UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2006

¨	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 of incorporation or organization)		(IRS employer identification number)

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 (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 ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes x No ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

As of April 28, 2006, there were 94,482,470 outstanding shares of the registrant’s $5.00 stated value common stock.

FEDERAL-MOGUL CORPORATION

Form 10-Q

For the Quarter Ended March 31, 2006

INDEX


		Page No.
Forward-Looking Statements		2
Part I – Financial Information
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		40
Item 3 – Qualitative and Quantitative Disclosures about Market Risk		52
Item 4 – Controls and Procedures		54
Part II – Other Information
Item 1 – Legal Proceedings		55
Item 3 – Defaults Upon Senior Securities		55
Item 6 – Exhibits		55
Signatures		56
Exhibits

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”, “believe”, “estimate”, “expect”, “intend”, “plan”, “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 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 implement its plan of reorganization in the U.S. and company voluntary arrangements (“CVAs”) 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 manufacturers of commercial and personal vehicles.

•

Fluctuations in the price and availability of raw materials and other supplies used in the manufacturing and distribution of the Company’s products.

•

Material shortages, transportation system delays, or other difficulties in markets where the Company purchases supplies for the manufacturing of its products.

•

Significant work stoppages, disputes, or any other difficulties in labor markets where the Company obtains materials necessary for the manufacturing of its products or where its products are manufactured, distributed or sold.

•

Increased development of fuel cells, hybrid-electric or other non-combustion engine technologies.

•

The Company’s ability to obtain cash adequate to fund its needs, including the borrowings available under its debtor-in-possession 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 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.

•

Physical damage to or loss of significant manufacturing or distribution property, plant and equipment due to fire, weather or other factors beyond the Company’s control.

•

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

•

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.

•

The Company is currently transitioning its information systems (“IS”) infrastructure and functions to newer generation systems. If the new systems cannot be properly implemented, the Company would expect to incur additional expenses to upgrade and improve our legacy systems.

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FEDERAL-MOGUL CORPORATION

Consolidated Statements of Operations (Unaudited)


	Three Months Ended March 31
	2006			2005
	(Millions of Dollars, Except Per Share Amounts)
Net sales	$	1,600.3		$	1,633.2
Cost of products sold		1,315.3			1,358.3


Gross margin		285.0			274.9

Selling, general and administrative expenses		227.5			249.7
Adjustment of assets to fair value		20.1			3.0
Interest expense, net		39.0			28.8
Chapter 11 and Administration related reorganization expenses		21.1			30.0
Equity earnings of unconsolidated affiliates		(9.4	)		(9.3	)
Restructuring expense, net		25.8			2.8
Other income, net		(0.3	)		(8.4	)


Loss before income tax expense		(38.8	)		(21.7	)
Income tax expense		29.6			26.6


Net loss	$	(68.4	)	$	(48.3	)


Basic and diluted loss per common share:
Net loss per common share	$	(0.77	)	$	(0.54	)

See accompanying notes to consolidated financial statements

FEDERAL-MOGUL CORPORATION

Consolidated Balance Sheets


	(Unaudited) March 31 2006			December 31 2005
	(Millions of dollars)
ASSETS
Current assets:
Cash and equivalents	$	395.6		$	387.2
Restricted cash		699.9			700.9
Accounts receivable, net		1,095.4			1,011.1
Inventories, net		839.3			808.1
Prepaid expenses		206.0			220.7

Total current assets		3,236.2			3,128.0

Property, plant and equipment, net		1,940.7			2,003.1
Goodwill and indefinite-lived intangible assets		1,189.3			1,189.5
Definite-lived intangible assets, net		286.6			289.6
Asbestos-related insurance recoverable		779.9			777.4
Prepaid pension costs		79.2			112.2
Other noncurrent assets		254.4			235.3


	$	7,766.3		$	7,735.1


LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Short-term debt, including current portion of long-term debt	$	578.0		$	606.7
Accounts payable		464.9			405.0
Accrued liabilities		563.4			536.0
Other current liabilities		124.3			116.9

Total current liabilities		1,730.6			1,664.6

Liabilities subject to compromise		5,994.5			5,988.8

Long-term debt		7.6			8.1
Postemployment benefits		2,244.4			2,230.8
Long-term portion of deferred income taxes		65.6			62.4
Other accrued liabilities		186.0			181.4
Minority interest in consolidated subsidiaries		31.9			32.0

Shareholders’ deficit:
Series C ESOP preferred stock		28.0			28.0
Common stock		445.3			445.3
Additional paid-in capital		2,156.1			2,154.6
Accumulated deficit		(3,670.5	)		(3,602.1	)
Accumulated other comprehensive loss		(1,453.2	)		(1,458.8	)

Total shareholders’ deficit		(2,494.3	)		(2,433.0	)


	$	7,766.3		$	7,735.1

See accompanying notes to consolidated financial statements.

FEDERAL-MOGUL CORPORATION

Consolidated Statements of Cash Flows (Unaudited)


	Three Months Ended March 31
	2006			2005
	(Millions of Dollars)
Cash Provided From (Used By) Operating Activities
Net loss	$	(68.4	)	$	(48.3	)
Adjustments to reconcile net loss to net cash provided from (used by) operating activities:
Depreciation and amortization		78.8			93.0
Adjustment of assets to fair value		20.1			3.0
Change in postemployment benefits, including pensions		34.9			30.3
Change in deferred taxes		(6.3	)		8.9
Changes in operating assets and liabilities:
Increase in accounts receivable		(81.0	)		(91.1	)
Increase in inventories		(29.5	)		(19.9	)
Increase in accounts payable		57.4			17.6
Changes in other assets and liabilities		47.6			(4.5	)

Net Cash Provided From (Used By) Operating Activities		53.6			(11.0	)

Cash Provided From (Used By) Investing Activities
Expenditures for property, plant and equipment		(29.6	)		(39.6	)
Net proceeds from the sale of property, plant and equipment		2.7			5.3
Net proceeds from the sale of business		4.0			—

Net Cash Used By Investing Activities		(22.9	)		(34.3	)

Cash Provided From (Used By) Financing Activities
Proceeds from borrowings on DIP credit facility		124.7			95.8
Principal payments on DIP credit facility		(153.0	)		(20.0	)
Increase (decrease) in short-term debt		(0.7	)		3.9
Decrease in other long-term debt		(0.6	)		(0.9	)
Net change in restricted cash		(1.0	)		—

Net Cash (Used By) Provided From Financing Activities		(30.6	)		78.8

Effect of foreign currency exchange rate fluctuations on cash		8.3			(13.7	)


Increase in cash and equivalents		8.4			19.8

Cash and equivalents at beginning of period		387.2			700.6


Cash and equivalents at end of period	$	395.6		$	720.4

See accompanying notes to consolidated financial statements.

FEDERAL-MOGUL CORPORATION

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2006

1.	Basis of 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 (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles 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 fair statements 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 year ended December 31, 2005, as filed with the Securities and Exchange Commission.

Operating results for the three month period ended March 31, 2006 are not necessarily indicative of the results that may be expected for the year ended December 31, 2006.

Financial Statement 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(JKF)). 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 the normal course. The Chapter 11 Cases are further discussed in Note 2 to the consolidated financial statements.

The accompanying consolidated financial statements have been prepared in accordance with 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 changes 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 amounts other than those reflected in the consolidated financial statements. Further, a plan of reorganization or company voluntary arrangement could materially change the amounts and classifications in the historical consolidated financial statements.

The appropriateness of using the going concern basis for the Company’s financial statements is dependent upon, among other things: (i) the Company’s ability to comply with the terms of its DIP credit facility and any cash management order entered by the Bankruptcy Court in connection with the Chapter 11 Cases; (ii) the ability of the Company to maintain adequate cash on hand; (iii) the ability of the Company to generate cash from operations; (iv) confirmation of a plan(s) of reorganization under the Bankruptcy Code; (v) confirmation of a company voluntary arrangement(s) in the U.K. under Administration; and (vi) the Company’s ability to achieve profitability following such confirmations.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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 affiliates 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 any 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.

Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts 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.

Trade Accounts Receivable: Federal-Mogul subsidiaries in Germany, France, Italy, Brazil and Spain are party to accounts receivable factoring arrangements. Accounts receivable factored or discounted under these facilities was $196 million and $177 million as of March 31, 2006 and December 31, 2005, respectively, of which $174 million and $159 million, respectively, was factored without recourse. Expenses associated with receivables factored or discounted are recorded in the statements of operations within “other income, net.” Under terms of these factoring arrangements, the Company is not obligated to draw cash immediately upon the factoring of accounts receivable. Thus, as of March 31, 2006 and December 31, 2005, the Company has outstanding factoring amounts of $18 million and $23 million, respectively, for which cash has not yet been drawn.

New Accounting Pronouncement: On June 29, 2005, the Emerging Issues Task Force (“EITF”) issued EITF No. 05-5, Accounting for Early Retirement or Postemployment Programs with Specific Features. EITF No. 05-5 requires reclassifications of certain restructuring reserves related to German early retirement (“ATZ”) programs from restructuring reserves to post-employment benefits. The Company adopted EITF No. 05-5 effective January 1, 2006 and for the quarter ended March 31, 2006, the Company is in compliance with the requirements.

Reclassifications: Certain items in the 2005 consolidated financial statements have been reclassified to conform with the presentation used in the current period.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

2.	Voluntary Reorganization under Chapter 11 and Administration

On October 1, 2001, Federal-Mogul and all of its wholly-owned United States subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in 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 under the United Kingdom Insolvency Act of 1986 in the High Court. Subsidiaries outside of the aforementioned U.S. and U.K. subsidiaries are not party to the Chapter 11 Cases and, therefore, are not currently provided protection from creditors by any insolvency court and are operating in the normal course.

The Restructuring Proceedings were initiated in response to a sharply increasing number of asbestos-related claims and their demand on the Company’s cash flows and liquidity. Under the Restructuring Proceedings, the Debtors expect to develop and implement a plan for addressing the asbestos-related claims against them.

Consequences of the Restructuring Proceedings

The Debtors are operating their businesses as debtors-in-possession subject to the provisions of the Bankruptcy Code. The U.K. Debtors are continuing to manage their operations under the supervision of Administrators approved by the High Court. All vendors are being paid for goods furnished and services provided after the Petition Date. However, as a consequence of the Restructuring Proceedings, pending litigation against the Debtors as of the Petition Date is stayed (subject to certain exceptions in the case of governmental authorities), and no party may take any action to pursue or collect pre-petition claims except pursuant to an order of the Bankruptcy Court or the High Court, as applicable. It is the Debtors’ intention to address pending and future asbestos-related claims and other pre-petition claims through plans of reorganization under the Bankruptcy Code and/or company voluntary arrangements under the Insolvency Act of 1986 (“CVAs”).

