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 September 30, 2001

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE
ACT OF 1934

For the transition period from __________ to __________

Commission File Number: 1-1511

FEDERAL-MOGUL CORPORATION
(Exact name of Registrant as specified in its charter)

Michigan 38-0533580
(State or other jurisdiction of (IRS employer
incorporation or organization) 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 November 12, 2001, there were 80,247,212 outstanding shares of the
registrant's $5.00 stated value common stock.

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"). Such statements are made in
good faith by Federal-Mogul (the "Company") pursuant to the "Safe Harbor"
provisions of the Reform Act.

Forward-looking statements include financial projections, estimates and
statements regarding plans, objectives and expectations of the Company and its
management, as well as the Company's views regarding industry and economic
conditions and trends. Forward looking statements include, without limitation,
plans to implement restructuring initiatives relating to manufacturing and
warehouse facilities, plans to address issues related to financing of the
Company's business operations, plans to address the issues related to the
conversion to the Euro, statements regarding industry conditions, and statements
regarding the scope and effect of asbestos liabilities.

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. Such risks, uncertainties and other factors
include, without limitation, fluctuation in demand for both original equipment
and replacement components in the automotive, heavy-duty vehicular and
industrial markets, the effect of certain global and regional economic
conditions, the ability of the Company to control operating and other costs,
legal proceedings and claims (including environmental and asbestos matters)
involving the Company, changes in the Company's relationships with customers and
suppliers, the effect of the Chapter 11 voluntary reorganization filing by the
Company and certain U.S. subsidiaries and filings of certain of the Company's
U.K. subsidiaries for Chapter 11 and Administration, legislative risks and
uncertainties, and other factors, some of which are beyond the Company's
control.

PART I - FINANCIAL INFORMATION
- ------------------------------

Item 1. Financial Statements
--------------------

FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(Millions of Dollars, Except Per Share Amounts)

Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2001 2000 2001 2000
----------- ----------- ----------- -----------

Net sales ............................................................ $ 1,288.8 $ 1,427.9 $ 4,164.9 $ 4,664.8
Cost of products sold ................................................ 1,050.3 1,089.2 3,319.9 3,482.4
----------- ----------- ----------- -----------
Gross margin ....................................................... 238.5 338.7 845.0 1,182.4
Selling, general and administrative expenses ......................... 213.8 210.5 648.5 629.4
Amortization of goodwill and other intangible assets ................. 29.2 31.2 89.4 93.7
Restructuring charges ................................................ 6.1 8.6 38.0 77.3
Adjustment of assets held for sale and other long-lived assets to
fair value ......................................................... 496.6 4.6 497.3 14.6
Interest expense ..................................................... 72.5 74.2 238.5 216.6
Interest income ...................................................... (1.1) (0.8) (3.3) (3.1)
International currency exchange losses ............................... 1.9 3.3 5.0 1.3
Chapter 11 and Administration related reorganization expenses ........ 13.7 -- 14.4 --
Other expense, net ................................................... 84.7 8.6 60.3 25.4
----------- ----------- ----------- -----------
Earnings (loss) before income tax expense and
extraordinary items .................................... (678.9) (1.5) (743.1) 127.2
Income tax expense ................................................... 178.3 6.1 218.9 71.0
----------- ----------- ----------- -----------
Earnings (loss) before extraordinary items ................. (857.2) (7.6) (962.0) 56.2
Extraordinary items -- gain on early retirement of debt .............. (47.1) -- (72.2) --
----------- ----------- ----------- -----------
Net earnings (loss) ........................................ (810.1) (7.6) (889.8) 56.2
Preferred dividends .................................................. 0.5 0.5 1.9 1.5
----------- ----------- ----------- -----------
Net Earnings (Loss) Available for Common Shareholders ................ $ (810.6) $ (8.1) $ (891.7) $ 54.7
=========== =========== =========== ===========

Earnings (Loss) Per Common Share:
Basic
Earnings (loss) before extraordinary items ......................... $ (10.91) $ (0.12) $ (13.11) $ 0.78
Extraordinary items - gain on early retirement of debt ............. (0.60) -- (0.98) --
----------- ----------- ----------- -----------
Net Earnings (Loss) Available for Common Shareholders .............. $ (10.31) $ (0.12) $ (12.13) $ 0.78
=========== =========== =========== ===========

Diluted
Earnings (loss) before extraordinary items ......................... $ (10.91) $ (0.12) $ (13.11) $ 0.70
Extraordinary items - gain on early retirement of debt ............. (0.60) -- (0.98) --
----------- ----------- ----------- -----------
Net Earnings (Loss) Available for Common Shareholders .............. $ (10.31) $ (0.12) $ (12.13) $ 0.70
=========== =========== =========== ===========

See accompanying notes.

FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Millions of Dollars)

(Unaudited)
September 30 December 31
2001 2000
------------ -------------

ASSETS
Cash and equivalents .................................................................... $ 263.2 $ 107.2
Accounts receivable ..................................................................... 528.8 512.8
Investment in accounts receivable securitization ........................................ 219.9 229.1
Inventories ............................................................................. 744.7 808.6
Deferred taxes .......................................................................... 166.2 235.5
Prepaid expenses and income tax benefits ................................................ 200.7 195.1
---------- -----------
Total Current Assets ............................................................... 2,123.5 2,088.3
Property, plant and equipment, net ...................................................... 2,174.1 2,388.8
Goodwill, net ........................................................................... 2,784.0 3,303.1
Other intangible assets, net ............................................................ 613.0 746.4
Asbestos-related insurance recoverable .................................................. 749.2 771.1
Other noncurrent assets ................................................................. 1,050.0 1,155.7
---------- -----------
Total Assets ....................................................................... $ 9,493.8 $ 10,453.4
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY

Short-term debt, including current portion of long-term debt and debt in default ........ $ 4,039.1 $ 147.8
Accounts payable ........................................................................ 386.3 431.9
Accrued compensation .................................................................... 221.8 157.8
Restructuring and rationalization reserves .............................................. 95.0 107.9
Current portion of asbestos liability ................................................... -- 350.0
Interest payable ........................................................................ 54.6 94.4
Other accrued liabilities ............................................................... 396.0 410.9
---------- -----------
Total Current Liabilities .......................................................... 5,192.8 1,700.7
Long-term debt .......................................................................... 15.2 3,559.7
Long-term portion of asbestos liability ................................................. 1,575.3 1,461.9
Postemployment benefits ................................................................. 635.6 637.6
Other accrued liabilities ............................................................... 851.9 910.8
Minority interest in consolidated subsidiaries .......................................... 55.1 57.5
Company-obligated mandatorily redeemable preferred securities of subsidiary trust
holding solely convertible subordinated debentures of the Company (1) ................ 571.4 575.0
Shareholders' Equity:
Series C ESOP preferred stock ........................................................ 28.0 38.1
Common stock ......................................................................... 401.2 352.5
Additional paid-in capital ........................................................... 1,750.3 1,778.6
Accumulated deficit .................................................................. (1,005.3) (113.5)
Accumulated other comprehensive loss ................................................. (577.2) (504.7)
Other ................................................................................ (0.5) (0.8)
---------- -----------
Total Shareholders' Equity ......................................................... 596.5 1,550.2
---------- -----------
Total Liabilities and Shareholders' Equity ......................................... $ 9,493.8 $ 10,453.4
========== ===========

- ---------------
(1) The sole assets of the Trust are convertible subordinated debentures of
Federal-Mogul with an aggregate principal amount of $571.4 million, which
bear interest at a rate of 7% per annum and mature on December 1, 2027.
Upon repayment of the subordinated debentures, the Company-obligated
mandatorily redeemable preferred securities of subsidiary trust will be
mandatorily redeemed.

See accompanying notes.

FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Millions of Dollars)

Nine Months Ended
September 30
-----------------
2001 2000
-------- -------

Cash Provided From (Used By) Operating Activities
Net earnings (loss)............................................................... $ (889.8) $ 56.2
Adjustments to reconcile net earnings (loss) to net cash used by operating
activities ......................................................................
Depreciation and amortization .................................................. 285.9 287.3
Extraordinary item -- gain on early retirement of debt ......................... (72.2) --
Restructuring charges .......................................................... 38.0 77.3
Adjustment of assets held for sale and other long-lived assets to fair value ... 497.3 14.6
Postemployment benefits ........................................................ (0.2) (13.4)
Decrease (increase) in accounts receivable ..................................... 71.4 (42.9)
Decrease (increase) in inventories ............................................. 33.1 (41.8)
Decrease in accounts payable ................................................... (35.3) (112.0)
Changes in other current liabilities and other current assets .................. 169.9 (26.4)
Payments against restructuring and rationalization reserves .................... (50.1) (42.8)
Payments against asbestos liability ............................................ (219.2) (234.7)
-------- --------
Net Cash Used By Operating Activities ....................................... (171.2) (78.6)
Cash Provided From (Used By) Investing Activities
Expenditures for property, plant and equipment and other long-term assets ........ (221.1) (231.6)
Proceeds from sale of property, plant and equipment .............................. 19.0 2.2
Business acquisitions, net of cash acquired ...................................... (18.8) (3.4)
Proceeds from sales of businesses ................................................ 241.8 60.9
-------- -------
Net Cash Provided From (Used By) Investing Activities ....................... 20.9 (171.9)
Cash Provided From (Used By) Financing Activities
Proceeds from issuance of long-term debt ......................................... 666.4 485.0
Principal payments on long-term debt ............................................. (171.8) (168.1)
Decrease in short-term debt ...................................................... (71.4) (26.9)
Fees paid for debt agreements .................................................... (18.5) --
Repurchase of accounts receivable under securitization ........................... (89.6) (46.9)
Dividends ........................................................................ (1.9) (3.1)
Other ............................................................................ (6.9) 1.8
-------- -------
Net Cash Provided From Financing Activities ................................. 306.3 241.8
-------- -------
Increase (Decrease) in Cash and Equivalents ................................. 156.0 (8.7)
Cash and Equivalents at Beginning of Period ................................. 107.2 64.5
-------- -------
Cash and Equivalents at End of Period ....................................... $ 263.2 $ 55.8
======== =======

See accompanying notes.

FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2001

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements 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 accruals) considered necessary for a fair
presentation have been included. Operating results for the three and nine month
periods ended September 30, 2001 are not necessarily indicative of the results
that may be expected for the year ended December 31, 2001. 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, 2000. Certain items in the prior year condensed consolidated
financial statements have been reclassified to conform to the presentation used
in 2001.

2. VOLUNTARY REORGANIZATION UNDER CHAPTER 11 AND ADMINISTRATION

On October 1, 2001 (the "Petition Date"), the Company and all of its United
States subsidiaries filed voluntary petitions for reorganization (the "U.S.
Restructurings") 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"). In addition on October 1, 2001, certain of
the Company's United Kingdom subsidiaries also filed voluntary petitions for
reorganization under Chapter 11 of the Bankruptcy Code and petitions for
Administration (the "U.K. Restructurings") 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 are herein referred to as the "Debtors". The U.S. Restructurings
and U.K. Restructurings are herein referred to as the "Restructuring
Proceedings". The Chapter 11 cases of the Debtors (collectively, the "Chapter 11
Cases") have been consolidated for purposes of joint administration as In re:
------
Federal-Mogul Global Inc., T&N Limited, et al (Case No. 01-10578(SLR)). The
- ---------------------------------------------
Chapter 11 Cases do not include any of the Company's non-U.S. subsidiaries
outside of the U.K. subsidiaries mentioned above.

The Restructuring Proceedings were taken to resolve the Company's
asbestos-related litigation in a fair and equitable manner, to protect the
long-term value of the Debtors' businesses and to maintain the Debtors'
leadership positions in their markets.

Consequences of the Restructuring Proceedings:

The U.S. Debtors are operating their businesses without interruption 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. However, it is currently
impossible to predict with any degree of certainty how a plan of reorganization
or a scheme of arrangement will treat asbestos and other pre-petition claims and
what impact the Restructuring Proceedings and any plan of reorganization or
scheme of arrangement may have on the shares of the Company's common stock. The
formulation and implementation of the plan of reorganization or scheme of
arrangement could take a significant period of time.

