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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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



For the quarterly period ended June 30, 2005



or



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



For the transition period from  to



Commission File Number: 1-1511



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FEDERAL-MOGUL CORPORATION

(Exact name of Registrant as specified in its charter)



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



(248) 354-7700

(Registrants telephone number, including area code)



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



Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x



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



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##### Table of Contents

FEDERAL-MOGUL CORPORATION



Form 10-Q



For the Quarterly Period Ended June 30, 2005



INDEX



|                                                                                               |  |         
|---------------------------------------------------------------------------------------------- |  | --------
|                                                                                               |  | Page No.
|Forward-Looking Statements                                                                     |  | 2       
|Part I  Financial Information                                                                 |  |         
|Item 1  Financial Statements                                                                  |  |         
|Consolidated Statements of Operations                                                          |  | 4       
|Consolidated Balance Sheets                                                                    |  | 5       
|Consolidated Statements of Cash Flows                                                          |  | 6       
|Notes to the Consolidated Financial Statements                                                 |  | 7       
|Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 46      
|Item 3  Quantitative and Qualitative Disclosures about Market Risk                            |  | 63      
|Item 4  Controls and Procedures                                                               |  | 65      
|Part II  Other Information                                                                    |  |         
|Item 1  Legal Proceedings                                                                     |  | 66      
|Item 3  Defaults Upon Senior Securities                                                       |  | 66      
|Item 6  Exhibits                                                                              |  | 66      
|Signatures                                                                                     |  | 67      
|Exhibits                                                                                       |  | 68      



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FORWARD-LOOKING STATEMENTS



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



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



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



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



Chapter 11 Filing



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



Legal and Environmental Proceedings



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



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



Business Environment and Economic Conditions



| |  | The Companys ability to generate cost savings or manufacturing efficiencies to offset or exceed contractually or competitively required price reductions or price reductions to
obtain new business.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Variations in the financial or operational condition of the Companys significant customers, particularly the worlds original equipment manufacturers of commercial and
personal vehicles.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Fluctuations in the price and availability of raw materials and other supplies used in the manufacturing and distribution of the Companys products.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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| |  | The Companys ability to obtain cash adequate to fund its needs, including the borrowings available under its debtor-in-possession credit facility and the availability of
financing for the Companys subsidiaries not included under the voluntary filing for Chapter 11 in the U.S. or Administration in the U.K.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



Other Factors



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



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



| |  | New or expanded litigation activity regarding alleged asbestos claims against subsidiaries of the Company not included in either the U.S. Chapter 11 or the U.K. Administration
Proceedings.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Legislative activities of governments, agencies, and similar organizations, both in the United States and in foreign countries, that may affect the operations of the Company,
including the Fairness in Asbestos Injury Resolution Act of 2005.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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PART I

FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



FEDERAL-MOGUL CORPORATION

Consolidated Statements of Operations (Unaudited)



|                                                                     |  |                                                 |         |   |                         |   |         |      |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------- |  | ----------------------------------------------- | ------- | - | ----------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                     |  | Three Months EndedJune 30                       |         |   | Six Months EndedJune 30 |  
|                                                                     |  | 2005                                            |         |   | 2004                    |   |         | 2005 |  |   | 2004    |  
|                                                                     |  | (Millions of Dollars, Except Per Share Amounts) |        
|Net sales                                                            |  | $                                               | 1,665.4 |   |                         | $ | 1,571.2 |      |  | $ | 3,298.6 |   |  | $ | 3,117.7 |  
|Cost of products sold                                                |  |                                                 | 1,373.6 |   |                         |   | 1,251.2 |      |  |   | 2,731.9 |   |  |   | 2,501.2 |  
|                                                                     |  |                                                 |         |   |                         |   |         |      |  |   |         |   |  |   |         |  
|Gross margin                                                         |  |                                                 | 291.8   |   |                         |   | 320.0   |      |  |   | 566.7   |   |  |   | 616.5   |  
|                                                                     |  |                                                 |         |  
|Selling, general and administrative expenses                         |  |                                                 | 226.3   |   |                         |   | 234.0   |      |  |   | 476.0   |   |  |   | 475.8   |  
|Adjustment of long-lived assets to fair value                        |  |                                                 | 1.0     |   |                         |   | 20.0    |      |  |   | 4.0     |   |  |   | 23.1    |  
|Interest expense, net                                                |  |                                                 | 33.8    |   |                         |   | 24.3    |      |  |   | 62.6    |   |  |   | 49.9    |  
|Chapter 11 and Administration related reorganization expenses        |  |                                                 | 20.2    |   |                         |   | 34.4    |      |  |   | 50.2    |   |  |   | 60.4    |  
|Equity earnings of unconsolidated affiliates                         |  |                                                 | (12.0   | ) |                         |   | (10.7   | )    |  |   | (21.3   | ) |  |   | (20.2   | )
|Other expense, net                                                   |  |                                                 | 9.5     |   |                         |   | 3.4     |      |  |   | 3.9     |   |  |   | 12.1    |  
|                                                                     |  |                                                 |         |   |                         |   |         |      |  |   |         |   |  |   |         |  
|Earnings (loss) from continuing operations before income tax expense |  |                                                 | 13.0    |   |                         |   | 14.6    |      |  |   | (8.7    | ) |  |   | 15.4    |  
|Income tax expense                                                   |  |                                                 | 24.6    |   |                         |   | 20.6    |      |  |   | 51.2    |   |  |   | 40.6    |  
|                                                                     |  |                                                 |         |   |                         |   |         |      |  |   |         |   |  |   |         |  
|Loss from continuing operations                                      |  |                                                 | (11.6   | ) |                         |   | (6.0    | )    |  |   | (59.9   | ) |  |   | (25.2   | )
|Loss from discontinued operations, net of income tax expense         |  |                                                 |        |   |                         |   | (3.0    | )    |  |   |        |   |  |   | (4.2    | )
|                                                                     |  |                                                 |         |   |                         |   |         |      |  |   |         |   |  |   |         |  
|Net loss                                                             |  | $                                               | (11.6   | ) |                         | $ | (9.0    | )    |  | $ | (59.9   | ) |  | $ | (29.4   | )
|                                                                     |  |                                                 |         |   |                         |   |         |      |  |   |         |   |  |   |         |  
|Basic and diluted loss per common share:                             |  |                                                 |         |   |                         |   |         |      |  |   |         |   |  |   |         |  
|Loss from continuing operations                                      |  | $                                               | (0.13   | ) |                         | $ | (0.07   | )    |  | $ | (0.67   | ) |  | $ | (0.29   | )
|Loss from discontinued operations, net of income tax expense         |  |                                                 |        |   |                         |   | (0.04   | )    |  |   |        |   |  |   | (0.05   | )
|                                                                     |  |                                                 |         |   |                         |   |         |      |  |   |         |   |  |   |         |  
|Net loss per common share                                            |  | $                                               | (0.13   | ) |                         | $ | (0.11   | )    |  | $ | (0.67   | ) |  | $ | (0.34   | )
|                                                                     |  |                                                 |         |   |                         |   |         |      |  |   |         |   |  |   |         |  



