Federal Mogul (FDMLQ) 10-Q 2003 Q2 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2003

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGEACT 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, and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

As of July 30, 2003, there were 87,131,298 outstanding shares of the registrant’s $5.00 stated value common stock.

FEDERAL-MOGUL CORPORATION

Form 10-Q

For the Quarter Ended June 30, 2003

INDEX

	Page No.
Forward-Looking Statements	4
Part I—Financial Information
Item 1—Consolidated Financial Statements
Consolidated Statements of Operations	6
Consolidated Balance Sheets	7
Consolidated Statements of Cash Flows	8
Notes to the Consolidated Financial Statements	9
Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
Item 3—Quantitative and Qualitative Disclosures about Market Risk	43
Item 4—Disclosure Controls and Procedures	43
Part II—Other Information
Item 1—Legal Proceedings	45
Item 3—Defaults Upon Senior Securities	45
Item 6—Exhibits and Reports on Form 8-K	45
Signatures	46
Exhibits	47

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FORWARD-LOOKING STATEMENTS

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

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

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

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

Chapter 11 Filing

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

Legal and Environmental Proceedings

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

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

Business Environment and Economic Conditions

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

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

• Material 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 manufacture 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.

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• Fluctuations in the global securities markets which directly impact the valuation of assets supporting the Company’s pension plans

Other Factors

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

• New 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 foreign countries, that may affect the Company and its operations

• Possible terrorist attacks or acts of aggression or war, which could exacerbate other risks such as reduced vehicle production or interruptions in the transportation system

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PART I—FINANCIAL INFORMATION

Item 1.Financial Statements

FEDERAL-MOGUL CORPORATION

Consolidated Statements of Operations (Unaudited)

(Millions of Dollars, Except Per Share Amounts)

	Three Months Ended June 30						Six Months Ended June 30
	2003			2002			2003			2002
Net sales	$	1,444.7		$	1,442.3		$	2,854.5		$	2,788.4
Cost of products sold		1,146.9			1,151.0			2,278.9			2,235.8
Gross margin		297.8			291.3			575.6			552.6
Selling, general and administrative expenses		229.0			208.7			455.0			417.2
Restructuring charges		9.9			1.5			20.2			11.0
Interest expense, net		21.8			29.9			51.3			60.2
Chapter 11 and Administration related reorganization expenses		26.9			23.2			59.7			43.0
Other income, net		(4.9	)		(8.7	)		(10.4	)		(4.1	)
Earnings (loss) before income tax expense and cumulative effect of change in accounting principle		15.1			36.7			(0.2	)		25.3
Income tax expense		20.2			20.7			39.1			50.5
Earnings (loss) before cumulative effect of change in accounting principle		(5.1	)		16.0			(39.3	)		(25.2	)
Cumulative effect of change in accounting principle, net of applicable income tax benefit		—			—			—			1,417.9
Net earnings (loss) attributable to common shareholders	$	(5.1	)	$	16.0		$	(39.3	)	$	(1,443.1	)
Loss Per Common Share:
Basic
Earnings (loss) per common share before cumulative effect of change in accounting principle	$	(0.06	)	$	0.19		$	(0.45	)	$	(0.30	)
Net earnings (loss) per common share	$	(0.06	)	$	0.19		$	(0.45	)	$	(17.52	)
Diluted
Earnings (loss) per common share before cumulative effect of change in accounting principle	$	(0.06	)	$	0.17		$	(0.45	)	$	(0.30	)
Net earnings (loss) per common share	$	(0.06	)	$	0.17		$	(0.45	)	$	(17.52	)

See accompanying notes.

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FEDERAL-MOGUL CORPORATION

Consolidated Balance Sheets

(Millions of Dollars)

	(Unaudited) June 30 2003			December 31 2002
ASSETS
Cash and equivalents	$	451.4		$	395.1
Accounts receivable, net		984.7			954.0
Inventories, net		803.6			800.1
Deferred taxes		14.0			35.4
Prepaid expenses and other current assets		212.1			174.5
Total Current Assets		2,465.8			2,359.1
Property, plant and equipment, net		2,330.0			2,273.0
Goodwill and indefinite-lived intangible assets		1,588.7			1,565.2
Definite-lived intangible assets, net		351.7			351.6
Asbestos-related insurance recoverable		802.0			780.6
Prepaid pension costs		318.7			361.5
Other noncurrent assets		203.6			222.3
Total Assets	$	8,060.5		$	7,913.3
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Short-term debt, including current portion of long-term debt	$	301.6		$	346.1
Accounts payable		355.3			318.9
Accrued compensation		237.2			242.1
Restructuring reserves		77.3			90.8
Accrued income taxes		55.7			43.1
Other accrued liabilities		352.4			363.4
Total Current Liabilities		1,379.5			1,404.4
Liabilities subject to compromise		6,061.7			6,053.2
Long-term debt		10.9			14.3
Postemployment benefits		1,583.4			1,541.2
Deferred income taxes		49.5			52.4
Other accrued liabilities		212.6			205.7
Minority interest in consolidated subsidiaries		47.7			45.7
Shareholders’ Deficit:
Series C ESOP preferred stock		28.0			28.0
Common stock		435.6			435.6
Additional paid-in capital		2,060.5			2,060.5
Accumulated deficit		(2,783.2	)		(2,743.9	)
Accumulated other comprehensive loss		(1,025.7	)		(1,183.7	)
Other		—			(0.1	)
Total Shareholders’ Deficit		(1,284.8	)		(1,403.6	)
Total Liabilities and Shareholders’ Deficit	$	8,060.5		$	7,913.3

See accompanying notes.

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FEDERAL-MOGUL CORPORATION

Consolidated Statements of Cash Flows (Unaudited)

(Millions of Dollars)

	Six Months Ended June 30
	2003			2002
Cash Provided From (Used By) Operating Activities
Net loss	$	(39.3	)	$	(1,443.1	)
Adjustments to reconcile net loss to net cash provided from operating activities:
Cumulative effect of change in accounting principle		—			1,464.5
Depreciation and amortization		149.6			136.8
Restructuring charges		20.2			11.0
Chapter 11 and Administration related reorganization expenses		59.7			43.0
(Gain) loss on sales of businesses		7.1			(6.6	)
Change in postemployment benefits, including pensions		57.6			27.8
Deferred taxes		14.8			(34.4	)
Decrease (increase) in accounts receivable		4.7			(122.5	)
Decrease (increase) in inventories		18.0			(48.2	)
Increase in accounts payable		14.2			21.2
Change in other assets and liabilities		(29.5	)		111.0
Payments against restructuring reserves		(37.6	)		(17.8	)
Payments for Chapter 11 and Administration related reorganization expenses		(38.6	)		(36.2	)
Net Cash Provided From Operating Activities		200.9			106.5
Cash Provided From (Used By) Investing Activities
Expenditures for property, plant and equipment		(140.7	)		(127.2	)
Net proceeds from sales of businesses		21.5			21.8
Net Cash Used By Investing Activities		(119.2	)		(105.4	)
Cash Provided From (Used By) Financing Activities
Proceeds from issuance of long-term debt		0.1			1.5
Principal payments on long-term debt		(3.5	)		(1.9	)
Borrowings from DIP credit facility		75.0			—
Principal payments on DIP credit facility		(100.2	)		(6.1	)
Decrease in short-term debt		(19.3	)		(7.5	)
Other		—			1.3
Net Cash Used By Financing Activities		(47.9	)		(12.7	)
Effect of Foreign Currency Exchange Rate Fluctuations on Cash		22.5			15.2
Increase in Cash and Equivalents		56.3			3.6
Cash and equivalents at beginning of period		395.1			346.9
Cash and Equivalents at End of Period	$	451.4		$	350.5

See accompanying notes.

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FEDERAL-MOGUL CORPORATION

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2003

1. BASIS OF PRESENTATION

Interim Financial Statements

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

New Accounting Pronouncements

Accounting for Costs Associated with Exit or Disposal Activities

In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This pronouncement addresses accounting and financial reporting for costs associated with an exit activity (including restructuring) or with the disposal of long-lived assets and supersedes Emerging Issues Task Force Issue (“EITF”) No. 94-3. Under SFAS No. 146, a liability is recorded for a cost associated with an exit activity when that liability is incurred and can be measured at fair value. SFAS No. 146 is effective prospectively for exit and disposal activities initiated after December 31, 2002. SFAS No. 146 does not allow for the restatement of previously issued financial statements and grandfathers the accounting for liabilities previously recorded under EITF Issue No. 94-3. The Company adopted SFAS No. 146 effective January 1, 2003. The adoption of SFAS No. 146 had no material effect on the Company’s financial statements.

Investments in Non-Consolidated Entities

Equity investments that comprise more than 20% but less than 50% of the outstanding equity of the investee are accounted for by the equity investment method and are not consolidated. Such investments aggregated $134.5 million and $129.7 million at June 30, 2003 and December 31, 2002, respectively, and are included in the consolidated balance sheets as “other noncurrent assets”. Net income from non-consolidated equity investments was $8.9 million and $5.7 million for the quarters ended June 30, 2003 and 2002, respectively. Net income from non-consolidated equity investments was $14.7 million and $11.0 million for the six-month periods ended June 30, 2003 and 2002, respectively. Net income from non-consolidated equity investments is included in the statements of operations as “other income, net”.