In the U.S., four committees, representing asbestos claimants, asbestos property damage claimants, unsecured creditors and equity security holders (collectively, the “Committees”) have been appointed as official committees in the Chapter 11 Cases and, in accordance with the provisions of the Bankruptcy Code, have the right to be heard on all matters that come before the Bankruptcy Court. The Committees, together with the legal representative for the future asbestos claimants, play important roles in the Restructuring Proceedings. In the U.K., the Administrators have appointed creditors committees, representing both asbestos claimants and general unsecured creditors.

On June 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. 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.

The Plan provides that asbestos personal injury claimants, both present and future, will be permanently channeled to a trust or series of trusts established pursuant to Section 524(g) of the Bankruptcy Code, thereby protecting the Company and its affiliates in the Chapter 11 Cases from existing and future asbestos liability. Although certain issues remain to be resolved, the Plan provides that all currently outstanding stock of the Company will be cancelled, 50.1% of newly issued common stock of reorganized Federal-Mogul will be distributed to the asbestos trust, and 49.9% of the newly issued common stock will be distributed pro rata to the noteholders. 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.

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 payout of all allowed unsecured claims against the U.S. Debtors does not exceed $258 million. Any excess above

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

this amount could result in a reduction in the percentage distribution that the unsecured creditors of the U.S. Debtors ultimately receive.

On July 12, 2004, solicitation packages containing the Plan and Disclosure Statement, various supporting documents and a ballot, if appropriate, were mailed to known creditors of the Company and holders of common and preferred stock interests in the Company. All votes were due by the close of business on November 3, 2004. The overwhelming majority of the classes of claims and interests have voted to accept the Plan. For the few classes of claims that voted to reject the Plan, the Plan Proponents intend to either amend the Plan so as to obtain such classes’ accepting votes or seek to confirm the Plan over the objection of such classes.

On February 2, 2005, the Company entered into an employment agreement with José Maria Alapont under which Mr. Alapont became the Company’s president and chief executive officer. As part of this employment agreement, the Plan Proponents have agreed to amend the Plan to provide Mr. Alapont with non-qualified stock options to purchase common stock of the reorganized Company. Significant terms and conditions of the contemplated stock options are outlined in the employment agreement previously filed with the SEC on Form 8-K dated February 2, 2005.

On June 14, 2005, the District Court overseeing the Chapter 11 Cases commenced its hearing to estimate the aggregate present value of pending and future asbestos personal injury and wrongful death claims against the U.K. Debtors. Closing arguments were completed on July 14, 2005, after which the District Court estimated the total liability for such claims at $9 billion in the United States and $500 million in the United Kingdom. The objective of the estimation hearing was to determine an aggregate claims value for purposes of formulating and confirming the reorganization plan and not to determine the liability for U.S. GAAP purposes. The Company has evaluated its currently recorded liability for such claims and, given the settlement terms and value as proposed in the Plan, determined that the amount recorded is appropriate.

On September 26, 2005, the Administrators of the U.K. Debtors and the Plan Proponents entered into an agreement outlining the terms and conditions of distributions to the creditors of the U.K. Debtors (“U.K. Settlement Agreement”). Prior to this agreement, the Company had agreed to sell certain long-term intercompany notes held by T&N Limited (“Loan Notes”) to Deutsche Bank as a means to fund expected distributions to creditors. In December 2005, in accordance with terms of the U.K. Settlement Agreement, the Company elected to retain the Loan Notes. Concurrently, the Loan Notes were transferred from the U.K. Debtors to a combination of a newly created non-debtor wholly-owned subsidiary of the Company and the U.S. parent, as provided in the Loan Note Sale Agreement filed with the SEC on Form 8-K on December 15, 2005.

Under the terms of the U.K. Settlement Agreement, certain amounts of cash within the U.K. Debtor entities, including cash contributed related to the transfer of the Loan Notes above, are restricted to settle specifically identified claims and liabilities of the U.K. Debtors. Restricted cash at March 31, 2006 and December 31, 2005 was $700 million and $701 million, respectively. In addition, remaining cash of the U.K. Debtor entities is limited for the general operating use of those entities, amounting to $40 million and $42 million at March 31, 2006 and December 31, 2005 respectively.

The U.K. Settlement Agreement sets forth the terms of various amendments to the Plan and the CVAs that will be used to reorganize the U.K. Debtors, including a delineation of distributions to U.K. and U.S. domiciled creditors. A copy of the U.K. Settlement Agreement was filed with the SEC on Form 8-K on September 30, 2005.

Also on September 26, 2005, the Plan Proponents and High River Limited Partnership agreed to make certain amendments to the Plan whereby i) the U.S. asbestos trust will make a payment to the reorganized Company (or pay a portion of the stock in reorganized Company to be issued to the asbestos trust in lieu thereof) for the agreed amounts that will be used by the Administrators to provide distributions on account of U.K. asbestos personal injury claims under the terms of the U.K. Settlement Agreement; ii) the U.S. asbestos trust will provide an option to Mr. Carl Icahn for the purchase of the remaining shares of the reorganized Company held by such trust; and (iii) if Mr. Carl Icahn does not exercise such option, he or one of his entities will provide certain financing to the U.S. asbestos trust. Terms of these Plan amendments were filed with the SEC on Form 8-K on September 30, 2005.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

On April 12, 2006, the High Court provided the Administrators with guidance on the appropriate timeline and mechanics for the solicitation of votes on the CVAs, providing for a 42-day solicitation of votes process. The Company anticipates that in the near future the Administrators will be distributing the CVAs to the creditors of the U.K. Debtors, along with an accompanying explanatory statement and notice of creditors meeting to vote on approval of the CVAs.

The Company cannot predict at this time whether the Plan and CVAs that will be proposed pursuant to the terms of the U.K. Settlement Agreement and the other agreed Plan amendments will be confirmed or approved.

The Bankruptcy Court may confirm a plan of reorganization only upon making certain findings required by the Bankruptcy Code, and a plan may be confirmed over the dissent of non-accepting creditors and equity security holders if certain requirements of the Bankruptcy Code are met. The payment rights and other entitlements of pre-petition creditors and equity security holders may be substantially altered by any plan of reorganization confirmed in the Chapter 11 Cases. The pre-petition creditors of some Debtors may be treated differently than those of other Debtors under the proposed Plan and CVAs.

Chapter 11 Financing

In connection with the Restructuring Proceedings, the Company entered into a debtor-in-possession (“DIP”) credit facility to supplement liquidity and fund operations during the restructuring proceedings. In November 2005, the Company amended and restated its existing DIP Facility, increasing the overall size of the financing facility from $500 million to $775 million and extending the term of the post-petition financing through December 9, 2006 (“Amended DIP Facility”). The Amended DIP Facility consists of a $500 million revolving credit facility (“Revolving Credit Facility”) and a $275 million term loan facility (“New Term Loan Facility”). The proceeds of the Term Loan Facility were used primarily to supplement the funding necessary for the Company and one of its subsidiaries to purchase certain Loan Notes pursuant to the U.K. Settlement Agreement and for general corporate purposes.

The Revolving Credit Agreement has an interest rate of either the ABR plus 1¹/4 percentage points or a formula based on the London Inter-Bank Offered Rate (“LIBOR”) plus 2¹/4 percentage points. Interest on the New Term Loan accrues at a rate of either the ABR plus 1 percentage point or a formula based on the London Inter-Bank Offered Rate (“LIBOR”) plus 2 percentage points. ABR is the greater of either the bank’s prime rate or the federal funds rate plus ¹/2 percentage point.

The Amended DIP facility is secured by the Company’s domestic assets and the Amended DIP lenders received permission from the lenders of the Senior Credit Agreements to have a priority over their collateral interest. The New Term Loan Facility has a first priority lien in the domestic fixed assets of the Company and a second priority lien in the Company’s domestic current assets and the Revolving Credit Facility has a first priority lien in the Company’s domestic current assets and a second priority lien in its domestic fixed assets. Availability under the Company’s Revolving Credit Facility is determined by the underlying collateral borrowing base at any point in time, consisting of the Company’s domestic inventories and domestic accounts receivable. The borrowing base available to the Company is calculated weekly based on the value of this underlying collateral. Commitments available under the Amended DIP facility is mandatorily reduced by a portion of proceeds from certain future assets or business divestitures. Amounts available and outstanding on the Amended DIP credit facility are further discussed in Note 9 to the consolidated financial statements, “Debt.”

As a condition of granting the DIP credit facility priority over the collateral interest of the Senior Credit Agreements, the Bankruptcy Court ordered that the noteholders receive, in cash, adequate protection payments equal to one-half of one percent (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 statements of operations. All cash adequate protection payments made to the noteholders are provisional in nature and are subject to recharacterization, credit against allowed claims, or other relief if the Bankruptcy Court were to ultimately conclude that the noteholders were not entitled to such payments.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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, the 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 $94 million as of March 31, 2006, have not been recorded in the accompanying financial statements.

Financial Statement Presentation

Virtually all of the Company’s pre-petition debt is in default. At March 31, 2006, the Debtors’ pre-petition debt is classified under the caption “Liabilities subject to compromise.” This includes debt outstanding of $1,962.0 million under the pre-petition Senior Credit Agreements and $2,117.4 million of other outstanding debt, primarily notes payable at various unsecured rates, less capitalized debt issuance fees of $29.1 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 directly to the holders of the debentures. This liability is a pre-petition liability and has been classified as “Liabilities subject to compromise” in the accompanying 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 remain subject to future adjustments, which 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.

Liabilities subject to compromise include the following:


	March 31 2006		December 31 2005
	(Millions of Dollars)
Debt	$	4,050.3	$	4,049.8
Asbestos liabilities		1,533.8		1,532.4
Accounts payable		202.9		202.6
Company-obligated mandatorily redeemable securities		114.6		114.6
Interest payable		44.0		44.0
Environmental liabilities		27.1		24.7
Other accrued liabilities		21.8		20.7

Subtotal		5,994.5		5,988.8
Intercompany payables to affiliates		3,177.1		3,169.6

	$	9,171.6	$	9,158.4

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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.

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 March 31
	2006		2005
	(Millions of Dollars)
Professional fees directly related to the filing	$	17.3	$	26.9
Critical employee retention costs		3.8		3.1
Other direct costs		—		—

	$	21.1	$	30.0

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 whom 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. 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.

Approximately 10,620 proofs of claim totaling approximately $158.7 billion in claims against various Debtors were filed in connection with the March 3, 2003 bar date as follows:

•

Approximately 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.

•

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 120 claims, totaling approximately $7.3 billion, represent bank and note-holder debt claims. The Company has previously recorded approximately $4.3 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 $0.2 billion, are alleging asbestos-related property damage. Based on its review, the Company believes most of these claims are duplicative or unsubstantiated. The Company has filed objections to many of these claims, entered into stipulations for the withdrawal of many of these claims, or otherwise induced the voluntary withdrawal of may of these claims. As a result, the remaining number of asbestos personal injury claims is approximately 1,600.