Court. The Company expects that the appointed committees, together with a legal
representative for future asbestos claimants yet to be appointed by the
Bankruptcy Court, will play important roles in the Restructuring Proceeding. In
the U.K. the Company expects the Administrator to appoint a creditors'
committee, representing asbestos claimants and general unsecured creditors. The
Company expects this committee to play an important role in the negotiation of
any scheme of arrangement.

As provided by the Bankruptcy Code, the Debtors initially have the
exclusive right to propose a plan of reorganization within 120 days following
the Petition Date with the Bankruptcy Court. The Debtors expect to ask the
Bankruptcy Court to extend the period of exclusivity, which request they expect
to be granted. If the Debtors fail to file a plan of reorganization during such
period or any extension thereof, or if such plan of reorganization is not
accepted by the requisite numbers of creditors and equity holders entitled to
vote on the plan, other parties in interest in the Chapter 11 Cases may be
permitted to propose their own plan(s) of reorganization for the Debtors.

One alternative such plan(s) of reorganization may provide, among other
things, is that all present and future asbestos-related liabilities of the
Debtors will be discharged and assumed and resolved by one or more independently
administered trusts established in compliance with Section 524(g) of the
Bankruptcy Code. Such plan(s) may also provide for the issuance of an injunction
by the Bankruptcy Court pursuant to Section 524(g) of the Bankruptcy Code that
will enjoin actions against the reorganized Debtors alleging asbestos-related
claims, which claims will be paid in whole or in part by one or more Section
524(g) trusts. Similar plans of reorganization have been confirmed in chapter 11
cases of other companies involved in asbestos-related litigation. Section 524(g)
of the Bankruptcy Code provides that, if certain specified conditions are
satisfied, a court may issue a supplemental permanent injunction barring the
assertion of asbestos-related claims against the reorganized company and
channeling those claims to an independent trust.

There are two possible types of 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.

The Company is unable to predict at this time what the treatment of
creditors and equity security holders of the respective Debtors will be under
any proposed plan(s) of reorganization or schemes of arrangement. The Company is
unable to predict at this time what treatment will be accorded under any such
plan(s) 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. These arrangements, transactions, and relationships may be challenged by
various parties in the Chapter 11 Cases, and the outcome of those challenges, if
any, may have an impact on the treatment of various claims under such plan(s) 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 shareholders may be
substantially altered by any plan(s) 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. Pre-petition creditors may receive under the proposed plan(s) less than
100% of the face value of their claims, and the interests of the Company's
equity security holders may be substantially diluted or cancelled in whole or in
part. As noted above, it is not possible at this time to predict the outcome of
the Chapter 11 Cases, the terms and provisions of any plan(s) of reorganization,
or the effect of the Chapter 11 reorganization process on the claims of the
pre-petition creditors of the Debtors or the interests of the Company's equity
security holders.

Chapter 11 Financing:

In connection with the Restructuring Proceedings, the Company has received
commitments for up to $675 million in debtor-in-possession ("DIP") Credit
Facility from JP Morgan Chase & Co. ("Chase") to supplement liquidity and fund
operations during the reorganization process. On an interim basis, the
Bankruptcy Court approved the availability of a $450 million DIP credit facility
from Chase. The final hearing in the DIP Credit Facility is scheduled for
November 20, 2001. The DIP Credit Facility has a term of two years and bears
interest at either the alternate base rate ("ABR") plus 2.5 percentage points or
a formula based on the London Inter-Bank Offered Rate ("LIBOR") plus 3.5
percentage points. The ABR is the greatest of either Chase's prime rate or the
base CD rate plus 1 percentage point or the fed funds rate plus 1/2 percentage
point. The Company believes, based on information presently available, that cash
on hand, cash available from operations and the DIP Credit Facility will provide
sufficient liquidity to allow its businesses to operate without interruption
(including its ability to meet post-petition obligations of the Debtors and to
meet obligations of the non-debtor subsidiaries).

As of September 30, 2001, the Company had $263.2 million of cash and
equivalents. Of this amount, $196.3 million was in the possession of non-Debtor
subsidiaries outside of the United States and $23.3 million was in the
possession of Federal-Mogul Funding Corporation (FMFC). On October 1, 2001, FMFC
notified BankOne and Wachovia Bank that an Amortization Event, as defined in the
accounts receivable securitization agreement, had occurred effective with the
U.S. Restructurings, as a result, transfers of receivables to the trust ceased.
On October 9, 2001, the Company made a payment of $217.1 million, with
borrowings from the DIP Credit Facility, as approved by the Bankruptcy Court in
connection with the termination of the facility. As a result, the Company's
accounts receivable increased $437.0 million (the $217.1 million above and
$219.9 million included in the balance sheet as investment in accounts
receivable securitization.) because it no longer securitizes its U.S.
receivables.

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 making interest payments on the debentures. As a result, the affiliate
will no longer have the funds available to pay distributions on the Company
Obligated Mandatorily Redeemable Preferred Securities and stopped paying such
distributions in October 2001. The affiliate is in default on the Company
Obligated Mandatorily Redeemable Preferred Securities.

Financial Statement Presentation:

The accompanying pro-forma condensed consolidated financial statements have
been prepared in accordance with AICPA Statement of Position 90-7 ("SOP 90-7"),
"Financial Reporting by Entities in Reorganization under the Bankruptcy Code"
and on a going concern basis, which contemplates continuity of operations,
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, are subject to uncertainty. Given this
uncertainty, there is doubt about continuing the going concern basis of
presentation. 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 condensed
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.

As of September 30, 2001, virtually all of the Company's pre-petition debt
was in default and is therefore classified as current. In the September 30, 2001
pro-forma balance sheet, the Debtors' pre-petition debt was classified under the
caption "Liabilities Subject to Compromise." This includes debt outstanding of
$1,898.9 million under the pre-petition Senior Credit Agreements and $2,123.0
million of other outstanding debt less capitalized debt issuance fees of $52.1
million.

As reflected in the pro-forma condensed 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.

Pursuant to the Bankruptcy Code, the Debtors will file schedules with the
Bankruptcy Court setting forth the assets and liabilities of the Debtors as of
the Petition Date. Differences between amounts recorded by the Debtors and
claims filed by creditors will be investigated and resolved as part of the
Restructuring Proceedings. No bar dates have been set for the filing of proofs
of claim against the Debtors. Accordingly, the ultimate number and allowed
amount of such claims are not presently known. The Debtors have received
approval from the Bankruptcy Court to pay or otherwise honor certain of their
pre-petition obligations, including employee wages, salaries, benefits and other
employee obligations and from limited available funds, pre-petition claims of
certain critical vendors, certain customer programs and warranty claims and
certain other pre-petition claims.

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.

Pro-Forma Condensed Consolidated Balance Sheet Information:

The unaudited pro-forma condensed consolidated balance sheet of the Company
as if the Debtors had filed petitions for reorganization under Chapter 11 and
Administration at September 30, 2001 is as follows (in millions):

ASSETS

Cash and equivalents............................................................ $ 263.2
Accounts receivable ............................................................ 528.8
Investment in accounts receivable securitization ............................... 219.9
Inventories .................................................................... 744.7
Deferred taxes ................................................................. 166.2
Prepaid expenses and income tax benefits ....................................... 200.7
--------
Total Current Assets ...................................................... 2,123.5
Property, plant and equipment, net ............................................. 2,174.1
Goodwill, net .................................................................. 2,784.0
Other intangible assets, net ................................................... 613.0
Asbestos-related insurance recoverable ......................................... 749.2
Other noncurrent assets ........................................................ 982.3
--------
Total Assets .............................................................. $9,426.1
========
LIABILITIES AND SHAREHOLDERS' EQUITY

Short-term debt, including current portion of long-term debt ................... $ 17.2
Accounts payable ............................................................... 163.3
Accrued compensation ........................................................... 221.8
Restructuring and rationalization reserves ..................................... 95.0
Other accrued liabilities ...................................................... 408.8
--------
Total Current Liabilities ................................................. 906.1
Long-term debt ................................................................. 15.2
Postemployment benefits ........................................................ 635.6
Other accrued liabilities ...................................................... 828.8
Minority interest in consolidated subsidiaries ................................. 55.1
Liabilities Subject to Compromise .............................................. 5,833.0
Company-obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely convertible subordinated debentures of the Company,
Subject to Compromise ......................................................... 555.8
Shareholders' Equity ...................................................... 596.5
--------
Total Liabilities and Shareholders' Equity ................................ $9,426.1
========

Pro-Forma Liabilities Subject to Compromise at September 30, 2001 are
comprised of (in millions):

Accounts payable................ $ 223.0
Other accrued liabilities ...... 8.1
Environmental liabilities ...... 23.1
Interest payable ............... 33.7
Debt ........................... 3,969.8
Asbestos liabilities ........... 1,575.3
--------
$5,833.0
========

Chapter 11 and Administration related reorganization expenses in the
consolidated statements of operations consist of legal, financial and advisory
fees for the three and nine months ended September 30, 2001.

3. ADJUSTMENT OF ASSETS TO FAIR VALUE

Concurrent with the Company's on-going planning process, the Company
performed an impairment assessment of its long-lived assets in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting for the
Impairment of Long-Lived Assets and Assets to be Disposed of" during the third
quarter of 2001. The Company's changing asbestos environment, impending
Restructuring Proceedings and recent operating losses were indicators of
impairment as provided by SFAS No. 121. The Company determined that the
undiscounted cash flows of certain of its non-core operating units, from its
Other and Powertrain segments, were less than the carrying value of the
long-lived assets of those operating units. Accordingly, the Company adjusted
the carrying value of those assets to their fair value resulting in an
impairment charge of $495.8 million. The fair value was determined by
anticipated future cash flows discounted at a rate commensurate with the risk
involved. The following is a summary of the impairment charge by long-lived
asset (in millions):

Goodwill...................................... $257.5
Other intangible assets....................... 73.5
Property, plant and equipment ................ 164.8
------
$495.8
======
4. TAXES

For the three months ended September 30, 2001, the Company recorded income
tax expense of $178.3 million on a loss of $678.9 million before income taxes
and extraordinary items, compared to income tax expense of $6.1 million on a
loss of $1.5 million before income taxes in the same period of 2000. For the
nine months ended September 30, 2001, the Company recorded income tax expense of
$218.9 million on a loss of $743.1 million before income taxes and extraordinary
items, compared to income tax expense of $71.0 million on earnings of $127.2
million before income tax expense in the same period of 2000. Income tax expense
for the three and nine months ended September 30, 2001 resulted from the effects
of the permanent difference between book and tax goodwill related to
divestitures and impairment charges, an increase in the valuation allowance on
deferred tax assets in the U.S. and U.K., and non-deductible goodwill
amortization as reflected in the reconciliation below from the U.S. federal
statutory rate to income tax expense (in millions):

Three-Months Nine-Months
Ended Ended
September 30, 2001 September 30, 2001
------------------ ------------------

Income tax benefit at United States statutory rate............. $(237.6) $(260.1)
Tax effect from: ..............................................
State income taxes ........................................... 0.7 2.2
Foreign operations, net of foreign tax credits ............... 14.9 20.9
Goodwill amortization ........................................ 7.5 19.8
Divestitures ................................................. 33.2 70.1
Impairment charge ............................................ 80.7 80.7
Early extinguishment of debt ................................. 16.5 25.3
Valuation allowance on previously recognized assets .......... 177.0 177.0
Valuation allowance on third quarter 2001 losses ............. 80.6 80.6
Tax credits and other ........................................ 4.8 2.4
------- -------
$ 178.3 $ 218.9
======= =======

At September 30, 2001, the Company had deferred tax assets of $605.9
million, net of a valuation allowance of $477.2 million, and deferred tax
liabilities of $722.8 million. The increase in the valuation allowance during
the third quarter was comprised of $177.0 million recorded in income tax expense
in the accompanying condensed consolidated statements of operations for deferred
tax assets as of June 30, 2001 and $80.6 million recorded as an increase to the
deferred asset and an increase to the valuation allowance for U.S. losses
generated in the third quarter. In each country except the U.S. and the U.K.,
the deferred tax liabilities are greater than the net deferred tax assets, and
they generally reverse in similar periods. The deferred tax assets in the U.S.
and U.K. relate primarily to net operating loss carryforwards, asbestos
liabilities and postemployment liabilities. The ultimate realization of net
deferred income tax assets in the U.S. and the U.K. is dependent upon future
taxable income. Management considers historical and projected future taxable
income and tax planning strategies by taxing jurisdiction in determining whether
a valuation allowance is necessary.

