks, ~~provides~~among ~~for~~other ~~partial~~things, ~~reimbursement~~a declaration of ~~indemnity~~the ~~and~~parties’ ~~defense~~respective rights ~~costs~~and ~~for~~obligations ~~Wagner~~under ~~asbestos~~the ~~claims~~policies ~~until~~and ~~exhaustion~~a partition of ~~aggregate~~the ~~limits.~~competing ~~Wagner~~rights ~~also~~of ~~has~~Dresser ~~substantial~~and ~~excess~~FMP ~~layer~~under ~~liability~~the ~~insurance~~policies. ~~coverage~~FMP ~~which,~~answered ~~barring unforeseen~~Dresser’s ~~insolvencies~~complaint ofand ~~excess~~filed ~~carriers~~cross-claims oragainst ~~other~~all ~~adverse~~of ~~events,~~the ~~should~~defendant-insurers ~~provide~~seeking ~~coverage~~a ~~for~~declaration ~~asbestos~~of FMP’s ~~claims~~rights ~~against~~to ~~Wagner~~the policies. The ~~Wagner~~subsidiary ~~insurance~~of ~~recoverable~~the ~~was~~Company ~~$53.5~~that ~~million~~may asbe ofliable ~~September~~for ~~30, 2003.~~

~~The~~30 ultimate realization of insurance proceeds is directly related to the amount of related covered claims paid by the Company. If the ultimate asbestos claims are higher than the recorded liability, the Company expects the ultimate insurance recoverable to be higher than the recorded amount. If the ultimate asbestos claims are lower than the recorded liability, the Company expects the ultimate insurance recoverable to be lower than the recorded amount. While the Restructuring Proceedings will impact the timing and amount of the asbestos claims and the insurance recoverable, there has been no change to the recorded amounts due to the uncertainties created by the Restructuring Proceedings. Accordingly, this asset could change materially based upon events that occur from the Restructuring Proceedings.

asbestos claims against Wagner has the benefit of that insurance, subject to the rights of other potential insureds under the policies. Primary layer liability insurance coverage for asbestos claims against Wagner is the subject of an agreement with Wagner’s solvent primary carriers. The agreement provides for partial reimbursement of indemnity and defense costs for Wagner asbestos claims until exhaustion of aggregate limits. Wagner also has substantial excess layer liability insurance coverage which, barring unforeseen insolvencies of excess carriers or other adverse events, should provide coverage for asbestos claims against Wagner. The Wagner insurance recoverable was $53 million as of June 30, 2005. On November 4, 2004, FMP, Dresser and Cooper Industries, Inc. (“Cooper”) and certain of the insurers (“Parties”) entered into a partitioning agreement, by which the Parties agreed as to the manner in which the limits of liability, self-insured retentions, deductibles and any other self-insurance features, and the erosion thereof, are to be partitioned among FMP, Dresser and Cooper. The partitioning agreement effectively disposes of Dresser’s claims in the Dresser adversary proceeding. However, FMP’s cross claim against the defendant-insurers remain, but are currently stayed pursuant to the agreement of the remaining parties and the court.

The ultimate realization of insurance proceeds is directly related to the amount of related covered claims paid by the Company. If the ultimate asbestos claims are higher than the recorded liability, the Company expects the ultimate insurance recoverable to be higher than the recorded amount. If the ultimate asbestos claims are lower than the recorded liability, the Company expects the ultimate insurance recoverable to be lower than the recorded amount. While the Restructuring Proceedings will impact the timing and amount of the asbestos claims and the insurance recoverable, there has been no change to the recorded amounts due to the uncertainties created by the Restructuring Proceedings. Accordingly, the recorded amounts for this insurance recoverable asset could change materially based upon events that occur from the Restructuring Proceedings.

The Company believes that based on its review of the insurance policies, the financial viability of the insurance carriers, and advice from outside legal counsel, it is probable that Abex and Wagner will realize an insurance recoverable correlating with the respective liability.

Federal-Mogul and Fel-Pro Asbestos Litigation

Prior to the Restructuring Proceedings, the Company was sued in its own name as one of a large number of defendants in multiple lawsuits brought by claimants alleging injury from exposure to asbestos due to its ownership of certain assets involved in gasket making. As of the Petition Date, the Company was a defendant in approximately 61,500 pre-petition pending claims. Over 40,000 of these claims were transferred to a federal court, where, prior to the Restructuring Proceedings, they were pending. Notices of complaints continue to be received post-petition and are in violation of the ~~Automatic~~automatic ~~Stay~~stay.

~~Prior~~31 to the Restructuring Proceedings, the Company’s Fel-Pro subsidiary also was named as a defendant in a number of product liability cases involving asbestos, primarily involving gasket or packing products. Fel-Pro was a defendant in approximately 34,000 pending claims as of the Petition Date. Over 32,000 of these claims were transferred to a federal court where, prior to the Restructuring Proceedings, they were pending. The Company was defending all such claims vigorously and believed that it and Fel-Pro had substantial defenses to liability and insurance coverage for defense and indemnity.

Prior to the Restructuring Proceedings, the Company’s Fel-Pro subsidiary also was named as a defendant in a number of product liability cases involving asbestos, primarily involving gasket or packing products. Fel-Pro was a defendant in approximately 34,000 pending claims as of the Petition Date. Over 32,000 of these claims were transferred to a federal court, where, prior to the Restructuring Proceedings, they were pending. The Company was defending all such claims vigorously and believed that it and Fel-Pro had substantial defenses to liability and insurance coverage for defense and indemnity.

All claims alleging exposure to the products of the Company and of Fel-Pro have been stayed as a result of the Restructuring Proceedings.

Aggregate of Asbestos Liability and Insurance Recoverable Asset

The following is a summary of the asbestos liability subject to compromise and the insurance recoverable asset as of ~~December~~June 3130, ~~2002~~2005 and ~~September~~ 30December 31, ~~2003 (in millions of dollars)~~2004:

	T&N Companies			~~Abex~~	Abex		~~Wagner~~	Wagner		~~Other~~		Other	~~Total~~		Total
Liability:
	(Millions of Dollars)
Balance at December 31, 2002	$	1,347.9		$	129.5		$	85.0		$	2.7		$	1,565.1
Liability:
Foreign exchange		6.1			—			—			—			6.1
Balance at December 31, 2004	$	1,367.7			$	129.5		$	84.1			$	2.7		$	1,584.0
Balance at September 30, 2003	$	1,354.0		$	129.5		$	85.0		$	2.7		$	1,571.2
CCR/ Surety settlement		(29.0	)			—			—				—			(29.0	)
Asset:
Foreign exchange		(13.5	)			—			—				—			(13.5	)
Balance at December 31, 2002	$	610.8		$	116.3		$	53.5		$	—		$	780.6
Balance at June 30, 2005	$	1,325.2			$	129.5		$	84.1			$	2.7		$	1,541.5
Foreign exchange		20.7			—			—			—			20.7
Asset:
Balance at September 30, 2003	$	631.5		$	116.3		$	53.5		$	—		$	801.3
Balance at December 31, 2004	$	687.7			$	112.6		$	53.5			$	—		$	853.8
Cash receipts		—				—			(0.5	)			—			(0.5	)
Foreign exchange		(43.1	)			—			—				—			(43.1	)
Balance at June 30, 2005	$	644.6			$	112.6		$	53.0			$	—		$	810.2

The Company’s estimate of asbestos-related liabilities for pending and expected future asbestos claims is subject to considerable uncertainty because such liabilities are influenced by numerous variables that are inherently difficult to predict. The Restructuring Proceedings significantly increase the inherent difficulties and uncertainties involved in estimating the number and cost of resolution of present and future asbestos-related claims against the Company and may have the effect of increasing the ultimate cost of the resolution of such claims.