•

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”.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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 March 31, 2006, the Debtors have filed objections to more than 5,200 proofs of claim, and have obtained stipulations or orders involving approximately 4,100 claims, which (i) reduce the filed claims to an amount that is consistent with the Debtors books or records, (ii) completely disallow the claims, (iii) withdraw the claims, or (iv) represent a fair compromise in light of the cost and risk of litigation.

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.

Debtors’ Financial Statements

The condensed consolidated 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 Debtor and non-Debtor subsidiaries of the Company, which are eliminated in the consolidated financial statements.

FEDERAL-MOGUL CORPORATION

Debtors’ Condensed Consolidated Statements of Operations (Unaudited)


	Three Months Ended March 31
	2006			2005
	(Millions of Dollars)
Net sales	$	941.9		$	971.2
Cost of products sold		810.4			839.9


Gross margin		131.5			131.3

Selling, general and administrative expenses		151.9			167.4
Adjustment of assets to fair value		11.6			0.5
Interest expense, net		39.0			27.9
Chapter 11 and Administration related reorganization expenses		21.1			30.0
Interest income from non-filers		(74.1	)		(82.9	)
Restructuring expense, net		10.4			1.3
Other income, net		(7.8	)		(16.5	)


Earnings (loss) before income taxes and equity loss of non-Debtor subsidiaries		(20.6	)		3.6
Income tax expense		2.2			7.2


Loss before equity loss of non-Debtor subsidiaries		(22.8	)		(3.6	)
Equity loss from non-Debtor subsidiaries		(45.6	)		(44.7	)


Net loss	$	(68.4	)	$	(48.3	)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

FEDERAL-MOGUL CORPORATION

Debtors’ Condensed Consolidated Balance Sheets


	(Unaudited) March 31 2006			December 31 2005
	(Millions of Dollars)
ASSETS
Current assets:
Cash and equivalents	$	55.6		$	53.8
Restricted cash		699.9			700.9
Accounts receivable, net		623.4			596.0
Accounts receivable, non-Debtors		495.9			489.9
Inventories, net		444.5			438.5
Prepaid expenses		91.4			89.6

Total current assets		2,410.7			2,368.7

Property, plant and equipment, net		864.1			919.0
Goodwill and indefinite-lived intangible assets		1,109.7			1,109.3
Definite-lived intangible assets, net		241.3			244.1
Asbestos-related insurance recoverable		779.9			777.4
Loans receivable from and investments in non-Debtors		4,408.9			4,382.8
Other noncurrent assets		332.9			366.6


	$	10,147.5		$	10,167.9


LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Short-term debt, including current portion of long-term debt	$	542.4		$	570.7
Accounts payable and accrued compensation		295.7			262.6
Accounts payable, non-Debtors		344.1			334.4
Other accrued liabilities		268.1			270.7

Total current liabilities		1,450.3			1,438.4

Postemployment benefits		1,896.7			1,890.1
Other accrued liabilities		123.2			114.0
Liabilities subject to compromise		9,171.6			9,158.4
Shareholders’ deficit		(2,494.3	)		(2,433.0	)


	$	10,147.5		$	10,167.9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

FEDERAL-MOGUL CORPORATION

Debtors’ Condensed Consolidated Statements of Cash Flows (Unaudited)


	Three Months Ended March 31
	2006			2005
	(Millions of Dollars)
Net Cash Provided From (Used By) Operating Activities	$	37.9		$	(67.5	)

Cash Provided From (Used By) Investing Activities
Expenditures for property, plant and equipment		(15.5	)		(17.6	)
Net proceeds from the sale of businesses		3.6			—

Net Cash Used By Investing Activities		(11.9	)		(17.6	)

Cash Provided From (Used By) Financing Activities
Proceeds from borrowings on DIP credit facility		124.7			95.8
Principal payments on DIP credit facility		(153.0	)		(20.0	)
Net change in restricted cash		(1.0	)		—

Net Cash (Used By) Provided From Financing Activities		(29.3	)		75.8

Effect of foreign currency exchange rate fluctuations on cash and equivalents		5.1			(10.0	)


Increase (decrease) in cash and equivalents		1.8			(19.3	)

Cash and equivalents at beginning of period		53.8			433.5


Cash and equivalents at end of period	$	55.6		$	414.2

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

3.	Adjustment of Assets to Fair Value

During the three month period ended March 31, 2006, the Company recorded charges of $20.1 million to adjust property, plant and equipment to their estimated fair values in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The fair value of property, plant and equipment is based upon estimated discounted future cash flows and estimates of salvage value. The impairment charge represents the difference between the estimated fair values and the carrying value of the subject assets.

Impairment charges by reporting segment are as follows:


	March 31
	2006		2005
	Millions of Dollars
Powertrain	$	13.6	$	—
Sealing Systems		6.5		—
Vehicle Safety and Performance		—		—
Aftermarket Products and Services		—		3.0
Corporate		—		—

	$	20.1	$	3.0

In February 2006, the Company announced the closure of its Malden, Missouri facility, a piston manufacturing location. As a result of this closure, the value associated with buildings and production equipment has been reduced by approximately $7.1 million to reflect estimated realizable values.

The Company also recorded impairment charges of $6.5 million related to its Powertrain bearing and pistons businesses due to reduced volumes resulting in a revaluation of the expected future cash flows of these facilities as compared to the current carrying value of property, plant and equipment.

During the quarter, the Company recorded impairment charges of $6.5 million related to assets as certain Sealing System operating locations. Continued manufacturing inefficiencies and changes in shift patterns rendering equipment obsolete 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 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. Management expects that future savings resulting from execution of its restructuring programs will generally result in full pay back within 36 to 60 months.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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.

Management 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. Management does not expect that the execution of these programs will have an adverse impact on its liquidity position.

The Company’s restructuring activities are undertaken as necessary to execute management’s strategy and streamline 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, and generally fall into one of the following categories:

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 geographies or to other locations with available capacity.

Consolidation of administrative functions 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 three months ended March 31, 2006. “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, 2005	$	10.6		$	0.9		$	0.9		$	13.3		$	0.6		$	26.3
Provisions		10.9			6.1			0.7			7.6			0.8			26.1
Reversals		(0.3	)		—			—			—			—			(0.3	)
Payments		(2.1	)		(0.4	)		(0.5	)		(3.9	)		(1.0	)		(7.9	)
Foreign currency		(0.2	)		—			—			0.1			(0.1	)		(0.2	)

Balance of reserves at March 31, 2006	$	18.9		$	6.6		$	1.1		$	17.1		$	0.3		$	44.0

Significant restructuring activities for the quarter ended March 31, 2006

In addition to previously initiated restructuring activities, the Company announced a global restructuring plan, herein referred to as “Restructuring 2006”, as part of its global profitable growth strategy. This plan will affect approximately 25 facilities and reduce the Company’s workforce by approximately 10% by the end of 2008. The Company continues to solidify the individual components of this plan, and will announce those components as plans are finalized. In addition to the two plant closures associated with this plan announced during December 2005, additional announcements were made during the quarter ended March 31, 2006 related to the closure of the Company’s facilities located in Malden, Missouri, Pontoise, France and Rochdale, United Kingdom. In addition to these announcements, the Company has entered into negotiations with the local Works Councils at three additional European facilities related to the potential closure of those sites. The Company has recorded the amount of severance associated with these announced closures that is probable and estimable as of March 31, 2006, and that is not attributable to future service from the current employees. The Company has recorded $42.5 million in restructuring charges associated with Restructuring 2006, and expects to incur additional restructuring charges up to $105 million through 2008. The Company expects to achieve annual cost savings of $155 million subsequent to completion of this restructuring program.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Included in the summary table above the payment activity and remaining reserves associated with activities executed under Restructuring 2006 are as follows:


	Powertrain			SS		VSP			APS			Corporate		Total
	(Millions of dollars)
Balance of reserves at December 31, 2005	$	4.5		$	—	$	0.7		$	11.6		$	—	$	16.8
Provisions		10.4			6.1		—			7.5			—		24.0
Payments		(1.0	)		—		(0.4	)		(3.6	)		—		(5.0	)
Foreign currency		(0.3	)		—		—			(0.1	)		—		(0.4	)

Balance of reserves at March 31, 2006	$	13.6		$	6.1	$	0.3		$	15.4		$	—	$	35.4

Significant components of charges recorded in 2006 related to Restructuring 2006 are as follows:


	Expected Costs		Previously Incurred		Incurred During the Quarter		Estimated Additional Charges
	(Millions of dollars)
Powertrain	$	45.6	$	4.2	$	10.4	$	31.0
Sealing Systems		32.1		—		6.1		26.0
Vehicle Safety and Performance		32.3		1.3		—		31.0
Aftermarket Products and Services		36.5		13.0		7.5		16.0
Corporate		1.0		—		—		1.0

Total as at March 31, 2006	$	147.5	$	18.5	$	24.0	$	105.0

In April 2006, the Company announced the closure of their powertrain facility in St. Johns, MI. Restructuring expenses associated with this closure are estimated to be approximately $12.6 million and are expected to continue into 2007. Substantially all of the expenses relating to this closure will be incurred by the end of 2006. Expected cost savings associated with this project are estimated to be approximately $11.7 million per year. Also in April 2006, the Company entered into negotiations with the local works council at one additional European facility related to the potential closure of this site.

5.	Other Income, Net

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


	Three Months Ended March 31
	2006			2005
	(Millions of Dollars)
Amortization of intangible assets	$	4.3		$	4.5
Foreign currency exchange		(4.0	)		1.2
Minority interest earnings in consolidated subsidiaries		0.9			0.8
Royalty income		(0.3	)		(0.2	)
Accounts receivable discount expense		1.2			0.9
(Gain) loss on sale of assets		0.2			(6.8	)
Gain on sale of businesses		(0.3	)		—
Adjustment of 2004 goodwill impairment charge		—			(7.7	)
Other		(2.3	)		(1.1	)

	$	(0.3	)	$	(8.4	)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

6.	Inventories

Inventories are stated at the lower of cost or market. Cost determined by the last-in, first-out (LIFO) method was used for 50% of inventories at both March 31, 2006 and December 31, 2005. 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:


	March 31 2006			December 31 2005
	(Millions of Dollars)
Raw materials	$	157.2		$	155.6
Work-in-process		152.7			141.7
Finished products		603.5			574.6

		913.4			871.9
Valuation reserves		(74.1	)		(63.8	)

	$	839.3		$	808.1

7.	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 5% to 50%. The aggregate investment in these affiliates approximates $160 million and $159 million at March 31, 2006 and December 31, 2005, respectively, and is included in the consolidated balance sheets as “other noncurrent assets.” The Company’s equity earnings of such affiliates amounted to approximately $9 million for both the three month periods ended March 31, 2006 and 2005. During the three months ended March 31, 2006, these entities generated sales of approximately $195 million, net income of approximately $21 million, and had total net assets at March 31, 2006 of approximately $381 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 joint venture partner and can be exercised at the discretion of the 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 March 31, 2006, the total amount of the contingent guarantee, were all triggering events to occur, approximated $52 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

In accordance with SFAS 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 contingencies on the future liquidity position of the Company.