2. VOLUNTARY REORGANIZATION UNDER CHAPTER 11 AND ADMINISTRATION

On October 1, 2001 (the “Petition Date”), Federal-Mogul Corporation 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 and 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

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U.K. subsidiaries included in the U.S. Restructuring and 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 asIn re: Federal-Mogul Global Inc., T&N Limited, et. al (Case No. 01-10578(SLR)). The Chapter 11 Cases do not include any of the Company’s non-U.S. subsidiaries outside of the U.K. subsidiaries mentioned above.

The Restructuring Proceedings were initiated in response to a sharply increasing number of asbestos-related claims and their related demand on the Company’s cash flows. 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 U.S. 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 an Administrator approved by the High Court. All vendors will be paid for all goods furnished and services provided after the Petition Date. However, as a consequence of the Restructuring Proceedings, all 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 all pending and future asbestos-related claims and all other pre-petition claims through a unified plan of reorganization under the Bankruptcy Code or scheme of arrangement under the Act.

In the U.S., three committees, representing asbestos claimants, unsecured creditors and equity security holders 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 appointed committees, together with the legal representative for the future asbestos claimants, play important roles in the Restructuring Proceedings. In the U.K., the Administrator has appointed a creditors committee, representing both asbestos claimants and general unsecured creditors.

As provided by the Bankruptcy Code, the Debtors initially had the exclusive right to propose a plan of reorganization within 120 days following the Petition Date with the Bankruptcy Court. The Debtors requested the Bankruptcy Court to extend the period of exclusivity to November 1, 2002, and the request was granted. On October 30, 2002, the Bankruptcy Court granted an additional extension of the period of exclusivity to March 3, 2003. This date was further extended by Federal District Court order until March 6, 2003, on which date a plan of reorganization was filed. With the filing of the plan of reorganization and due to unresolved issues as discussed below, the Bankruptcy Court extended the exclusivity period until August 11, 2003. On July 30, 2003, the Bankruptcy Court further extended this exclusivity period until October 13, 2003.

Although a number of issues remain to be resolved, the plan of reorganization provides that the noteholders and asbestos claimants, present and future, will convert all of their claims into equity of the reorganized Company. Specifically, 49.9% of newly authorized and issued stock will be distributed to the noteholders, and 50.1% of newly authorized and issued stock will be distributed to a trust established pursuant to Section 524(g) of the Bankruptcy Code for the benefit of existing and future asbestos claimants. United States trade creditors are expected to receive yet to be determined distributions under the consensual plan. Subject to continued negotiation, the plan of reorganization currently provides for the cancellation of pre-petition equity interests. The filing of the plan of reorganization was followed by the Plan Disclosure Statement which details the reorganization transaction and the U.K. scheme of arrangement. The Plan Disclosure Statement was filed with the Bankruptcy Court on April 21, 2003. Additional critical documents, such as the U.K. scheme of arrangement and the trust distribution procedure document will follow later.

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

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The Company is unable to predict with a high degree of certainty at this time what treatment will be accorded under any such plan of reorganization to intercompany indebtedness, licenses, executory contracts, transfers of goods and services, and other intercompany arrangements, transactions and relationships that were entered into prior to the Petition Date. Various parties in the Chapter 11 Cases may challenge these arrangements, transactions, and relationships, and the outcome of those challenges, if any, may have an impact on the treatment of various claims under such plan of reorganization.

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. There is no assurance that there will be sufficient assets to satisfy the Debtors’ pre-petition liabilities in whole or in part, and the pre-petition creditors of some Debtors may be treated differently than those of other Debtors.

Chapter 11 Financing

In connection with the Restructuring Proceedings, the Company entered into a $675 million debtor-in-possession (“DIP”) credit facility to supplement liquidity and fund operations during the restructuring proceedings. The DIP credit facility expires in October 2003 and bears interest at either the alternate base rate (“ABR”) plus 2½ percentage points or a formula based on the London Inter-Bank Offered Rate (“LIBOR”) plus 3½ percentage points. The ABR is the greatest of either the bank’s prime rate or the base CD rate plus 1 percentage point or the federal funds rate plus ½ percentage point. The $675 million commitment is mandatorily reduced by a portion of the proceeds received from an asset or business divestiture. The Company is currently renegotiating its DIP credit facility and expects to complete this process and obtain the required Bankruptcy Court approval prior to the facility’s expiration.

The Company’s available borrowings under the DIP credit facility are determined by the underlying collateral at any point in time, consisting of its domestic inventories, domestic accounts receivable, domestic plant, and its equipment and real property. The DIP lenders received permission from the lenders of the Senior Credit Agreements to have priority over their collateral interest. The borrowing base available to the Company is calculated weekly based upon the value of this underlying collateral. The total commitment and amounts outstanding on the DIP credit facility are as follows (in millions of dollars):

	June 30 2003			December 31 2002
Original commitment	$	675.0		$	675.0
Mandatory commitment reductions—divestitures		(38.4	)		(27.0	)
Current commitment	$	636.6		$	648.0
Outstanding:
Current borrowings	$	289.5		$	314.7
Letters of credit		18.0			14.0
Total outstanding		307.5			328.7
Available to borrow		256.6			200.3
Total borrowing base	$	564.1		$	529.0

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

Financial Statement Presentation

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

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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 and/or changes of ownership, is highly uncertain. Given this uncertainty, there is substantial doubt about the ability of the Company to continue as a going concern. While operating as debtors-in-possession under the protection of Chapter 11 of the Bankruptcy Code and Administration under the Act, and subject to approval of the Bankruptcy Court, Administrator or the High Court or otherwise as permitted in the ordinary course of business, the Debtors, or some of them, may sell or otherwise dispose of assets and liquidate or settle liabilities for some amounts other than those reflected in the consolidated financial statements. Further, a plan of reorganization or scheme of arrangement could materially change the amounts and classifications in the historical consolidated financial statements.

Virtually all of the Company’s pre-petition debt is in default. At June 30, 2003, the Debtors’ pre-petition debt is classified under the caption “Liabilities subject to compromise.” This includes debt outstanding of $1,905.3 million under the pre-petition Senior Credit Agreements and $2,118.1 million of other outstanding debt, primarily notes payable at various unsecured rates, less capitalized debt issuance fees of $36.1 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 to the holders of the debentures directly. This liability is a pre-petition liability. As a result, the Company has classified these securities as “Liabilities subject to compromise” in the consolidated balance sheets.

As reflected in the consolidated financial statements, “Liabilities subject to compromise” refers to Debtors’ liabilities incurred prior to the commencement of the Restructuring Proceedings. The amounts of the various liabilities that are subject to compromise are set forth below. These amounts represent the Company’s estimate of known or potential pre-petition claims to be resolved in connection with the Restructuring Proceedings. Such claims remain subject to future adjustments. Future adjustments may result from (i) negotiations; (ii) actions of the Bankruptcy Court, High Court or Administrator; (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 are comprised of (in millions of dollars):

	June 30 2003		December 31 2002
Debt	$	3,987.3	$	3,982.7
Asbestos liabilities		1,571.4		1,565.1
Company-obligated mandatorily redeemable securities		211.0		211.0
Accounts payable		201.1		211.9
Interest payable		43.0		43.9
Environmental liabilities		27.4		22.9
Other liabilities		20.5		15.7
Subtotal		6,061.7		6,053.2
Intercompany payables to Affiliates		3,129.3		3,092.7
Liabilities subject to compromise	$	9,191.0	$	9,145.9

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Chapter 11 and Administration related reorganization expenses in the consolidated statements of operations for the three and six-month periods ended June 30, 2003 and 2002, respectively, consist of legal, financial and advisory fees, critical employee retention costs and other directly related internal costs as follows (in millions of dollars):

	Three Months Ended June 30				Six Months Ended June 30
	2003		2002		2003		2002
Professional fees directly related to the filing	$	22.5	$	16.2	$	48.9	$	29.9
Critical employee retention costs		2.0		4.8		4.1		9.6
Other directly related costs		2.4		2.2		6.7		3.5
Total	$	26.9	$	23.2	$	59.7	$	43.0

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. March 3, 2003 was the property and general bar date for the filing of proofs of claim against the U.S. Debtors.

Approximately 10,500 proofs of claim totaling approximately $158.4 billion alleging a right to payment from a Debtor were filed in connection with the March 3, 2003 bar date as follows:

• Approximately 1,900 claims, totaling approximately $144.1 billion, which the Company believes should be disallowed by the Bankruptcy Court primarily because these claims appear to be duplicate or unsubstantiated claims.

• Approximately 400 claims, totaling approximately $8.3 billion, associated with asbestos-related contribution, indemnity, or reimbursement claims.

• Approximately 3,700 claims, totaling approximately $0.2 billion, alleging asbestos-related property damage. Based on its review, the Company believes most of these claims are duplicative or unsubstantiated.