Due to the Company's Restructuring Proceedings that limit the
implementation of certain tax planning strategies, current adverse market
conditions and recent taxable losses in the U.S., management established a full
valuation allowance reserve against the net U.S. deferred tax asset as of
September 30, 2001.

In the U.K., only certain deferred tax assets related to specific interest
expense deductions have been provided for in the valuation allowance. The net
operating losses in the U.K. have no expiration date and management believes it
is more likely than not that the U.K. deferred tax assets beyond those
specifically reserved of $ 264.9 will be realized through a combination of the
reversal of deferred tax liabilities and future taxable income from operations.

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

September 30 December 31
2001 2000
-------- ---------

Deferred tax assets................................ $1,083.1 $1,298.7
Valuation allowance................................ (477.2) (219.6)
-------- --------
Net deferred tax assets......................... 605.9 1,079.1
Deferred tax liabilities........................... 722.8 1,032.6
-------- --------
Net deferred tax asset/(liability)................. $ (116.9) $ 46.5
========= ========

5. OPERATIONS BY REPORTABLE SEGMENT

The segment information has been restated to reflect the Company's internal
organization changes in 2001. The Company is a global manufacturer with six
reportable segments: Powertrain; Sealing Systems and Systems Protection;
Friction; Aftermarket; Other; and Discontinued Operations.

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 reportable segment include
engine bearings, pistons, piston pins, rings, cylinder liners, camshafts,
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 reportable
segment include dynamic seals, gaskets and systems protection products.

Friction products are used in automotive and heavy duty applications. The
primary products of this reportable segment unit include discs, pads and brake
shoes.

Aftermarket provides products from the above segments to the independent
automotive and heavy duty aftermarkets as well as the manufacturing operations
of North American brake, chassis, ignition, fuel and wipers.

Other includes the non-core businesses of lighting, European wipers &
ignition manufacturing, as well as Asia Pacific and Corporate functions.

Discontinued operations include the historical operating results of the
Company's divestitures in Note 7 and certain operation divested in 2000.

The Company has aggregated individual product segments within its six
reportable segments. The accounting policies of the segments are the same as
that of the Company. The Company evaluates segment performance based on several
factors, including Operational EBIT and major cash flow drivers. Operational
EBIT is defined as earnings before interest, income taxes, extraordinary items
and certain nonrecurring items such as restructuring and impairment charges,
Chapter 11 and Administration related reorganization expenses and losses on the
sales of businesses. Operational EBIT for each segment is shown below, as it is
most consistent with the corresponding condensed consolidated financial
statements (in millions).

Net Sales Operational EBIT Net Sales Operational EBIT
--------- ---------------- --------- ----------------
Three Months Three Months Nine Months Nine Months
Ended September 30 Ended September 30 Ended September 30 Ended September 30
------------------ ------------------ ------------------ ------------------
2001 2000 2001 2000 2001 2000 2001 2000
-------- -------- -------- -------- -------- -------- -------- -------

Powertrain.................. $ 376.3 $ 403.4 $ 10.2 $ 32.0 $1,245.6 $1,363.5 $ 87.2 $ 161.2
Sealing Systems and
Systems Protection ..... 140.6 161.1 3.6 14.6 451.8 529.6 24.6 63.8
Friction.................... 78.2 100.6 0.2 7.9 258.2 332.4 6.1 36.9
Aftermarket................. 594.7 619.3 55.4 76.5 1,842.4 1,961.5 184.5 286.5
Other, including Corporate.. 89.0 100.9 (76.6) (43.3) 277.0 337.6 (204.7) (108.8)
Discontinued Operations..... 10.0 42.6 0.3 7.5 89.9 140.2 10.8 23.6
-------- -------- -------- -------- -------- -------- -------- -------
Total $1,288.8 $1,427.9 $ (6.9) $ 95.2 $4,164.9 $4,664.8 $ 108.5 $ 463.2
======== ======== ======== ======== ======== ======== ======== =======

Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
Reconciliation: 2001 2000 2001 2000
------- -------- -------- -------

Total segments Operational EBIT................................. $ (6.9) $ 95.2 $ 108.5 $ 463.2
Net interest and other financing costs ......................... (80.5) (83.5) (264.4) (244.1)
Restructuring, impairment and other special charges ............ (502.7) (13.2) (535.3) (91.9)
Chapter 11 and Administration related reorganization expenses .. (13.7) -- (14.4) --
Loss on sales of businesses .................................... (75.1) -- (37.5) --
------- -------- -------- -------
Earnings (loss) before income taxes and extraordinary items ... $(678.9) $ (1.5) $ (743.1) $ 127.2
======= ======== ======== =======

Total assets by reportable segment are as follows:

Total Assets
------------
September 30 December 31
2001 2000
------ ------
Powertrain ......................... $2,759.5 $ 2,751.0
Sealing Systems and
Systems Protection ............... 1,090.1 1,290.4
Friction ........................... 463.4 528.8
Aftermarket ........................ 3,371.6 3,065.0
Other, including Corporate ......... 1,809.2 2,491.3
Discontinued Operations ............ -- 326.9
-------- ---------
Total .............................. $9,493.8 $10,453.4
======== =========

6. EARNINGS PER SHARE

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

Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2001 2000 2001 2000
------ ------ ------ -------

Numerator:
Net earnings (loss) ......................................................... $ (810.1) $ (7.6) $ (889.8) $ 56.2
Extraordinary items-- gain on early retirement of debt ...................... (47.1) -- (72.2) --
-------- ------ -------- ------
Earnings (loss) before extraordinary items. ................................. $ (857.2) (7.6) (962.0) 56.2
Series C preferred dividend requirement ..................................... (0.5) (0.5) (1.9) (1.5)
-------- ------ -------- ------
Numerator for basic earnings (loss) per share - income available to
common shareholders before extraordinary items ............................ $ (857.7) $ (8.1) $ (963.9) $ 54.7
-------- ------ -------- ------
Effect of dilutive securities:
Series C preferred dividend requirement ................................ -- -- -- 1.5
Additional required ESOP contribution. ................................. -- -- -- (1.5)
-------- ------ -------- ------
Numerator for diluted earnings (loss) per share - income available to
common shareholders before extraordinary items ......................... $ (857.7) $ (8.1) $ (963.9) $ 54.7
======== ======= ======== ======
Numerator for basic earnings (loss) per share-- income available to
common shareholders after extraordinary items .......................... $ (810.6) $ (8.1) $ (891.7) $ 54.7
======== ====== ======== ======
Numerator for diluted earnings (loss) per share-- income available to
common shareholders after extraordinary items .......................... $ (810.6) $ (8.1) $ (891.7) $ 54.7
Denominator: ======== ====== ======== ======

Denominator for basic earnings per share - weighted average shares .......... 78.7 70.3 73.5 70.3
Effect of dilutive securities:
Nonvested stock ........................................................ -- -- -- 0.2
Conversion of Series C preferred stock ................................. -- -- -- 1.3
Contingently issuable shares of common stock ........................... -- -- -- 6.0
-------- ------ -------- ------
Dilutive potential common shares ............................................ -- -- -- 7.5
-------- ------ -------- ------
Denominator for dilutive earnings per share - adjusted weighted average
shares and assumed conversions ......................................... 78.7 70.3 73.5 77.8
-------- ------ -------- ------
Basic earnings (loss) per share before extraordinary items ..................... $ (10.91) $ (.12) $ (13.11) $ .78
======== ====== ======== ======
Basic earnings (loss) per share after extraordinary items ...................... $ (10.31) $ (.12) $ (12.13) $ .78
======== ====== ======== ======
Diluted earnings (loss) per share before extraordinary items ................... $ (10.91) $ (.12) $ (13.11) $ .70
======== ====== ======== ======
Diluted earnings (loss) per share after extraordinary items .................... $ (10.31) $ (.12) $ (12.13) $ .70
======== ====== ======== ======

Convertible preferred securities redeemable for 11.2 million shares of
common stock were outstanding for 2000 and 2001 but were not included in the
computation of diluted earnings per share because the effect would be
antidilutive.

7. DIVESTITURES

During the first nine months of 2001 the Company completed several divestitures
of non-core businesses including:

. In April 2001, the divestiture of its torque converter business ("TCI") to
Competition Cams, Inc. TCI remanufactures torque converters for
high-performance automotive aftermarket applications.

. In May 2001, the divestiture of its Champion aviation ignition products
division ("Aviation") to TransDigm Inc. Aviation provides products for all
major commercial, military and general aircraft applications.

. In July 2001 the divestiture of its industrial heavy wall bearing operation
in McConnelsville, Ohio, ("McConnelsville") to Miba-Bearings - US, LLC, a
subsidiary of Miba AG, a major Austrian industrial bearing manufacturer.

. In August 2001 the divestiture of its subsidiary Federal-Mogul RPB Ltd.
("RPB") to Waukesha Bearings Corporation a subsidiary of Dover Corporation.
RPB manufactures industrial rotating plant bearing and magnetic bearing
business.

. In August 2001 the divestiture of the aftermarket operations of Blazer
Lighting Products (Blazer) to Clean-Rite Products LLC, an automotive
aftermarket supplier. Blazer had aftermarket lighting sales $22 million in
2000. Blazer became part of Federal-Mogul when the Company purchased the
automotive division of Cooper Industries in 1998.

. In August 2001 the divestiture of its Pontotoc, Mississippi, operation to
Union Spring and Manufacturing Corp. The leased plant and manufacturing
operation will continue to supply coil springs and metal stampings to
Federal-Mogul for sale to automotive aftermarket customers under a
long-term supply agreement.

. In August 2001 the Company restructured its equity positions in several
large and industrial bearing manufacturing joint ventures with its partner,
Daido Metal Company Ltd. of Japan. The restructuring transactions included
the transfer of controlling interest in manufacturing facilities.

. In September 2001 the divestiture of its Tri-Way machine tool business in
Windsor, Ontario ("Tri-way"), under terms of a management buyout.

In aggregate these businesses had 2000 net sales of $196.5 million and
1,175 employees. The Company received aggregate proceeds of $86.6 million and
$241.8 million for the three and nine months ended September 30, 2001. The
Company recognized an aggregate pre-tax loss of $75.1 million and $37.5 million
for these divestitures for the three and nine months ended September 30, 2001,
respectively. Such losses are included in "other expenses" in the accompanying
condensed consolidated statements of operations. These losses were impacted by
income tax expense of $7.7 million and $47.0 million for the three and nine
months ended September 30, 2001, respectively, as the tax basis of the goodwill
was significantly less than the related book basis on most of these businesses.

8. ASBESTOS LIABILITY AND LEGAL PROCEEDINGS

As described in Note 2, on October 1, 2001, the Company and all of its U.S.
subsidiaries filed voluntary petitions for reorganization under Chapter 11 of
the United States Bankruptcy Code. In addition, on October 1, 2001, certain of
Company's U.K. subsidiaries also filed voluntary petitions for reorganization
under Chapter 11 of the Bankruptcy Code and petitions for Administration under
the United Kingdom Insolvency Act of 1986 in the High Court of Justice, Chancery
Division in London, England.

As a result of the Restructuring Proceedings, all pending asbestos
litigation against the Company 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 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 is
expected to appoint a legal representative for the interests of potential future
asbestos claimants. In the U.K. the Company expects the High Court to appoint a
creditors' committee consisting in part of representatives of asbestos
claimants. The Bankruptcy Court likely will set a deadline for filing of all
present asbestos-related claims, including claims by plaintiffs who allegedly
entered into settlements agreements with the Company that have not been paid. 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 of
Justice, Chancery Division in London, England 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.

The Company anticipates that its liability for pending and future asbestos
claims will be addressed in a plan of reorganization developed and approved by
the Bankruptcy Court and the High Court. It is anticipated that as part of the
Plan of Reorganization the Bankruptcy Court and the High Court will ultimately
issue a permanent injunction channeling all asbestos-related claims away from
the reorganized companies and barring the assertion of pending or future
asbestos-related claims against the reorganized companies.