~~Other~~Fairness ~~Legal~~in ~~Matters~~Asbestos Injury Resolution Act of 2005

Since April 2003, the U.S. Congress has actively considered legislation to reform the tort system with respect to claims arising from exposure to asbestos in the United States. The current legislative vehicle is the “Fairness in Asbestos Injury Resolution Act of 2005” (the “FAIR Act”). There is significant uncertainty as to whether or not the FAIR Act will become law, either in 2005 or thereafter. There is also significant uncertainty as to whether any version of the FAIR Act that may ultimately be enacted will contain the provisions that are in the current draft of the proposed legislation. If the FAIR Act were enacted in its current form, there could be a material adverse impact on the Plan.

Other Matters

The Company is involved in other legal actions and claims, directly and through its subsidiaries. After taking into consideration legal counsel’s evaluation of such actions, management is of the opinion that the outcomes are not likely to have a material adverse effect on the Company’s financial position, operating results, or cash flows.

Environmental Matters

The Company is a defendant in lawsuits filed, or the recipient of administrative orders issued, in various jurisdictions pursuant to the Federal Comprehensive Environmental Response Compensation and Liability Act of 1980 (“CERCLA”) or other similar national or state environmental laws. These laws require responsible parties to

2432

pay for remediating contamination resulting from hazardous substances that were discharged into the environment by ~~these parties~~them, or by others to whom they sent such substances for treatment or other disposition. In addition, the Company has been notified by the United States Environmental Protection Agency, other national environmental agencies, and various state agencies that it may be a potentially responsible party (“PRP”) under such laws for the cost of remediating hazardous substances pursuant to CERCLA and other national and state environmental laws. PRP designation requires the funding of site investigations and subsequent ~~remediation~~remedial activities.

At most of the sites that are likely to be ~~costliest~~the costliest to remediate, which are often current or former commercial waste disposal facilities to which numerous companies sent waste, the Company’s exposure is expected to be limited. Despite the joint and several liability which ~~may~~might be imposed on the Company under CERCLA and some of the other laws pertaining to these sites, the Company’s share of the total waste has generally been small. The other companies, often numbering in the hundreds or more, which also sent wastes to these disposal sites, generally include large, solvent publicly owned companies, and in most such situations the government agencies and courts have imposed liability in some reasonable relationship to contribution of waste.

The Company also has identified certain ~~present~~presently and ~~former~~formerly owned properties at which it is or may be responsible for cleaning up environmental contamination, in some cases as a result of contractual commitments. The Company is actively seeking to resolve these matters. Although difficult to quantify based on the complexity of the issues, the Company has accrued amounts corresponding to its best estimate of the costs associated with such matters based upon current available information from site investigations and consultants.

~~Environmental~~Although ~~reserves~~difficult ~~were~~to ~~$67.3~~quantify ~~million~~based ~~and~~on ~~$64.6~~the ~~million~~complexity as of ~~September~~the 30issues, ~~2003 and December 31, 2002, respectively. Management believes that such reserves will be adequate to cover~~ the Company’s ~~estimated~~has ~~liability~~accrued ~~for~~amounts ~~its~~corresponding ~~exposure in respect~~ to ~~such~~its ~~matters.~~best Inestimate of the ~~event~~costs ~~that~~associated with such ~~liabilities~~regulatory ~~were~~and tocontractual ~~significantly~~matters ~~exceed~~based ~~the~~upon ~~amounts~~current ~~recorded~~available byinformation ~~the~~from ~~Company, the~~site ~~Company’s~~investigations ~~results of operations~~ and ~~financial condition could be materially affected~~consultants. AsEnvironmental areserves ~~result~~were ~~of the Restructuring Proceedings,~~ $2758.30 million and $2261.90 million ofat ~~environmental~~June ~~reserves as of September~~ 30, ~~2003~~2005 and December 31, ~~2002~~2004, respectively, ~~have~~and ~~been~~are ~~classified~~included ~~as liabilities subject to compromise~~ in the consolidated balance ~~sheet.~~sheets as follows:

9. INVENTORIES


	June 30 2005		December 31 2004
	(Millions of Dollars)
Other current liabilities	$	9.7	$	11.5
Other long-term accrued liabilities		23.5		25.9
Liabilities subject to compromise		24.8		23.6

	$	58.0	$	61.0

~~Inventories~~Management ~~consisted~~believes ofthat such accruals will be adequate to cover the ~~following~~Company’s (estimated liability for its exposure in ~~millions~~respect to such matters. In the event that such liabilities were to significantly exceed the amounts recorded by the Company, the Company’s results of operations ~~dollars):~~and financial condition could be materially affected. At June 30, 2005, management estimates that reasonably possible material additional losses above and beyond management’s best estimate of required remediation costs as recorded approximates $44 million.

	September 30 2003			December 31 2002
Raw materials	$	164.3		$	172.5
Work-in-process		132.6			130.3
Finished products		565.2			552.8
		862.1			855.6
Reserves and allowances		(60.2	)		(55.5	)
	$	801.9		$	800.1

Environmental reserves subject to compromise include those that may be reduced in the Company’s Restructuring Proceedings because they may be determined to be “dischargeable debts” incurred prior to the Company’s filing for bankruptcy. Such liabilities generally arise at either (1) commercial waste disposal sites to which the Company and other companies sent wastes for disposal, or (2) sites in relation to which the Company has a contractual obligation to indemnify the current owner of a site for the costs of cleanup of contamination that was released into the environment before the Company sold the site.

10Environmental reserves determined not to be subject to compromise include those which arise from a legal obligation of the Company, under an administrative or judicial order, to perform cleanup at a site. ~~RESTRUCTURING~~Such obligations are normally associated with sites which the Company owns and either operates or formerly operated.

~~The~~33 Company recorded $28 million of restructuring charges during the first nine months of 2003. These charges primarily consisted of severance costs for European and North American site consolidation and headcount reduction programs. Aftermarket recorded $14 million of these charges, and Powertrain recorded $10 million of these charges. Restructuring charges for Sealing Systems and Systems Protection totaled $4 million for the nine-month period ending September 30, 2003 primarily relating to previously announced programs.

Total employee reductions for all current Company restructuring programs are expected to be approximately 3,300 of which approximately 2,900 have been terminated as of September 30, 2003.

The ~~following~~best ~~table~~estimate ~~sets~~of ~~forth~~environmental ~~the~~liability ~~restructuring~~at ~~reserves~~a ~~for~~site may change from time to time during a bankruptcy proceeding even though the ~~three~~liability relating to that site is subject to compromise and ~~nine-month~~the ~~periods~~Company’s ~~ended~~responsibility to make payments is stayed. Notwithstanding the stay of legal proceedings against the Company regarding such a site, activities such as further ~~September~~site 30investigation and/or actual cleanup work often continue to be performed, ~~2003~~generally ~~(in~~by ~~millions~~parties other than the Company. Such activities may produce new and better information that requires the Company to revise its best estimate of ~~dollars):~~total site cleanup costs and its own share of such costs.

Balance of restructuring reserves as of December 31, 2002	$	90.8
Restructuring charges		10.3
Effect of foreign exchange		0.5
Payments against restructuring reserves		(17.4	)
Balance of restructuring reserves as of March 31, 2003		84.2
Restructuring charges		9.9
Effect of foreign exchange		3.4
Payments against restructuring reserves		(20.2	)
Balance of restructuring reserves as of June 30, 2003		77.3
Restructuring charges		8.1
Effect of foreign exchange		—
Payments against restructuring reserves		(21.5	)
Balance of restructuring reserves as of September 30, 2003	$	63.9

16. Operations by Reporting Segment

11The Company’s integrated operations are organized into five reporting segments generally corresponding to major product groups; Powertrain, Sealing Systems, Vehicle Safety and Performance, Aftermarket Products and Services and Corporate. ~~ACQUISITION~~Segment ~~AND~~information ~~DIVESTITURES~~for three and six months ended June 30, 2004 and the six months ended June 30, 2005 has been reclassified to reflect organizational changes implemented during the second quarter of 2005.