The Company has not completed its evaluation of the approximate remaining 4,500 claims, totaling approximately $5.8 billion, alleging rights to payment for financing, environmental, trade accounts payable and other matters. The Company has previously recorded approximately $4.4 billion in liabilities for these claims. The Company continues to investigate these unresolved proofs of claim, and intends to file objections to the claims that are inconsistent with its books and records. To date, the Debtors have filed objections to more than 4,500 proofs of claim, and have obtained stipulations or orders involving more than 1,000 claims, which either (i) reduce the filed claims to an amount that is consistent with the Debtors books or records, or (ii) completely disallow the claims.

Because the Debtors have not completed an evaluation of all filed claims and will be continuing their objections to claims, 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.

The appropriateness of using the going concern basis for its 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; and (v) the Company’s ability to achieve profitability following such confirmation.

Debtors’ Financial Statements

The condensed combined financial statements of the Debtors are presented below. These statements reflect the financial position, results of operations and cash flows of the combined Debtor subsidiaries, including certain

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amounts and activities between Debtors and non-Debtor subsidiaries of the Company, which are eliminated in the condensed consolidated financial statements.

Federal-Mogul Corporation

Debtors’ Condensed Consolidated Statements of Operations (Unaudited)

(Millions of Dollars)

	Three months ended June 30						Six months ended June 30
	2003			2002			2003			2002
Net sales	$	897.9		$	997.1		$	1,789.4		$	1,931.6
Cost of products sold		739.1			817.7			1,470.6			1,589.5
Gross margin		158.8			179.4			318.8			342.1
Selling, general and administrative expenses		154.1			141.3			309.7			286.5
Interest expense, net		21.6			30.7			50.6			61.6
Chapter 11 and Administration related reorganization expenses		26.9			23.2			59.7			43.0
Intercompany interest income from non-filers		(84.8	)		(79.6	)		(159.8	)		(160.4	)
Other (income) expense, net		(17.8	)		(4.0	)		(16.8	)		1.1
Earnings before income taxes, equity loss of non-Debtor subsidiaries, and cumulative effect of change in accounting principle		58.8			67.8			75.4			110.3
Income tax expense		11.5			7.2			11.7			28.2
Earnings before equity loss of non-Debtor subsidiaries and cumulative effect of change in accounting principle		47.3			60.6			63.7			82.1
Equity loss of non-Debtor subsidiaries before cumulative effect of change in accounting principle		(52.4	)		(44.6	)		(103.0	)		(107.3	)
Earnings (loss) before cumulative effect of change in accounting principle		(5.1	)		16.0			(39.3	)		(25.2	)
Cumulative effect of change in accounting principle, Debtors, net of applicable income tax benefit		—			—			—			1,100.7
Cumulative effect of change in accounting principle, non-Debtors, net of applicable income tax benefit		—			—			—			317.2
Net Earnings (Loss)	$	(5.1	)	$	16.0		$	(39.3	)	$	(1,443.1	)

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Federal-Mogul Corporation

Debtors’ Condensed Consolidated Balance Sheets

(Millions of Dollars)

	(Unaudited) June 30 2003			December 31 2002
ASSETS
Cash and equivalents	$	246.5		$	189.6
Accounts receivable		577.5			573.1
Accounts receivable, non-Debtors		401.8			345.4
Inventories		454.9			472.6
Deferred taxes		12.6			20.3
Prepaid expenses		86.9			96.4
Total Current Assets		1,780.2			1,697.4
Property, plant and equipment, net		1,140.5			1,171.5
Goodwill and indefinite-lived intangible assets		1,377.7			1,376.9
Definite-lived intangible assets, net		298.0			300.6
Asbestos-related insurance recoverable		802.0			780.6
Loans receivable and investments in non-Debtors		4,477.4			4,333.1
Other noncurrent assets		461.8			519.2
Total Assets	$	10,337.6		$	10,179.3
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Short-term debt, including current portion of long-term debt	$	289.3		$	314.7
Accounts payable and accrued compensation		263.6			268.9
Accounts payable, non-Debtors		146.3			129.6
Other accrued liabilities		261.2			281.0
Total Current Liabilities		960.4			994.2
Postemployment benefits		1,356.9			1,336.9
Other accrued liabilities		114.1			110.0
Liabilities subject to compromise		9,191.0			9,145.9
Shareholders’ Deficit		(1,284.8	)		(1,407.7	)
Total Liabilities and Shareholders’ Deficit	$	10,337.6		$	10,179.3

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Federal-Mogul Corporation

Debtors’ Condensed Consolidated Statement of Cash Flows (Unaudited)

(Millions of Dollars)

	Six Months Ended June 30
	2003			2002
Net Cash Provided From Operating Activities	$	134.5		$	48.7
Cash Provided From (Used By) Investing Activities
Expenditures for property, plant and equipment		(71.6	)		(56.8	)
Net proceeds from sales of businesses		13.1			21.8
Net Cash Used By Investing Activities		(58.5	)		(35.0	)
Cash Provided From (Used By) Financing Activities
Borrowings from DIP credit facility		75.0			—
Principal payments on DIP credit facility		(100.2	)		(6.1	)
Other		—			1.3
Net Cash Used By Financing Activities		(25.2	)		(4.8	)
Effect of Foreign Currency Exchange Rate Fluctuations on Cash		6.1			4.9
Increase in Cash and Equivalents		56.9			13.8
Cash and equivalents at beginning of period		189.6			146.5
Cash and Equivalents at End of Period	$	246.5		$	160.3

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3. INCOME TAXES

For the six months ended June 30, 2003, the Company recorded income tax expense of $39.1 million on a loss of $0.2 million before income taxes. This compares to income tax expense of $50.5 million on earnings of $25.3 million before income taxes and cumulative effect of change in accounting principle in the same period of 2002. Income tax expense for the six month period ended June 30, 2003 resulted primarily from the recognition of income tax expense on earnings in certain foreign jurisdictions without the recognition of income tax benefits on current losses in the United States and certain entities in the U.K.

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

	June 30 2003			December 31 2002
Deferred tax assets	$	1,454.0		$	1,456.8
Valuation allowance		(724.3	)		(701.6	)
Net deferred tax assets		729.7			755.2
Deferred tax liabilities		(795.6	)		(799.0	)
Net deferred tax liability	$	(65.9	)	$	(43.8	)

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

	June 30 2003			December 31 2002
Assets
Deferred taxes	$	14.0		$	35.4
Other noncurrent assets		7.3			11.4
Liabilities
Other current accrued liabilities		(37.7	)		(38.2	)
Deferred income taxes		(49.5	)		(52.4	)
Net deferred tax liability	$	(65.9	)	$	(43.8	)

4. OPERATIONS BY REPORTABLE SEGMENT

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

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

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

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

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

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Other includes Asia Pacific and other Corporate functions.

Divested Operations include the historical operating results of the Company’s divestitures

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

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

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

	Net Sales
	Three Months Ended June 30				Six Months Ended June 30
	2003		2002		2003		2002
Powertrain	$	474.8	$	426.0	$	940.3	$	833.5
Sealing Systems and Systems Protection		163.6		170.9		327.0		331.3
Friction		109.8		95.4		214.7		182.6
Aftermarket		655.1		664.7		1,268.4		1,264.5
Other, including Corporate		24.7		20.3		45.2		33.7
Divested Operations		16.7		65.0		58.9		142.8
Total	$	1,444.7	$	1,442.3	$	2,854.5	$	2,788.4

	Gross Margin
	Three Months Ended June 30						Six Months Ended June 30
	2003			2002			2003			2002
Powertrain	$	71.6		$	71.7		$	137.8		$	139.7
Sealing Systems and Systems Protection		31.3			38.0			61.0			68.6
Friction		32.6			27.8			63.7			52.2
Aftermarket		159.7			148.9			307.0			285.6
Other, including Corporate		(0.9	)		(2.2	)		(2.5	)		(7.4	)
Divested Operations		3.5			7.1			8.6			13.9
Total	$	297.8		$	291.3		$	575.6		$	552.6

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Operational EBIT by reportable segment is as follows (in millions of dollars):

	Operational EBIT
	Three Months Ended June 30						Six Months Ended June 30
	2003			2002			2003			2002
Powertrain	$	41.0		$	41.5		$	80.6		$	66.3
Sealing Systems and Systems Protection		13.5			19.8			24.7			32.0
Friction		17.0			15.4			33.1			28.8
Aftermarket		94.5			86.7			179.9			159.3
Other, including Corporate		(86.6	)		(75.7	)		(182.9	)		(158.0	)
Divested Operations		2.7			5.6			6.2			6.7
Total Operational EBIT		82.1			93.3			141.6			135.1
Items required to reconcile Operational EBIT to earnings (loss) before income tax expense and cumulative effect of change in accounting principle:
Interest expense, net		(21.8	)		(29.9	)		(51.3	)		(60.2	)
Restructuring charges		(9.9	)		(1.5	)		(20.2	)		(11.0	)
Chapter 11 and Administration related reorganization expenses		(26.9	)		(23.2	)		(59.7	)		(43.0	)
Other income (expense), net		(8.4	)		(2.0	)		(10.6	)		4.4
Earnings (loss) before income tax expense and cumulative effect of change in accounting principle	$	15.1		$	36.7		$	(0.2	)	$	25.3