See accompanying notes
to unaudited consolidated financial statements.



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FEDERAL-MOGUL CORPORATION

Consolidated Balance Sheets



|                                                             |  |                          |          |   |                  |   |          |  
|------------------------------------------------------------ |  | ------------------------ | -------- | - | ---------------- | - | -------- | -
|                                                             |  | (Unaudited) June 30 2005 |          |   | December 31 2004 |  
|                                                             |  | (Millions of Dollars)    |         
|ASSETS                                                       |  |                          |          |   |                  |   |          |  
|Current assets:                                              |  |                          |          |   |                  |   |          |  
|Cash and equivalents                                         |  | $                        | 756.1    |   |                  | $ | 700.6    |  
|Accounts receivable, net                                     |  |                          | 1,115.5  |   |                  |   | 1,049.5  |  
|Inventories, net                                             |  |                          | 908.8    |   |                  |   | 952.9    |  
|Prepaid expenses and other current assets                    |  |                          | 230.0    |   |                  |   | 230.9    |  
|                                                             |  |                          |          |   |                  |   |          |  
|Total current assets                                         |  |                          | 3,010.4  |   |                  |   | 2,933.9  |  
|                                                             |  |                         
|Property, plant and equipment, net                           |  |                          | 2,143.5  |   |                  |   | 2,363.9  |  
|Goodwill and indefinite-lived intangible assets              |  |                          | 1,278.7  |   |                  |   | 1,283.7  |  
|Definite-lived intangible assets, net                        |  |                          | 312.4    |   |                  |   | 335.3    |  
|Asbestos-related insurance recoverable                       |  |                          | 810.2    |   |                  |   | 853.8    |  
|Prepaid pension costs                                        |  |                          | 178.6    |   |                  |   | 257.4    |  
|Other noncurrent assets                                      |  |                          | 214.1    |   |                  |   | 237.2    |  
|                                                             |  |                          |          |   |                  |   |          |  
|                                                             |  | $                        | 7,947.9  |   |                  | $ | 8,265.2  |  
|                                                             |  |                          |          |   |                  |   |          |  
|LIABILITIES AND SHAREHOLDERS DEFICIT                        |  |                          |          |   |                  |   |          |  
|Current liabilities:                                         |  |                          |          |   |                  |   |          |  
|Short-term debt, including current portion of long-term debt |  | $                        | 398.2    |   |                  | $ | 309.6    |  
|Accounts payable                                             |  |                          | 407.4    |   |                  |   | 435.9    |  
|Accrued liabilities                                          |  |                          | 539.1    |   |                  |   | 559.7    |  
|Other current liabilities                                    |  |                          | 136.6    |   |                  |   | 145.6    |  
|                                                             |  |                          |          |   |                  |   |          |  
|Total current liabilities                                    |  |                          | 1,481.3  |   |                  |   | 1,450.8  |  
|                                                             |  |                         
|Liabilities subject to compromise                            |  |                          | 5,999.8  |   |                  |   | 6,018.5  |  
|                                                             |  |                         
|Long-term debt                                               |  |                          | 7.5      |   |                  |   | 10.1     |  
|Postemployment benefits                                      |  |                          | 2,239.9  |   |                  |   | 2,355.9  |  
|Long-term portion of deferred income taxes                   |  |                          | 107.9    |   |                  |   | 102.0    |  
|Other accrued liabilities                                    |  |                          | 210.2    |   |                  |   | 221.2    |  
|Minority interest in consolidated affiliates                 |  |                          | 31.2     |   |                  |   | 32.4     |  
|                                                             |  |                         
|Shareholders deficit:                                       |  |                          |          |   |                  |   |          |  
|Series C ESOP preferred stock                                |  |                          | 28.0     |   |                  |   | 28.0     |  
|Common stock                                                 |  |                          | 445.3    |   |                  |   | 445.3    |  
|Additional paid-in capital                                   |  |                          | 2,150.7  |   |                  |   | 2,148.0  |  
|Accumulated deficit                                          |  |                          | (3,327.8 | ) |                  |   | (3,267.9 | )
|Accumulated other comprehensive loss                         |  |                          | (1,426.1 | ) |                  |   | (1,279.1 | )
|                                                             |  |                          |          |   |                  |   |          |  
|Total shareholders deficit                                  |  |                          | (2,129.9 | ) |                  |   | (1,925.7 | )
|                                                             |  |                          |          |   |                  |   |          |  
|                                                             |  | $                        | 7,947.9  |   |                  | $ | 8,265.2  |  
|                                                             |  |                          |          |   |                  |   |          |  



See accompanying notes
to unaudited consolidated financial statements.