The following summarizes the Company's asbestos- related issues:

T&N Asbestos Litigation

Prior to the Restructuring Proceedings, the Company's U.K. subsidiary, T&N
Ltd., and two U.S. subsidiaries (the "T&N Companies") were, 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.
was also subject to asbestos-disease litigation, to a lesser extent, in the
United Kingdom and France. Because of the slow onset of asbestos-related
diseases, management anticipated that similar claims could have been made in the
future. The Company expects that all claims, including future claims, will be
addressed in the Bankruptcy Proceedings.

In 2000, the Company increased its estimate of asbestos-related liability
for the T&N Companies by $751 million and recorded a related insurance
recoverable asset of $577 million. The revision in the estimate of probable
asbestos-related liability principally resulted from a study performed by an
econometric firm that specializes in these types of matters. The liability
(approximately $1.3 billion at September 30, 2001) represented the Company's
estimate for claims currently pending and those which were reasonably estimated
to be asserted in a future period. Prior to the Restructuring Proceedings the
Company believed that these claims would be paid over approximately the next 11
years. In arriving at the revised liability for the T&N Companies, assumptions
were made 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.

While the Company believes that the liability and receivable recorded were
appropriate for anticipated losses arising from asbestos-related claims against
the T&N Companies for the period covered, 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 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 for the period covered. 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.

T&N Ltd. was a defendant in approximately 64,600 pending personal injury
claims as of September 30, 2001. The two United States subsidiaries were
defendants in approximately 123,600 pending personal injury claims as of
September 30, 2001.

In 1988, T&N Ltd. appointed the Center for Claims Resolution ("CCR") as
exclusive representative in relation to all asbestos-related personal injury
claims made against the T&N Companies in the United States. Effective January
18, 2000, the two United States subsidiaries withdrew from CCR and appointed a
law firm specializing in asbestos matters as their litigation defense, claims
handling and administrative service provider; T&N, however, remained a member of
CCR through the date of the Restructuring Proceedings. This change was intended
to create greater economic and defense efficiencies for the two subsidiaries.
The T&N Companies previously entered into $225 million of surety, with a
declining balance, to meet CCR collateral requirements for certain related
obligations. Performance under the surety bond is subject to approval by the
Bankruptcy Court. As a result of the Restructuring Proceedings T&N's membership
in CCR was terminated. An in-house claims tracking process has been initiated in
order to maintain claims information previously administered by CCR and the
Company's outside asbestos defense counsel.

In January 2001 the Company adopted a new strategy for dealing with its
asbestos issue. The new strategy had two aspects. First, the Company adopted a
trial list strategy that generally avoided entering into large-scale claim
inventory settlements, and instead only paid cases that were on trial dockets.
As a result, the T&N Companies had more cases tried to verdict than had
previously been experienced. This resulted in significant verdicts where
acceptable settlements could not be reached in advance of trial. In February
2001, a jury in Beaumont, Texas returned a verdict against one of the T&N
Companies in favor of 22 plaintiffs in the amount of $18.5 million. The
co-defendant in the verdict, U.S. Gypsum, was found liable for an additional
$16.6 million. U.S. Gypsum, a former CCR member, is now in Chapter 11. In
addition, two jury verdicts, one in Missouri and one in California, for $11
million in aggregate have been rendered. Appeals in all three cases appeals were
pending as of the date of the Restructuring Proceedings. The second aspect of
the Company's strategy was to pursue a legislative solution. The Company works
with a coalition group to advance federal legislation that would establish
medical criteria to differentiate the sick from the non-sick; limit or abolish
the consolidation of cases; and establish venue requirements that provide that
an individual's claim must be brought where he or she lives or worked.

In 1996, T&N Ltd. purchased for the T&N Companies a (pound)500 million
layer of insurance which will be triggered should the aggregate costs of claims
filed after June 30, 1996, where the exposure occurred prior to that date,
exceed (pound)690 million. The Company believes that the aggregate cost of the
claims filed after June 30, 1996 will exceed the trigger point. While the
uncertainty in estimating the asbestos liability has increased as a result of
the Restructuring Proceeds, the Company has recorded as of September 30, 2001 an
insurance recoverable asset under the T&N policy of $570 million. The Company
believes that based on its review of the insurance policies and advice from
outside legal counsel that it is probable that the T&N Companies will be
entitled to receive payment from the reinsures for the cost of the claims in
excess of the trigger point of the insurance. The Company has reviewed the
financial viability and legal obligations of the three reinsurance companies
involved and has concluded that there is little risk of the reinsurers not being
able to meet their obligation to pay, once the claims filed after June 30, 1996
exceed the (pound)690 million trigger point. The U.S. claims' costs applied
against this policy are converted at a fixed exchange rate of $1.69/(pound). As
such, if the market exchange rate is less then $1.69/(pound), the Company will
effectively have a discount from 100% recovery on claims paid. At September 30,
2001, the $570 million insurance recoverable asset is net of an exchange rate
discount of approximately $75 million.

The ultimate exposure of the T&N Companies with respect to asbestos
liabilities will depend upon the extent to which the insurance described above
will be available to cover claims made in the Restructuring Proceedings.

Abex and Wagner Asbestos Litigation

As of the date of the Restructuring Proceedings, other businesses of the
Company formerly owned by Cooper Industries, Inc. known as Abex and Wagner were
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. Abex was a defendant in approximately 65,600
pending claims as of September 30, 2001. Wagner was a defendant in approximately
37,500 claims as of September 30, 2001.

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 Chapter 11 proceedings. As a consequence of the Restructuring Proceedings,
all claims against the Company and the purchased subsidiary alleging liability
for Wagner product exposures 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 corporation whose stock the Company purchased in 1998, as
described in the preceding paragraph. Pursuant to that 1994 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
aforesaid contractual liability.

In 2000, the Company decreased its estimate of probable asbestos-related
liability for Abex and Wagner claims by $127 million, which was accompanied by
an approximately equivalent reduction in the insurance recoverable asset. The
revised 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 $226 million as of September 30, 2001)
represented the Company's estimate for claims currently pending and those, which
were reasonably estimated to be asserted in a future period. Prior to the
Restructuring Proceedings, the Company believed that these claims would be paid
over approximately the next 11 years. In arriving at the revised liability for
Abex and Wagner claims, assumptions were made regarding the number of claims
anticipated to be received in the future, the typical cost of settlement (which
is sensitive to the alleged disease type and the jurisdiction in which the
action is being brought), the rate of receipt of claims, and the timing of
settlements.

While the Company believes that the liability and receivable recorded for
Abex and Wagner claims were appropriate for anticipated losses arising from
asbestos-related claims against Abex and Wagner for the covered period, it is
the Company's view that, such asbestos activities will be impacted by the
Restructuring Proceedings and are, at this time, uncertain. 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
asbestos for the period covered. In the event that such liabilities exceed the
amounts recorded by the Company or the remaining insurance coverage, the
Company's results of operations, could be materially affected.

The Company does not believe it can, at this time, reasonably determine the
ultimate asbestos liability for all pending and future claims as the level of
uncertainty is too great to provide for reasonable estimation of the number of
such claims, the nature of such claims, the cost to resolve them and the impact
of the Restructuring Proceedings. Accordingly, it is possible that the ultimate
losses from asbestos-related claims could be greater than the amounts recorded.
The ultimate exposure of Abex and Wagner with respect to asbestos liabilities
will also depend upon the extent to which the insurance described above will be
available to cover claims made in the Restructuring Proceedings.

Abex maintained product liability insurance coverage for most of the time
that it manufactured products that contained asbestos. 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 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, barring
unforeseen insolvencies of excess carriers or other adverse events should
provide coverage for asbestos claims against Abex.

Wagner, now a re-named subsidiary of the Company as a consequence of the
1998 transaction described above, also maintained product liability insurance
coverage for some of the time that it manufactured products that contained
asbestos. 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 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 receive payment for a portion
of the cost of claims. Based on the probable conclusion of collection under the
insurance policies, the Company has recorded a $177 million insurance
recoverable asset related to the Abex and Wagner liabilities.

Federal-Mogul and Fel-Pro Asbestos Litigation

Prior to the Restructuring Proceedings the Company was also sued in its own
name as one of a large number of defendants in a number of lawsuits brought by
claimants alleging injury due to exposure to asbestos. As a result of its
ownership of certain assets involved in gasket making, the Company was a
defendant in approximately 53,000 pending claims as of September 30, 2001. Over
40,000 of these claims were transferred to a federal court where, prior to the
Restructuring Proceedings, they were pending. 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 33,000 pending
claims as of September 30, 2001. 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

As of September 30, 2001, the Company has provided an aggregated liability
for all of its subsidiaries and businesses with potential asbestos liability of
approximately $1.6 billion for claims currently pending and those which were
reasonably expected to be asserted in a future period. Prior to the
Restructuring Proceedings the Company believed that these claims would be paid
over approximately the next 11 years. As a result of the Restructuring
Proceedings, the Company does not expect to incur asbestos payments over the
next 12 months and has reflected no current liability. As of October 1, 2001
this liability was classified as Liabilities Subject to Compromise.

The Company believes that it is probable that its subsidiaries with
asbestos-related liabilities and related insurance policies will collect the
recorded aggregated insurance recoverable asset of $749 million.

Other

The Company has been named in a class action lawsuit captioned In Re
-----
Federal-Mogul Corp. Securities Litigation, alleging violations by the Company of
- -----------------------------------------
various federal securities laws. In September 2001 the Company's motion to
dismiss the lawsuit was granted. The Company is involved in various 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.

On October 1, 2001, in connection with the Restructuring Proceedings, the
Company received notice from the New York Stock Exchange (the "Exchange") that
it was in violation of the Exchange's minimum trading price listing criteria.
The Company has been granted six months to correct the violation or the Exchange
could initiate delisting proceedings against the Company. The Company cannot
provide any assurance whether its stock price will comply with the Exchange's
listing criteria. In the event the Company's shares are delisted from the
Exchange, the Company's shares would continue to trade on the Over-the-Counter
exchange.

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 federal or state environmental laws. These laws
require responsible parties to pay for cleaning up contamination resulting from
hazardous wastes, which were discharged into the environment by them, or by
others to which they sent such wastes for disposition. In addition, the Company
has been notified by the United States Environmental Protection Agency and
various state agencies that it may be a potentially responsible party ("PRP")
under such law for the cost of cleaning up certain other hazardous waste storage
or disposal facilities pursuant to CERCLA and other federal and state
environmental laws. PRP designation requires the funding of site investigations
and subsequent remedial activities. At most of the sites that are likely to be
costliest to clean up, which are often current or former commercial waste
disposal facilities to which numerous companies sent waste, the Company's
exposure is expected to be limited. Despite the joint and several liability
which might be imposed on the Company under CERCLA and some of the other laws
pertaining to these sites, the Company's share of the total waste has generally
been small. The other companies, which also sent wastes, often numbering in the
hundreds or more, generally include large, solvent publicly owned companies, and
in most such situations the government agencies and courts have imposed
liability in some reasonable relationship to contribution of waste. In addition,
the Company has identified certain present and former properties at which it may
be responsible for cleaning up environmental contamination. The Company is
actively seeking to resolve these matters. Although difficult to quantify based
on the complexity of the issues, the Company has accrued the estimated cost
associated with such matters based upon current available information from site
investigations and consultants. The environmental reserve was approximately
$56.6 million and $67.9 million at September 30, 2001 and December 31, 2000,
respectively. The decrease is primarily due to remediation payments made during
the first six months of 2001. Management believes that such accruals will be
adequate to cover the Company's estimated liability for its exposure in respect
to such matters. As a result of the Restructuring Proceedings, the Company has
identified approximately $23.1 million of the reserve is subject to compromise,
and is evaluating such classification for other sites.