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

	June 30 2003		December 31 2002
Powertrain	$	1,864.4	$	1,897.8
Sealing Systems and Systems Protection		1,275.9		1,237.1
Friction		646.4		618.3
Aftermarket		2,828.5		2,661.1
Other, including Corporate		1,445.3		1,499.0
Total Assets	$	8,060.5	$	7,913.3

5. COMPREHENSIVE INCOME (LOSS)

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

	Three Months Ended June 30					Six Months Ended June 30
	2003			2002		2003			2002
Net earnings (loss)	$	(5.1	)	$	16.0	$	(39.3	)	$	(1,443.1	)
Foreign currency translation adjustments		145.8			224.8		158.0			149.7
Total Comprehensive Income (Loss)	$	140.7		$	240.8	$	118.7		$	(1,293.4	)

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6. EARNINGS (LOSS) PER SHARE

The following table sets forth the computation of basic and diluted earnings (loss) per share (in millions of dollars, except share and per share data):

	Three Months Ended June 30					Six Months Ended June 30
	2003			2002		2003			2002
Numerator:
Net Earnings (Loss)	$	(5.1	)	$	16.0	$	(39.3	)	$	(1,443.1	)
Cumulative effect of change in accounting principle, net of applicable tax benefit		—			—		—			1,417.9
Numerator for basic and dilutive earnings (loss) per share—loss attributable to common shareholders before cumulative effect of change in accounting principle	$	(5.1	)	$	16.0	$	(39.3	)	$	(25.2	)
Numerator for basic and diluted earnings (loss) per share	$	(5.1	)	$	16.0	$	(39.3	)	$	(1,443.1	)
Denominator:
Denominator for basic earnings (loss) per share—weighted average shares (in millions)		87.1			82.4		87.1			82.4
Effect of dilutive securities:
Conversion of Series C preferred stock		—			0.9		—			—
Conversion of Company-obligated mandatorily redeemable securities		—			8.7		—			—
Dilutive potential common shares		—			9.6		—			—
Denominator for dilutive earnings (loss) per share—adjusted weighted average shares and assumed coversions (in millions)		87.1			92.0		87.1			82.4
Basic earnings (loss) per share before cumulative effect of change in accounting principle	$	(0.06	)	$	0.19	$	(0.45	)	$	(0.30	)
Basic earnings (loss) per share	$	(0.06	)	$	0.19	$	(0.45	)	$	(17.52	)
Dilutive earnings (loss) per share before cumulative effect of change in accounting principle	$	(0.06	)	$	0.17	$	(0.45	)	$	(0.30	)
Diluted earnings (loss) per share	$	(0.06	)	$	0.17	$	(0.45	)	$	(17.52	)

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

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7. INCENTIVE STOCK PLANS

The Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25), and related interpretations in accounting for its employee stock awards. Accordingly, no compensation cost has been recognized for its stock option grants, as the exercise price of the Company’s employee stock options equals the underlying stock price on the date of grant. Had compensation cost for the Company’s stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123 “Accounting for Stock Base Compensation”, the Company’s net earnings (loss) and earnings (loss) per share would have been adjusted to the pro forma amounts indicated below (in millions of dollars, except per share amounts):

	Three Months Ended June 30						Six Months Ended June 30
	2003			2002			2003			2002
Net earnings (loss) as reported	$	(5.1	)	$	16.0		$	(39.3	)	$	(1,443.1	)
Additional compensation expense for fair value of stock options		(0.1	)		(1.4	)		(0.2	)		(3.8	)
Pro forma net earnings (loss)	$	(5.2	)	$	14.6		$	(39.5	)	$	(1,446.9	)
Basic earnings (loss) per share as reported	$	(0.06	)	$	0.19		$	(0.45	)	$	(17.52	)
Pro forma basic earnings (loss) per share	$	(0.06	)	$	0.18		$	(0.45	)	$	(17.57	)
Diluted earnings (loss) per share as reported	$	(0.06	)	$	0.17		$	(0.45	)	$	(17.52	)
Pro forma diluted earnings (loss) per share	$	(0.06	)	$	0.16		$	(0.45	)	$	(17.57	)

8. ASBESTOS LIABILITY AND LEGAL PROCEEDINGS

T&N Companies Asbestos Litigation

Background

The Company’s U.K. subsidiary, T&N Ltd., and two U.S. subsidiaries (the “T&N Companies”) are among many defendants named in numerous court actions in the U.S. alleging personal injury resulting from exposure to asbestos or asbestos-containing products. T&N Ltd. is also subject to asbestos-disease litigation, to a lesser extent, in the United Kingdom and France. As of the Petition Date, T&N Ltd. was a defendant in approximately 115,000 pending personal injury claims. The two United States subsidiaries were defendants in approximately 199,000 pending personal injury claims. As a result of the Restructuring Proceedings, the Company includes as a pending claim open served claims, settled but not documented claims and settled but not paid claims. Notice of complaints continue to be received Post-petition and are in violation of the Automatic 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 $1.4 billion as of June 30, 2003) represented the Company’s estimate prior to the Restructuring Proceedings for claims currently pending and those which were reasonably estimated to be asserted and paid through 2012. The Company did not provide a liability for claims that may be paid subsequent to this period as it could not reasonably estimate such claims. In estimating the liability prior to the Restructuring Proceedings, the Company made assumptions regarding the total number of claims anticipated to be received in a future period, the typical cost of settlement (which is sensitive to the industry in which the plaintiff claims exposure, the alleged disease type and the jurisdiction in which the action is being brought), the rate of receipt of claims, the settlement strategy in dealing with outstanding claims and the timing of settlements. As a result of the Restructuring Proceedings (see Note 2), all pending asbestos-related litigation against the Company in the United States and the

21

U.K. is stayed (subject to certain exceptions in the case of governmental authorities), and no party may take any 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. March 3, 2003 was the bar date for the filing of all asbestos-related property damage claims. As part of the Restructuring Proceedings, it will be determined which asbestos claims should be allowed, or compensated, and the aggregate value of such claims. The Company’s obligations with respect to present and future claims could be determined through litigation in Bankruptcy Court, the High Court, and/or through negotiations with each of the official committees appointed; that determination may provide the basis for a plan of reorganization or scheme of arrangement.

In December of 2000, the Company entered into $250 million of surety on behalf of the T&N Companies to meet certain collateral requirements for asbestos indemnity obligations associated with their prior membership in the Center for Claims Resolution (“CCR”). This amount was stepped down by contract to $225 million effective June, 2001. As a result of the filing, the Company has sought declaratory and injunctive relief in an adversary proceeding filed in the Bankruptcy Court, in order to enjoin any post-petition payments to asbestos claimants by the CCR and any post-petition draw by the CCR on $225 million in face amount of the surety bonds. The CCR now seeks 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 are all disputed. On March 28, 2003, the Federal District Court Judge held that, with respect to phase one, the CCR has the right to draw upon the bonds to the extent that a settlement between an individual and the CCR member was consummated, i.e., a release has been obtained from such individual. The CCR has appealed and the ruling was modified to require a state-by-state analysis of what constitutes a release. This is in process, as is a yet to be heard phase two, which will ultimately determine the amount of any such draw.

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

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

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 June 30, 2003, the recorded insurance recoverable was $632.1 million. In December 2001, one of the three reinsurers filed suit in a London, England court to challenge the validity of its insurance contract with the T&N Companies. In December 2002, the remaining two

22

reinsurers issued separate declaratory proceedings seeking clarification of policy requirements related to the Asbestos Liability Policy. The Company believes that, based on its review of the insurance policies and advice from outside legal counsel, it is probable that the T&N Companies will be entitled to receive payment from the reinsurers for the cost of the claims in excess of the trigger point of the insurance.

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

The Company has reviewed the financial viability and legal obligations of the three reinsurance companies involved and has concluded that currently there is little risk that the reinsurers will not be able to meet their obligation to pay, once the claims filed after June 30, 1996 exceed the £690 million trigger point. 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 less then $1.69/£, the Company will effectively have a discount from 100% recovery on claims paid. As of June 30, 2003, the $632.2 million insurance recoverable asset is net of an exchange rate discount of approximately $9.9 million.

Abex and Wagner Asbestos Litigation

Background

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

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

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

As mentioned above, as of the Petition Date, all 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 any 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 $165.4 million in Abex liabilities and $49.1 million in Wagner liabilities as of June 30, 2003) represented the Company’s estimate prior to the Restructuring Proceedings for claims currently pending and those which were reasonably estimated to be asserted and paid through 2012. The Company did not

23

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.

As a result of the Restructuring Proceedings (see Note 2), all pending asbestos-related litigation is stayed as previously described for the T&N Companies.