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FEDERAL-MOGUL CORPORATION

Consolidated Statements of Cash Flows (Unaudited)



|                                                                                  |  |                         |        |   |      |   |        |  
|--------------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | -
|                                                                                  |  | Six Months EndedJune 30 |       
|                                                                                  |  | 2005                    |        |   | 2004 |  
|                                                                                  |  | (Millions of Dollars)   |       
|Cash provided from (used by) operating activities                                 |  |                         |        |   |      |   |        |  
|Net loss                                                                          |  | $                       | (59.9  | ) |      | $ | (29.4  | )
|Adjustments to reconcile net loss to net cash provided from operating activities: |  |                         |        |   |      |   |        |  
|Depreciation and amortization                                                     |  |                         | 178.6  |   |      |   | 166.7  |  
|Adjustment of long-lived assets to fair value                                     |  |                         | 4.0    |   |      |   | 23.1   |  
|Change in postemployment benefits, including pensions                             |  |                         | 68.8   |   |      |   | 45.8   |  
|Change in deferred taxes                                                          |  |                         | 19.1   |   |      |   | 11.9   |  
|Changes in operating assets and liabilities:                                      |  |                         |        |   |      |   |        |  
|Increase in accounts receivable                                                   |  |                         | (114.7 | ) |      |   | (91.7  | )
|Increase in inventories, net of involuntary conversion in 2004                    |  |                         | (2.7   | ) |      |   | (91.3  | )
|(Decrease) increase in accounts payable                                           |  |                         | (1.9   | ) |      |   | 88.2   |  
|Changes in other assets and liabilities, net of involuntary conversion in 2004    |  |                         | (13.3  | ) |      |   | 102.5  |  
|Insurance proceeds from involuntary conversion                                    |  |                         |       |   |      |   | 55.0   |  
|                                                                                  |  |                         |        |   |      |   |        |  
|Net cash provided from operating activities                                       |  |                         | 78.0   |   |      |   | 280.8  |  
|                                                                                  |  |                        
|Cash provided from (used by) investing activities                                 |  |                         |        |   |      |   |        |  
|Expenditures for property, plant and equipment                                    |  |                         | (84.9  | ) |      |   | (132.1 | )
|Net proceeds from the sale of property, plant and equipment                       |  |                         | 10.4   |   |      |   | 13.0   |  
|                                                                                  |  |                         |        |   |      |   |        |  
|Net cash used by investing activities                                             |  |                         | (74.5  | ) |      |   | (119.1 | )
|                                                                                  |  |                        
|Cash provided from (used by) financing activities                                 |  |                         |        |   |      |   |        |  
|Proceeds from borrowings on DIP credit facility                                   |  |                         | 85.1   |   |      |   |       |  
|Principal payments on DIP credit facility                                         |  |                         |       |   |      |   | (41.7  | )
|Increase (decrease) in short-term debt                                            |  |                         | 7.2    |   |      |   | (3.5   | )
|Decrease in other long-term debt                                                  |  |                         | (1.6   | ) |      |   | (1.7   | )
|                                                                                  |  |                         |        |   |      |   |        |  
|Net cash provided from (used by) financing activities                             |  |                         | 90.7   |   |      |   | (46.9  | )
|                                                                                  |  |                        
|Effect of foreign currency exchange rate fluctuations on cash                     |  |                         | (38.7  | ) |      |   | 3.7    |  
|                                                                                  |  |                         |        |   |      |   |        |  
|Increase in cash and equivalents                                                  |  |                         | 55.5   |   |      |   | 118.5  |  
|                                                                                  |  |                        
|Cash and equivalents at beginning of period                                       |  |                         | 700.6  |   |      |   | 472.4  |  
|                                                                                  |  |                         |        |   |      |   |        |  
|Cash and equivalents at end of period                                             |  | $                       | 756.1  |   |      | $ | 590.9  |  
|                                                                                  |  |                         |        |   |      |   |        |  



See accompanying notes
to unaudited consolidated financial statements.



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FEDERAL-MOGUL CORPORATION

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2005



1. Basis of Presentation



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



Operating results for the three and six month periods ended June 30, 2005 are not necessarily indicative of the results that may be expected for the year ended December
31, 2005. Certain items in the 2004 consolidated financial statements have been reclassified to conform to the presentation used in the current period.



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



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



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



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



The Company continues to consolidate all of its Debtor subsidiaries that are more than 50% owned in accordance with Company policy and with Accounting Research Bulletin
No. 51, Consolidated Financial Statements. The Debtors are operating their businesses as debtors-in-possession subject to the provisions of the Bankruptcy Code. The U.K. Debtors are continuing to manage their operations under the
supervision of Administrators approved by the High Court. The Company believes that the facts and circumstances related to the Restructuring Proceedings continue to require consolidation of the U.K. Debtors as follows:



| |  | Pursuant to an agreement (Protocol) between the Administrators and the Company, the Company is currently in control of the day-to-day business of all U.K. Debtors.
Additionally, the Company is operating the U.K. Debtor businesses as debtors-in-possession subject to the provisions of the Bankruptcy Code. Accordingly, the Company determines the operating and financial policies and directs the on-going economic
activities of the U.K. Debtors.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The current proposed Plan of Reorganization provides that the parent, which is also a Debtor entity, will emerge from the U.S. Restructuring concurrently with all Debtor
subsidiaries.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The U.K. Debtor subsidiaries filed for the U.K. Restructuring Proceedings to resolve asbestos claims. To the extent any such U.K. Debtor subsidiary is unable to emerge from the
Restructuring Proceedings in accordance with the Bankruptcy Code, that subsidiary would not receive the benefit from the permanent channeling of asbestos personal injury claimants to a trust or series of trusts established pursuant to section 524(g)
of the Bankruptcy Code.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