9. INVENTORIES

Inventories consisted of the following (in millions):

September 30 December 31
2001 2000
------------ -----------

Finished products .................. $ 507.5 $ 545.8
Work-in-process .................... 126.9 136.3
Raw materials ...................... 151.2 155.8
-------- --------
785.6 837.9
Reserve for inventory valuation .... (40.9) (29.3)
-------- --------
$ 744.7 $ 808.6
======== ========

10. RESTRUCTURING AND RATIONALIZATION

During the first nine months of 2001, the Company recognized $38.0 million
of restructuring charges related to severance and exit costs. Severance costs of
$36.0 million primarily included the planned consolidation of the European
friction business and the January 2001 salaried employee reductions in North
America and Europe. Total

employee reductions are expected to be approximately 1,000 of which 750 have
been terminated as of September 30, 2001. Exit costs of $2.0 million are
primarily comprised of planned consolidation of the European friction business.

The following table sets forth the restructuring and rationalization
reserves for the nine months ended September 30, 2001 (in millions):

Restructuring Rationalization Total
------------- --------------- -----

Balance of reserves at December 31, 2000 ................ $ 89.9 $ 18.0 $ 107.9
Restructuring charges ................................... 29.8 -- 29.8
Effect of foreign exchange .............................. (1.3) (0.1) (1.4)
Payments against restructuring reserves ................. (13.8) (2.2) (16.0)
-------- ------- --------
Balance of reserves at March 31, 2001 ................... $ 104.6 $ 15.7 $ 120.3
Restructuring charges ................................... 2.1 -- 2.1
Effect of foreign exchange .............................. (1.3) 0.1 (1.2)
Payments against restructuring reserves ................. (21.0) (0.5) (21.5)
-------- ------- --------
Balance of reserves at June 30, 2001 .................... $ 84.4 $ 15.3 $ 99.7
Restructuring charges ................................... 6.1 -- 6.1
Effect of foreign exchange .............................. 1.8 -- 1.8
Payments against restructuring reserves ................. (12.5) (0.1) (12.6)
-------- ------- --------
Balance of reserves at September 30, 2001 ............... $ 79.8 $ 15.2 $ 95.0
======== ======= ========

Of the $16.0 million of payments during the first quarter of 2001, $2.0
million were exits costs and $14.0 million were severance costs. Of the $21.5
million of payments in the second quarter of 2001, $1.7 million were exits costs
and $19.8 million were severance costs. Of the $12.6 million of payments in the
third quarter of 2001, $2.8 million were exits costs and $9.8 million were
severance costs.

11. DERIVATIVE FINANCIAL INSTRUMENTS

The Company is exposed to market risks, such as fluctuations in foreign
currency risk and commodity price risk. To manage the volatility relating to
these exposures, the Company aggregates its exposures on a consolidated basis to
take advantage of natural offsets. For exposures that are not offset within its
operations, the Company enters into various derivative transactions pursuant to
its risk management policies. Designation is performed on a transaction basis to
support hedge accounting. The changes in fair value of these hedging instruments
are offset in part or in whole by corresponding changes in the fair value or
cash flows of the underlying exposures being hedged. The Company assesses the
initial and ongoing effectiveness of its hedging relationships in accordance
with its documented policy. The Company does not hold or issue derivative
financial instruments for trading purposes. The Company's objectives for holding
derivatives are to minimize the risks using the most effective methods to
eliminate or reduce the impacts of these exposures.

Foreign Currency Risk

Certain forecasted transactions and recorded transactions and assets and
liabilities are exposed to foreign currency risk. The Company monitors its
foreign currency exposures daily to maximize the overall effectiveness of its
foreign currency hedge positions. Principal currencies hedged include the Euro,
British pound, Japanese yen and Canadian dollar. Options used to hedge a portion
of forecasted transactions, for up to twelve months in the future, are
designated as cash flow hedging instruments. Options and forwards used to hedge
certain booked transactions and assets and liabilities are not designated as
hedging instruments under SFAS 133 as they are natural hedges. The effect of
changes in the fair value of these hedges and the underlying exposures are
recognized in earnings each period. These hedges were highly effective and their
impact on earnings was not significant during the three and nine months ended
September 30, 2001.

Commodity Price Risk

The Company is dependent upon the supply of certain raw materials in its
production processes; these raw materials are exposed to price fluctuations on
the open market. The primary purpose of the Company's commodity price hedging
activities is to manage the volatility associated with these forecasted
purchases. The Company monitors its commodity price risk exposures periodically
to maximize the overall effectiveness of its commodity

forward contracts. Principal raw materials hedged include copper, nickel, lead,
high-grade aluminum and aluminum alloy. Forward contracts used to hedge raw
materials, for up to eighteen months in the future, are designated as cash flow
hedging instruments. These instruments are intended to offset the effect of
changes in raw materials prices on forecasted purchases.

Other

For options designated either as fair value or cash flow hedges, changes in
the time value are excluded from the assessment of hedge effectiveness. Hedge
ineffectiveness, determined in accordance with SFAS 133, did not have a material
effect on operations for the three and nine months ended September 30, 2001. No
fair value hedges or cash flow hedges were de-designated or discontinued for the
three and nine months ended September 30, 2001.

For the three months ended September 30, 2001, Other expense, net included a
$7,000 net gain comprised of $1.1 million of net losses and $1.1 million of net
gains on fair value of derivatives not designated as hedging instruments. For
the nine months ended September 30, 2001, Other expenses, net included a $0.2
million net gain comprised of $6.8 million of net losses and $7.0 million of net
gains on fair value of derivatives not designated as hedging instruments.

Derivative gains and losses included in OCI are reclassified into operations
at the time forecasted transactions are recognized. During the three and nine
months ended September 30, 2001, $538,000 and $954,000 of derivative losses were
reclassified to cost of goods sold, respectively. The Company also reduced OCI
by $740,000 pre-tax during the nine months ended September 30, 2001 for market
fluctuations on its commodity hedges. As a result of the Filing the Company's
forward contracts were canceled and the $740,000 was charged to income as a
Chapter 11 and Administration related expense in October 2001.

12. EXTRAORDINARY ITEM

During the second quarter of 2001, the Company completed a series of debt
to equity exchanges of its public bonds. As a result of these exchanges, the
Company issued 3.3 million shares in aggregate of its common stock to the
holders of: $10.0 million face value of its 2004 Notes; $1.8 million face value
of its 2007 Notes; $20.2 million face value of its 2009 Notes; and $1.0 million
face value of its 2010 Notes. These exchanges resulted in a gain of $25.1
million.

During the third quarter of 2001, the Company completed several additional
exchanges resulting in the issuance of 6.3 million shares in aggregate of its
common stock to the holders of: $8.0 million face value of its 2006 7.75% Notes;
$5.0 million of its 2006 7.375 Notes; $19.7 million face value of its 2007
Notes; $15.8 million face value of its 2009 Notes; and $8.0 million face value
of its 2010 Notes. The exchanges resulted in a gain of $47.1 million.

As a result of the deferred tax valuation allowance recorded in the third
quarter the extraordinary gain does not have a related tax expense for the third
quarter. The second quarter tax expense has been reclassified to income tax
expense accordingly.

13. COMPREHENSIVE LOSS

Other comprehensive loss includes foreign currency translation adjustments
and unrealized gains (losses) on investments. Total comprehensive loss is
summarized as follows (in millions of dollars):

Three Months Nine Months
Ended September 30 Ended September 30
------------------- -------------------
2001 2000 2001 2000
------- --------- --------- --------

Net earnings (loss) .......................... $ (810.1) $ (7.6) $ (889.8) $ 56.2
Other Comprehensive Income (Loss)
Foreign currency translation adjustments.. 113.8 (67.0) (76.0) (220.1)
Derivatives and other, net of tax 0.7 (0.1) 3.5 (0.5)
-------- ------- -------- --------
Total Comprehensive Loss $ (695.6) $ (74.7) $ (962.3) $ (164.4)
======== ======= ======== ========

14. 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 Dutch Holdings Inc.
Federal-Mogul Global Properties Inc. Federal-Mogul UK Holdings Inc.
Carter Automotive Company F-M UK Holdings Limited
Federal-Mogul Worldwide Inc. Federal-Mogul Global Inc.
Federal-Mogul Ignition Company T&N Industries, Inc.
Federal-Mogul Products, Inc. Federal-Mogul Powertrain, Inc.
Federal-Mogul Aviation, Inc.

The Company issued notes in 1999 and 1998, which are guaranteed by the
Guarantor Subsidiaries. The Guarantor Subsidiaries also guarantee the Company's
previously existing publicly registered Medium-term notes and Senior notes.

T&N Industries, Inc. and Federal-Mogul Powertrain, Inc. are wholly owned
subsidiaries of the Company and were acquired with the acquisition of T&N, plc.
These subsidiaries became guarantors as a result of the Company's Fourth Amended
and Restated Senior Credit Agreement dated December 29, 2000.

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.

In May 2001, the Company divested of Federal-Mogul Aviation, Inc. (see note
8 of the Consolidated Condensed Financial Statements, "Divestitures"). The
results of operation of Aviation have been included through the divestiture
date.

As a result of the Restructuring Proceedings (see Note 2 "Voluntary
Reorganization Under Chapter 11 and Administration") certain of the liabilities,
as shown below, were Liabilities Subject to Compromise as of the Petition date:

Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
---------- ------------ ------------- ------------

Accounts payable ............. $ 71.0 $ 128.7 $ 23.3 $ 223.0
Other accrued liabilities..... 4.6 0.8 2.7 8.1
Environmental liabilities..... 23.1 -- -- 23.1
Interest payable ............. 33.7 -- -- 33.7
Debt ......................... 3,965.6 4.1 0.1 3,969.8
Asbestos liabilities ......... 1.5 526.3 1,047.5 1,575.3
---------- ---------- ---------- ----------
$ 4,099.5 $ 659.9 $ 1,073.6 $ 5,833.0
========== ========== ========== ==========

Federal-Mogul Corporation
Notes to Condensed Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Operations
Three Months Ended September 30, 2001
(Millions of Dollars)

(Unconsolidated)
---------------------------------------
Non-
----
Guarantor Guarantor
--------- ---------
Parent Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------ ------------ -------------

Net sales .................................................... $ 303.4 $ 444.2 $ 657.5 $ (116.3) $ 1,288.8
Cost of products sold ........................................ 252.2 364.5 549.9 (116.3) 1,050.3
---------- ---------- ---------- --------- ----------
Gross margin ............................................ 51.2 79.7 107.6 -- 238.5
Selling, general and administrative expenses ................. 81.7 53.3 78.8 -- 213.8
Amortization of goodwill and other intangible
assets .................................................. 5.0 11.2 13.0 -- 29.2
Restructuring charges ........................................ -- -- 6.1 -- 6.1
Adjustment of assets held for sale and other
long-lived assets to fair value ......................... -- 380.9 115.7 -- 496.6
Interest expense, net ........................................ 71.7 0.1 (0.4) -- 71.4
International currency exchange losses/(gains) ............... 0.9 (0.4) 1.4 -- 1.9
Chapter 11 and Administration related
reorganization expenses ............................... 13.7 -- -- -- 13.7
Other expense (income), net .................................. (14.4) 18.6 80.5 -- 84.7
---------- ---------- ---------- --------- ----------
Loss before income taxes, extraordinary
items and equity in losses of
subsidiaries ...................................... (107.4) (384.0) (187.5) -- (678.9)
Income tax expense ........................................... 143.0 34.0 1.3 -- 178.3
---------- ---------- ---------- --------- ----------
Loss before extraordinary items and equity
in losses of subsidiaries ......................... (250.4) (418.0) (188.8) -- (857.2)
Extraordinary Items -- gain on early retirement
of debt .................................................. (47.1) -- -- -- (47.1)
---------- ---------- ---------- ---------- ----------
Loss before equity in losses of
Subsidiaries ...................................... (203.3) (418.0) (188.8) -- (810.1)
Equity in (losses) earnings of subsidiaries .................. (606.8) 4.5 -- 602.3 --
---------- ---------- ---------- ---------- ----------
Net Loss ..................................................... $ (810.1) $ (413.5) $ (188.8) $ 602.3 $ (810.1)
========== ========== ========== ========== ==========

Federal-Mogul Corporation
Notes to Condensed Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Operations
Nine Months Ended September 30, 2001
(Millions of Dollars)