OnThe ~~January 30, 2003, the~~ Company ~~announced~~has ~~that~~aggregated itcertain ~~had~~individual ~~entered~~product ~~into~~segments awithin ~~letter~~its offive ~~intent~~reporting tosegments. ~~acquire~~The ~~principally~~accounting ~~all~~policies of the ~~Bendix~~segments ~~friction~~are ~~materials business~~the ofsame ~~Honeywell~~as ~~International,~~those ~~Inc. (“Honeywell”). The terms~~ of the Company. ~~transaction~~Revenues ~~are~~related ~~under~~to ~~negotiation~~Powertrain, ~~and~~Sealing ~~the~~Systems, ~~Company continues to assess the acquisition~~ and ~~work~~Vehicle ~~with~~Safety ~~Honeywell~~ and ~~the~~Performance ~~Company’s~~products ~~appointed~~sold ~~committees in the Restructuring Proceedings~~ to ~~finalize~~OE ~~the~~customers ~~terms~~are ofrecorded ~~the~~within ~~transaction. The Company continues to make progress on satisfying~~ the ~~regulatory~~respective ~~conditions to the transaction~~segments. ~~The~~Revenues ~~consummation of this acquisition is expressly conditional upon Honeywell receiving a bankruptcy court-issued permanent injunction shielding it~~ from ~~all~~such ~~current~~products ~~and~~sold ~~future asbestos liabilities related~~ to ~~the~~Aftermarket ~~friction~~customers ~~materials~~are ~~business.~~recorded Inwithin ~~addition,~~ the ~~completion of the acquisition is subject to Bankruptcy Court~~ ~~approval.~~Aftermarket ~~The~~Products ~~Bendix friction business has annual sales of approximately $700 million,~~ and ~~includes~~Services ~~13 manufacturing plants and 5 major engineering facilities in nine countries~~segment. InAll ~~September~~products ~~2003,~~transferred ininto ~~response~~the toAftermarket ~~this~~Products ~~proposed transaction, DaimlerChrysler Corporation, Ford Motor Company~~ and ~~General~~Services ~~Motors~~reporting ~~Corporation~~segment ~~jointly~~from ~~filed~~other ~~suit~~reporting ~~against~~segments ~~the~~are ~~Company~~transferred ~~and~~at ~~Honeywell~~cost ~~International,~~in ~~Inc. seeking declaratory judgment to enjoin~~ the ~~transaction.~~United ~~The~~States ~~Company~~and ~~continues~~at toagreed-upon ~~evaluate~~transfer ~~the~~prices ~~bases for the claims~~internationally.

~~During~~The ~~April~~Company ~~2003,~~evaluates ~~the~~segment ~~Company~~performance ~~completed the~~principally ~~divestitures~~on ofa non-GAAP ~~its~~Operational UEBITDA basis.S. ~~camshaft~~Operational ~~operations~~EBITDA ~~and~~is ~~principally~~defined ~~all~~as ofearnings ~~its~~before ~~original~~interest, ~~equipment~~income ~~lighting~~taxes, ~~operations.~~depreciation ~~The~~and ~~divested~~amortization ~~U.S.~~and ~~camshaft~~certain ~~operations~~nonrecurring ~~include~~items ~~manufacturing~~such ~~operations~~as inrestructuring ~~Grand~~and ~~Haven~~impairment charges, ~~Michigan~~Chapter 11 and ~~Orland,~~Administration related ~~Indiana~~reorganization expenses, asand ~~well~~gains asor losses on the ~~Company’s~~ ~~share~~sales of anassets. ~~assembled~~Operational ~~camshaft~~EBITDA ~~joint~~for ~~venture~~each ~~operation~~segment inis ~~Grand~~shown ~~Haven.~~below ~~The~~and ~~original~~is ~~equipment~~reconciled ~~lighting~~to ~~divestitures~~its ~~include~~most ~~operations~~comparable inU.S. ~~Matamoros,~~GAAP ~~Mexico;~~measure ~~Brownsville,~~in ~~Texas;~~the ~~and~~consolidated ~~Toledo,~~financial ~~Ohio~~statements.

~~During~~Net ~~the third quarter of 2003, the Company divested of its lighting operations located in Hampton, Virginia and Solon, Ohio. These divested operations had 2003 year-to-date net~~ sales ~~of $32.7 million compared to $34.3 million for the same period of 2002. The Company received aggregate net cash proceeds of $2.1 million~~ and ~~recognized~~gross anmargin ~~aggregate~~information ~~loss~~by ofreporting ~~$0.8~~segment ~~million~~is ~~for~~as ~~its~~follows: ~~divestitures in the third quarter of 2003.~~


	Net Sales
	Three Months Ended June 30						Six Months Ended June 30
	2005			2004			2005			2004
	(Millions of Dollars)
Powertrain	$	585		$	544		$	1,167		$	1,093
Sealing Systems		127			131			254			264
Vehicle Safety and Performance		196			176			390			351
Aftermarket Products and Services		757			720			1,488			1,410

	$	1,665		$	1,571		$	3,299		$	3,118


	Gross Margin
	Three Months Ended June 30						Six Months Ended June 30
	2005			2004			2005			2004
	(Millions of Dollars)
Powertrain	$	88		$	87		$	172		$	164
Sealing Systems		8			16			12			30
Vehicle Safety and Performance		51			49			96			98
Aftermarket Products and Services		171			178			336			343
Corporate		(26	)		(10	)		(49	)		(18	)

	$	292		$	320		$	567		$	617

~~12.~~Operational ~~CONSOLIDATING~~EBITDA ~~CONDENSED~~by ~~FINANCIAL~~reporting ~~INFORMATION~~segment OFand ~~GUARANTOR~~the ~~SUBSIDIARIES~~reconciliation of Operational EBITDA to earnings (loss) from continuing operations before income tax expense is as follows:


	Three Months Ended June 30						Six Months Ended June 30
	2005			2004			2005			2004
	(Millions of Dollars)
Powertrain	$	102		$	89		$	198		$	173
Sealing Systems		7			19			9			32
Vehicle Safety and Performance		45			42			86			86
Aftermarket Products and Services		117			123			224			232
Corporate		(113	)		(101	)		(232	)		(212	)

Total Operational EBITDA		158			172			285			311

Adjustment of long-lived assets to fair value		(1	)		(20	)		(4	)		(23	)
Depreciation and amortization		(86	)		(82	)		(179	)		(167	)
Interest expense, net		(34	)		(24	)		(63	)		(50	)
Chapter 11 and Administration related reorganization expenses		(20	)		(34	)		(50	)		(60	)
Discontinued operations and other		(4	)		3			2			4

Earnings (loss) from continuing operations before income tax expense	$	13		$	15		$	(9	)	$	15

Total assets by reportable segment are as follows:


	June 30 2005		December 31 2004
	(Millions of Dollars)
Powertrain	$	1,886	$	2,032
Sealing Systems		807		791
Vehicle Safety and Performance		979		1,017
Aftermarket Products and Services		3,031		3,057
Corporate		1,245		1,368

	$	7,948	$	8,265

17. Stock-Based Compensation

On February 2, 2005, the Company entered into a five-year employment agreement with José Maria Alapont, effective March 1, 2005, whereby Mr. Alapont was appointed as the Company’s president and chief executive officer. In connection with this agreement, the proponents of the Third Amended Plan of Reorganization have agreed to amend the Plan to provide that the reorganized Federal-Mogul will grant to Mr. Alapont stock options equal to at least 4% of the value of the reorganized Company at the reorganization date (“Options”). If there is a material reduction in the value of the reorganized Company under any amendment to the Plan, that is confirmed, then Mr. Alapont would receive stock options in an amount that would be the economic equivalent of the Options. These stock options vest ratably over the life of the employment agreement, such that one fifth of the options will vest on each anniversary of the employment agreement effective date. The contractual term of these stock options is 7 years from the date of grant (reorganization date).

Additionally, one-half of the options have an additional feature allowing for the exchange of options for shares of stock prior to the end of the employment agreement. Specifically, Mr. Alapont may elect to exchange four options for a Class A share of stock. The options without the exchange feature are referred to herein as “plain vanilla options” and those options with the exchange feature are referred to as “options with exchange.”