Discontinued Operations: During 2004, the Company completed the divestitures of its large bearings operations in Pinetown, South Africa and Uslar, Germany, and its transmission operation located in Dayton, Ohio. The aggregate net
losses of these divestitures are reported as discontinued operations in the Companys consolidated statements of operations for the three and six-month periods ended June 30, 2004. Additional financial information related to the Companys
discontinued operations is presented in Note 6, to the Companys consolidated financial statements, Discontinued Operations.



New Accounting Pronouncement: On December 16, 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS)
No. 123(R), Share-Based Payment. SFAS No. 123(R) revises SFAS No. 123, Accounting for Stock-Based Compensationand requires companies to expense the fair value of employee stock options and other forms of
stock-based compensation. The Company adopted SFAS No. 123(R) effective January 1, 2005. Additional financial information related to the Companys share-based payments is presented in Note 17, to the Companys consolidated financial
statements, Stock-Based Compensation.



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##### Table of Contents

2. Voluntary Reorganization under Chapter 11 and Administration



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



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



Consequences of the Restructuring Proceedings



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



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



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



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



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



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



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



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



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



In October 2004, the Administrators applied to the High Court for directions related to: 1) questions of fairness of the Plan; 2) the approach of the High Court to CVAs and schemes of arrangement designed to implement the Plan within the
U.K.; 3) the compatibility with English pension laws of the proposals for the trustees of pension schemes of the U.K. debtors; and 4) the impact under English insolvency law should the Administrators not propose CVAs and schemes of arrangement. In
response to the application for directions, the High Court directed the Administrators to not propose schemes of arrangement and CVAs consistent with the draft schemes and draft CVAs included within the currently filed Plan without further order of
the High Court. In addition, the High Court directed the Administrators to not convene meetings of creditors of the U.K. Companies pursuant to any demands or requisitions made pursuant to the Plan. Additionally, the High Court granted the
Administrators leave to modify their consent, if necessary, to the directors of the U.K. Debtors, exercising any powers they might have to a) promote and/or confirm the Plan; or b) file or continue any motion in the Bankruptcy Court which seeks
relief in relation to the Administrators or the U.K. Debtors. This was part of the Administrators efforts, and those of certain creditors of the U.K. Debtors, to oppose the Plan.



10



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##### Table of Contents

If the Plan Proponents and the Administrators cannot reach an agreement regarding either Schemes of Arrangement and CVAs
that parallel the Plan or the means by which the Company will retain the businesses of those U.K. Debtors that are valuable to the Company and its customers, then the Company believes one or more of the following may occur with respect to each U.K.
Debtor: (a) the High Court may be asked by the Plan Proponents to approve the Plan with respect to the U.K. Debtors as a matter of comity; or (b) the Company may bid for those businesses and/or assets of the U.K. Debtors that are valuable to the
Company and its customers and any actual or deemed transfer of assets to the Company in connection therewith shall be entitled to the benefits of the injunction pursuant to Section 524(g) of the Bankruptcy Code. The Plan provides that if the Company
is not the successful bidder, the injunction pursuant to Section 524(g) of the Bankruptcy Code shall not apply to the transfer of any assets to any entity other than the Company or its designee. As a result, the Company believes that, in the event
the assets of the U.K. debtors are marketed for public sale, the Company ultimately will be the successful bidder for those assets that are valuable to the Company and its customers. Any remaining assets would be liquidated. The Company believes
that such a non-consensual process with the Administrators is not in the best interest of the creditors of the U.K. Debtors, including pension creditors, and employees of the U.K. Debtors, and that the failure to arrive at a consensual plan could be
damaging to the interests of such parties.



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



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



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



Chapter 11 Financing



In connection with the Restructuring Proceedings, the Company entered into a DIP credit facility to supplement liquidity and fund operations during the restructuring proceedings. The Companys existing DIP credit
facility expires in December 2005, and the interest rate is either the alternate base rate (ABR) plus 11⁄4 percentage points or the London Inter-Bank Offered Rate (LIBOR) plus 21⁄4 percentage points. The ABR is the
greater of either the banks base rate or the federal funds rate plus 1⁄2 percentage point. In addition, the commitment available under the DIP credit facility is mandatorily reduced by a portion of proceeds received from future asset or
business divestitures.



The Companys available borrowings under the
existing DIP credit facility are determined by the underlying collateral at any point in time, consisting of domestic inventories and domestic accounts receivable. The DIP lenders received permission from the lenders of the Senior Credit Agreements
to have priority over their collateral interest. Amounts available and outstanding on the DIP credit facility are further discussed in Note 10 to the consolidated financial statements, Debt.



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



11



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##### Table of Contents

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



In the U.S., the Bankruptcy Court further ordered additional adequate protection to the noteholders in the form of either cash payment of one-half of one percent (0.5%) of the outstanding notes per year or the
granting of an administrative expense claim pursuant to Section 507(b) of the Bankruptcy Code in the amount of one percent (1.0%) of the outstanding notes per year. The Company has elected to grant an administrative expense claim in favor of the
noteholders for this additional adequate protection. All adequate protection administrative expense claims inured in favor of the noteholders are provisional in nature and subject to challenge by all parties-in-interest to the Restructuring
Proceedings. Thus, the ultimate amount and related payment terms, if any, for these administrative expense claims will be established in connection with the Restructuring Proceedings. Accordingly, such additional administrative expense claims,
approximating $78 million as of June 30, 2005, have not been recorded in the accompanying financial statements.