While the Company believes that the liability recorded was appropriate 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 future asbestos liability and related insurance recovery for pending and future claims. There are significant differences in the treatment of asbestos claims in a bankruptcy proceeding as compared to the tort litigation system. Among other things, it is uncertain at this time as to the number of asbestos-related claims that will be filed in the proceeding; the number of future claims that will be included in a plan of reorganization; how claims for punitive damages and claims by persons with no asbestos-related physical impairment will be treated and whether such claims will be allowed; and the impact historical settlement values for asbestos claims may have on the estimation of asbestos liability in the Restructuring Proceedings.

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

Insurance Recoverable

Abex maintained product liability insurance coverage for most of the time that it manufactured products that contained asbestos. This coverage is shared with other third-party companies. The subsidiary of the Company that may be liable for certain indemnity and defense payments with respect to Abex has the benefit of that insurance up to the extent of that liability. Abex has been in litigation since 1982 with the insurance carriers of its primary layer of liability concerning coverage for asbestos claims. Abex also has substantial excess layer liability insurance coverage that is shared with other companies that, barring unforeseen insolvencies of excess carriers or other adverse events, should provide coverage for asbestos claims against Abex. The Abex insurance recoverable was $116.3 million as of June 30, 2003.

Wagner also maintained product liability insurance coverage for some of the time that it manufactured products that contained asbestos. This coverage is shared with other third-party companies. The 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 $53.5 million as of June 30, 2003.

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

24

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 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 and the insurance recoverable asset as of December 31, 2002 and June 30, 2003 (in millions of dollars):

	T&N Companies		Abex		Wagner		Other		Total
Liability:
Balance at December 31, 2002	$	1,347.9	$	165.4	$	49.1	$	2.7	$	1,565.1
Foreign exchange		6.3		—		—		—		6.3
Balance at June 30, 2003	$	1,354.2	$	165.4	$	49.1	$	2.7	$	1,571.4
Asset:
Balance at December 31, 2002	$	610.8	$	116.3	$	53.5	$	—	$	780.6
Foreign exchange		21.4		—		—		—		21.4
Balance at June 30, 2003	$	632.2	$	116.3	$	53.5	$	—	$	802.0

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 Legal Matters

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

Environmental Matters

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

25

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

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

The Company 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. Although difficult to quantify based on the complexity of the issues, the Company has accrued amounts corresponding to its best estimate of the costs associated with such matters based upon current available information from site investigations and consultants.

Environmental reserves were $68.4 million and $64.6 million as of June 30, 2003 and December 31, 2002, respectively. 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. As a result of the Restructuring Proceedings, $27.4 million and $22.9 million of environmental reserves as of June 30, 2003 and December 31, 2002, respectively, have been classified as liabilities subject to compromise in the consolidated balance sheet.

9. INVENTORIES

Inventories consisted of the following (in millions of dollars):

	June 30 2003			December 31 2002
Raw materials	$	168.8		$	172.5
Work-in-process		134.0			130.3
Finished products		559.7			552.8
		862.5			855.6
Reserves and allowances		(58.9	)		(55.5	)
	$	803.6		$	800.1

10. RESTRUCTURING

The Company recorded $20.2 million of restructuring charges during the first six months of 2003. These charges primarily consisted of severance costs for European and North American site consolidation and headcount reduction programs. Aftermarket recorded $9.9 million of these restructuring charges, including $2.4 million associated with restructuring programs initiated during the first six months of 2003. Powertrain recorded $6.4 million of these restructuring charges, including $4.7 million of costs relating to restructuring programs initiated during the first six months of 2003. Restructuring charges for Sealing Systems and Systems Protection totaled $3.9 million for the six-month period ending June 30, 2003 primarily relating to previously announced programs.

Total employee reductions for all current Company restructuring programs are expected to be approximately 3,200 of which approximately 2,350 have been terminated as of June 30, 2003.

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The following table sets forth the restructuring reserves for the three and six month periods ended June 30, 2003 (in millions of dollars):

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

11. ACQUISITION AND DIVESTITURES

On January 30, 2003, the Company announced that it had entered into a letter of intent to acquire principally all of the Bendix friction materials business of Honeywell International, Inc. (“Honeywell”). The terms of the transaction are under negotiation, and the Company continues to assess the acquisition and work with Honeywell and the Company’s appointed committees in the Restructuring Proceedings to finalize the terms of the transaction. The Company continues to make progress on satisfying the regulatory conditions to the transaction. The consummation of this acquisition is expressly conditional upon Honeywell receiving a bankruptcy court-issued permanent injunction shielding it from all current and future asbestos liabilities related to the friction materials business. In addition, the completion of the acquisition is subject to Bankruptcy Court approval. The Bendix friction business has annual sales of approximately $700 million, and includes 13 manufacturing plants and five major engineering facilities in nine countries.

During April 2003, the Company completed the divestitures of its U.S. camshaft operations and principally all of its original equipment lighting operations. The divested U.S. camshaft operations include Grand Haven, Michigan and Orland, Indiana, as well as the Company’s share of an assembled camshaft joint venture in Grand Haven. The original equipment lighting divestitures include operations in Matamoros, Mexico; Brownsville, Texas; and Toledo, Ohio.

Collectively, the divested operations had 2002 net sales of $147.1 million. The Company received aggregate net cash proceeds of $18.1 million and recognized an aggregate loss of $6.3 million for its divestitures in the second quarter of 2003.

12. 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	Federal-Mogul U.K. Holdings Inc.	Felt Products Mfg. Co.
Federal-Mogul Worldwide Inc.	F-M U.K. 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.

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In lieu of providing separate unaudited financial statements for the Guarantor Subsidiaries, the Company has included the accompanying unaudited consolidating condensed financial statements based on the Company’s understanding of the Securities and Exchange Commission’s interpretation and application of Rule 3-10 of the Securities and Exchange Commission’s Regulation S-X and Staff Accounting Bulletin 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 pre-petition liabilities, as shown below, were liabilities subject to compromise as of June 30, 2003 (in millions of dollars):

	Parent		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Consolidated
Debt	$	3,986.3	$	1.0	$	—	$	3,987.3
Asbestos liabilities		1.4		237.7		1,332.3		1,571.4
Company-obligated mandatorily redeemable securities		—		—		211.0		211.0
Accounts payable		57.7		114.2		29.2		201.1
Interest payable		42.8		0.2		—		43.0
Environmental liabilities		26.8		—		0.6		27.4
Other accrued liabilities		6.3		1.4		12.8		20.5
Liabilities subject to compromise	$	4,121.3	$	354.5	$	1,585.9	$	6,061.7

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Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Operations

Three Months Ended June 30, 2003

(Millions of Dollars)

	(Unconsolidated)
	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Net sales	$	291.4		$	421.9		$	997.7		$	(266.3	)	$	1,444.7
Cost of products sold		236.9			326.9			849.4			(266.3	)		1,146.9
Gross margin		54.5			95.0			148.3			—			297.8
Selling, general and administrative expenses		80.9			53.2			94.9			—			229.0
Restructuring charges		—			0.2			9.7			—			9.9
Interest expense (income), net		23.0			—			(1.2	)		—			21.8
Chapter 11 and Administration related reorganization expenses		26.9			—			—			—			26.9
Other expense (income), net		(10.0	)		(31.5	)		36.6			—			(4.9	)
Earnings (loss) before income taxes and equity in earnings (loss) of subsidiaries		(66.3	)		73.1			8.3			—			15.1
Income tax expense		1.2			0.9			18.1			—			20.2
Earnings (loss) before equity in earnings (loss) of subsidiaries		(67.5	)		72.2			(9.8	)		—			(5.1	)
Equity in earnings (loss) of subsidiaries		62.4			15.6			—			(78.0	)		—
Net Earnings (Loss)	$	(5.1	)	$	87.8		$	(9.8	)	$	(78.0	)	$	(5.1	)

29

Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Operations

Six Months Ended June 30, 2003

(Millions of Dollars)

	(Unconsolidated)
	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Net sales	$	572.9		$	847.4		$	1,962.3		$	(528.1	)	$	2,854.5
Cost of products sold		467.3			653.8			1,685.9			(528.1	)		2,278.9
Gross margin		105.6			193.6			276.4			—			575.6
Selling, general and administrative expenses		159.4			107.4			188.2			—			455.0
Restructuring charges		—			0.6			19.6			—			20.2
Interest expense (income), net		53.0			—			(1.7	)		—			51.3
Chapter 11 and Administration related reorganization expenses		59.7			—			—			—			59.7
Other expense (income), net		(15.1	)		(60.4	)		65.1			—			(10.4	)
Earnings (loss) before income taxes and equity in earnings (loss) of subsidiaries		(151.4	)		146.0			5.2			—			(0.2	)
Income tax expense		2.4			1.9			34.8			—			39.1
Earnings (loss) before equity in earnings (loss) of subsidiaries		(153.8	)		144.1			(29.6	)		—			(39.3	)
Equity in earnings (loss) of subsidiaries		114.5			38.8			—			(153.3	)		—
Net Earnings (Loss)	$	(39.3	)	$	182.9		$	(29.6	)	$	(153.3	)	$	(39.3	)

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Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Operations

Three Months Ended June 30, 2002

(Millions of Dollars)