8.	Accrued Liabilities

Accrued liabilities consisted of the following:


	March 31 2006		December 31 2005
	(Millions of Dollars)
Accrued compensation	$	223.5	$	228.0
Accrued income taxes		110.0		90.1
Accrued rebates		72.5		81.5
Restructuring reserves		44.0		26.3
Accrued Chapter 11 and Administration expenses		33.5		41.7
Non-income taxes payable		29.1		21.4
Accrued product returns		19.2		19.3
Accrued professional services		17.1		16.3
Accrued warranty		14.5		11.4

	$	563.4	$	536.0

Debt

Long-term debt consisted of the following:


	March 31 2006			December 31 2005
	(Millions of Dollars)
DIP credit facility	$	542.4		$	570.7
Other		43.3			44.1

		585.7			614.8
Less: current maturities included in short-term debt		(578.1	)		(606.7	)

	$	7.6		$	8.1

In November 2005, the Company amended and restated its existing DIP Facility, increasing the overall size of the financing facility from $500 million to $775 million and extending the term of the post-petition financing through December 9, 2006 (“Amended DIP Facility”). The Amended DIP Facility consists of a $500 million revolving credit facility (“Revolving Credit Facility”) and a new $275 million term loan facility (“New Term Loan Facility”). The proceeds of the New Term Loan Facility were used primarily to supplement the funding necessary for the Company and one of its subsidiaries to purchase certain Loan Notes pursuant to the U.K. Settlement Agreement and for general corporate purposes.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

The Amended DIP facility is secured by the Company’s domestic assets and the Amended DIP lenders received permission from the lenders of the Senior Credit Agreements to have a priority over their collateral interest. The New Term Loan Facility has a first priority lien in the domestic fixed assets of the Company and a second priority lien in the Company’s domestic current assets and the Revolving Credit Facility has a first priority lien in the Company’s domestic current assets and a second priority lien in its domestic fixed assets. Availability under the Company’s Revolving Credit Facility is determined by the underlying collateral borrowing base at any point in time, consisting of the Company’s domestic inventories and domestic accounts receivable. The borrowing base available to the Company is calculated weekly based on the value of this underlying collateral. Commitments available under the Amended DIP facility is mandatorily reduced by a portion of proceeds from certain future assets or business divestitures. The commitment and amounts outstanding on the DIP credit facilities are as follows:


	March 31 2006		December 31 2005
	(Millions of Dollars)
Contractual commitment:
Revolving credit facility	$	500.0	$	500.0
Term loan facility		275.0		275.0
Mandatory commitment reductions		—		—

Current commitment	$	775.0	$	775.0


Outstanding:
Revolving credit facility	$	267.4	$	295.7
Term loan facility		275.0		275.0
Letters of credit		26.3		24.2

Total outstanding	$	568.7	$	594.9


Borrowing Base on Revolving credit facility
Current borrowings	$	267.4		295.7
Letters of credit		26.3		24.2
Available to borrow		206.3		174.2

Total borrowing base	$	500.0	$	494.1

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.

10.

Other Comprehensive Loss

The Company’s comprehensive loss consists of the following:


	Three Months Ended March 31
	2006			2005
	(Millions of Dollars)
Net loss	$	(68.4	)	$	(48.3	)
Foreign currency translation adjustments and other		5.6			(73.9	)

	$	(62.8	)	$	(122.2	)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

11.

Income Taxes

For the three months ended March 31, 2006, the Company recorded income tax expense of $29.6 million on a loss before income taxes of $38.8 million. This compares to income tax expense of $26.6 million on a loss before income taxes of $21.7 million in the same period of 2005. Income tax expense for the three month period ended March 31, 2006 resulted primarily from taxable income generated by certain international subsidiaries, non-recognition of income tax benefits on certain operating losses, primarily in the U.S. and U.K., and certain non-deductible items in various jurisdictions.

12.

Loss Per Common Share

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


	Three Months Ended March 31
	2006			2005
	(Millions of Dollars, Except Per Share Amounts)
Numerator:
Numerator for basic and diluted loss per common share	$	(68.4	)	$	(48.3	)


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


Basic and diluted loss per common share	$	(0.77	)	$	(0.54	)

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

13.

Pensions and Other Postretirement Benefits

The Company sponsors several defined benefit pension plans (“Pension Benefits”) and health care, disability 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 federal 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 March 31 are as follows:


	Pension Benefits
	United States						International						Other Benefits
	2006			2005			2006			2005			2006			2005
	(Millions of Dollars)
Service cost	$	7.5		$	7.7		$	1.9		$	2.6		$	2.7		$	1.3
Interest cost		14.5			14.3			37.2			42.2			8.7			8.5
Expected return on plan assets		(15.6	)		(14.7	)		(29.1	)		(31.4	)		—			—
Unrecognized transition obligation		—			2.4			—			—			—			—
Amortization of actuarial loss		6.4			6.6			27.6			27.1			3.2			3.0
Amortization of prior service cost		1.6			1.9			—			—			(1.0	)		(1.0	)

Net periodic benefit cost	$	14.4		$	18.2		$	37.6		$	40.5		$	13.6		$	11.8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

14.

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. 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 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 $1.3 billion as of March 31, 2006) 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, 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.

In 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 Restructuring Proceedings, 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 i) settlements that have already occurred or have yet to occur of up to $26 million and ii) CCR

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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.

While the Company believes that the liability recorded was appropriate as of October 1, 2001 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 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 Restructuring Proceedings, the number of current and 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.

While the Restructuring Proceedings will impact the timing and amount of the asbestos claims and related insurance recoverable amounts, there has been no change, other than to reflect an insurance settlement and foreign exchange translation, to the recorded amounts since the Company initiated the Restructuring Proceedings. Accordingly, the recorded amounts for the asbestos claims and related insurance recoverable asset could change significantly based upon events that occur from 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 March 31, 2006, the recorded insurance recoverable was $620 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. Prior to the conclusion of the trial, the parties were able to reach a settlement. As a result of this settlement, the Company recorded a $38.9 million asbestos charge during 2003. Under the terms of the settlement, EIR would be liable for 65.5% of its one-third share of the reinsurance policy. By separate agreement, Sedgwick agreed to be liable for an additional 17.25% of the EIR share of the reinsurance policy. T&N Ltd. has also agreed to indemnify the insurer for sums paid under the policy for which the insurer is liable to T&N Ltd. for which the insurer has no recovery from the reinsurers or Sedgwick. The settlement agreements referenced above are being held in escrow pending approval by the Bankruptcy Court and the Administrators of T&N Ltd. of those portions of the above-described settlement agreements that affect the Debtors. A motion seeking the Bankruptcy Court’s approval of the settlement was filed on March 1, 2004.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Subsequent 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 were 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 during July 2005 and judgement was handed down on December 21, 2005. The court held that the settlements did not breach the reinsurance agreement. Munich Re and CRIC have not appealed the judgement.

The ultimate realization of insurance proceeds is directly related to the amount of related covered valid claims against 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 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.

During the first quarter of 2004, the security rating of Centre Reinsurance International Co. was downgraded by several major credit rating providers. As a result of the downgrade, the Company obtained a guarantee of all CRIC’s obligations under the policy from Centre Reinsurance (US) Limited (“CRUS”), an affiliate of CRIC. The security rating of CRUS has not been affected by the downgrade of CRIC and remains unchanged since the inception of the policy. If the reinsurers and/or the related affiliate are not able to meet their obligations under the policy, the Company’s results of operations and financial condition could be materially affected.

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 or less than $1.69/£, the Company will effectively have a premium or discount on claims paid. As of March 31, 2006, the $620 million insurance recoverable asset includes an exchange rate premium of approximately $14 million.

Abex and Wagner Asbestos Litigation

Background

Two of the Company’s businesses formerly owned by Cooper Industries, Inc., historically 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 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. 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 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.

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 and 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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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 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 Liability

The liability (comprised of $129.5 million in Abex liabilities and $84.1 million in Wagner liabilities as of March 31, 2006) 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 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.

The Company issued various letters of credit in connection with asbestos lawsuits that had resulted in verdicts against the Company prior to its filing for bankruptcy protection. The letters of credit were issued as security for judgments entered against the Company to permit the Company to pursue appeals to these judgments. During 2004, the final appeal in one case was denied, the Bankruptcy Court lifted the automatic stay related to one letter of credit associated with this appeal, and a net draw was made upon this letter of credit of approximately $1 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 current and 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.

In December of 2005, Cooper Industries, Inc., Pneumo Abex Corporation, the Asbestos Committee, the Asbestos Futures Representative, the Company and various other relevant parties entered into a nonbinding term sheet to resolve all of Cooper Industries, Inc. and Pnuemo Abex Corporation claims against the Company arising out of the Abex asbestos litigation and the related alleged indemnity obligations. A condition precedent to that term sheet was that the Bankruptcy Court issue a preliminary injunction staying the asbestos litigation against Cooper Industries, Inc. and Pneumo Abex Corporation pending consummation of the term sheet which would have occurred through the confirmation of the Company’s Plan. The Bankruptcy Court denied the motion for preliminary injunction on January 20, 2006. Consequently, the parties have resumed discussions regarding settlement of the outstanding issues.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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 $112.6 million as of March 31, 2006.

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. One of the companies, Dresser Industries, Inc. (“Dresser”) initiated an adversary action against the Debtors and a number of insurance carriers in the Company’s Restructuring Proceedings. In its complaint, Dresser alleged that it has rights under certain primary and excess general liability insurance policies that may be shared with one of the Debtors, Federal-Mogul Products (“FMP”) as the successor to Wagner Electric Corporation. Dresser seeks, among other things, a declaration of the parties’ respective rights and obligations under the policies and a partition of the competing rights of Dresser and FMP under the policies. FMP answered Dresser’s complaint and filed cross-claims against all of the defendant-insurers seeking a declaration of FMP’s rights to the policies. The subsidiary of the Company that may be liable for 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 $47.8 million as of March 31, 2006. 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 remains.