The Company has based its determination of the amount of compensation expense associated with these stock options on the fair value of such options as of June 30, 2005. Key assumptions and related option-pricing models used by the Company are summarized in the following table.


	Plain Vanilla Options	Options with Exchange
Valuation model	Black-Scholes	Modified Binomial
Expected volatility	47%	47%
Expected dividend yield	0%	0%
Risk-free rate over the estimated expected life of option	3.27 – 3.92%	3.27 – 3.92%
Expected term (in years)	4.47	5.46

During the three and six month periods ended June 30, 2005, the Company recorded compensation expense of $2.1 million and $2.7 million, respectively. As of June 30, 2005, there was approximately $40 million of total unrecognized compensation cost related to non-vested stock-options under the employment agreement, which is expected to be recognized ratably over the remaining term of the employment agreement.

18. Consolidating Condensed Financial Information of Guarantor Subsidiaries

Certain subsidiaries of the Company (as listed below, collectively the “Guarantor Subsidiaries”) have guaranteed fully and unconditionally, on a joint and several basis, the obligation to pay principal and interest under the Company’s Senior Credit Agreements.

Federal-Mogul Venture Corporation Federal-Mogul Piston Rings, Inc. Federal-Mogul Powertrain, Inc. Federal-Mogul Global Properties Inc. Federal-Mogul Dutch Holdings Inc. Federal-Mogul Mystic, Inc. Carter Automotive Company, Inc. Federal-Mogul ~~U.K.~~UK Holdings Inc. Felt Products ~~Mfg~~MFG. Co. Federal-Mogul ~~Worldwide~~World Wide Inc. F-M ~~U.K.~~UK Holdings Limited Ferodo America, Inc. Federal-Mogul Ignition Company Federal-Mogul Global Inc. McCord Sealing, Inc. Federal-Mogul Products, Inc. T&N Industries, Inc.

The Company issued notes in ~~1998~~1999 and 1998 ~~1999~~ that are guaranteed by the Guarantor Subsidiaries. The Guarantor Subsidiaries also guarantee the Company’s previously existing publicly registered ~~medium~~Medium-term notes and ~~senior~~Senior notes.

In lieu of providing separate unaudited financial statements for the Guarantor Subsidiaries, the Company has included the accompanying ~~unaudited~~ consolidating condensed financial statements based on the Company’s understanding of the Securities and Exchange Commission’s interpretation and application of Rule 3-10 of the Securities and Exchange Commission’s Regulation S-X and Staff Accounting Bulletin No. 53. Management does not believe that separate financial statements of the Guarantor Subsidiaries are material to investors. Therefore, separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented.

Certain amounts in the 2004 Guarantor financial statements have been reclassified to conform to the presentation used in the current period. In 2005, the Company finalized the push down of the Sealing Systems goodwill impairment charge resulting in a reclassification of goodwill from the Parent subsidiaries to the Guarantor and Non-guarantor subsidiaries in the December 31, 2004 balance sheet.

Subsequent to the Restructuring Proceedings, no dividends have been paid to the Federal-Mogul parent company by any of its subsidiaries.

As a result of the Restructuring Proceedings (see Note 2 “Voluntary Reorganization Under Chapter 11 and Administration”) certain ~~pre-petition~~of the liabilities at June 30, 2005, as shown below, were liabilities subject to compromise as of ~~September~~the ~~30,~~Petition ~~2003 (in millions of dollars)~~date:

	Parent		GuarantorSubsidiaries		Non-GuarantorSubsidiaries		Consolidated
Debt	$	3,989.4	$	1.0	$	—	$	3,990.4
	(Millions of Dollars)
Asbestos liabilities		1.4		237.7		1,332.1		1,571.2
Debt	$	4,050.2	$	0.2	$	—	$	4,050.4
Company-obligated mandatorily redeemable securities		—		—		211.0		211.0
Asbestos liabilities		1.4		236.3		1,303.8		1,541.5
Accounts payable		5759.51		~~115~~116.02		2728.34		~~199~~203.87
Interest payable		42.8		0.2		—		43.0
Company-obligated mandatorily redeemable securities		—		—		114.6		114.6
Environmental liabilities		26.8		—		0.5		27.3
Interest payable		43.8		0.2		—		44.0
Other liabilities		6.2		1.2		13.0		20.4
Environmental liabilities		24.8		—		—		24.8
Liabilities subject to compromise	$	4,124.1	$	355.1	$	1,583.9	$	6,063.1
Other accrued liabilities		9.8		0.9		10.1		20.8
	$	4,189.1	$	353.8	$	1,456.9	$	5,999.8

2737

Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Operations

Three Months Ended ~~September~~June 30, ~~2003~~2005

(Millions of Dollars)


	Unconsolidated
	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
	(Millions of Dollars)
Net sales	$	327.8		$	717.3		$	1,118.0		$	(497.7	)	$	1,665.4
Cost of products sold		277.5			622.0			971.8			(497.7	)		1,373.6

Gross margin		50.3			95.3			146.2			—			291.8

Selling, general and administrative expenses		56.9			60.7			108.7			—			226.3
Adjustment of long-lived assets to fair value		—			—			1.0			—			1.0
Interest expense (income), net		37.4			—			(3.6	)		—			33.8
Chapter 11 and Administration related reorganization expenses		20.2			—			—			—			20.2
Equity earnings of unconsolidated subsidiaries		—			(1.4	)		(10.6	)		—			(12.0	)
Other (income) expense, net		(12.2	)		(32.5	)		54.2			—			9.5

Earnings (loss) before income taxes and equity earnings (loss) of subsidiaries		(52.0	)		68.5			(3.5	)		—			13.0
Income tax expense (benefit)		(0.5	)		1.2			23.9			—			24.6

Earnings (loss) before equity earnings (loss) of subsidiaries		(51.5	)		67.3			(27.4	)		—			(11.6	)
Equity earnings (loss) of subsidiaries		39.9			24.8			—			(64.7	)		—

Net earnings (loss)	$	(11.6	)	$	92.1		$	(27.4	)	$	(64.7	)	$	(11.6	)

	(Unconsolidated)
	Parent			GuarantorSubsidiaries			Non-GuarantorSubsidiaries			Eliminations			Consolidated
Net sales	$	265.3		$	406.6		$	940.3		$	(265.8	)	$	1,346.4
Cost of products sold		223.1			322.1			816.4			(265.8	)		1,095.8
Gross margin		42.2			84.5			123.9			—			250.6
Selling, general and administrative expenses		66.7			54.8			91.2			—			212.7
Restructuring charges		—			1.6			6.5			—			8.1
Adjustment of assets held for sale and other long-lived assets to fair value		—			0.6			0.3			—			0.9
Interest expense (income), net		23.3			—			(0.2	)		—			23.1
Chapter 11 and Administration related reorganization expenses		25.7			—			—			—			25.7
Other expense (income), net		(11.6	)		(29.1	)		37.8			—			(2.9	)
Earnings (loss) before income taxes and equity in earnings (loss) of subsidiaries		(61.9	)		56.6			(11.7	)		—			(17.0	)
Income tax expense		1.2			1.0			10.3			—			12.5
Earnings (loss) before equity in earnings (loss) of subsidiaries		(63.1	)		55.6			(22.0	)		—			(29.5	)
Equity in earnings (loss) of subsidiaries		33.6			11.5			—			(45.1	)		—
Net Earnings (Loss)	$	(29.5	)	$	67.1		$	(22.0	)	$	(45.1	)	$	(29.5	)

Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Operations

~~Nine~~Six Months Ended ~~September~~June 30, ~~2003~~2005

(Millions of Dollars)


	Unconsolidated
	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
	(Millions of Dollars)
Net sales	$	638.7		$	1,412.1		$	2,213.6		$	(965.8	)	$	3,298.6
Cost of products sold		562.5			1,216.0			1,919.2			(965.8	)		2,731.9