Financial Statement Classification



Virtually all of the Companys pre-petition debt is in default. At June 30, 2005, the Debtors pre-petition debt is classified under the caption
Liabilities subject to compromise. This includes debt outstanding of $1,962.1 million under the pre-petition Senior Credit Agreements and $2,117.4 million of other outstanding debt, primarily notes payable at various unsecured rates,
less capitalized debt issuance fees of $29.1 million. The carrying value of the pre-petition debt will be adjusted once it has become an allowed claim by the Bankruptcy Court to the extent the related carrying value differs from the amount of the
allowed claim. Such adjustment may be material to the consolidated financial statements.



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



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



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##### Table of Contents

Liabilities subject to compromise include the following:



|                                                    |  |                       |         |                 |   |        
|--------------------------------------------------- |  | --------------------- | ------- | --------------- | - | -------
|                                                    |  | June 302005           |         | December 312004
|                                                    |  | (Millions of Dollars)
|Debt                                                |  | $                     | 4,050.4 |                 | $ | 4,026.9
|Asbestos liabilities                                |  |                       | 1,541.5 |                 |   | 1,584.0
|Accounts payable                                    |  |                       | 203.7   |                 |   | 204.5  
|Company-obligated mandatorily redeemable securities |  |                       | 114.6   |                 |   | 114.6  
|Interest payable                                    |  |                       | 44.0    |                 |   | 43.9   
|Environmental liabilities                           |  |                       | 24.8    |                 |   | 23.6   
|Other accrued liabilities                           |  |                       | 20.8    |                 |   | 21.0   
|                                                    |  |                       |         |                 |   |        
|                                                    |  |                       | 5,999.8 |                 |   | 6,018.5
|Intercompany payables to affiliates                 |  |                       | 3,222.7 |                 |   | 3,301.3
|                                                    |  |                       |         |                 |   |        
|                                                    |  | $                     | 9,222.5 |                 | $ | 9,319.8
|                                                    |  |                       |         |                 |   |        



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



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



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



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



|                                                 |  |                           |      |                         |   |      |  |      |      |  |   |     
|------------------------------------------------ |  | ------------------------- | ---- | ----------------------- | - | ---- |  | ---- | ---- |  | - | ----
|                                                 |  | Three Months EndedJune 30 |      | Six Months EndedJune 30
|                                                 |  | 2005                      |      | 2004                    |   | 2005 |  | 2004
|                                                 |  | (Millions of Dollars)    
|Professional fees directly related to the filing |  | $                         | 17.2 |                         | $ | 30.7 |  | $    | 44.4 |  | $ | 53.9
|Critical employee retention costs                |  |                           | 2.8  |                         |   | 2.0  |  |      | 5.6  |  |   | 4.0 
|Other direct costs                               |  |                           | 0.2  |                         |   | 1.7  |  |      | 0.2  |  |   | 2.5 
|                                                 |  |                           |      |                         |   |      |  |      |      |  |   |     
|                                                 |  | $                         | 20.2 |                         | $ | 34.4 |  | $    | 50.2 |  | $ | 60.4
|                                                 |  |                           |      |                         |   |      |  |      |      |  |   |     



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



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



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



| |  | Approximately 2,200 claims, totaling approximately $142.1 billion, which the Company believes should be disallowed by the Bankruptcy Court primarily because these claims appear to
be duplicative or unsubstantiated claims.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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



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



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##### Table of Contents

Debtors Financial Statements



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



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##### Table of Contents

FEDERAL-MOGUL CORPORATION

Debtors Condensed Consolidated Statements of Operations (Unaudited)