Net sales .................................................... $ 972.4 $ 1,419.3 $ 2,180.0 $ (406.8) $ 4,164.9
Cost of products sold ........................................ 794.2 1,147.0 1,785.5 (406.8) 3,319.9
---------- ---------- ---------- --------- ----------
Gross margin ............................................ 178.2 272.3 394.5 -- 845.0
Selling, general and administrative expenses ................. 221.8 167.8 258.9 -- 648.5
Amortization of goodwill and other intangible
assets .................................................. 15.2 34.7 39.5 -- 89.4
Restructuring charges ........................................ 12.2 -- 25.8 -- 38.0
Adjustment of assets held for sale and other
long-lived assets to fair value ......................... 0.6 380.9 115.8 -- 497.3
Interest expense, net ........................................ 230.9 0.4 3.9 -- 235.2
International currency exchange losses/(gains) ............... 2.4 (0.2) 2.8 -- 5.0
Chapter 11 and Administration related
reorganization expenses ............................... 14.4 -- -- -- 14.4
Other expense (income), net .................................. 61.3 (1.6) 0.6 -- 60.3
---------- ---------- ---------- --------- ----------
Loss before income taxes, extraordinary
items and equity in losses of
subsidiaries ...................................... (380.6) (309.7) (52.8) -- (743.1)
Income tax expense ........................................... 105.6 83.8 29.5 -- 218.9
---------- ---------- ---------- --------- ----------
Loss before extraordinary items and equity
in losses of subsidiaries ......................... (486.2) (393.5) (82.3) -- (962.0)
Extraordinary Items -- gain on early retirement
of debt .................................................. (72.2) -- -- -- (72.2)
---------- ---------- ---------- ---------- ----------
Loss before equity in losses of
Subsidiaries ...................................... (414.0) (393.5) (82.3) -- (889.8)
Equity in (losses) earnings of subsidiaries .................. (475.8) 83.4 -- 392.4 --
---------- ---------- ---------- ---------- ----------
Net Loss ..................................................... $ (889.8) $ (310.1) $ (82.3) $ 392.4 $ (889.8)
========== ========== ========== ========== ==========

Federal-Mogul Corporation
Notes to Condensed Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Operations
Three Months Ended September 30, 2000
(Millions of Dollars)

(Unconsolidated)
--------------------------------------
Non-
----
Guarantor Guarantor
--------- ---------
Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------

Net sales ............................................. $ 345.8 $ 507.9 $ 744.5 $ (170.3) $ 1,427.9
Cost of products sold ................................. 275.5 386.5 597.5 (170.3) 1,089.2
---------- ---------- ---------- -------- ----------
Gross margin ..................................... 70.3 121.4 147.0 -- 338.7
Selling, general and administrative expenses .......... 65.0 57.4 88.1 -- 210.5
Amortization of goodwill and other intangible
assets ........................................... 5.4 10.8 15.0 -- 31.2
Restructuring charges ................................. 3.1 2.5 3.0 -- 8.6
Adjustment of assets held for sale and other
long-lived assets to fair value .................. -- -- 4.6 -- 4.6
Interest expense, net ................................. 71.9 0.5 1.0 -- 73.4
International currency exchange (gains) losses ........ 1.6 -- 1.7 -- 3.3
Other expense (income), net ........................... (78.2) (26.5) 113.3 -- 8.6
---------- ---------- ---------- -------- ----------
Earnings (loss) before income taxes and
equity in earnings (loss) of subsidiaries .. 1.5 76.7 (79.7) -- (1.5)
Income tax expense (benefit) .......................... 6.1 36.0 (36.0) -- 6.1
---------- ---------- ---------- -------- ----------
Earnings (loss) before equity in earnings ........
(loss) of subsidiaries .................... (4.6) 40.7 (43.7) -- (7.6)
Equity in earnings (loss) of subsidiaries ............. (3.0) 88.1 -- (85.1) --
---------- ---------- ---------- -------- ----------
Net Earnings (Loss) ................................... $ (7.6) $ 128.8 $ (43.7) $ (85.1) $ (7.6)
========== ========== ========== ======== ==========

Federal-Mogul Corporation
Notes to Condensed Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Operations
Nine Months Ended September 30, 2000
(Millions of Dollars)

Net sales ............................................. $ 1,130.1 $ 1,625.2 $ 2,469.3 $ (559.8) $ 4,664.8
Cost of products sold ................................. 867.9 1,211.7 1,962.6 (559.8) 3,482.4
---------- ---------- ---------- -------- ----------
Gross margin ..................................... 262.2 413.5 506.7 -- 1,182.4
Selling, general and administrative expenses .......... 180.1 175.8 273.5 -- 629.4
Amortization of goodwill and other intangible
assets ........................................... 15.6 31.1 47.0 -- 93.7
Restructuring charges ................................. 5.9 7.9 63.5 -- 77.3
Adjustment of assets held for sale and other
long-lived assets to fair value .................. -- 4.6 10.0 -- 14.6
Interest expense, net ................................. 205.9 0.9 6.7 -- 213.5
International currency exchange (gains) losses ........ 2.1 0.7 (1.5) -- 1.3
Other expense (income), net ........................... 3.3 (57.1) 79.2 -- 25.4
---------- ---------- ---------- -------- ----------
Earnings (loss) before income taxes and
equity in earnings (loss) of subsidiaries .. (150.7) 249.6 28.3 -- 127.2
Income tax expense (benefit) .......................... (74.2) 129.0 16.2 -- 71.0
---------- ---------- ---------- -------- ----------
Earnings (loss) before equity in earnings
(loss) of subsidiaries .................... (76.5) 120.6 12.1 -- 56.2
Equity in earnings (loss) of subsidiaries ............. 132.7 233.3 -- (366.0) --
---------- ---------- ---------- -------- ----------
Net Earnings (Loss) ................................... $ 56.2 $ 353.9 $ 12.1 $ (366.0) $ 56.2
========== ========== ========== ======== ==========

Federal-Mogul Corporation
Notes to Condensed Consolidated Financial Statements
Unaudited Consolidating Condensed Balance Sheet
September 30, 2001
(Millions of Dollars)

(Unconsolidated)
---------------------------------------
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------- -------------- ------------ ------------

ASSETS

Cash and equivalents.................................... $ 26.0 $ 8.7 $ 228.5 $ -- $ 263.2
Accounts receivable .................................... 38.2 12.8 477.8 -- 528.8
Investment in accounts receivable securitization ....... -- -- 219.9 -- 219.9
Inventories ............................................ 104.0 290.7 350.0 -- 744.7
Deferred taxes ......................................... 138.8 -- 27.4 -- 166.2
Prepaid expenses and income tax benefits ............... 69.7 44.8 86.2 -- 200.7
---------- ------------ ------------- ----------- ------------
Total Current Assets .............................. 376.7 357.0 1,389.8 -- 2,123.5
Property, plant and equipment .......................... 261.1 686.7 1,226.3 -- 2,174.1
Goodwill ............................................... 551.3 958.2 1,274.5 -- 2,784.0
Other intangible assets ................................ 37.0 300.1 275.9 -- 613.0
Investment in subsidiaries ............................. 6,365.5 2,984.0 -- (9,349.5) --
Intercompany accounts, net ............................. (2,079.7) 2,475.0 (395.3) -- --
Asbestos-related insurance recoverable ................. -- 179.5 569.7 -- 749.2
Other noncurrent assets ................................ 237.0 23.5 789.5 -- 1,050.0
---------- ------------ ------------- ----------- ------------
Total Assets ...................................... $ 5,748.9 $ 7,964.0 $ 5,130.4 $ (9,349.5) $ 9,493.8
========== ============ ============= =========== ============

LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt, including current portion of
long-term debt and debt in default ................... $ 4,017.7 $ 4.1 $ 17.3 $ -- $ 4,039.1
Accounts payable ....................................... 71.0 128.7 186.6 -- 386.3
Accrued compensation ................................... 68.3 26.5 127.0 -- 221.8
Restructuring and rationalization reserves ............. 13.3 18.3 63.4 -- 95.0
Interest payable ....................................... 53.1 0.2 1.3 -- 54.6
Other accrued liabilities .............................. 68.2 144.0 183.8 -- 396.0
---------- ------------ ------------- ----------- ------------
Total Current Liabilities ......................... 4,291.6 321.8 579.4 -- 5,192.8
Long-term debt ......................................... -- -- 15.2 -- 15.2
Long-term portion of asbestos liability ................ 1.5 526.3 1,047.5 -- 1,575.3
Postemployment benefits ................................ 472.2 0.4 163.0 -- 635.6
Other accrued liabilities .............................. 340.6 0.5 510.8 -- 851.9
Minority interest in consolidated subsidiaries ......... 46.5 8.4 0.2 -- 55.1
Company-obligated mandatorily redeemable preferred
securities of subsidiary holding solely convertible
subordinated debentures of the Company ............... -- -- 571.4 -- 571.4
Shareholders' Equity ................................... 596.5 7,106.6 2,242.9 (9,349.5) 596.5
---------- ------------ ------------- ----------- ------------
Total Liabilities and Shareholders' Equity ........ $ 5,748.9 $ 7,964.0 $ 5,130.4 $ (9,349.5) $ 9,493.8
========== ============ ============= =========== ============

Federal-Mogul Corporation
Notes to Condensed Consolidated Financial Statements
Unaudited Consolidating Condensed Balance Sheet
December 31, 2000
(Millions of Dollars)

(Unconsolidated)
--------------------------------------
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------- -------------- ------------- -------------

ASSETS

Cash and equivalents..................................... $ 148.3 $ 10.9 $ (52.0) $ -- $ 107.2
Accounts receivable ..................................... 22.4 -- 490.4 -- 512.8
Investment in accounts receivable securitization ........ -- -- 229.1 -- 229.1
Inventories ............................................. 137.9 299.2 371.5 -- 808.6
Deferred taxes .......................................... 148.2 -- 87.3 -- 235.5
Prepaid expenses and income tax benefits ................ 49.4 53.0 92.7 -- 195.1
--------- ----------- ------------ --------- ---------
Total Current Assets ............................... 506.2 363.1 1,219.0 -- 2,088.3
Property, plant and equipment ........................... 270.4 887.2 1,231.2 -- 2,388.8
Goodwill ................................................ 584.5 1,256.7 1,461.9 -- 3,303.1
Other intangible assets ................................. 39.8 406.2 300.4 -- 746.4
Investment in subsidiaries .............................. 6,186.0 2,871.6 -- (9,057.6) --
Intercompany accounts, net .............................. (1,591.5) 1,787.5 (196.0) -- --
Asbestos-related insurance recoverable .................. -- 194.4 576.7 -- 771.1
Other noncurrent assets ................................. 460.5 88.6 606.6 -- 1,155.7
-------- ----------- ------------ --------- ---------
Total Assets ....................................... $ 6,455.9 $ 7,855.3 $ 5,199.8 $(9,057.6) $10,453.4
========= =========== ============ ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt, including current portion of
long-term debt ....................................... $ 124.4 $ 3.0 $ 20.4 $ -- $ 147.8
Accounts payable ........................................ 78.0 145.0 208.9 -- 431.9
Accrued compensation .................................... 31.8 27.6 98.4 -- 157.8
Restructuring and rationalization reserves .............. 12.6 27.1 68.2 -- 107.9
Current portion of asbestos liability ................... -- -- 350.0 -- 350.0
Interest payable ........................................ 92.9 0.3 1.2 -- 94.4
Other accrued liabilities ............................... 31.7 141.9 237.3 -- 410.9
--------- ----------- -------------- --------- ---------

Total Current Liabilities .......................... 371.4 344.9 984.4 -- 1,700.7
Long-term debt .......................................... 3,534.0 7.6 18.1 -- 3,559.7
Long-term portion of asbestos liability ................. -- 606.4 855.5 -- 1,461.9
Postemployment benefits ................................. 470.1 -- 167.5 -- 637.6
Other accrued liabilities ............................... 474.9 -- 435.9 -- 910.8
Minority interest in consolidated subsidiaries .......... 55.3 2.2 -- -- 57.5
Company-obligated mandatorily redeemable preferred
securities of subsidiary holding solely convertible
subordinated debentures of the Company ............... -- -- 575.0 -- 575.0
Shareholders' Equity .................................... 1,550.2 6,894.2 2,163.4 (9,057.6) 1,550.2
--------- ----------- ----------- --------- ---------
Total Liabilities and Shareholders' Equity ......... $ 6,455.9 $ 7,855.3 $ 5,199.8 $(9,057.6) $10,453.4
========= =========== =========== ========= =========