	(Unconsolidated)
	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Net sales	$	339.0		$	472.5		$	807.6		$	(176.8	)	$	1,442.3
Cost of products sold		270.9			378.9			678.0			(176.8	)		1,151.0
Gross margin		68.1			93.6			129.6			—			291.3
Selling, general and administrative expenses		54.9			67.7			86.1			—			208.7
Restructuring charges		—			4.1			(2.6	)		—			1.5
Interest expense (income), net		31.4			—			(1.5	)		—			29.9
Chapter 11 and Administration related reorganization expenses		23.2			—			—			—			23.2
Other expense (income), net		(12.9	)		(26.8	)		31.0			—			(8.7	)
Earnings (loss) before income taxes, cumulative effect of change in accounting principle and equity in earnings (loss) of subsidiaries		(28.5	)		48.6			16.6			—			36.7
Income tax expense		0.7			0.4			19.6			—			20.7
Earnings (Loss) before equity in loss of subsidiaries		(29.2	)		48.2			(3.0	)		—			16.0
Equity in earnings (loss) of subsidiaries		45.2			26.8			—			(72.0	)		—
Net Earnings (Loss)	$	16.0		$	75.0		$	(3.0	)	$	(72.0	)	$	16.0

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Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Operations

Six Months Ended June 30, 2002

(Millions of Dollars)

	(Unconsolidated)
	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Net sales	$	654.0		$	916.8		$	1,553.0		$	(335.4	)	$	2,788.4
Cost of products sold		527.1			733.9			1,310.2			(335.4	)		2,235.8
Gross margin		126.9			182.9			242.8			—			552.6
Selling, general and administrative expenses		114.9			130.8			171.5			—			417.2
Restructuring charges		—			4.1			6.9			—			11.0
Interest expense (income), net		62.9			—			(2.7	)		—			60.2
Chapter 11 and Administration related reorganization expenses		43.0			—			—			—			43.0
Other expense (income), net		(31.5	)		(57.8	)		85.2			—			(4.1	)
Earnings (loss) before income taxes, cumulative effect of change in accounting principle and equity in earnings (loss) of subsidiaries		(62.4	)		105.8			(18.1	)		—			25.3
Income tax expense		0.7			23.7			26.1			—			50.5
Earnings (loss) before cumulative effect of change in accounting principle and equity in earnings (loss) of subsidiaries		(63.1	)		82.1			(44.2	)		—			(25.2	)
Cumulative effect of change in accounting principle, net of applicable tax benefits		(3.8	)		432.8			988.9			—			1,417.9
Loss before equity in loss of subsidiaries		(59.3	)		(350.7	)		(1,033.1	)		—			(1,443.1	)
Equity in earnings (loss) of subsidiaries		(1,383.8	)		(690.9	)		—			2,074.7			—
Net Loss	$	(1,443.1	)	$	(1,041.6	)	$	(1,033.1	)	$	2,074.7		$	(1,443.1	)

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Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Balance Sheet

June 30, 2003

(Millions of Dollars)

	(Unconsolidated)							Eliminations			Consolidated
	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiaries
ASSETS
Cash and equivalents	$	55.8		$	—	$	395.6	$	—		$	451.4
Accounts receivable, net		188.3			294.5		501.9		—			984.7
Inventories		80.3			310.6		412.7		—			803.6
Deferred taxes		—			—		14.0		—			14.0
Prepaid expenses and other current assets		41.3			32.1		138.7		—			212.1
Total Current Assets		365.7			637.2		1,462.9		—			2,465.8
Property, plant and equipment, net		266.1			644.0		1,419.9		—			2,330.0
Goodwill and indefinite-lived intangible assets		531.4			682.6		374.7		—			1,588.7
Definite-lived intangible assets, net		86.3			89.4		176.0		—			351.7
Investment in subsidiaries		6,404.6			2,999.9		—		(9,404.5	)		—
Intercompany accounts, net		(3,372.0	)		2,677.6		694.4		—			—
Asbestos-related insurance recoverable		—			171.9		630.1		—			802.0
Prepaid pension costs		34.3			—		284.4		—			318.7
Other noncurrent assets		29.3			34.3		140.0		—			203.6
Total Assets	$	4,345.7		$	7,936.9	$	5,182.4	$	(9,404.5	)	$	8,060.5
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Short-term debt, including current portion of long-term debt	$	289.6		$	—	$	12.0	$	—		$	301.6
Accounts payable		51.1			76.3		227.9		—			355.3
Accrued compensation		62.9			24.5		149.8		—			237.2
Restructuring reserves		9.4			12.5		55.4		—			77.3
Accrued income taxes		7.1			—		48.6		—			55.7
Other accrued liabilities		136.7			40.0		175.7		—			352.4
Total Current Liabilities		556.8			153.3		669.4		—			1,379.5
Liabilities subject to compromise		4,121.4			354.5		1,585.8		—			6,061.7
Long-term debt		—			—		10.9		—			10.9
Postemployment benefits		815.3			—		768.1		—			1,583.4
Deferred income taxes		2.5			—		47.0		—			49.5
Other accrued liabilities		110.2			0.9		101.5		—			212.6
Minority interest in consolidated subsidiaries		24.3			23.4		—		—			47.7
Shareholders’ Equity (Deficit)		(1,284.8	)		7,404.8		1,999.7		(9,404.5	)		(1,284.8	)
Total Liabilities and Shareholders’ Equity (Deficit)	$	4,345.7		$	7,936.9	$	5,182.4	$	(9,404.5	)	$	8,060.5

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Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Consolidating Condensed Balance Sheet

December 31, 2002

(Millions of Dollars)

	(Unconsolidated)
	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated
ASSETS
Cash and equivalents	$	31.9		$	—	$	363.2	$	—		$	395.1
Accounts receivable		171.8			310.0		472.2		—			954.0
Inventories		62.5			351.9		385.7		—			800.1
Deferred taxes		—			—		35.4		—			35.4
Prepaid expenses		41.1			33.0		100.4		—			174.5
Total Current Assets		307.3			694.9		1,356.9		—			2,359.1
Property, plant and equipment, net		244.6			687.4		1,341.0		—			2,273.0
Goodwill and indefinite-lived intangible assets		536.3			681.1		347.8		—			1,565.2
Definite-lived intangible assets, net		87.6			91.7		172.3		—			351.6
Investment in subsidiaries		6,394.2			2,771.7		—		(9,165.9	)		—
Intercompany accounts, net		(3,424.6	)		2,295.2		1,129.4		—			—
Asbestos-related insurance recoverable		—			171.9		608.7		—			780.6
Prepaid pension costs		71.2			—		290.3		—			361.5
Other noncurrent assets		43.7			36.5		142.1		—			222.3
Total Assets	$	4,260.3		$	7,430.4	$	5,388.5	$	(9,165.9	)	$	7,913.3
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Short-term debt, including current portion of long-term debt	$	314.7		$	—	$	31.4	$	—		$	346.1
Accounts payable		44.5			67.0		207.4		—			318.9
Accrued compensation		91.4			25.3		125.4		—			242.1
Restructuring reserves		13.9			18.1		58.8		—			90.8
Accrued income taxes		9.2			—		33.9		—			43.1
Other accrued liabilities		138.1			41.6		183.7		—			363.4
Total Current Liabilities		611.8			152.0		640.6		—			1,404.4
Liabilities subject to compromise		4,111.1			363.6		1,578.5		—			6,053.2
Long-term debt		—			—		14.3		—			14.3
Postemployment benefits		813.5			—		727.7		—			1,541.2
Deferred income taxes		2.5			—		49.9		—			52.4
Other accrued liabilities		102.7			1.4		101.6		—			205.7
Minority interest in consolidated subsidiaries		22.3			23.4		—		—			45.7
Shareholders’ Equity (Deficit)		(1,403.6	)		6,890.0		2,275.9		(9,165.9	)		(1,403.6	)
Total Liabilities and Shareholders’ Equity (Deficit)	$	4,260.3		$	7,430.4	$	5,388.5	$	(9,165.9	)	$	7,913.3

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Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Cash Flows

Six Months Ended June 30, 2003

(Millions of Dollars)

	(Unconsolidated)
	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations		Consolidated
Net Cash Provided From (Used By) Operating Activities	$	(88.4	)	$	280.2		$	9.1		$	—	$	200.9
Cash Provided From (Used By) Investing Activities:
Expenditures for property, plant and equipment and other long-term assets		(20.1	)		(38.6	)		(82.0	)		—		(140.7	)
Proceeds from sale of businesses		—			21.5			—			—		21.5
Net Cash Used By Investing Activities		(20.1	)		(17.1	)		(82.0	)		—		(119.2	)
Cash Provided From (Used By) Financing Activities:
Proceeds from issuance of long-term debt		—			—			0.1			—		0.1
Principal payments on long-term debt		—			—			(3.5	)		—		(3.5	)
Borrowings from DIP credit facility		75.0			—			—			—		75.0
Principal payments on DIP credit facility		(100.2	)		—			—			—		(100.2	)
Decrease in short-term debt		—			—			(19.3	)		—		(19.3	)
Change in intercompany accounts		156.1			(263.1	)		107.0			—		—
Net Cash Provided From (Used By) Financing Activities		130.9			(263.1	)		84.3			—		(47.9	)
Effect of Foreign Currency Exchange Rate Fluctuations on Cash		1.5			—			21.0			—		22.5
Net Increase in Cash and Equivalents	$	23.9		$	—		$	32.4		$	—	$	56.3