The ultimate realization of insurance proceeds is directly related to the amount of related covered valid claims against 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, other than to reflect cash received under this policy, 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 stay.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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 March 31, 2006 and December 31, 2005:


	T&N Companies		Abex		Wagner			Other		Total
	(Millions of Dollars)
Liability:
Balance at December 31, 2005	$	1,316.1	$	129.5	$	84.1		$	2.7	$	1,532.4
Foreign exchange		1.4		—		—			—		1.4

Balance at March 31, 2006	$	1,317.5	$	129.5	$	84.1		$	2.7	$	1,533.8


Asset:
Balance at December 31, 2005	$	615.4	$	112.6	$	49.4		$	—	$	777.4
Cash receipts		—		—		(1.6	)		—		(1.6	)
Foreign exchange		4.1		—		—			—		4.1

Balance at March 31, 2006	$	619.5	$	112.6	$	47.8		$	—	$	779.9

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 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 believes 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 pay for remediating contamination resulting from hazardous substances that were discharged into the environment by 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 or provincial environmental laws. PRP designation requires the funding of site investigations and subsequent remedial activities.

At most of the sites that are likely to be 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 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 sent to these sites has generally been small. The other companies, which also sent waste to these sites, often numbering in the hundreds or more, 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 has identified certain present and former properties at which it 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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 regulatory and contractual matters based upon current available information from site investigations and consultants.

Environmental reserves were $59.8 million and $57.3 million at March 31, 2006 and December 31, 2005, respectively, and are included in the consolidated balance sheets as follows:


	March 31 2006		December 31 2005
	(Millions of Dollars)
Current liabilities	$	9.7	$	10.7
Long-term accrued liabilities		23.0		21.9
Liabilities subject to compromise		27.1		24.7

	$	59.8	$	57.3

Management believes that such accruals will be adequate to cover the Company’s estimated liability for its exposure in 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 and financial condition could be materially affected. At March 31, 2006, management estimates that reasonably possible material additional losses above and beyond management’s best estimate of required remediation costs as recorded approximates $65 million.

Environmental reserves subject to compromise include those that may be reduced in the Company’s bankruptcy proceeding 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 waste 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.

Environmental 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. Such obligations are normally associated with sites which the Company owns and either operates or formerly operated.

The best estimate of environmental liability at a site may change from time to time during a bankruptcy proceeding even though the liability relating to that site is subject to compromise and the Company’s responsibility to make payments is stayed. Notwithstanding the stay of legal proceedings against the Company regarding such a site, activities such as further site investigation and/or actual cleanup work often continue to be performed, generally by parties other than the Company. Such activities may produce new and better information that requires the Company to revise its best estimate of total site cleanup costs and its own share of such costs.

15.

Operations by Reporting Segment

The Company’s integrated operations are organized in five reporting segments generally corresponding to major product groups; Powertrain, Sealing Systems, Vehicle Safety and Performance, Aftermarket Products and Services and Corporate. Segment information for the three month period ended March 31, 2005 has been reclassified to reflect organizational changes implemented in the second quarter of 2005.

The Company has aggregated certain individual operating units within its five reporting segments. The accounting policies of the segments are the same as those of the Company. Revenues related to Powertrain, Sealing Systems, and Vehicle Safety and Performance products sold to OE customers are recorded within the respective segments. Revenues from such products sold to Aftermarket customers are recorded within the Aftermarket Products and Services segment.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

The Company evaluates segment performance principally on an Operational EBITDA basis. Operational EBITDA is defined as earnings before interest, income taxes, depreciation and amortization, and certain items such as restructuring and impairment charges, Chapter 11 and Administration related reorganization expenses, and gains or losses on the sales of assets. Operational EBITDA for each segment is shown below, as it is most consistent with the corresponding consolidated financial statements.

Net sales and gross margin information by reporting segment is as follows:


	Net Sales				Gross Margin
	Three Months Ended March 31				Three Months Ended March 31
	2006		2005		2006			2005
	(Millions of Dollars)
Powertrain	$	568	$	582	$	83		$	84
Sealing Systems		124		127		12			4
Vehicle Safety and Performance		192		193		48			45
Aftermarket Products and Services		716		731		163			165
Corporate		—		—		(21	)		(23	)

	$	1,600	$	1,633	$	285		$	275

Operational EBITDA by reporting segment and the reconciliation of Operational EBITDA to loss before income tax expense is as follows:


	Three Months Ended March 31
	2006			2005
	(Millions of Dollars)
Powertrain	$	92		$	96
Sealing Systems		12			2
Vehicle Safety and Performance		42			41
Aftermarket Products and Services		112			107
Corporate		(112	)		(119	)

Total Operational EBITDA		146			127

Interest expense, net		(39	)		(29	)
Depreciation and amortization		(79	)		(93	)
Restructuring charges, net		(26	)		(3	)
Adjustment of assets to fair value		(20	)		(3	)
Chapter 11 and Administration related reorganization expenses		(21	)		(30	)
Finalization of 2004 Goodwill Impairment Charge		—			8
Other		—			1

Loss before income tax expense	$	(39	)	$	(22	)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Total assets by reporting segment are as follows:


	March 31 2006		December 31 2005
	(Millions of Dollars)
Powertrain	$	1,765	$	1,746
Sealing Systems		770		765
Vehicle Safety and Performance		1,020		1,008
Aftermarket Products and Services		2,940		2,875
Corporate		1,271		1,341

	$	7,766	$	7,735

16.

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 chairman, president and chief executive officer. In connection with this agreement, the Plan Proponents 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, 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.

Additionally, one-half of the options have an additional feature allowing for the exchange of options for shares of stock of the reorganized Company prior to the end of the employment agreement, at the exchange equivalent of four options for one 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.”

In accordance with Financial Accounting Standards Board (“SFAS”) No. 123(R), Shared Based Payments, the Company has determined the amount of compensation expense associated with these stock options on the fair value of such options as of March 31, 2006. 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	43%	43%
Expected dividend yield	0%	0%
Risk-free rate over the estimated expected life of option	4.69 – 4.81%	4.69 – 4.81%
Expected term (in years)	4.29	5.27

Until the date of grant, the Company is required to reassess the value of the Options quarterly and adjust the aggregate compensation expense recognized to reflect any change in the value of the Options. During the three months ended March 31, 2006 and March 31, 2005, the Company recorded compensation expense of $1.5 million and $0.6 million, respectively. As of March 31, 2006, there was approximately $29 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

17.

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 UK Holdings Inc.	Felt Products MFG. Co.
Federal-Mogul World Wide Inc.	F-M 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 1999 and 1998 that are guaranteed by the Guarantor Subsidiaries. The Guarantor Subsidiaries also guarantee the Company’s previously existing publicly registered Medium-term notes and Senior notes.

In lieu of providing separate unaudited financial statements for the Guarantor Subsidiaries, the Company has included the accompanying 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 Bulleting 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.

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 of the liabilities at March 31, 2006, as shown below, were liabilities subject to compromise as of the Petition date:


	Parent		Guarantor Subsidiaries		Non – Guarantor Subsidiaries		Consolidated
	(Millions of Dollars)
Debt	$	4,050.1	$	0.2	$	—	$	4,050.3
Asbestos liabilities		1.4		236.3		1,296.1		1,533.8
Accounts payable		59.0		116.6		27.3		202.9
Company-obligated mandatorily redeemable preferred securities of subsidiary holding solely convertible subordinated debentures of the Company		—		—		114.6		114.6
Interest payable		43.8		0.2		—		44.0
Environmental liabilities		27.1		—		—		27.1
Other accrued liabilities		10.8		0.1		10.9		21.8

	$	4,192.2	$	353.4	$	1,448.9	$	5,994.5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Operations

Three Months Ended March 31, 2006


	Unconsolidated
	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
	(Millions of Dollars)
Net sales	$	301.9		$	431.2		$	1,305.7		$	(438.5	)	$	1,600.3
Cost of products sold		258.0			333.4			1,162.4			(438.5	)		1,315.3


Gross margin		43.9			97.8			143.3			—			285.0

Selling, general and administrative expenses		73.6			53.9			100.0			—			227.5
Adjustment of assets to fair value		8.4			0.2			11.5			—			20.1
Interest expense (income), net		47.0			—			(8.0	)		—			39.0
Chapter 11 and Administration related reorganization expenses		21.1			—			—			—			21.1
Equity earnings of unconsolidated affiliates		—			(1.6	)		(7.8	)		—			(9.4	)
Restructuring expense, net		3.3			0.1			22.4			—			25.8
Other (income) expense, net		(2.6	)		(32.0	)		34.3			—			(0.3	)


Earnings (loss) before income taxes and equity earnings (loss) of subsidiaries		(106.9	)		77.2			(9.1	)		—			(38.8	)
Income tax expense		1.0			1.1			27.5			—			29.6


Earnings (loss) before equity earnings (loss) of subsidiaries		(107.9	)		76.1			(36.6	)		—			(68.4	)
Equity earnings (loss) of subsidiaries		39.5			13.5			—			(53.0	)		—


Net earnings (loss)	$	(68.4	)	$	89.6		$	(36.6	)	$	(53.0	)	$	(68.4	)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Operations

Three Months Ended March 31, 2005


	Unconsolidated
	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
	(Millions of Dollars)
Net sales	$	310.9		$	433.9		$	1,356.5		$	(468.1	)	$	1,633.2
Cost of products sold		285.0			333.1			1,208.3			(468.1	)		1,358.3


Gross margin		25.9			100.8			148.2			—			274.9

Selling, general and administrative expenses		73.5			63.1			113.1			—			249.7
Adjustment of assets to fair value		—			0.5			2.5			—			3.0
Interest expense (income), net		32.5			—			(3.7	)		—			28.8
Chapter 11 and Administration related reorganization expenses		30.0			—			—			—			30.0
Equity earnings of unconsolidated affiliates		—			(1.5	)		(7.8	)		—			(9.3	)
Restructuring expense, net		0.4			1.1			1.3			—			2.8
Other (income) expense, net		(16.1	)		(35.4	)		43.1			—			(8.4	)


Earnings (loss) before income taxes and equity earnings (loss) of subsidiaries		(94.4	)		73.0			(0.3	)		—			(21.7	)
Income tax expense		1.2			1.1			24.3			—			26.6


Earnings (loss) before equity earnings (loss) of subsidiaries		(95.6	)		71.9			(24.6	)		—			(48.3	)
Equity earnings (loss) of subsidiaries		47.3			24.8			—			(72.1	)		—


Net earnings (loss)	$	(48.3	)	$	96.7		$	(24.6	)	$	(72.1	)	$	(48.3	)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Balance Sheet

March 31, 2006


	Unconsolidated
	Parent			Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminations			Consolidated
ASSETS
Current Assets:
Cash and equivalents	$	15.9		$	—	$	379.7	$	—		$	395.6
Restricted cash		699.9			—		—		—			699.9
Accounts receivable, net		201.3			323.1		571.0		—			1,095.4
Inventories, net		95.6			302.0		441.7		—			839.3
Prepaid expenses		47.2			31.1		127.7		—			206.0