Federal-Mogul Corporation
Notes to Condensed Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Cash Flows
Nine Months Ended September 30, 2001
(Millions of Dollars)

(Unconsolidated)
-------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------

Net Cash Provided From (Used By)
Operating Activities ............................ $ (4.7) $ 46.4 $(212.9) $ -- $ (171.2)

Cash Provided From (Used By) Investing
Activities:
Expenditures for property, plant and
equipment and other long-term assets ............ (23.0) (64.5) (133.6) -- (221.1)
Proceeds from sale of property, plant and
equipment .................................... -- 9.4 9.6 -- 19.0
Business acquisitions, net of cash acquired ..... -- -- (18.8) -- (18.8)
Proceeds from sales of businesses ............... 5.2 209.0 27.6 -- 241.8
-------- -------- -------- --------- ---------
Net Cash Provided From (Used By)
Investing Activities ................ (17.8) 153.9 (115.2) -- 20.9

Cash Provided From (Used By) Financing
Activities:
Proceeds from issuance of long-term debt ........... 666.4 -- -- -- 666.4
Principal payments on long-term debt ............... (163.7) -- (8.1) -- (171.8)
Increase (decrease) in short-term debt ............. (57.6) (6.5) (7.3) -- (71.4)
Fees paid for debt issuance and other securities ... (18.5) -- -- -- (18.5)
Change in intercompany accounts .................... (414.4) (196.0) 610.4 -- --
Sale of accounts receivable under securitization ... (89.6) -- -- -- (89.6)
Dividends .......................................... (1.9) -- -- -- (1.9)
Other .............................................. (6.9) -- -- -- (6.9)
-------- -------- -------- --------- ---------
Net Cash Provided From (Used By)
Financing Activities ....................... (86.2) (202.5) 595.0 -- 306.3
-------- -------- -------- --------- ---------
Net Increase (Decrease) in Cash
and Equivalents ............................ $(108.7) $ (2.2) $ 266.9 $ -- $ 156.0
======== ======== ======== ========= =========

Federal-Mogul Corporation
Notes to Condensed Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Cash Flows
Nine Months Ended September 30, 2000
(Millions of Dollars)

(Unconsolidated)
---------------------------------
Guarantor Non-Guarantor
--------- -------------
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------

Net Cash Provided From (Used By)
Operating Activities ............................ $(130.4) $ 169.1 $ (117.3) $ -- $(78.6)

Expenditures for property, plant and equipment
and other long-term assets ................. (4.1) (90.7) (134.6) -- (229.4)
Proceeds from the sales of businesses .............. 0.8 60.1 60.9
Other .............................................. -- -- (3.4) -- (3.4)
--------- --------- ---------- ---------- --------
Net Cash Used By Investing Activities ......... (3.3) (90.7) (77.9) -- (171.9)

Cash Provided From (Used By) Financing
Activities:
Proceeds from issuance of long-term debt ........... 485.0 -- -- -- 485.0
Principal payments on long-term debt ............... (162.1) (2.9) (3.1) -- (168.1)
Decrease in short-term debt ........................ (49.3) (5.0) 27.4 -- (26.9)
Change in intercompany accounts .................... (8.7) (28.9) 37.6 -- --
Sale of accounts receivable under securitization (46.9) -- -- -- (46.9)
Dividends .......................................... (3.1) -- -- -- (3.1)
Other .............................................. (3.3) -- 5.1 -- 1.8
--------- --------- ---------- ---------- --------
Net Cash Provided From (Used By)
Financing Activities ....................... 211.6 (36.8) 67.0 -- 241.8
--------- --------- ---------- ---------- --------
Net Increase (Decrease) in Cash and
Equivalents ............................. $ 77.9 $ 41.6 $ (188.3) $ -- $ (8.7)
========= ========= ========== ========== ========

15. NEW ACCOUNTING PRONOUNCEMENTS

On July 20, 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142 "Goodwill and Other Intangible Assets". These pronouncements
significantly change the accounting for business combinations, goodwill, and
intangible assets. SFAS No. 141 eliminates the pooling-of-interests method of
accounting for business combinations and further clarifies the criteria to
recognize intangible assets separately from goodwill. The requirements of SFAS
No. 141 are effective for any business combination accounted for by the purchase
method that is completed after June 30, 2001. Under SFAS No. 142 goodwill and
indefinite lived intangible assets are no longer amortized but are reviewed for
impairment annually (or more frequently if impairment indicators arise).
Separable intangible assets that are not deemed to have an indefinite life will
continue to be amortized over their useful lives. The amortization provisions of
SFAS No. 142 apply to goodwill and intangible assets acquired after June 30,
2001. With respect to goodwill and intangible assets acquired prior to July 1,
2001, companies are required to adopt the pronouncement in their fiscal year
beginning after December 15, 2001.

The Company will adopt the new rules on accounting for goodwill and other
intangible assets January 1, 2002. Application of the non-amortization provision
of the Statement will result in an increase in net income. During the year ended
December 31, 2000 and during the nine-months ended September 30, 2001 the
Company recognized amortization expense of $123.6 million and $89.4 million,
respectively, related primarily to goodwill and indefinite lived intangible
assets. During 2002 the Company will perform the first of the required
impairment tests of goodwill and indefinite lived intangible assets. The Company
has not completed its analysis of the effect of the initial impairment test
under these statements and what effect the adoption of the initial impairment
test will have on the financial statements.

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

OVERVIEW:

Federal-Mogul is an automotive 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, camshafts, sintered products,
sealing systems, fuel systems, wipers, lighting, ignition, brake, friction and
chassis products. The Company's principal customers include many of the world's
original equipment ("OE") manufacturers of such vehicles and industrial
products. The Company also manufactures and supplies its products and related
parts to the aftermarket.

VOLUNTARY BANKRUPTCY FILING:

On October 1, 2001 (the "Petition Date"), the Company and all of its United
States subsidiaries filed voluntary petitions for reorganization (the "U.K.
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"). In addition on October 1, 2001, certain of
the Company's United Kingdom subsidiaries also 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 are herein referred to as the "Debtors". The U.S. Restructuring and
U.K. Restructuring are herein referred to as the "Restructuring Proceedings".
The Chapter 11 cases of the Debtors (collectively, the "Chapter 11 Cases") have
been consolidated for purposes of joint administration as In re: Federal-Mogul
--------------------
Global Inc., T&N Limited, et al (Case No. 01-10578(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 made in response to a sharply increasing
number of asbestos-related claims. These claims are discussed in more detail in
Note 8 to the condensed consolidated financial statements. Under the
Restructuring Proceedings, the Debtors expect to continue to operate their
businesses as debtors-in-possession under court protection from their creditors
and claimants, while using the Restructuring Proceedings process to develop and
implement a plan for addressing the asbestos-related claims against them.

Background of the Restructuring Proceedings:

In December 2000, the Company increased its estimate of asbestos-related
liability by $625.3 million and recorded a related insurance recoverable asset
of $440.9 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.

In January 2001, the Company implemented a new strategy for dealing with
its asbestos issue. The strategy had two features. First, the Company adopted a
trial list strategy, avoiding wherever possible mass settlements and only paying
individuals that were sick and where the Company or its subsidiaries' products
were the cause of the illness. The second aspect of the Company's strategy was
to pursue a legislative solution. The Company continues to work with a coalition
group to advance federal legislation that will: establish medical criteria which
will be used to differentiate the sick from the non-sick; establish criteria to
limit the consolidation of cases; and establish venue requirements that provide
that an individual's claim must be brought where they live or where they worked.

In the first six months of 2001, three additional companies, WR Grace, GI
Holdings (formerly GAF) and USG Corp, which are major defendants in many
asbestos-related cases in which some of the Company's U.S. and U.K. subsidiaries
are also named, filed for Chapter 11 bankruptcy protection. In the second
quarter of 2001 the Company disclosed that without a satisfactory legislative
solution to the asbestos litigation in the near term, the Company would need to
consider alternative ways to manage its asbestos issue. These adverse
developments continued during the third quarter of 2001. On September 30, 2001
the Company's Board of Directors concluded that a satisfactory

legislative solution to the asbestos litigation was not probable in the near
term and that a federal court-supervised Chapter 11 filing would provide the
best forum available to achieve predictability and fairness in the claims
settlement process. By filing under Chapter 11, the Company expects to be able
to both obtain a comprehensive resolution of the claims against it and preserve
the inherent value of its businesses.

Consequence of the Restructuring Proceedings:

As a consequence of the Restructuring Proceedings, all pending litigation
against the Debtors is generally stayed (subject to certain exceptions in the
case of governmental authorities) and no party may take any action to realize
its pre-petition claims except pursuant to order of the Bankruptcy Court or the
High Court. It is the Debtors' intention to address all of their pending and
future asbestos-related claims and all other pre-petition claims in a plan of
reorganization. However, it is currently impossible to predict with any degree
of certainty how the plan will treat asbestos and other pre-petition claims or
what impact any reorganization plan may have on the shares of common stock of
the Company. The formulation and implementation of the plan of reorganization
could take a significant period of time.

Subsequent to the Restructuring Proceedings the Company's financial
statements will be prepared in accordance with AICPA Statement of Position 90-7
("SOP 90-7"), "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code" and on a going concern basis, which contemplates continuity of
operations, 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, are subject to uncertainty. Given this
uncertainty, there is doubt about continuing the going concern basis of
presentation. While operating as debtors-in-possession under the protection of
Chapter 11 of the Bankruptcy Code, and subject to Bankruptcy Court approval 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 condensed
consolidated financial statements. Further, a plan of reorganization could
materially change the amounts and classifications in the historical consolidated
financial statements. All of the Debtor's outstanding pre-petition debt is in
default. Accordingly, the accompanying Consolidated Balance Sheets as of
September 30, 2001 reflect the classification of the Debtors' pre-petition debt
as current.

The Debtors have received approval from the Bankruptcy Court to pay or
otherwise honor certain of their pre-petition obligations in the ordinary course
of business, including employee wages and benefits, customer programs, shipping
charges and a limited amount of claims of essential trade creditors.

In the U.S. two creditors' committees, one representing asbestos claimants
and another representing general unsecured creditors, have been appointed as
official committees in the Chapter 11 Cases and, in accordance with the
provisions of the Bankruptcy Code, will have the right to be heard on all
matters that come before the Bankruptcy Court. The Company expects that the
appointed committees, together with a legal representative of future asbestos
claimants to be appointed by the Bankruptcy Court, will play important roles in
the Restructuring Proceedings. In the U.K. the Company expects the Administrator
to appoint a creditor's committee, representing asbestos claimants and general
unsecured creditors. The Company expects this committee to play an important
role in the negotiation of any scheme of arrangement.

rate ("ABR") plus 2.5 percentage points or a formula based on the London
Inter-Bank Offered Rate ("LIBOR") plus 3.5 percentage points. The ABR is the
greatest of either Chase's prime rate or the base CD rate plus 1 percentage
point or the fed funds rate plus 1/2 percentage point. The Company believes,
based on information presently available, that cash on hand, cash available from
operations and the DIP credit facility will provide sufficient liquidity to
allow its businesses to operate without interruption.

Accounting Impact:

Pursuant to SOP 90-7, the Company's pre-petition liabilities that are
subject to compromise are reported separately on the pro-forma condensed
consolidated balance sheet at an estimate of the amount that will ultimately be
allowed by the Bankruptcy Court. See Note 2, "Voluntary Reorganization Under
Chapter 11 and Administration", to the pro-forma condensed consolidated
financial statements for the detail of the liabilities subject to compromise as
of September 30, 2001. Obligations of the Company's subsidiaries not covered by
the Restructuring Proceedings will remain classified on the pro-forma condensed
consolidated balance sheet based upon maturity dates or the expected dates of
payment. SOP 90-7 also requires separate reporting of certain expenses, realized
gains and losses, and provisions for losses related to the Restructuring
Proceedings as reorganization items. Accordingly, the Debtors recorded Chapter
11 and Administration related reorganization expenses of $13.7 million and $14.4
million for the three-month and nine-month periods ended September 30, 2001,
respectively. See Note 2, "Voluntary Reorganization Under Chapter 11 and
Administration", to the condensed consolidated financial statements for further
information concerning the Restructuring Proceedings.