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Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Cash Flows

Six Months Ended June 30, 2002

(Millions of Dollars)

	(Unconsolidated)
	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations		Consolidated
Net Cash Provided From (Used By) Operating Activities	$	0.6		$	129.0		$	(23.1	)	$	—	$	106.5
Cash Provided From (Used By) Investing Activities:
Expenditures for property, plant and equipment and other long-term assets		(13.6	)		(33.8	)		(79.8	)		—		(127.2	)
Net proceeds from sales of businesses		5.9			6.0			9.9			—		21.8
Net Cash Used By Investing Activities		(7.7	)		(27.8	)		(69.9	)		—		(105.4	)
Cash Provided From (Used By) Financing Activities:
Proceeds from the issuance of long-term debt		—			—			1.5			—		1.5
Principal payments on long-term debt		—			—			(1.9	)		—		(1.9	)
Principal payments on DIP credit facility		(6.1	)		—			—			—		(6.1	)
Increase (decrease) in short-term debt		—			0.5			(8.0	)		—		(7.5	)
Change in intercompany accounts		(34.9	)		(102.2	)		137.1			—		—
Other		1.3			—			—			—		1.3
Net Cash Provided From (Used By) Financing Activities		(39.7	)		(101.7	)		128.7			—		(12.7	)
Effect of Foreign Currency Exchange Rate Fluctuations on Cash		15.2			—			—			—		15.2
Net Increase (Decrease) in Cash and Equivalents	$	(31.6	)	$	(0.5	)	$	35.7		$	—	$	3.6

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

Federal-Mogul Corporation (the “Company” or “Federal-Mogul”) is a vehicular parts manufacturer providing innovative solutions and systems to global customers in the automotive, small engine, heavy-duty and industrial markets. The Company manufactures engine bearings, pistons, piston pins, rings, cylinder liners, sintered products, connecting rods, sealing systems, systems protection sleeving products, fuel systems, wipers, ignition, brake, friction and chassis products. The Company’s principal customers include many of the world’s original equipment (“OE”) manufacturers of vehicles and industrial products. The Company also manufactures and supplies its products to the aftermarket.

VOLUNTARY BANKRUPTCY FILING

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 and 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 and 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 asIn re: Federal-Mogul Global Inc., T&N Limited, et. al (Case No. 01-10578(SLR)). The Chapter 11 Cases do not include any of the Company’s non-U.S. subsidiaries outside of the U.K. subsidiaries mentioned above.

The Restructuring Proceedings were initiated in response to a sharply increasing number of asbestos-related claims and their related demand on the Company’s cash flows. Under the Restructuring Proceedings, the Debtors expect to develop and implement a plan for addressing the asbestos-related claims against them. The Chapter 11 Cases are further discussed in Note 2 to the consolidated financial statements, “Voluntary Reorganization Under Chapter 11 and Administration”.

CONTINUING OPERATIONS

THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002

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, 2002.

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Net Sales

Consolidated net sales by reportable segment for the three-months ended June 30, 2003 and 2002 were as follows (in millions of dollars):

	2003		2002		Change
Powertrain	$	474.8	$	426.0	$	48.8
Sealing Systems and Systems Protection		163.6		170.9		(7.3	)
Friction		109.8		95.4		14.4
Aftermarket		655.1		664.7		(9.6	)
Other, including Corporate		24.7		20.3		4.4
Divested Operations		16.7		65.0		(48.3	)
Total	$	1,444.7	$	1,442.3	$	2.4

Gross Margin

Consolidated gross margin by reportable segment for the three-months ended June 30, 2003 and 2002 was as follows (in millions of dollars):

	2003			2002			Change
Powertrain	$	71.6		$	71.7		$	(0.1	)
Sealing Systems and Systems Protection		31.3			38.0			(6.7	)
Friction		32.6			27.8			4.8
Aftermarket		159.7			148.9			10.8
Other, including Corporate		(0.9	)		(2.2	)		1.3
Divested Operations		3.5			7.1			(3.6	)
Total	$	297.8		$	291.3		$	6.5

Powertrain

Net sales for the second quarter of 2003 were $475 million compared to $426 million in the same quarter of 2002. Favorable foreign currency approximating $54 million combined with increased European sales volumes of approximately $20 million were partially offset by reduced sales volumes in the Americas and by customer price reductions.

Gross margin was $72 million, or 15% of net sales, for the second quarter of 2003 compared to $72 million, or 17% of net sales, for the same quarter in 2002. The impact of favorable foreign currency, productivity programs, and increased production volumes in Europe were more than offset by reduced production volumes in the Americas, increased warranty and product costs, and customer price reductions.

Sealing Systems and Systems Protection

Net sales for the second quarter of 2003 were $164 million compared to $171 million in the same quarter of 2002. Favorable foreign currency of approximately $8 million was more than offset by customer price reductions and decreased sales volumes.

Gross margin was $31 million, or 19% of net sales, for the second quarter of 2003 compared to $38 million, or 22% of net sales, for the same quarter in 2002. Favorable productivity and foreign currency were more than offset by the effects of decreased production volumes and customer price reductions.

Friction

Net sales for the second quarter of 2003 were $110 million compared to $95 million in the same quarter of 2002. Favorable foreign currency of approximately $11 million combined with increased sales volumes more than offset the impact of customer price reductions.

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Gross margin was $33 million, or 30% of net sales, for the second quarter of 2003 compared to $28 million, or 29% of net sales, for the same quarter of 2002. Increased production volumes and favorable foreign currency more than offset customer price reductions.

Aftermarket

Net sales for the second quarter of 2003 were $655 million compared to $665 million in the same quarter of 2002. Favorable foreign currency partially offset decreased sales volumes in both the Americas and Europe.

Gross margin was $160 million, or 24% of net sales, for the second quarter of 2003 compared to $149 million, or 22% of net sales, for the same quarter of 2002. Adverse production volumes were more than offset by productivity programs, product sourcing savings, and favorable foreign currency.

Other

Other primarily includes Asia Pacific and other Corporate functions. Net sales for the second quarter of 2003 were $25 million compared to $20 million in the same quarter of 2002. This increase is primarily the result of increased sales volumes in the Asia Pacific region.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $229 million, or 16% of net sales, for the second quarter of 2003 as compared to $209 million, or 14% of net sales, for the same quarter of 2002. Foreign currency and increased current year pension expense due to lower than expected returns on the Company’s pension plan assets in the prior year were partially offset by operating and corporate cost reductions.

Interest Expense, net

Interest expense, net was $22 million in the second quarter of 2003 compared to $30 million for the same quarter of 2002. The decline is principally attributable to interest income associated with U.S. tax refunds resulting from claims filed for prior years, combined with reduced interest expense on the DIP credit facility resulting from favorable interest rates and lower average outstanding borrowings.

Income Tax Expense

For the three months ended June 30, 2003, the Company recorded income tax expense of $20 million on earnings of $15 million before income taxes. This compares to income tax expense of $21 million on earnings of $37 million before income taxes in the same period of 2002. Income tax expense for the three month period ended June 30, 2003 resulted primarily from the recognition of income tax expense on earnings in certain foreign jurisdictions without the recognition of income tax benefits on current losses in the United States and certain entities in the U.K.

Restructuring Charges

During the three months ended June 30, 2003 and 2002, the Company recorded restructuring charges of $10 million and $2 million, respectively. Charges for 2003 primarily relate to severance charges for North American and European Powertrain, Aftermarket and Sealing Systems and Systems Protection restructuring programs initiated during the three months ended June 30, 2003 as well as severance charges for previously announced European distribution site consolidations and closures in the Sealing Systems and Systems Protection and Aftermarket businesses.

Chapter 11 and Administration Related Reorganization Expenses

During the three months ended June 30, 2003 and 2002, the Company recorded Chapter 11 and Administration related reorganization expenses of $27 million and $23 million, respectively. These expenses consist of legal, financial and advisory fees, critical employee retention costs and other directly related internal costs, and

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fluctuate largely based upon the necessity for professional services by third-party vendors in connection with the Restructuring Proceedings.

SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002

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, 2002.