Total Current Assets		1,059.9			656.2		1,520.1		—			3,236.2

Property, plant and equipment, net		234.3			511.7		1,194.7		—			1,940.7
Goodwill and indefinite-lived intangible assets		482.3			577.5		129.5		—			1,189.3
Definite-lived intangible assets, net		56.1			76.6		153.9		—			286.6
Investment in subsidiaries		6,495.8			3,042.7		—		(9,538.5	)		—
Intercompany accounts, net		(5,061.4	)		3,596.7		1,464.7		—			—
Asbestos-related insurance recoverable		—			160.4		619.5		—			779.9
Prepaid pension costs		2.8			—		76.4		—			79.2
Other noncurrent assets		43.7			19.0		191.7		—			254.4

	$	3,313.5		$	8,640.8	$	5,350.5	$	(9,538.5	)	$	7,766.3


LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
Short-term debt, including current portion of long-term debt	$	542.4		$	—	$	35.6	$	—		$	578.0
Accounts payable		88.2			103.3		273.4		—			464.9
Accrued liabilities		101.5			59.2		402.7		—			563.4
Other current liabilities		35.4			10.2		78.7		—			124.3

Total Current Liabilities		767.5			172.7		790.4		—			1,730.6

Liabilities subject to compromise		4,192.2			353.4		1,448.9		—			5,994.5

Long-term debt		—			—		7.6		—			7.6
Postemployment benefits		717.3			—		1,527.1		—			2,244.4
Long-term portion of deferred income taxes		—			—		65.6		—			65.6
Other accrued liabilities		105.0			0.4		80.6		—			186.0
Minority interest in consolidated subsidiaries		25.8			6.1		—		—			31.9
Shareholders’ Equity (Deficit)		(2,494.3	)		8,108.2		1,430.3		(9,538.5	)		(2,494.3	)

	$	3,315.5		$	8,640.8	$	5,350.5	$	(9,538.5	)	$	7,766.3

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Consolidating Condensed Balance Sheet

December 31, 2005


	Unconsolidated
	Parent			Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminations			Consolidated
ASSETS
Current Assets:
Cash and equivalents	$	4.5		$	—	$	382.7	$	—		$	387.2
Restricted cash		700.9			—		—		—			700.9
Accounts receivable, net		203.9			302.5		504.7		—			1,011.1
Inventories, net		94.8			294.3		419.0		—			808.1
Prepaid expenses		47.2			31.0		142.5					220.7

Total Current Assets		1,051.3			627.8		1,448.9		—			3,128.0

Property, plant and equipment, net		253.4			522.3		1,227.4		—			2,003.1
Goodwill and indefinite-lived intangible assets		482.3			577.7		129.5		—			1,189.5
Definite-lived intangible assets, net		56.8			77.8		155.0		—			289.6
Investment in subsidiaries		6,398.6			3,035.1		—		(9,433.7	)		—
Intercompany accounts, net		(4,901.7	)		3,488.0		1,413.7		—			—
Asbestos-related insurance recoverable		—			162.0		615.4		—			777.4
Prepaid pension costs		2.9			—		109.3		—			112.2
Other noncurrent assets		46.3			19.5		169.5		—			235.3

	$	3,389.9		$	8,510.2	$	5,268.7	$	(9,433.7	)	$	7,735.1


LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
Short-term debt, including current portion of long-term debt	$	570.7		$	—	$	36.0	$	—		$	606.7
Accounts payable		66.0			83.8		255.2		—			405.0
Accrued liabilities		106.9			58.8		370.3		—			536.0
Other current liabilities		39.7			10.6		66.6		—			116.9

Total Current Liabilities		783.3			153.2		728.1		—			1,664.6

Liabilities subject to compromise		4,188.3			353.2		1,447.3		—			5,988.8

Long-term debt		—			—		8.1		—			8.1
Postemployment benefits		725.3			—		1,505.5		—			2,230.8
Long-term portion of deferred income taxes		—			—		62.4		—			62.4
Other accrued liabilities		100.2			0.3		80.9		—			181.4
Minority interest in consolidated subsidiaries		25.8			6.2		—		—			32.0
Shareholders’ Equity (Deficit)		(2,433.0	)		7,997.3		1,436.4		(9,433.7	)		(2,433.0	)

	$	3,389.9		$	8,510.2	$	5,268.7	$	(9,433.7	)	$	7,735.1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Cash Flows

Three Months Ended March 31, 2006


	(Unconsolidated)
	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations		Consolidated
	(Millions of Dollars)
Net Cash Provided From (Used By) Operating Activities	$	(30.4	)	$	97.1		$	(13.1	)	$	—	$	53.6

Expenditures for property, plant and equipment		(6.8	)		(15.3	)		(7.5	)		—		(29.6	)
Net proceeds from sale of property, plant and equipment		—			—			2.7			—		2.7
Net proceeds from sale of business		—			—			4.0			—		4.0

Net Cash Used By Investing Activities		(6.8	)		(15.3	)		(0.8	)		—		(22.9	)

Proceeds from borrowings on DIP credit facility		124.7			—			—			—		124.7
Principal payments on DIP credit facility		(153.0	)		—			—			—		(153.0	)
Decrease in short-term debt		—			—			(0.7	)		—		(0.7	)
Decrease in long-term debt		—			—			(0.6	)		—		(0.6	)
Net change in restricted cash		(1.0	)		—			—			—		(1.0	)
Change in intercompany accounts		69.6			(81.8	)		12.2			—		—

Net Cash Provided From (Used By) Financing Activities		40.3			(81.8	)		10.9			—		(30.6	)

Effect of foreign currency exchange rate fluctuations on cash and equivalents		8.3			—			—			—		8.3


Increase (decrease) in cash and equivalents	$	11.4		$	—		$	(3.0	)	$	—	$	8.4

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Cash Flows

Three Months Ended March 31, 2005


	(Unconsolidated)
	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations		Consolidated
	(Millions of Dollars)
Net Cash Provided From (Used By) Operating Activities	$	(23.2	)	$	141.2		$	(129.0	)	$	—	$	(11.0	)

Expenditures for property, plant and equipment		(6.8	)		(9.0	)		(23.8	)		—		(39.6	)
Net proceeds from sale of property, plant and equipment		—			—			5.3			—		5.3

Net Cash Used By Investing Activities		(6.8	)		(9.0	)		(18.5	)		—		(34.3	)

Proceeds from borrowings on DIP credit facility		95.8			—			—			—		95.8
Principal payments on DIP credit facility		(20.0	)		—			—			—		(20.0	)
Increase in short-term debt		—			—			3.9			—		3.9
Decrease in long-term debt		—			—			(0.9	)		—		(0.9	)
Change in intercompany accounts		(36.9	)		(132.2	)		169.1			—		—

Net Cash Provided From (Used By) Financing Activities		38.9			(132.2	)		172.1			—		78.8

Effect of foreign currency exchange rate fluctuations on cash and equivalents		(13.7	)		—			—			—		(13.7	)


Increase (decrease) in cash and equivalents	$	(4.8	)	$	—		$	24.6		$	—	$	19.8

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Federal-Mogul Corporation (“Federal-Mogul” or the “Company”) is a leading global supplier of vehicular parts, components, modules and systems to customers in the automotive, small engine, heavy-duty and industrial markets. Federal-Mogul has established an expansive global presence and conducts its operations through various manufacturing, distribution and technical centers that are wholly-owned subsidiaries or partially-owned joint ventures, organized into five primary reporting segments; Powertrain, Sealing Systems, Vehicle Safety and Performance, Aftermarket Products and Services and Corporate. The Company has operations in established markets including the United States, Germany, United Kingdom, France, Italy and Canada, and emerging markets including China, Czech Republic, Hungary, India, Korea, Mexico, Poland and Thailand. The attendant risks of the Company’s international operations are primarily related to currency fluctuations, changes in local economic and political conditions, and changes in laws and regulations.

Federal-Mogul offers 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. 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 operates in an extremely competitive industry, driven by global vehicle production volumes and part replacement trends. Business is typically awarded to the supplier offering the most favorable combination of cost, quality, technology and service. In addition, customers continue to require periodic price reductions, which requires the Company to continually assess, redefine and improve its operations, products, and manufacturing capabilities to maintain and improve profitability. Management continues to develop and execute initiatives to meet the challenges of the industry and to achieve its strategy.

For a more detailed description of the Company’s business, products, industry, operating strategy and associated risks, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

Voluntary reorganization under Chapter 11 and Administration

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(JKF)). 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 the normal course.

Consequences of the Restructuring Proceedings

On September 26, 2005, the Administrators of the U.K. Debtors and the Plan Proponents entered into an agreement outlining the terms and conditions of distributions to the creditors of the U.K. Debtors (“U.K. Settlement Agreement”). Prior to this agreement, the Company had agreed to sell certain long-term intercompany notes held by T&N Limited (“Loan Notes”) to Deutsche Bank as a means to fund expected distributions to creditors. In December 2005, in accordance with terms of the U.K. Settlement Agreement, the Company elected to retain the Loan Notes. Concurrently, the Loan Notes were transferred from the U.K. Debtors to a combination of a newly created non-debtor wholly-owned subsidiary of the Company and the U.S. parent, as provided in the Loan Note Sale Agreement was filed with the SEC on Form 8-K on December 15, 2005.

Under the terms of the Settlement Agreement, certain amounts of cash within the U.K. Debtor entities, including cash contributed related to the transfer of the Loan Notes above, is restricted to settle specifically identified claims and liabilities of the U.K. Debtors. Restricted cash at March 31, 2006 was $700 million. In addition, remaining cash of the U.K. Debtor entities is limited for the general operating use of those entities, amounting to $40 million and $42 million at March 31, 2006 and December 31, 2005, respectively.

Also, on September 26, 2005, the Plan Proponents and High River Limited Partnership agreed to make certain amendments to the Plan whereby i) the U.S. asbestos trust will make a payment to the reorganized Company (or pay a portion of the stock in reorganized Company to be issued to the asbestos trust in lieu thereof) for the agreed amounts that will be used by the Administrators to provide distributions on account of U.K. asbestos personal injury claims under the terms of the U.K. Settlement Agreement; ii) the U.S. asbestos trust will provide an option to Mr. Carl Icahn for the purchase of the remaining shares of the reorganized Company held by such trust; and (iii) if Mr. Carl Icahn does not exercise such option, he or one of his entities will provide certain financing to the U.S. asbestos trust. Terms of these Plan amendments were filed with the SEC on Form 8-K on September 30, 2005.

On April 12, 2006, upon ordinary application by the Administrators of the U.K. Debtors, the High Court provided the Administrators with guidance on the appropriate timeline and mechanics for the solicitation of votes on the CVAs, providing for a 42-day solicitation of votes process. The Company anticipates that the Administrators will be distributing the CVAs, along with an accompanying explanatory statement and notice of creditors meeting to vote on approval of the CVAs, to creditors of the U.K. Debtors in the near future.