CONTINUING OPERATIONS

THREE-MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE-MONTHS ENDED SEPTEMBER
30, 2000

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, 2000.

Net Sales: Consolidated net sales by segment for the three-months ended
September 30, 2001 and 2000 were (in millions):

2001 2000 Change
--------- -------- ---------

Powertrain ............................. $ 376.3 $ 403.4 $ (27.1)
Sealing Systems and
Systems Protection ................. 140.6 161.1 (20.5)
Friction ............................... 78.2 100.6 (22.4)
Aftermarket 594.7 619.3 (24.6)
Other, including Corporate ............. 89.0 100.9 (11.9)
Discontinued Operations................. 10.0 42.6 (32.6)
-------- -------- -------
Total $1,288.8 $1,427.9 $(139.1)
======== ======== =======

Net sales for the third quarter of 2001 were $1,288.8 million compared to
$1,427.9 million in the same quarter of 2000. Sales decreased primarily due to
weak North American light vehicle production schedules, further softening of
North American heavy-duty markets and continued deterioration of the North
American and European aftermarket. These decreases were slightly offset by an
increase in OE volumes in Europe.

Gross Margin: Gross Margin was 18.5% for the third quarter of 2001 compared to
23.7% for the same quarter in 2000. The decrease was attributed to lower sales
volumes and year over year weakening of the Euro and British pound, both as
mentioned above mix, as well as increasing medical benefit costs. Gross margin
has also been impacted by the Company's cost reduction activities keeping pace
with the lower sales volumes and not realizing net productivity improvements
necessary to offset inflation.

Selling, General and Administrative Expenses: Selling, general and
administrative expenses as a percent of net sales increased to 16.5% for the
third quarter of 2001 compared to 14.7% for the same quarter of 2000. This
increase was primarily attributed to lower sales volumes, as mentioned above and
increased medical benefit costs, certain employee incentive programs and the
effect of lower actuarial returns on the Company's pension plan assets on year
over year pension expense.

Interest Expense: Interest expense was $72.5 million in the third quarter of
2001 compared to $74.2 million for the same quarter of 2000. This decrease was
attributed to the debt to equity exchanges in the second and third quarter and
lower interest rates. Additional borrowing on the Company's Credit Facilities
offset these decreases.

Income Tax Expense: For the three months ended September 30, 2001, the Company
recorded income tax expense of $178.3 million on a pretax loss of $678.9
million, compared to income tax expense of $6.1 million on a pretax loss of $1.5
million in the same period of 2000. Income tax expense for the three months
ended September 30, 2001 results from the effects of the permanent differences
between book and tax goodwill related to divestitures and impairment charges, an
increase in the valuation allowance on deferred income tax assets in the U.S.
and U.K., and non-deductible goodwill amortization.

NINE-MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE-MONTHS ENDED SEPTEMBER 30,
2000

RESULTS OF OPERATIONS

Net Sales: Consolidated net sales by segment for the nine-months ended September
30, 2001 and 2000 were (in millions):

2001 2000 Change
-------- -------- -------
Powertrain .................... $1,245.6 $1,365.5 $(119.9)
Sealing Systems and
Systems Protection ........ 451.8 529.6 (77.8)
Friction ...................... 258.2 332.4 (74.2)
Aftermarket ................... 1,842.4 1,961.5 (119.1)
Other, including Corporate .... 277.0 337.6 (60.6)
Discontinued Operations ....... 89.9 140.2 (50.3)
-------- -------- --------
Total ......................... $4,164.9 $4,664.8 $(499.9)
======== ======== ========

Net sales for the first nine months of 2001 were $4,164.9 million compared
to $4,664.8 million in the same period of 2000. Sales decreased primarily due to
weak North American light vehicle production schedules, further softening of
North American heavy-duty markets, continued deterioration of the North American
and European aftermarket and year over year weakening of the Euro and British
pound. These decreases were slightly offset by an increase in OE volumes in
Europe.

Gross Margin: Gross Margin was 20.3% for the first nine months of 2001 compared
to 25.3% for the same period in 2000. The decrease is attributed to lower sales
volumes and year over year weakening of the Euro and British pound, both as
mentioned above, as well as increasing medical benefit costs and increased
natural gas costs. Gross margin has also been impacted by the Company's cost
reduction activities not keeping pace with the lower sales volumes and not
realizing net productivity improvements necessary to offset inflation.

Selling, General and Administrative Expenses: Selling, general and
administrative expenses as a percent of net sales increased to 15.6% for the
first nine months of 2001 compared to 13.5% for the same period of 2000. This
increase is attributed primarily to lower sales as mentioned above, as well as
increased medical benefit costs, certain employee incentive programs, the effect
of lower actual returns on the Company's pension plan assets on year over year
pension expense and professional fees associated with its amended bank facility
and with the implementation of the investment strategy initiative.

Restructuring: During 2001, the Company recognized $38.0 million of
restructuring charges related to severance and exit costs. Severance costs of
$36.0 million primarily included the planned consolidation of the European
friction business and the January 2001 salaried employee reductions in North
America and Europe. Total employee reductions are expected to be approximately
1,000, of which 750 have occurred as of September 30, 2001. Exit costs of $2.0
million are primarily comprised of costs related to the planned consolidation of
the European friction business.

Interest Expense: Interest expense was $238.5 million in the first nine months
of 2001 compared to $216.6 million for the same period of 2000. This increase
was attributed to additional borrowings on the Company's Credit Facilities
during the first six month of 2001 compared to 2000 offset by lower interest
rates in 2001.

Income Tax Expense: For the nine months ended September 30, 2001, the Company
had income tax expense of $218.9 million on a pretax loss of $743.1 million,
compared to income tax expense of $71.0 million on pretax earnings of $127.2
million in the same period of 2000. Income tax expense for the three and nine
months ended September 30, 2001 results from the effects of the permanent
difference between book and tax goodwill related to divestitures and impairment
charges, an increase in the valuation allowance on deferred income tax assets in
the U.S. and U.K., and non-deductible goodwill amortization.

Through September 30, 2001 tax expense had historically differed from
income taxes currently payable due to timing differences most significantly
related to asbestos payments. As a result of the Restructuring Proceedings, the
Company does not expect to make payments for the settlement of asbestos claims
in the near term and as such, income taxes payable in the U.K. may increase. The
Company does not expect the effect of suspended asbestos payments to have a
significant effect on income taxes payable in the U.S. in the near term.

The Company will evaluate its deferred taxes and related valuation
allowance quarterly. If the Company believes that changes in current or future
taxable income will not support the basis for recognizing the benefit of the
deferred tax asset, valuation allowances will be provided accordingly.

LITIGATION & ENVIRONMENTAL CONTINGENCIES

The Company is named in numerous lawsuits. For a summary of material
contingencies as a result of those lawsuits, refer to Note 8 of the Consolidated
Condensed Financial Statements, "Asbestos Liability and Legal Proceedings".

LIQUIDITY AND CAPITAL RESOURCES

To meet its liquidity needs over the next two years, the Company entered
into a debtor-in-possession loan facility (the "DIP credit facility") in the
aggregate amount of $675 million, under which it has borrowed $350 million as of
November 12, 2001. On an interim basis, the Bankruptcy Court approved the
availability of a $450 million DIP credit facility from Chase. The final hearing
in the DIP Credit Facility is scheduled for November 20, 2001. The DIP Credit
Facility has a term of two years and bears interest at either alternate base
rate ("ABR") plus 2.5 percentage points or a formula based on the London
Inter-Bank Offered Rate ("LIBOR") plus 3.5 percentage points. The ABR is the
greatest of either Chase's prime rate or the base CD rate plus 1 percentage
point or the fed funds rate plus 1/2 percentage point. In addition, the Company
had cash and equivalents of $263.2 million as of September 30, 2001. Management
believes that cash on hand, cash provided from operations and the DIP credit
facility will be sufficient to meet the operating needs of the Company over the
next year.

The Company provided collateral in the form of a pledge of its domestic
inventories, domestic accounts receivable not otherwise sold under
securitizations, domestic plant, equipment and real property, and its domestic
intellectual property to the DIP lenders. The DIP lenders received permission
from the lenders of the Senior Credit Agreements to have priority over their
collateral interest.

The DIP Credit Facility contains restrictive covenants. The more significant
of these covenants are requirements for the maintenance of consolidated EBITDA
and domestic EBITDA; limitation on quarterly capital expenditures; limitations
on the early retirement of debt; additional borrowings; payment of dividends;
and sell assets or businesses.

The Company has pledged 100% of the capital stock of certain U.S.
subsidiaries, 65% of capital stock of certain foreign subsidiaries and certain
intercompany loans to secure the Senior Credit Agreements of the Company.
Certain of such pledges also extend to the Notes, Medium-Term Notes and Senior
Notes of the Company. In addition, certain subsidiaries of the Company have
guaranteed the senior debt. In addition to the pledge of capital stock the
Company provided collateral in the form of a pledge of its domestic inventories,
domestic accounts receivable not otherwise sold under securitizations, domestic
plant, equipment and real property, and its domestic intellectual property to
its Senior Credit Agreements.

The agreement relating to the Company's Senior Credit Agreement contains
restrictive covenants. The more significant of these covenants are requirements
for the maintenance of consolidated net worth; a consolidated leverage ratio;
cash flow coverage; limitations on the early retirement of debt; additional
borrowings; and payment of common dividends. As of September 30, 2001, the
Company is in default on substantially all of its pre-petition debt.

The Company is subject to the risk of changes in foreign currency exchange
rates due to its operations in foreign jurisdictions. The Company manufactures
and sells its products in North America, Europe, South America, Africa and Asia.
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 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 US dollar as the
functional currency. The Company's equity was increase by $115.8 million during
the three months ended September 30, 2001 and reduced by $70.6 million during
the nine months ended September 30, 2001, primarily due to cumulative
translation adjustments resulting from changes in the U.S. dollar to the Euro
and the British Pound.

Cash Flow Provided From (Used By) Operating Activities

Cash flow used by operating activities was $171.2 million for the first nine
months of 2001. Among the factors impacting operating cash flows were the loss
from operations exclusive of non-cash charges, payments related to asbestos of
$219.2 million and restructuring and rationalization activities of $50.1 million
and a decreases in accounts payable of $35.3 million. These usages were
partially offset by decreases in inventory and accounts receivable of $33.1
million and $71.4 million, respectively.

Cash Flow Provided From Investing Activities

Cash flow provided from investing activities was $20.9 million in the first
nine months of 2001. Among the factors impacting investing cash flows were
capital expenditures of $221.1 million made for property, plant and equipment to
implement process improvements, increase manufacturing capacity, and introduce
new products offset by proceeds from the sales of businesses and proceeds from
the sales of certain buildings and equipment of $241.8 million and $19.0
million, respectively.

The Company anticipates that 2001 capital expenditures, exclusive of
acquisitions and investments in affiliates, will be at approximately $300
million. The Company expects that funding for these expenditures will be from
operations and external sources as required.

Cash Flow Provided From Financing Activities

Cash flow provided from financing activities was $306.3 million for the
first nine months of 2001 primarily resulting from proceeds received from the
issuance of long-term debt of $666.4 million, partially offset by principal
payments on long-term debt of $171.8 million, a decrease in short term
borrowings of $71.3 million and a decrease in accounts receivable
securitizations of $89.6.

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 flow from operations, in conjunction
with borrowings from its DIP, 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 favorable resolution of its asbestos liability
through Chapter 11 could 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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes to the Company's exposures to market
risk since June 30, 2001.

PART II - OTHER INFORMATION
- ---------------------------

Item 1. Legal Proceedings
-----------------

(a) Contingencies.
Note 8 to the Consolidated Condensed 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 condensed
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 condensed consolidated financial statements.

Item 6. Exhibits and Reports on Form 8-K
--------------------------------

(a) Exhibits:

None

(b) Reports on Form 8-K:

(1) On July 25, 2001 the Company filed a Current Report on
Form 8-K to disclose the changes to its 401K program.

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: November 14, 2001