Gross margin		76.2			196.1			294.4			—			566.7

Selling, general and administrative expenses		130.4			123.8			221.8			—			476.0
Adjustment of long-lived assets to fair value		3.0			—			1.0			—			4.0
Interest expense (income), net		69.9			—			(7.3	)		—			62.6
Chapter 11 and Administration related reorganization expenses		50.2			—			—			—			50.2
Equity earnings of unconsolidated subsidiaries		—			(2.9	)		(18.4	)		—			(21.3	)
Other (income) expense, net		(30.9	)		(66.3	)		101.1			—			3.9

Earnings (loss) before income taxes and equity earnings (loss) of subsidiaries		(146.4	)		141.5			(3.8	)		—			(8.7	)
Income tax expense		0.7			2.3			48.2			—			51.2

Earnings (loss) before equity earnings (loss) of subsidiaries		(147.1	)		139.2			(52.0	)		—			(59.9	)
Equity earnings (loss) of subsidiaries		87.2			49.6			—			(136.8	)		—

Net earnings (loss)	$	(59.9	)	$	188.8		$	(52.0	)	$	(136.8	)	$	(59.9	)

	(Unconsolidated)
	Parent			GuarantorSubsidiaries			Non-GuarantorSubsidiaries			Eliminations			Consolidated
Net sales	$	838.2		$	1,254.0		$	2,902.6		$	(793.9	)	$	4,200.9
Cost of products sold		690.4			975.9			2,502.3			(793.9	)		3,374.7
Gross margin		147.8			278.1			400.3			—			826.2
Selling, general and administrative expenses		226.1			162.2			279.4			—			667.7
Restructuring charges		—			2.2			26.1			—			28.3
Adjustment of assets held for sale and other long-lived assets to fair value		—			0.7			3.8			—			4.5
Interest expense (income), net		76.3			—			(1.9	)		—			74.4
Chapter 11 and Administration related reorganization expenses		85.4			—			—			—			85.4
Other expense (income), net		(26.7	)		(89.6	)		99.4			—			(16.9	)
Earnings (loss) before income taxes and equity in earnings (loss) of subsidiaries		(213.3	)		202.6			(6.5	)		—			(17.2	)
Income tax expense		3.6			2.9			45.1			—			51.6
Earnings (loss) before equity in earnings (loss) of subsidiaries		(216.9	)		199.7			(51.6	)		—			(68.8	)
Equity in earnings (loss) of subsidiaries		148.1			50.3			—			(198.4	)		—
Net Earnings (Loss)	$	(68.8	)	$	250.0		$	(51.6	)	$	(198.4	)	$	(68.8	)

Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Operations

Three Months Ended ~~September~~June 30, ~~2002~~2004

(Millions of Dollars)


	Unconsolidated									Eliminations
	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Discontinued Operations			Inter- Company			Consolidated
	(Millions of Dollars)
Net sales	$	304.3		$	547.1		$	1,048.2		$	(5.3	)	$	(323.1	)	$	1,571.2
Cost of products sold		250.9			436.3			893.7			(6.6	)		(323.1	)		1,251.2

Gross margin		53.4			110.8			154.5			1.3			—			320.0

Selling, general and administrative expenses		76.4			55.0			103.6			(1.0	)		—			234.0
Adjustment of long-lived assets to fair value		—			—			20.0			—			—			20.0
Interest expense (income), net		24.9			—			(0.6	)		—			—			24.3
Chapter 11 and Administration related reorganization expenses		34.4			—			—			—			—			34.4
Equity earnings of unconsolidated subsidiaries		—			(1.9	)		(8.8	)		—			—			(10.7	)
Other (income) expense, net		(10.9	)		(31.4	)		47.3			(1.6	)		—			3.4

Earnings (loss) from continuing operations before income taxes and equity earnings (loss) of subsidiaries		(71.4	)		89.1			(7.0	)		3.9			—			14.6
Income tax expense (benefit)		(7.3	)		1.2			25.8			0.9			—			20.6

Earnings (loss) from continuing operations before equity earnings (loss) of subsidiaries		(64.1	)		87.9			(32.8	)		3.0			—			(6.0	)
Earnings from discontinued operations, net of income taxes		—			—			—			(3.0	)		—			(3.0	)
Equity earnings (loss) of subsidiaries		55.1			21.6			—			—			(76.7	)		—

Net earnings (loss)	$	(9.0	)	$	109.5		$	(32.8	)	$	—		$	(76.7	)	$	(9.0	)

	(Unconsolidated)
	Parent			GuarantorSubsidiaries			Non-GuarantorSubsidiaries			Eliminations			Consolidated
Net sales	$	291.2		$	444.1		$	765.6		$	(155.7	)	$	1,345.2
Cost of products sold		232.9			362.5			655.8			(155.7	)		1,095.5
Gross margin		58.3			81.6			109.8			—			249.7
Selling, general and administrative expenses		52.3			68.6			85.5			—			206.4
Restructuring charges		—			3.6			13.4			—			17.0
Adjustment of assets held for sale and other long-lived assets to fair value		—			5.7			18.9			—			24.6
Interest expense (income), net		31.4			—			(1.6	)		—			29.8
Chapter 11 and Administration related reorganization expenses		33.4			—			—			—			33.4
Other expense (income), net		17.7			(27.2	)		12.0			—			2.5
Earnings (loss) before income taxes, cumulative effect of change in accounting principle and equity in earnings (loss) of subsidiaries		(76.5	)		30.9			(18.4	)		—			(64.0	)
Income tax expense		0.4			0.5			8.4			—			9.3
Earnings (Loss) before equity in loss of subsidiaries		(76.9	)		30.4			(26.8	)		—			(73.3	)
Equity in earnings (loss) of subsidiaries		3.6			(12.8	)		—			9.2			—
Net Earnings (Loss)	$	(73.3	)	$	17.6		$	(26.8	)	$	9.2		$	(73.3	)

Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Operations

~~Nine~~Six Months Ended ~~September~~June 30, ~~2002~~2004

(Millions of Dollars)


	Unconsolidated									Eliminations
	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Discontinued Operations			Inter- Company			Consolidated
	(Millions of Dollars)
Net sales	$	597.2		$	1,082.0		$	2,091.2		$	(11.8	)	$	(640.9	)	$	3,117.7
Cost of products sold		495.9			866.6			1,792.5			(12.9	)		(640.9	)		2,501.2

Gross margin		101.3			215.4			298.7			1.1			—			616.5

Selling, general and administrative expenses		156.7			109.4			211.9			(2.2	)		—			475.8
Adjustment of long-lived assets to fair value		—			—			23.1			—			—			23.1
Interest expense (income), net		51.7			—			(1.8	)		—			—			49.9
Chapter 11 and Administration related reorganization expenses		60.4			—			—			—			—			60.4
Equity earnings of unconsolidated subsidiaries		—			(3.9	)		(16.3	)		—			—			(20.2	)
Other (income) expense, net		(17.7	)		(65.5	)		97.2			(1.9	)		—			12.1

Earnings (loss) from continuing operations before income taxes and equity earnings (loss) of subsidiaries		(149.8	)		175.4			(15.4	)		5.2			—			15.4
Income tax expense (benefit)		(6.3	)		2.2			43.7			1.0			—			40.6

Earnings (loss) from continuing operations before equity earnings (loss) of subsidiaries		(143.5	)		173.2			(59.1	)		4.2			—			(25.2	)
Earnings from discontinued operations, net of income taxes		—			—			—			(4.2	)		—			(4.2	)
Equity earnings (loss) of subsidiaries		114.1			39.2			—			—			(153.3	)		—

Net earnings (loss)	$	(29.4	)	$	212.4		$	(59.1	)	$	—		$	(153.3	)	$	(29.4	)