|                                                                                                   |  |                           |       |   |                         |   |       |      |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------------------------------------- |  | ------------------------- | ----- | - | ----------------------- | - | ----- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                   |  | Three Months EndedJune 30 |       |   | Six Months EndedJune 30 |  
|                                                                                                   |  | 2005                      |       |   | 2004                    |   |       | 2005 |  |   | 2004    |  
|                                                                                                   |  | (Millions of Dollars)     |      
|Net sales                                                                                          |  | $                         | 991.9 |   |                         | $ | 927.4 |      |  | $ | 1,963.1 |   |  | $ | 1,831.6 |  
|Cost of products sold                                                                              |  |                           | 850.7 |   |                         |   | 759.1 |      |  |   | 1,690.6 |   |  |   | 1,507.7 |  
|                                                                                                   |  |                           |       |   |                         |   |       |      |  |   |         |   |  |   |         |  
|Gross margin                                                                                       |  |                           | 141.2 |   |                         |   | 168.3 |      |  |   | 272.5   |   |  |   | 323.9   |  
|                                                                                                   |  |                           |       |  
|Selling, general and administrative expenses                                                       |  |                           | 143.9 |   |                         |   | 155.8 |      |  |   | 311.3   |   |  |   | 318.5   |  
|Interest expense, net                                                                              |  |                           | 32.5  |   |                         |   | 22.2  |      |  |   | 60.4    |   |  |   | 46.7    |  
|Chapter 11 and Administration related reorganization expenses                                      |  |                           | 20.2  |   |                         |   | 34.4  |      |  |   | 50.2    |   |  |   | 60.4    |  
|Intercompany interest income from non-filers                                                       |  |                           | (76.2 | ) |                         |   | (88.1 | )    |  |   | (159.1  | ) |  |   | (179.6  | )
|Other income, net                                                                                  |  |                           | (6.3  | ) |                         |   | (3.9  | )    |  |   | (21.0   | ) |  |   | (13.8   | )
|                                                                                                   |  |                           |       |   |                         |   |       |      |  |   |         |   |  |   |         |  
|Earnings from continuing operations before income taxes and equity loss of non-Debtor subsidiaries |  |                           | 27.1  |   |                         |   | 47.9  |      |  |   | 30.7    |   |  |   | 91.7    |  
|Income tax expense (benefit)                                                                       |  |                           | 8.7   |   |                         |   | (4.1  | )    |  |   | 15.9    |   |  |   | (0.5    | )
|                                                                                                   |  |                           |       |   |                         |   |       |      |  |   |         |   |  |   |         |  
|Earnings from continuing operations before equity loss of non-Debtor subsidiaries                  |  |                           | 18.4  |   |                         |   | 52.0  |      |  |   | 14.8    |   |  |   | 92.2    |  
|Equity loss from continuing operations of non-Debtor subsidiaries                                  |  |                           | (30.0 | ) |                         |   | (58.0 | )    |  |   | (74.7   | ) |  |   | (117.4  | )
|                                                                                                   |  |                           |       |   |                         |   |       |      |  |   |         |   |  |   |         |  
|Loss from continuing operations                                                                    |  |                           | (11.6 | ) |                         |   | (6.0  | )    |  |   | (59.9   | ) |  |   | (25.2   | )
|Loss from discontinued operations, net of income taxes, Debtors                                    |  |                           |      |   |                         |   | (0.3  | )    |  |   |        |   |  |   | (0.5    | )
|Loss from discontinued operations, net of income taxes, non-Debtors                                |  |                           |      |   |                         |   | (2.7  | )    |  |   |        |   |  |   | (3.7    | )
|                                                                                                   |  |                           |       |   |                         |   |       |      |  |   |         |   |  |   |         |  
|Net loss                                                                                           |  | $                         | (11.6 | ) |                         | $ | (9.0  | )    |  | $ | (59.9   | ) |  | $ | (29.4   | )
|                                                                                                   |  |                           |       |   |                         |   |       |      |  |   |         |   |  |   |         |  



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FEDERAL-MOGUL CORPORATION

Debtors Condensed Consolidated Balance Sheets



|                                                             |  |                          |          |   |                  |   |          |  
|------------------------------------------------------------ |  | ------------------------ | -------- | - | ---------------- | - | -------- | -
|                                                             |  | (Unaudited) June 30 2005 |          |   | December 31 2004 |  
|                                                             |  | (Millions of Dollars)    |         
|ASSETS                                                       |  |                          |          |   |                  |   |          |  
|Current assets:                                              |  |                          |          |   |                  |   |          |  
|Cash and equivalents                                         |  | $                        | 424.2    |   |                  | $ | 433.5    |  
|Accounts receivable, net                                     |  |                          | 625.3    |   |                  |   | 582.8    |  
|Accounts receivable, non-Debtors                             |  |                          | 485.5    |   |                  |   | 458.0    |  
|Inventories, net                                             |  |                          | 478.8    |   |                  |   | 483.6    |  
|Prepaid expenses and other current assets                    |  |                          | 99.7     |   |                  |   | 101.9    |  
|                                                             |  |                          |          |   |                  |   |          |  
|Total current assets                                         |  |                          | 2,113.5  |   |                  |   | 2,059.8  |  
|                                                             |  |                         
|Property, plant and equipment, net                           |  |                          | 985.4    |   |                  |   | 1,016.4  |  
|Goodwill and indefinite-lived intangible assets              |  |                          | 1,177.1  |   |                  |   | 1,183.5  |  
|Definite-lived intangible assets, net                        |  |                          | 265.0    |   |                  |   | 280.3    |  
|Asbestos-related insurance recoverable                       |  |                          | 810.1    |   |                  |   | 853.8    |  
|Loans receivable from and investments in non-Debtors         |  |                          | 4,683.8  |   |                  |   | 4,803.6  |  
|Other noncurrent assets                                      |  |                          | 307.5    |   |                  |   | 402.1    |  
|                                                             |  |                          |          |   |                  |   |          |  
|                                                             |  | $                        | 10,342.4 |   |                  | $ | 10,599.5 |  
|                                                             |  |                          |          |   |                  |   |          |  
|LIABILITIES AND SHAREHOLDERS DEFICIT                        |  |                          |          |   |                  |   |          |  
|Current liabilities:                                         |  |                          |          |   |                  |   |          |  
|Short-term debt, including current portion of long-term debt |  | $                        | 362.7    |   |                  | $ | 277.8    |  
|Accounts payable and accrued compensation                    |  |                          | 271.6    |   |                  |   | 269.1    |  
|Accounts payable, non-Debtors                                |  |                          | 300.3    |   |                  |   | 249.0    |  
|Other accrued liabilities                                    |  |                          | 246.3    |   |                  |   | 256.4    |  
|                                                             |  |                          |          |   |                  |   |          |  
|Total current liabilities                                    |  |                          | 1,180.9  |   |                  |   | 1,052.3  |  
|                                                             |  |                         
|Postemployment benefits                                      |  |                          | 1,951.7  |   |                  |   | 2,033.5  |  
|Other accrued liabilities                                    |  |                          | 117.2    |   |                  |   | 119.6    |  
|Liabilities subject to compromise                            |  |                          | 9,222.5  |   |                  |   | 9,319.8  |  
|Shareholders deficit                                        |  |                          | (2,129.9 | ) |                  |   | (1,925.7 | )
|                                                             |  |                          |          |   |                  |   |          |  
|                                                             |  | $                        | 10,342.4 |   |                  | $ | 10,599.5 |  
|                                                             |  |                          |          |   |                  |   |          |  