The Company cannot predict at this time whether the Plan or CVAs that will be proposed pursuant to the terms of the U.K. Settlement Agreement and the other agreed Plan amendments will be confirmed or approved.

holders if certain requirements of the Bankruptcy Code are met. The payment rights and other entitlements of pre-petition creditors and equity security holders may be substantially altered by any plan of reorganization confirmed in the Chapter 11 Cases. The pre-petition creditors of some Debtors may be treated differently than those of other Debtors under the proposed Plan and CVAs.

The accompanying consolidated financial statements have been prepared in accordance with 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 changes 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 amounts other than those reflected in the consolidated financial statements. Further, a plan of reorganization or company voluntary arrangement could materially change the amounts and classifications in the historical consolidated financial statements.

The appropriateness of using the going concern basis for the Company’s financial statements is dependent upon, among other things: (i) the Company’s ability to comply with the terms of the DIP credit facility and any cash management order entered by the Bankruptcy Court in connection with the Chapter 11 Cases; (ii) the ability of the Company to maintain adequate cash on hand; (iii) the ability of the Company to generate cash from operations; (iv) confirmation of a plan(s) of reorganization under the Bankruptcy Code; (v) confirmation of a company voluntary arrangement in the U.K. under Administration; and (vi) the Company’s ability to achieve profitability following such confirmations.

Asbestos Liabilities and Related Insurance Recoverable

Results of Operations

The following Management’s Discussion and Analysis of financial condition and results of operations (“MD&A”) should be read in conjunction with the MD&A included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

Consolidated Results

Net sales by reporting segment were:


	Three Months Ended March 31
	2006		2005
	(Millions of Dollars)
Powertrain	$	568	$	582
Sealing Systems		124		127
Vehicle Safety and Performance		192		193
Aftermarket Products and Services		716		731
Corporate		—		—

	$	1,600	$	1,633

The percentage of net sales by group and region are listed below. “SS”, “VSP” and “APS” represent Sealing Systems, Vehicle Safety and Performance, and Aftermarket Products and Services, respectively.


	Three Months Ended March 31
	Powertrain		SS		VSP		APS		Total
2006
Americas	29	%	69	%	48	%	74	%	55	%
Europe	69	%	31	%	51	%	24	%	43	%
Asia	2	%	0	%	1	%	2	%	2	%

2005
Americas	28	%	66	%	44	%	74	%	53	%
Europe	70	%	33	%	54	%	24	%	45	%
Asia	2	%	1	%	2	%	2	%	2	%

Gross margin by reporting segment was:


	Three Months Ended March 31
	2006			2005
	(Millions of Dollars)
Powertrain	$	83		$	84
Sealing Systems		12			4
Vehicle Safety and Performance		48			45
Aftermarket Products and Services		163			165
Corporate		(21	)		(23	)

	$	285		$	275

Net sales decreased by $33 million, or 2%, to $1,600 million for the first quarter of 2006 from $1,633 million in the same period of 2005. Production volumes in existing markets and customers served remained largely flat year over year, with increased demand for existing European Powertrain applications being offset by a reduction in global demand for replacement engine parts. The impact of the U.S. dollar strengthening against the Euro reduced revenues reported by the Company’s European operations by $56 million, partially offset by $5 million in favorable movements in other foreign currencies. New program launches, primarily in VSP Americas, generated $13 million in additional sales and customer price increases generated a further $5 million, with price increases in APS more than offsetting continued price reductions to the OEMs.

Gross margin increased by $10 million to $285 million, or 18% of sales for the first quarter of 2006 from $275 million, or 17% of sales in the same period of 2005. Reductions in margin due to volume and product mix of $11 million and foreign currency of $9 million were more than offset by customer price increases of $5 million and improved manufacturing productivity and operational efficiency of $25 million, including reduced raw material costs of $8 million.

Reporting Segment Results – Three Months Ended March 31, 2006 compared to March 31, 2005

The following table provides a reconciliation of changes in sales and gross margin for the three months ended March 31, 2006 compared with the three months ended March 31, 2005 for each of the Company’s reporting segments. “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)
Sales
Three-months ended March 31, 2005	$	582		$	127		$	193		$	731		$	—		$	1,633
Sales volumes		22			1			8			(18	)		—			13
Customer pricing		(6	)		(1	)		—			12			—			5
Foreign currency		(30	)		(3	)		(9	)		(9	)		—			(51	)

Three-months ended March 31, 2006	$	568		$	124		$	192		$	716		$	—		$	1,600


Gross Margin
Three-months ended March 31, 2005	$	84		$	4		$	45		$	165		$	(23	)	$	275
Sales volumes / mix		1			1			4			(17	)		—			(11	)
Customer pricing		(6	)		(1	)		—			12			—			5
Productivity, net of inflation		10			8			3			3			1			25
Foreign currency		(6	)		—			(4	)		—			1			(9	)

Three-months ended March 31, 2006	$	83		$	12		$	48		$	163		$	(21	)	$	285

Powertrain

Sales decreased by $14 million to $568 million for the first quarter of 2006 from $582 million in the same period of 2005. The Powertrain group generates about 70% of its revenue in Europe where the strengthening of the U.S. dollar against the Euro reduced reported sales by $30 million. These foreign currency movements were partially offset by $22 million of additional sales volumes due to increased production, mainly from the European OEM’s. Continued customer pricing pressure, concentrated in Europe, reduced sales by a further $6 million.

Gross margin decreased by $1 million to $83 million, or 15% of sales, for the first quarter of 2006 compared to $84 million, or 14% of sales for the first quarter of 2005. Improvements in year over year manufacturing productivity produced $10 million of additional margin which was more than offset by $6 million of adverse foreign currency movements and $6 million of customer price reductions.

Sealing Systems

Sales decreased by $3 million, or 2%, to $124 million for the first quarter of 2006 from $127 million in the same period of 2005. Approximately 30% of Sealing Systems’ revenues are generated in Europe and the resulting foreign

currency movements were the cause of the sales decline. Reduced market demand for existing applications in Europe was offset by new European program launches, otherwise sales remained flat year over year.

Gross margin increased by $8 million, to $12 million, or 10% of sales, for the first quarter of 2006 compared to $4 million, or 3% of sales for the first quarter of 2005. This increase was due to improved efficiency in the manufacturing operations and a slight reduction in raw material costs.

Vehicle Safety and Performance

Sales decreased by $1 million to $192 million for the first quarter of 2006 from $193 million in the same period of 2005. Approximately 50% of VSP sales are in Europe, where foreign currency movements reduced sales by $9 million. Sales volumes increased by $8 million, mostly due to new program launches in the Americas. With the exception of foreign currency movements European volumes remained flat year over year.

Gross margin was $48 million, or 25% of sales, for the first quarter of 2006 compared to $45 million, or 23% of sales, for the first quarter of 2005. Increased sales volumes contributed $4 million of the increase, and reduced depreciation a further $3 million. These increases were partially offset by unfavorable foreign currency movements of $4 million.

Aftermarket Products and Services

Sales decreased by $15 million, or 2%, to $716 million for the first quarter of 2006, from $731 million in the same period of 2005. This decrease was driven by reduced global demand for replacement engine parts of $18 million and unfavorable foreign currency movements of $9 million. These adverse factors were partially offset by $12 million in customer price increases, primarily in North America.

Gross margin was $163 million, or 23% of sales, for the first quarter of 2006 compared to $165 million, or 23% of sales, in the same period of 2005. The impact of reduced sales volumes and unfavorable product mix of $17 million was partially offset by $12 million of customer price increases and $3 million of productivity improvements.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses were $228 million, or 14% of net sales, for the first quarter of 2006 as compared to $250 million, or 15% of net sales, for the same quarter of 2005. Selling, general and administrative expenses decreased primarily due to cost savings measures, and favorable foreign currency movements.

Research and development (“R&D”) costs included in SG&A expenses were $41 million for the quarter ended March 31, 2006 compared with $44 million for the same period in 2005. As a percentage of OE sales research and development was 5% for the quarters ended March 31, 2006 and 2005. The Company maintains technical centers throughout the world designed to integrate the Company’s leading technologies into advanced products and processes, to provide engineering support for all of the Company’s manufacturing sites, and to provide technological expertise in engineering and design development providing solutions for customers and bringing new, innovative products to market. Federal-Mogul’s research and development activities are conducted at the Company’s major research centers in Burscheid, Germany; Nuremberg, Germany; Wiesbaden, Germany; Bad Camberg, Germany; Chapel, U.K.; Plymouth, Michigan; Skokie, Illinois, Ann Arbor, Michigan and Yokohama, Japan.

Interest Expense, net

Interest expense, net was $39 million in the first quarter of 2006 compared to $29 million for the same quarter of 2005. The increase is due to higher average outstanding borrowings on the DIP credit facility and higher average interest rates on all debt.

As a condition of the DIP credit facility, the Bankruptcy Court ordered that the noteholders receive, in cash, adequate protection payments equal to one-half of one percent (0.5%) of the outstanding notes. These cash payments, which approximate $2.6 million per quarter, are recorded as interest expense in the statement of

operations. All cash adequate protection payments made to the noteholders are provisional in nature and are subject to recharacterization, credit against allowed claims or other relief if the Bankruptcy Court were to conclude that the noteholders were not entitled to such payments.

In connection with the Restructuring Proceedings and in accordance with SOP 90-7, the Company ceased recording interest expense on its outstanding pre-petition Notes, Medium-Term Notes and Senior Notes effective October 1, 2001.

Restructuring Activities


	Powertrain			SS			VSP			APS			Corporate			Total
	(Millions of dollars)
Balance of reserves at December 31, 2005	$	10.6		$	0.9		$	0.9		$	13.3		$	0.6		$	26.3
Provisions		10.9			6.1			0.7			7.6			0.8			26.1
Reversals		(0.3	)		—			—			—			—			(0.3	)
Payments		(2.1	)		(0.4	)		(0.5	)		(3.9	)		(1.0	)		(7.9	)
Foreign currency		(0.2	)		—			—			0.1			(0.1	)		(0.2	)

Balance of reserves at March 31, 2006	$	18.9		$	6.6		$	1.1		$	17.1		$	0.3		$	44.0

The Company’s restructuring reserve balances are principally comprised of severance and employee-related costs.

Adjustment of Assets to Fair Value

During the three month periods ended March 31, 2006, the Company recorded charges of $20.1 million to adjust property, plant and equipment to their estimated fair values in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” The fair value of property, plant and equipment is based upon estimated discounted future cash flows and estimates of salvage value. The impairment charge represents the difference between the estimated fair values and the carrying value of the subject assets.

Impairment charges by reporting segment are as follows:


	March 31
	2006		2005
	Millions of Dollars
Powertrain	$	13.6	$	—
Sealing Systems		6.5		—
Vehicle Safety and Performance		—		—
Aftermarket Products and Services		—		3.0
Corporate		—		—

	$	20.1	$	3.0

Chapter 11 and Administration Related Reorganization Expenses

During the three months ended March 31, 2006 and 2005, the Company recorded Chapter 11 and Administration related reorganization expenses of $21 million and $30 million, respectively. These expenses fluctuate largely based upon the necessity for professional services by third-party advisors in connection with the Restructuring Proceedings.