Net Sales

Consolidated net sales by reportable segment for the six-months ended June 30, 2003 and 2002 were as follows (in millions of dollars):

	2003		2002		Change
Powertrain	$	940.3	$	833.5	$	106.8
Sealing Systems and Systems Protection		327.0		331.3		(4.3	)
Friction		214.7		182.6		32.1
Aftermarket		1,268.4		1,264.5		3.9
Other, including Corporate		45.2		33.7		11.5
Divested Operations		58.9		142.8		(83.9	)
Total	$	2,854.5	$	2,788.4	$	66.1

Gross Margin

Consolidated gross margin by reportable segment for the six-months ended June 30, 2003 and 2002 was as follows (in millions of dollars):

	2003			2002			Change
Powertrain	$	137.8		$	139.7		$	(1.9	)
Sealing Systems and Systems Protection		61.0			68.6			(7.6	)
Friction		63.7			52.2			11.5
Aftermarket		307.0			285.6			21.4
Other, including Corporate		(2.5	)		(7.4	)		4.9
Divested Operations		8.6			13.9			(5.3	)
Total	$	575.6		$	552.6		$	23.0

Powertrain

Net sales for the first six months of 2003 were $940 million compared to $834 million in the same period of 2002. Favorable foreign currency approximating $102 million combined with increased European sales volumes of approximately $41 million were partially offset by reduced sales volumes in the Americas and by customer price reductions.

Gross margin was $138 million, or 15% of net sales, for the first six months of 2003 compared to $140 million, or 17% of net sales, for the same period in 2002. Increased production volumes in Europe and productivity programs were more than offset by reduced production volumes in the Americas, increased warranty and product costs, and customer price reductions.

Sealing Systems and Systems Protection

Net sales for the first six months of 2003 were $327 million compared to $331 million in the same period of 2002. Favorable foreign currency of approximately $15 million was more than offset by the impacts of customer price reductions and decreased sales volumes.

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Gross margin was $61 million, or 19% of net sales, for the first six months of 2003 compared to $69 million, or 21% of net sales, for the same period in 2002. Favorable productivity and foreign currency were more than offset by the effects of decreased production volumes and customer price reductions.

Friction

Net sales for the first six months of 2003 were $215 million compared to $183 million in the same period of 2002. Favorable foreign currency of approximately $21 million combined with increased sales volumes more than offset the impact of customer price reductions.

Gross margin was $64 million, or 30% of net sales, for the first six months of 2003 compared to $52 million, or 29% of net sales, for the same period of 2002. Favorable production volumes and foreign currency more than offset customer price reductions.

Aftermarket

Net sales for the first six months of 2003 were $1,268 million compared to $1,265 million in the same period of 2002. The effects of favorable foreign currency marginally offset decreased sales volumes in both the Americas and Europe.

Gross margin was $307 million, or 24% of net sales, for the first six months of 2003 compared to $286 million, or 23% of net sales, for the same period of 2002. Gross margin was favorably impacted by productivity programs and favorable foreign currency, which were partially offset by a decline in production volumes.

Other

Other primarily includes Asia Pacific and other Corporate functions. Net sales for the first six months of 2003 were $45 million compared to $34 million in the same period of 2002. This increase is primarily the result of increased sales volumes in the Asia Pacific region.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $455 million, or 16% of net sales, for the first six months of 2003 as compared to $417 million, or 15% of net sales, for the same period of 2002. Foreign currency and increased current year pension expense due to lower than expected returns on the Company’s pension plan assets in the prior year were partially offset by operating and corporate cost reductions.

Interest Expense, net

Interest expense, net was $51 million in the first six months of 2003 compared to $60 million for the same quarter of 2002. The decline is principally attributable to interest income associated with U.S. tax refunds resulting from claims filed for prior years, combined with reduced interest expense on the DIP credit facility resulting from favorable interest rates and lower average outstanding borrowings.

Income Tax Expense

For the six months ended June 30, 2003, the Company recorded income tax expense of $39 million on a loss of $0.2 million before income taxes. This compares to income tax expense of $51 million on earnings of $25 million before income taxes and cumulative effect of change in accounting principle in the same period of 2002. Net income tax expense for the six month period ended June 30, 2003 resulted primarily from the recognition of income tax expense on earnings in certain foreign jurisdictions without the recognition of income tax benefits on current losses in the United States and certain entities in the U.K.

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Restructuring Charges

During the six months ended June 30, 2003 and 2002, the Company recorded restructuring charges of $20 million and $11 million, respectively. Charges for 2003 primarily relate to severance charges for North American and European Powertrain, Sealing Systems and Systems Protection, and Aftermarket restructuring programs initiated during the first six months of 2003 as well as severance charges for previously announced European distribution site consolidations and closures in the Powertrain, Sealing Systems and Systems Protection and Aftermarket businesses.

Chapter 11 and Administration Related Reorganization Expenses

During the six months ended June 30, 2003 and 2002, the Company recorded Chapter 11 and Administration related reorganization expenses of $60 million and $43 million, respectively. These expenses consist of legal, financial and advisory fees, critical employee retention costs and other directly related internal costs, and fluctuate largely based upon the necessity for professional services by third-party vendors in connection with the pace and degree of the Restructuring Proceedings.

LITIGATION & ENVIRONMENTAL CONTINGENCIES

For a summary of material litigation and environmental contingencies, refer to Note 8 of the consolidated financial statements, “Asbestos Liability and Legal Proceedings”.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flow Provided From Operating Activities

Cash flow provided from operating activities was $201 million for the first six months of 2003. Among the factors impacting operating cash flows were positive operational EBIT and working capital improvements, and are affected by timing issues on various accounts. Operational EBIT is defined as earnings before interest, income taxes, cumulative effect of change in accounting principle and certain items such as restructuring and impairment charges.

Cash Flow Used By Investing Activities

Cash flow used by investing activities was $119 million in the first six months of 2003. Investing cash flows were comprised principally of capital expenditures made for property, plant and equipment to implement process improvements, increase manufacturing capacity and production, and introduce new products.

Cash Flow Used By Financing Activities

Cash flow used by financing activities was $48 million for the first six months of 2003 resulting from a net paydown of the Company’s DIP credit facility of $25 million, combined with repayments of certain short-term and international debt.

In connection with the Restructuring Proceedings, the Company entered into a $675 million DIP credit facility to supplement liquidity and fund operations during the restructuring proceedings. The DIP credit facility expires in October 2003 and bears interest at either the alternate base rate (“ABR”) plus 2½ percentage points or a formula based on the London Inter-Bank Offered Rate plus 3½ percentage points. The ABR is the greatest of either the bank’s prime rate or the base certificate of deposit rate plus 1 percentage point or the federal funds rate plus ½ percentage point. The $675 million commitment is reduced by a portion of the proceeds received from an asset sale or business divestiture. The Company is currently renegotiating its DIP credit facility and expects to complete this process and obtain the required Bankruptcy Court approval prior to the facility’s expiration.

The Company has pledged 100% of the capital stock of certain U.S. subsidiaries, 65% of the capital stock of certain foreign subsidiaries and certain intercompany loans to secure the Senior Credit Agreements of the

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Company. Certain of such pledges also extend to the Notes, Medium-Term Notes and Senior Notes of the Company. In addition, certain subsidiaries of the Company have guaranteed the senior debt.

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 and cash flow from operations, in conjunction with borrowings available from its DIP credit facility, will be sufficient to fund capital expenditures and meet its post-petition operating obligations in the short term. In the long term, the Company believes that the benefits from the previously announced restructuring programs and the favorable resolution of its asbestos liabilities through Chapter 11 and Administration should provide adequate long-term cash flows. However, there can be no assurance in this regard or that the terms available for any future financing, if required, would be favorable to the Company. Also, certain obligations, particularly asbestos obligations, can be impacted by factors outside the Company’s control.

As of June 30, 2003, the Company was in compliance with all debt covenants under its existing DIP credit facility. Based on current forecasts, the Company expects to be in compliance through the expiration of the facility. Changes in the business environment, market factors, macroeconomic factors, and 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.

Item 3.Quantitative And Qualitative Disclosures About Market Risk

The Company is subject to the risk of changes in foreign currency exchange rates due to its operations in foreign jurisdictions. As a result, the Company’s financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the 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 shareholders’ 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 equity was increased by $158 million during the six months ended June 30, 2003, due to cumulative translation adjustments primarily resulting from changes in the U.S. dollar to the Euro and the British Pound.

Item 4.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.

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. Pursuant to ongoing integration efforts associated with previous acquisitions, the Company converted its financial systems at certain of it North American operating units to a pre-existing common information technology platform during the second quarter of 2003.

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As of June 30, 2003, an evaluation was performed under the supervision and with the participation of our Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2003, subject to the limitations previously described.

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PART II—OTHER INFORMATION

Item 1.Legal Proceedings

(a) Contingencies.

Note 8 to the Consolidated Financial Statements, “Asbestos Liability and Legal Proceedings”, 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 Filing. 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 Filing. See Note 2 “Voluntary Reorganization Under Chapter 11 and Administration” to the Company’s consolidated financial statements.

Item 6.Exhibits and Reports on Form 8-K

(a) Exhibits:

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

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

99.3 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.

(b) Reports on Form 8-K:

(1) On April 22, 2003, the Company filed a Current Report on Form 8-K to report the issuance of a press release announcing its first quarter earnings for the period ended March 31, 2003.

(2) On April 22, 2003, the Company filed a Current Report on Form 8-K to report the filing of a proposed Disclosure Statement with the Bankruptcy Court in Wilmington, Delaware in connection with the Company’s Chapter 11 reorganization case.

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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/ William G. Quigley III
William G. Quigley III
Vice President and Controller,
Chief Accounting Officer

Dated:  August 4, 2003

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