	(Unconsolidated)
	Parent			GuarantorSubsidiaries			Non-GuarantorSubsidiaries			Eliminations			Consolidated
Net sales	$	945.2		$	1,360.9		$	2,318.6		$	(491.1	)	$	4,133.6
Cost of products sold		760.0			1,096.4			1,966.0			(491.1	)		3,331.3
Gross margin		185.2			264.5			352.6			—			802.3
Selling, general and administrative expenses		167.3			199.3			257.0			—			623.6
Restructuring charges		—			7.7			20.3			—			28.0
Adjustment of assets held for sale and other long-lived assets to fair value		—			6.0			21.2			—			27.2
Interest expense (income), net		94.3			—			(4.3	)		—			90.0
Chapter 11 and Administration related reorganization expenses		76.4			—			—			—			76.4
Other expense (income), net		(13.8	)		(85.3	)		94.9			—			(4.2	)
Earnings (loss) before income taxes, cumulative effect of change in accounting principle and equity in earnings (loss) of subsidiaries		(139.0	)		136.8			(36.5	)		—			(38.7	)
Income tax expense		1.1			24.2			34.5			—			59.8
Earnings (loss) before cumulative effect of change in accounting principle and equity in earnings (loss) of subsidiaries		(140.1	)		112.6			(71.0	)		—			(98.5	)
Cumulative effect of change in accounting principle, net of applicable tax benefits		(3.8	)		432.8			988.9			—			1,417.9
Loss before equity in loss of subsidiaries		(136.3	)		(320.2	)		(1,059.9	)		—			(1,516.4	)
Equity in earnings (loss) of subsidiaries		(1,380.1	)		(703.7	)		—			2,083.8			—
Net Loss	$	(1,516.4	)	$	(1,023.9	)	$	(1,059.9	)	$	2,083.8		$	(1,516.4	)

Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Balance Sheet

~~September~~June 30, ~~2003~~2005

(Millions of Dollars)


	Unconsolidated
	Parent			Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminations			Consolidated
	(Millions of Dollars)
ASSETS
Current assets:
Cash and equivalents	$	4.7		$	—	$	751.4	$	—		$	756.1
Accounts receivable, net		220.2			312.2		583.1		—			1,115.5
Inventories, net		114.3			306.2		488.3		—			908.8
Prepaid expenses and other current assets		51.1			31.3		147.6		—			230.0

Total current assets		390.3			649.7		1,970.4		—			3,010.4

Property, plant and equipment, net		259.0			558.6		1,325.9		—			2,143.5
Goodwill and indefinite-lived intangible assets		488.2			595.7		194.8		—			1,278.7
Definite-lived intangible assets, net		66.6			80.1		165.7		—			312.4
Investment in subsidiaries		6,482.0			3,026.7		—		(9,508.7	)		—
Intercompany accounts, net		(4,213.2	)		3,466.6		746.6		—			—
Asbestos-related insurance recoverable		—			165.6		644.6		—			810.2
Prepaid pension costs		—			—		178.6		—			178.6
Other noncurrent assets		30.7			26.0		157.4		—			214.1

	$	3,503.6		$	8,569.0	$	5,384.0	$	(9,508.7	)	$	7,947.9

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Short-term debt, including current portion of long-term debt	$	362.8		$	—	$	35.4	$	—		$	398.2
Accounts payable		74.7			83.4		249.3		—			407.4
Accrued liabilities		104.2			58.4		376.5		—			539.1
Other current liabilities		31.4			18.3		86.9		—			136.6

Total current liabilities		573.1			160.1		748.1		—			1,481.3

Liabilities subject to compromise		4,189.1			353.8		1,456.9		—			5,999.8

Long-term debt		—			—		7.5		—			7.5
Postemployment benefits		741.9			—		1,498.0		—			2,239.9
Long-term portion of deferred income taxes		—			—		107.9		—			107.9
Other accrued liabilities		104.0			—		106.2		—			210.2
Minority interest in consolidated subsidiaries		25.4			5.8		—		—			31.2
Shareholders’ equity (deficit)		(2,129.9	)		8,049.3		1,459.4		(9,508.7	)		(2,129.9	)

	$	3,503.6		$	8,569.0	$	5,384.0	$	(9,508.7	)	$	7,947.9

	(Unconsolidated)
	Parent			GuarantorSubsidiaries		Non-GuarantorSubsidiaries		Eliminations			Consolidated
ASSETS
Cash and equivalents	$	53.0		$	—	$	419.8	$	—		$	472.8
Accounts receivable, net		180.3			304.5		493.4		—			978.2
Inventories		78.5			292.1		431.3		—			801.9
Prepaid expenses and other current assets		61.3			32.0		130.1		—			223.4
Total Current Assets		373.1			628.6		1,474.6		—			2,476.3
Property, plant and equipment, net		256.7			638.8		1,427.8		—			2,323.3
Goodwill and indefinite-lived intangible assets		535.8			682.2		374.9		—			1,592.9
Definite-lived intangible assets, net		85.6			88.2		173.7		—			347.5
Investment in subsidiaries		6,406.1			2,996.1		—		(9,402.2	)		—
Intercompany accounts, net		(3,378.2	)		2,772.1		606.1		—			—
Asbestos-related insurance recoverable		—			171.9		629.4		—			801.3
Prepaid pension costs		18.1			—		276.1		—			294.2
Other noncurrent assets		24.6			33.6		158.6		—			216.8
Total Assets	$	4,321.8		$	8,011.5	$	5,121.2	$	(9,402.2	)	$	8,052.3
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Short-term debt, including current portion of long-term debt	$	0.1		$	—	$	14.2	$	—		$	14.3
Accounts payable		48.1			76.2		216.1		—			340.4
Accrued compensation		65.2			22.3		149.3		—			236.8
Restructuring reserves		8.4			10.2		45.3		—			63.9
Accrued income taxes		7.1			—		45.4		—			52.5
Other accrued liabilities		132.5			35.2		195.1		—			362.8
Total Current Liabilities		261.4			143.9		665.4		—			1,070.7
Liabilities subject to compromise		4,124.1			355.1		1,583.9		—			6,063.1
Long-term debt		310.0			—		11.8		—			321.8
Postemployment benefits		816.5			—		773.2		—			1,589.7
Deferred income taxes		2.5			—		58.5		—			61.0
Other accrued liabilities		96.5			1.1		113.9		—			211.5
Minority interest in consolidated subsidiaries		24.9			23.6		0.1		—			48.6
Shareholders’ Equity (Deficit)		(1,314.1	)		7,487.8		1,914.4		(9,402.2	)		(1,314.1	)
Total Liabilities and Shareholders’ Equity (Deficit)	$	4,321.8		$	8,011.5	$	5,121.2	$	(9,402.2	)	$	8,052.3

Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Consolidating Condensed Balance Sheet

December 31, ~~2002~~2004

(Millions of Dollars)


	Unconsolidated
	Parent			Guarantor Subsidiaries		Non- Guarantor Subsidiaries			Eliminations			Consolidated
	(Millions of Dollars)
ASSETS
Current assets:
Cash and equivalents	$	8.9		$	—	$	691.7		$	—		$	700.6
Accounts receivable, net		201.8			291.0		556.7			—			1,049.5
Inventories, net		133.8			292.8		526.3			—			952.9
Prepaid expenses and other current assets		50.4			31.9		148.6			—			230.9

Total current assets		394.9			615.7		1,923.3			—			2,933.9
Property, plant and equipment, net		259.7			577.0		1,527.2			—			2,363.9
Goodwill and indefinite-lived intangible assets		478.1			595.5		210.1			—			1,283.7
Definite-lived intangible assets, net		67.9			82.4		185.0			—			335.3
Investment in subsidiaries		6,460.1			2,982.7		—			(9,442.8	)		—
Intercompany accounts, net		(4,080.8	)		3,316.9		763.9			—			—
Asbestos-related insurance recoverable		—			166.1		687.7			—			853.8
Prepaid pension costs		5.1			—		252.3			—			257.4
Other noncurrent assets		41.2			28.5		167.5			—			237.2

	$	3,626.2		$	8,364.8	$	5,717.0		$	(9,442.8	)	$	8,265.2

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Short-term debt, including current portion of long-term debt	$	277.9		$	—	$	31.7		$	—		$	309.6
Accounts payable		65.7			81.7		288.5			—			435.9
Accrued liabilities		120.7			51.5		387.5			—			559.7
Other current liabilities		51.6			11.8		82.2			—			145.6