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FEDERAL-MOGUL CORPORATION

Debtors Condensed Consolidated Statements of Cash Flows (Unaudited)



|                                                              |  |                         |       |   |      |   |       |  
|------------------------------------------------------------- |  | ----------------------- | ----- | - | ---- | - | ----- | -
|                                                              |  | Six Months EndedJune 30 |      
|                                                              |  | 2005                    |       |   | 2004 |  
|                                                              |  | (Millions of Dollars)   |      
|Net cash provided from (used by) operating activities         |  | $                       | (29.7 | ) |      | $ | 120.2 |  
|                                                              |  |                        
|Cash provided from (used by) investing activities             |  |                         |       |   |      |   |       |  
|Expenditures for property, plant and equipment                |  |                         | (38.1 | ) |      |   | (68.2 | )
|Net proceeds from the sale of property, plant and equipment   |  |                         |      |   |      |   | 13.0  |  
|                                                              |  |                         |       |   |      |   |       |  
|Net cash used by investing activities                         |  |                         | (38.1 | ) |      |   | (55.2 | )
|                                                              |  |                        
|Cash provided from (used by) financing activities             |  |                         |       |   |      |   |       |  
|Proceeds from borrowings on DIP credit facility               |  |                         | 85.1  |   |      |   |      |  
|Principal payments on DIP credit facility                     |  |                         |      |   |      |   | (41.7 | )
|                                                              |  |                         |       |   |      |   |       |  
|Net cash provided from (used by) financing activities         |  |                         | 85.1  |   |      |   | (41.7 | )
|                                                              |  |                        
|Effect of foreign currency exchange rate fluctuations on cash |  |                         | (26.6 | ) |      |   | 7.4   |  
|                                                              |  |                         |       |   |      |   |       |  
|Increase (decrease) in cash and equivalents                   |  |                         | (9.3  | ) |      |   | 30.7  |  
|                                                              |  |                        
|Cash and equivalents at beginning of period                   |  |                         | 433.5 |   |      |   | 281.5 |  
|                                                              |  |                         |       |   |      |   |       |  
|Cash and equivalents at end of period                         |  | $                       | 424.2 |   |      | $ | 312.2 |  
|                                                              |  |                         |       |   |      |   |       |  



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3. Adjustment of Long-Lived Assets to Fair Value



During the six month periods ended June 30, 2005 and 2004, the Company recorded charges of $4.0 million and $23.1 million, respectively, to
adjust property, plant and equipment to their estimated fair values in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The fair value of property, plant and equipment is based upon
estimated discounted future cash flows and estimates of salvage value. The impairment charge represents the difference between the estimated fair values and the carrying value of the subject assets.



Impairment charges by reporting segment are as follows:



|                                  |  |                           |     |                         |   |      |  |      |     |  |   |     
|--------------------------------- |  | ------------------------- | --- | ----------------------- | - | ---- |  | ---- | --- |  | - | ----
|                                  |  | Three Months EndedJune 30 |     | Six Months EndedJune 30
|                                  |  | 2005                      |     | 2004                    |   | 2005 |  | 2004
|                                  |  | (Millions of Dollars)    
|Powertrain                        |  | $                         | 0.8 |                         | $ | 20.0 |  | $    | 0.8 |  | $ | 20.2
|Sealing Systems                   |  |                           |    |                         |   |     |  |      |    |  |   |    
|Vehicle Safety and Performance    |  |                           | 0.2 |                         |   |     |  |      | 0.2 |  |   |    
|Aftermarket Products and Services |  |                           |    |                         |   |     |  |      | 3.0 |  |   | 2.7 
|Corporate                         |  |                           |    |                         |   |     |  |      |    |  |   | 0.2 
|                                  |  |                           |     |                         |   |      |  |      |     |  |   |     
|                                  |  | $                         | 1.0 |                         | $ | 20.0 |  | $    | 4.0 |  | $ | 23.1
|                                  |  |                           |     |                         |   |      |  |      |     |  |   |     



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



4. Restructuring



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



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



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



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



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



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



|2. | Consolidation of administrative functions and standardization of manufacturing processes  As part of its productivity initiative, the Company has acted to consolidate its
administrative functions and change its manufacturing processes to reduce selling, general and administrative costs and improve operating efficiencies through standardization of processes.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