	Three Months Ended March 31
	2006		2005
	(Millions of Dollars)
Professional fees directly related to the filing	$	17.3	$	26.9
Critical employee retention costs		3.8		3.1
Other direct costs		—		—

	$	21.1	$	30.0

Cash payments for Chapter 11 and Administration related reorganization expenses totaled $29.3 million and $33.9 million for the three months ended March 31, 2006 and 2005, respectively.

Income Tax Expense

Litigation and Environmental Contingencies

For a summary of material litigation and environmental contingencies, refer to Note 14 of the consolidated financial statements, “Litigation and Environmental Matters”.

Liquidity and Capital Resources

Cash Flow

Cash flow provided from operating activities was $54 million for the first quarter of 2006, compared to cash used by operating activities of $11 million in the same for the comparable period of 2005. The increase in cash provided by operating activities was primarily the result of an additional $92 million of cash generated by changes in working capital and other asset accounts.

Cash flow used by investing activities was $23 million in the first three months of 2006. Capital expenditures of $30 million were partially offset by proceeds from the sale of property, plant and equipment of $3 million and sale of businesses of $4 million. Cash flow used by financing activities was $30 million for the first three months of 2006 primarily resulting from net payments on the Company’s DIP credit facility.

Chapter 11 Financing

Company amended and restated its existing DIP Facility, increasing the overall size of the financing facility from $500 million to $775 million and extending the term of the post-petition financing through December 9, 2006 (“Amended DIP Facility”). The Amended DIP Facility consists of a $500 million revolving credit facility (“Revolving Credit Facility”) and a $275 million term loan facility (“New Term Loan Facility”). The proceeds of the Term Loan Facility were used primarily to supplement the funding necessary for the Company and one of its subsidiaries to purchase certain Loan Notes pursuant to the U.K. Settlement Agreement and for general corporate purposes.

The amended 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.

The Company has pledged 100% of the capital stock of certain U.S. subsidiaries, 65% of capital stock of certain foreign subsidiaries and certain intercompany loans to secure the Senior Credit Agreements of the Company. Certain of such pledges also extend to the Notes, Medium-Term Notes and Senior Notes. In addition, certain subsidiaries of the Company have guaranteed the senior debt (refer to Note 17, “Consolidating Condensed Financial Information of Guarantor Subsidiaries.”)

The Company’s ability to obtain cash adequate to fund its needs depends generally on the results of its operations, restructuring initiatives, the Bankruptcy Court’s approval of management’s plans and the availability of financing. Management believes that cash on hand, cash flow from operations, and available borrowings under its DIP credit facility will be sufficient to fund capital expenditures and meet its post-petition operating obligations for the next fiscal year. In the longer term, the Company believes that the benefits from its announced restructuring programs and favorable resolution of its asbestos liability through Chapter 11 and Administration, combined with post-emergence financing to be obtained as part of the Restructuring Proceedings, will provide adequate long-term cash flows. However, there can be no assurance that such initiatives are achievable in this regard or that the terms available for any future financing, if required, would be available or favorable to the Company. Also, resolutions of certain obligations, particularly asbestos obligations, are impacted by factors outside the Company’s control. Given these uncertainties, the Company’s auditors have raised substantial doubt regarding the Company’s ability to continue as a going concern.

At March 31, 2006, the Company was in compliance with all debt covenants under its DIP credit facility. Based on current forecasts, the Company expects to be in compliance through the December 2006 expiration of the facility. Changes in the business environment, market factors, macroeconomic factors, or the Company’s ability to achieve its forecasts and other factors outside of the Company’s control, could adversely impact its ability to remain in compliance with debt covenants. If the Company were to not be in compliance at a measurement date, the Company would be required to renegotiate its facility. No assurance can be provided as to the impact of such actions.

Restricted Cash

Under the terms of the U.K. Settlement Agreement, certain amounts of cash within the U.K. Debtor entities, including cash contributed related to the transfer of the T&N Limited Loan Notes, are restricted to settle specifically identified claims and liabilities of the U.K. Debtors. Restricted cash at March 31, 2006 and December 31, 2005 was $700 million and $701 million, respectively. In addition, remaining cash of the U.K. Debtor entities is limited for the general operating use of those entities, amounting to $40 million and $42 million at March 31, 2006 and December 31, 2005, respectively.

Other Liquidity and Capital Resource Items

The Company’s joint ventures are businesses established and maintained in connection with its operating strategy and are not special purpose entities. In general, the Company does not extend guarantees, loans or other instruments of a variable nature that may result in incremental risk to the Company’s liquidity position. Furthermore, the Company does not rely on dividend payments or other cash flows from its non-consolidated affiliates to fund its operations and, accordingly, does not believe that they have a material effect on the Company’s liquidity.

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 March 31, 2006, the total amount of the contingent guarantee, were all triggering events to occur, approximated $52 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 is 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 contingencies on the future liquidity position of the Company.

Federal-Mogul subsidiaries in Germany, France, Italy, Brazil and Spain are party to accounts receivable factoring arrangements. Accounts receivable factored or discounted under these facilities was $196 million and $177 million as of March 31, 2006 and December 31, 2005, respectively, of which $174 million and $159 million, respectively, was factored without recourse. Expenses associated with receivables factored or discounted are recorded in the statements of operations within “other income, net.” Under terms of these factoring arrangements, the Company is not obligated to draw cash immediately upon the factoring of accounts receivable. Thus, as of March 31, 2006 and December 31, 2005, the Company has outstanding factoring amounts of $18 million and $23 million, respectively, for which cash has not yet been drawn.

ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

In the normal course of business, the Company is subject to market exposure from changes in foreign currency exchange rates, interest rates and raw material prices. To manage a portion of these inherent risks, the Company may purchase various derivative financial instruments and commodity futures contracts to hedge against unfavorable market changes. The Company does not hold or issue derivative financial instruments for trading purposes.

Foreign Currency Risk

The Company is subject to the risk of changes in foreign currency exchange rates due to its global operations. Accordingly, operating results may be impacted by transactions such as buying, selling or financing in currencies other than the functional currency of the Company’s operating entities. The Company’s financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets in which the Company manufactures and distributes its products. The Company’s operating results are primarily exposed to changes in exchange rates between the U.S. dollar and European currencies.

As currency exchange rates change, translation of the statements of operations of the Company’s international businesses into United States dollars affects year-over-year comparability of operating results. The Company does not generally hedge operating translation risks because cash flows from international operations are generally reinvested locally. Changes in foreign currency exchange rates are generally reported as a component of stockholders’ equity for the Company’s foreign subsidiaries reporting in local currencies and as a component of income for its foreign subsidiaries using the U.S. dollar as the functional currency. The Company’s other comprehensive loss was increased by $80 million and decreased by $69 million for the three months ended March 31, 2006 and 2005, respectively, due to cumulative translation adjustments resulting primarily from changes in the U.S. Dollar to the Euro and British Pound.

The Company manages certain aspects of its foreign currency activities and larger transactions through the use of foreign currency options or forward contracts. The Company generally tries to utilize natural hedges within its foreign currency activities, including the matching of revenues and costs. The Company did not have any contracts outstanding at March 31, 2006.

Interest Rate Risk

In connection with the Restructuring Proceedings, the Company entered into a debtor-in-possession (“DIP”) credit facility to supplement liquidity and fund operations during the Restructuring Proceedings. The Company’s current DIP credit facility expires in December 2006, and the interest rate is either the alternate base rate (“ABR”) plus 1¹/4 percentage points or the London Inter-Bank Offered Rate (“LIBOR”) plus 2¹/4 percentage points. The ABR is the greater of either the bank’s base rate or the federal funds rate plus ¹/2 percentage point. 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. The amount outstanding from the DIP facility as of March 31, 2006 was approximately $542 million.

Due to the level of outstanding borrowings on the Company’s DIP credit facility management believes that interest rate risk to the Company could be material if there are significant adverse changes in interest rates. However, management cannot predict with any certainty the level of interest rate risk that may exist following the completion of the Restructuring Proceedings.

Commodity Price Risk

The Company is dependent upon the supply of certain raw materials used in its production processes; these raw materials are exposed to price fluctuations on the open market. The primary purpose of the Company’s commodity

price hedging activities is to manage the volatility associated with these forecasted purchases. The Company monitors its commodity price risk exposures periodically to maximize the overall effectiveness of its commodity forward contracts, including exposures related to natural gas, copper, nickel, lead, high-grade aluminum and aluminum alloy. Forward contracts used to mitigate commodity price risk associated with raw materials, for up to eighteen months in the future, are designated as cash flow hedging instruments. These instruments are intended to offset the effect of changes in raw materials prices on forecasted purchases. The Company had 29 contracts outstanding with a combined notional value of $19.9 million at March 31, 2006, and 27 contracts outstanding with a combined notional value of $21.6 million at December 31, 2005.

ITEM 4. CONTROLS AND PROCEDURES

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s periodic Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As of March 31, 2006, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2006, subject to the limitations previously described.

Changes to Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the U.S. Securities Exchange Act of 1934. As of March 31, 2006, the Company’s management, with the participation of the principal executive and financial officers, has evaluated for disclosure, changes to the Company’s internal control over financial reporting that occurred during the fiscal quarter ended March 31, 2006 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. There were no material changes in the Company’s internal control over financial reporting during the first quarter of 2006.

PART II

OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

(a)

Contingencies.

Note 14 to the Consolidated Financial Statements, “Litigation and Environmental Matters”, that is included in Part I of this report, is incorporated herein by reference.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

Virtually all of the Company’s pre-petition debt is in default due to the Restructuring Proceedings. See Note 2 “Voluntary Reorganization Under Chapter 11 and Administration” to the Company’s consolidated financial statements.

The Company-Obligated Mandatorily Redeemable Preferred Securities are in default due to the Restructuring Proceedings. See Note 2 “Voluntary Reorganization Under Chapter 11 and Administration” to the Company’s consolidated financial statements.

ITEM 6.

EXHIBITS

(a)

Exhibits:


31.1		Certification by the Company’s Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

31.2		Certification by the Company’s Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

32		Certification by the Company’s Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, and Rule 13a-14(b) of the Securities Exchange Act of 1934.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

FEDERAL-MOGUL CORPORATION

By: /s/ G. Michael Lynch

G. Michael Lynch

Executive Vice President and Chief Financial Officer,

Principal Financial Officer

By: /s/ Alan J. Haughie

Alan J. Haughie

Vice President, Controller, and Chief Accounting Officer

Dated: May 2, 2006

FEDERAL MOGUL CORP 10-Q