Total current liabilities		515.9			145.0		789.9			—			1,450.8

Liabilities subject to compromise		4,163.4			353.5		1,501.6			—			6,018.5

Long-term debt		—			—		10.1			—			10.1
Postemployment benefits		742.8			—		1,613.1			—			2,355.9
Long-term portion of deferred income taxes		—			—		102.0			—			102.0
Other accrued liabilities		102.6			0.2		118.4			—			221.2
Minority interest in consolidated subsidiaries		27.2			5.6		(0.4	)		—			32.4
Shareholders’ equity (deficit)		(1,925.7	)		7,860.5		1,582.3			(9,442.8	)		(1,925.7	)

	$	3,626.2		$	8,364.8	$	5,717.0		$	(9,442.8	)	$	8,265.2

	(Unconsolidated)
	Parent			GuarantorSubsidiaries		Non-GuarantorSubsidiaries		Eliminations			Consolidated
ASSETS
Cash and equivalents	$	31.9		$	—	$	363.2	$	—		$	395.1
Accounts receivable		171.8			310.0		472.2		—			954.0
Inventories		62.5			351.9		385.7		—			800.1
Prepaid expenses		41.1			33.0		135.8		—			209.9
Total Current Assets		307.3			694.9		1,356.9		—			2,359.1
Property, plant and equipment, net		244.6			687.4		1,341.0		—			2,273.0
Goodwill and indefinite-lived intangible assets		536.3			681.1		347.8		—			1,565.2
Definite-lived intangible assets, net		87.6			91.7		172.3		—			351.6
Investment in subsidiaries		6,394.2			2,977.5		—		(9,371.7	)		—
Intercompany accounts, net		(3,424.6	)		2,295.2		1,129.4		—			—
Asbestos-related insurance recoverable		—			171.9		608.7		—			780.6
Prepaid pension costs		71.2			—		290.3		—			361.5
Other noncurrent assets		43.7			36.5		142.1		—			222.3
Total Assets	$	4,260.3		$	7,636.2	$	5,388.5	$	(9,371.7	)	$	7,913.3
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Short-term debt, including current portion of long-term debt	$	314.7		$	—	$	31.4	$	—		$	346.1
Accounts payable		44.5			67.0		207.4		—			318.9
Accrued compensation		91.4			25.3		125.4		—			242.1
Restructuring reserves		13.9			18.1		58.8		—			90.8
Accrued income taxes		9.2			—		33.9		—			43.1
Other accrued liabilities		138.1			41.6		183.7		—			363.4
Total Current Liabilities		611.8			152.0		640.6		—			1,404.4
Liabilities subject to compromise		4,111.1			363.6		1,578.5		—			6,053.2
Long-term debt		—			—		14.3		—			14.3
Postemployment benefits		813.5			—		727.7		—			1,541.2
Deferred income taxes		2.5			—		49.9		—			52.4
Other accrued liabilities		102.7			1.4		101.6		—			205.7
Minority interest in consolidated subsidiaries		22.3			23.4		—		—			45.7
Shareholders’ Equity (Deficit)		(1,403.6	)		7,095.8		2,275.9		(9,371.7	)		(1,403.6	)
Total Liabilities and Shareholders’ Equity (Deficit)	$	4,260.3		$	7,636.2	$	5,388.5	$	(9,371.7	)	$	7,913.3

Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Cash Flows

~~Nine~~Six Months Ended ~~September~~June 30, ~~2003~~2005

(Millions of Dollars)


	(Unconsolidated)
	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations		Consolidated
	(Millions of Dollars)
Net cash provided from (used by) operating activities	$	11.1		$	110.2		$	(43.3	)	$	—	$	78.0

Cash provided from (used by) investing activities:
Expenditures for property, plant and equipment		(6.8	)		(9.0	)		(69.1	)		—		(84.9	)
Net proceeds from sale of property, plant and equipment		—			—			10.4			—		10.4

Net cash used by investing activities		(6.8	)		(9.0	)		(58.7	)		—		(74.5	)

Cash provided from (used by) financing activities:
Proceeds from borrowings on DIP credit facility		75.6			—			9.5			—		85.1
Increase in short-term debt		—			—			7.2			—		7.2
Decrease in other long-term debt		—			—			(1.6	)		—		(1.6	)
Change in intercompany accounts		(45.4	)		(101.2	)		146.6			—		—

Net cash provided from (used by) financing activities		30.2			(101.2	)		161.7			—		90.7
Effect of foreign currency exchange rate fluctuations on cash		(38.7	)		—			—			—		(38.7	)

Net increase (decrease) in cash and equivalents	$	(4.2	)	$	—		$	59.7		$	—	$	55.5

	(Unconsolidated)
	Parent			GuarantorSubsidiaries			Non-GuarantorSubsidiaries			Eliminations		Consolidated
Net Cash Provided From (Used By) Operating Activities	$	(191.5	)	$	338.8		$	121.8		$	—	$	269.1
Cash Provided From (Used By) Investing Activities:
Expenditures for property, plant and equipment and other long-term assets		(30.9	)		(58.9	)		(125.0	)		—		(214.8	)
Proceeds from sale of businesses		—			23.3			0.3			—		23.6
Net Cash Used By Investing Activities		(30.9	)		(35.6	)		(124.7	)		—		(191.2	)
Cash Provided From (Used By) Financing Activities:
Proceeds from issuance of long-term debt		—			—			1.2			—		1.2
Principal payments on long-term debt		—			—			(3.7	)		—		(3.7	)
Borrowings from DIP credit facility		105.5			—			—			—		105.5
Principal payments on DIP credit facility		(110.2	)		—			—			—		(110.2	)
Decrease in short-term debt		—			—			(17.1	)		—		(17.1	)
Change in intercompany accounts		246.7			(303.2	)		56.5			—		—
Net Cash Provided From (Used By) Financing Activities		242.0			(303.2	)		36.9			—		(24.3	)
Effect of Foreign Currency Exchange Rate Fluctuations on Cash		1.5			—			22.6			—		24.1
Net Increase in Cash and Equivalents	$	21.1		$	—		$	56.6		$	—	$	77.7

Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Cash Flows

~~Nine~~Six Months Ended ~~September~~June 30, ~~2002~~2004

(Millions of Dollars)


	(Unconsolidated)
	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations		Consolidated
	(Millions of Dollars)
Net cash provided from (used by) operating activities	$	(15.4	)	$	293.8		$	2.4		$	—	$	280.8

Cash provided from (used by) investing activities:
Expenditures for property, plant and equipment		(20.0	)		(38.6	)		(73.5	)		—		(132.1	)
Net proceeds from the sale of property, plant and equipment		—			—			13.0			—		13.0

Net cash used by investing activities		(20.0	)		(38.6	)		(60.5	)		—		(119.1	)

Cash provided from (used by) financing activities:
Principal payments on DIP credit facility		(41.7	)		—			—			—		(41.7	)
Decrease in short-term debt		—			—			(3.5	)		—		(3.5	)
Decrease in other long-term debt		—			—			(1.7	)		—		(1.7	)
Change in intercompany accounts		81.5			(255.2	)		173.7			—		—

Net cash provided from (used by) financing activities		39.8			(255.2	)		168.5			—		(46.9	)

Effect of foreign currency exchange rate fluctuations on cash		3.7			—			—			—		3.7

Net increase in cash and equivalents	$	8.1		$	—		$	110.4		$	—	$	118.5

	(Unconsolidated)
	Parent			GuarantorSubsidiaries			Non-GuarantorSubsidiaries			Eliminations		Consolidated
Net Cash Provided From (Used By) Operating Activities	$	(38.4	)	$	166.9		$	60.3		$	—	$	188.8
Cash Provided From (Used By) Investing Activities:
Expenditures for property, plant and equipment and other long-term assets		(23.6	)		(61.6	)		(142.9	)		—		(228.1	)
Net proceeds from sales of businesses		5.9			6.0			13.6			—		25.5
Net Cash Used By Investing Activities		(17.7	)		(55.6	)		(129.3	)		—		(202.6	)
Cash Provided From (Used By) Financing Activities:
Proceeds from the issuance of long-term debt		—			—			2.5			—		2.5
Principal payments on long-term debt		—			—			(2.1	)		—		(2.1	)
Principal payments on DIP credit facility		(10.0	)		—			—			—		(10.0	)
Increase (decrease) in short-term debt		—			0.7			2.6			—		3.3
Change in intercompany accounts		(8.5	)		(115.2	)		123.7			—		—
Net Cash Provided From (Used By) Financing Activities		(18.5	)		(114.5	)		126.7			—		(6.3	)
Effect of Foreign Currency Exchange Rate Fluctuations on Cash		12.5			—			—			—		12.5
Net Increase (Decrease) in Cash and Equivalents	$	(62.1	)	$	(3.2	)	$	57.7		$	—	$	(7.6	)

~~Item~~ ITEM 2. ~~Management~~MANAGEMENT’sS ~~Discussion~~DISCUSSION ~~and~~AND ~~Analysis~~ANALYSIS ofOF ~~Financial~~FINANCIAL ~~Condition~~CONDITION ~~and~~AND ~~Results~~RESULTS ofOF ~~Operations~~OPERATIONS

~~OVERVIEW~~Overview

Federal-Mogul Corporation (~~the~~ “~~Company~~Federal-Mogul” or the “~~Federal-Mogul~~Company”) is a ~~vehicular~~leading ~~parts~~global ~~manufacturer~~supplier ~~providing~~of ~~innovative~~vehicular ~~solutions~~parts, components, modules and systems to ~~global~~ customers in the automotive, small engine, heavy-duty and industrial markets. ~~The~~Federal-Mogul ~~Company~~has ~~manufactures~~established ~~engine~~an ~~bearings~~expansive global presence and conducts its operations through various manufacturing, ~~pistons~~distribution and technical centers that are wholly-owned subsidiaries or partially-owned joint ventures, ~~piston~~organized ~~pins~~into five primary reporting segments; Powertrain, ~~rings~~Sealing Systems, ~~cylinder~~Vehicle ~~liners~~Safety and Performance, ~~sintered~~Aftermarket ~~products~~Products and Services and Corporate. The Company has operations in established markets including the United States, Germany, ~~connecting~~United ~~rods~~Kingdom, ~~sealing~~France, ~~systems~~Italy, ~~systems protection~~Mexico ~~sleeving~~and ~~products~~Canada, ~~lighting~~and emerging markets including China, ~~fuel~~Czech ~~systems~~Republic, ~~wipers~~Hungary, ~~ignition~~India, ~~brake~~Korea, ~~friction~~Poland and ~~chassis products~~Thailand. The ~~Company’s~~attendant ~~principal~~risks ~~customers include many~~ of the ~~world~~Company’s ~~original~~international ~~equipment~~operations ~~(“OE”)~~are ~~manufacturers~~primarily ofrelated ~~vehicles and~~to ~~industrial~~currency ~~products.~~fluctuations, ~~The~~changes ~~Company~~in ~~also~~local ~~manufactures~~economic conditions, and ~~supplies~~changes ~~its~~in ~~products~~laws toand ~~the aftermarket~~regulations.

~~VOLUNTARY~~Federal-Mogul ~~BANKRUPTCY~~offers ~~FILING~~its customers a diverse array of market-leading products for original equipment (“OE”) and parts replacement (“aftermarket”) applications, including engine bearings, pistons, piston pins, rings, cylinder liners, valve train and transmission products, connecting rods, sealing systems, element resistant systems protection sleeving products, electrical connectors and sockets, disc pads and brake shoes, and ignition, lighting, fuel, wiper and chassis products. The Company’s principal customers include many of the world’s original equipment manufacturers (“OEM”) of vehicles and industrial products and aftermarket retailers and wholesalers. The Company seeks to participate in both of these markets by leveraging its original equipment product engineering and development capability, manufacturing know-how, and expertise in managing a broad and deep range of replacement parts to service the aftermarket. The Company believes that it is uniquely positioned to effectively manage the life cycle of a broad range of products to a diverse customer base. Prominent OE customers include the world’s largest automotive and heavy-duty manufacturers such as Caterpillar, Cummins, Fiat, General Motors, Ford/Jaguar/Volvo, DaimlerChrysler, BMW, PSA, Volkswagen/Audi and Renault/Nissan. Similarly, prominent aftermarket customers include the Aftermarket Auto Parts Alliance, Autozone, CarQuest, NAPA and Ozark/O’Reilly’s.

OnThe ~~October~~Company 1,operates ~~2001~~in ~~(the~~an extremely ~~“Petition~~competitive ~~Date”)~~industry, ~~the~~driven ~~Company~~by ~~and~~global ~~all~~vehicle ofproduction ~~its~~volumes ~~wholly-owned~~and ~~United~~part ~~States~~replacement ~~subsidiaries filed voluntary petitions for reorganization (the “U~~trends.S. ~~Restructuring”)~~Business ~~under~~is ~~Chapter~~typically 11awarded ofto the ~~United~~supplier ~~States~~offering ~~Bankruptcy Code (~~the ~~“Bankruptcy~~most ~~Code”)~~favorable incombination ~~the United States Bankruptcy Court for the District~~ of ~~Delaware (the “Bankruptcy Court”). Also on October 1~~cost, ~~2001~~quality, ~~certain~~technology ~~of the Company’s United Kingdom subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code~~ and ~~petitions for Administration (the “U~~service.K. ~~Restructuring”)~~In ~~under the United~~addition, ~~Kingdom~~customers ~~Insolvency~~continue ~~Act~~to ofrequire ~~1986~~periodic ~~(the~~price ~~“Act”) in the High Court of Justice~~reductions, ~~Chancery~~which ~~division~~requires ~~in London, England (~~the ~~“High Court”). The~~ Company ~~and~~to ~~its~~continually ~~U.S.~~assess, redefine and ~~U.K.~~improve ~~subsidiaries~~its ~~included~~operations, inproducts, ~~the U.S. Restructuring~~ and ~~U.K. Restructuring~~manufacturing ~~are~~capabilities ~~herein referred~~ to asmaintain ~~the~~and ~~“Debtors”~~improve profitability. ~~The~~Management ~~U.S.~~continues ~~Restructuring~~to develop and ~~U.K.~~execute ~~Restructuring~~initiatives ~~are herein referred~~ to asmeet the ~~“Restructuring~~challenges ~~Proceedings”. The Chapter 11 cases~~ of the ~~Debtors~~industry ~~(collectively,~~and ~~the~~to ~~“Chapter 11~~achieve ~~Cases”)~~its ~~have been consolidated for purposes of joint administration as In re: Federal-Mogul Global Inc~~strategy., ~~T&N Limited, et. al (Case No. 01-10578(SLR)). The Chapter 11 Cases do not include any of the Company’s non-U.S. subsidiaries outside of the U.K. subsidiaries mentioned above.~~

~~The~~For ~~Restructuring Proceedings were initiated in response to~~ a ~~sharply~~more ~~increasing~~detailed ~~number~~description of ~~asbestos-related claims and their related demand on~~ the Company’s ~~cash~~business, ~~flows.~~products, ~~Under the Restructuring Proceedings~~industry, ~~the~~operating ~~Debtors~~strategy ~~expect to develop~~ and ~~implement~~associated arisks, ~~plan~~refer ~~for~~to ~~addressing~~ the ~~asbestos-related~~Company’s ~~claims~~Annual ~~against~~Report ~~them.~~on ~~The~~Form ~~Chapter~~10-K 11for ~~Cases are further discussed in Note 2 to~~ the ~~consolidated~~year ~~financial~~ended ~~statements~~December 31, ~~“Voluntary Reorganization Under Chapter 11 and Administration”~~

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