|                                         |  |                       |      |   |    |   |      |     |  |   |      |   |  |           |      |   |       |   |      |   |  |   |      |  
|---------------------------------------- |  | --------------------- | ---- | - | -- | - | ---- | --- |  | - | ---- | - |  | --------- | ---- | - | ----- | - | ---- | - |  | - | ---- | -
|                                         |  | Powertrain            |      |   | SS |   |      | VSP |  |   | APS  |   |  | Corporate |      |   | Total |  
|                                         |  | (Millions of dollars) |     
|Balance of reserves at December 31, 2004 |  | $                     | 18.7 |   |    | $ | 3.8  |     |  | $ | 1.6  |   |  | $         | 2.9  |   |       | $ | 0.9  |   |  | $ | 27.9 |  
|Provisions                               |  |                       | 2.7  |   |    |   |     |     |  |   |     |   |  |           |     |   |       |   | 0.9  |   |  |   | 3.6  |  
|Reversals                                |  |                       |     |   |    |   |     |     |  |   |     |   |  |           | (0.6 | ) |       |   | (0.2 | ) |  |   | (0.8 | )
|Payments                                 |  |                       | (3.1 | ) |    |   | (0.2 | )   |  |   | (0.1 | ) |  |           | (0.2 | ) |       |   |     |   |  |   | (3.6 | )
|Foreign currency                         |  |                       | (1.1 | ) |    |   | (0.2 | )   |  |   | 0.1  |   |  |           |     |   |       |   | 0.2  |   |  |   | (1.0 | )
|                                         |  |                       |      |   |    |   |      |     |  |   |      |   |  |           |      |   |       |   |      |   |  |   |      |  
|Balance of reserves at March 31, 2005    |  |                       | 17.2 |   |    |   | 3.4  |     |  |   | 1.6  |   |  |           | 2.1  |   |       |   | 1.8  |   |  |   | 26.1 |  
|Provisions                               |  |                       | 2.9  |   |    |   | 0.3  |     |  |   | 0.1  |   |  |           | 2.3  |   |       |   |     |   |  |   | 5.6  |  
|Reversals                                |  |                       | (0.1 | ) |    |   |     |     |  |   | (0.4 | ) |  |           |     |   |       |   | (0.3 | ) |  |   | (0.8 | )
|Payments                                 |  |                       | (3.1 | ) |    |   | (0.7 | )   |  |   | (0.2 | ) |  |           | (0.2 | ) |       |   | (0.9 | ) |  |   | (5.1 | )
|Foreign currency                         |  |                       | (0.9 | ) |    |   | (0.2 | )   |  |   | (0.1 | ) |  |           | (0.1 | ) |       |   |     |   |  |   | (1.3 | )
|                                         |  |                       |      |   |    |   |      |     |  |   |      |   |  |           |      |   |       |   |      |   |  |   |      |  
|Balance of reserves at June 30, 2005     |  | $                     | 16.0 |   |    | $ | 2.8  |     |  | $ | 1.0  |   |  | $         | 4.1  |   |       | $ | 0.6  |   |  | $ | 24.5 |  
|                                         |  |                       |      |   |    |   |      |     |  |   |      |   |  |           |      |   |       |   |      |   |  |   |      |  



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



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



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



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



5. Other (Income) Expense, Net



The specific components of
Other (income) expense, net are as follows:



|                                               |  |                           |      |   |                         |   |      |      |  |   |      |   |  |   |      |  
|---------------------------------------------- |  | ------------------------- | ---- | - | ----------------------- | - | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                                               |  | Three Months EndedJune 30 |      |   | Six Months EndedJune 30 |  
|                                               |  | 2005                      |      |   | 2004                    |   |      | 2005 |  |   | 2004 |  
|                                               |  | (Millions of Dollars)     |     
|Amortization of intangible assets              |  | $                         | 4.2  |   |                         | $ | 3.9  |      |  | $ | 8.7  |   |  | $ | 8.4  |  
|Foreign currency exchange                      |  |                           | 7.4  |   |                         |   | 2.8  |      |  |   | 8.6  |   |  |   | 8.1  |  
|Restructuring expense                          |  |                           | 4.8  |   |                         |   |     |      |  |   | 7.6  |   |  |   |     |  
|Minority interest in consolidated subsidiaries |  |                           | 1.1  |   |                         |   | 1.0  |      |  |   | 1.9  |   |  |   | 2.5  |  
|Royalty income                                 |  |                           | (0.9 | ) |                         |   | (0.6 | )    |  |   | (1.1 | ) |  |   | (1.0 | )
|Loss (gain) on sale of assets                  |  |                           | (0.6 | ) |                         |   | 0.6  |      |  |   | (7.4 | ) |  |   | (0.1 | )
|Adjustment of 2004 goodwill impairment charge  |  |                           |     |   |                         |   |     |      |  |   | (7.7 | ) |  |   |     |  
|Other                                          |  |                           | (6.5 | ) |                         |   | (4.3 | )    |  |   | (6.7 | ) |  |   | (5.8 | )
|                                               |  |                           |      |   |                         |   |      |      |  |   |      |   |  |   |      |  
|                                               |  | $                         | 9.5  |   |                         | $ | 3.4  |      |  | $ | 3.9  |   |  | $ | 12.1 |  
|                                               |  |                           |      |   |                         |   |      |      |  |   |      |   |  |   |      |  



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



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



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6. Discontinued Operations



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



|                                             |  |                                  |      |   |                                |   |      |  
|-------------------------------------------- |  | -------------------------------- | ---- | - | ------------------------------ | - | ---- | -
|                                             |  | Three Months Ended June 30, 2004 |      |   | Six Months Ended June 30, 2004 |  
|                                             |  | (Millions of Dollars)            |     
|Net sales                                    |  | $                                | 5.3  |   |                                | $ | 11.8 |  
|Cost of products sold                        |  |                                  | 6.6  |   |                                |   | 12.9 |  
|                                             |  |                                  |      |   |                                |   |      |  
|Gross margin                                 |  |                                  | (1.3 | ) |                                |   | (1.1 | )
|                                             |  |                                 
|Selling, general and administrative expenses |  |                                  | 1.0  |   |                                |   | 2.2  |  
|Other expense, net                           |  |                                  | 1.6  |   |                                |   | 1.9  |  
|                                             |  |                                  |      |   |                                |   |      |  
|Loss before income taxes                     |  |                                  | (3.9 | ) |                                |   | (5.2 | )
|Income tax benefit                           |  |                                  | (0.9 | ) |                                |   | (1.0 | )
|                                             |  |                                  |      |   |                                |   |      |  
|Loss from discontinued operations            |  | $                                | (3.0 | ) |                                | $ | (4.2 | )
|                                             |  |                                  |      |   |                                |   |      |  



7. Inventories



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



|                   |  |                       |       |   |                 |   |         |  
|------------------ |  | --------------------- | ----- | - | --------------- | - | ------- | -
|                   |  | June 302005           |       |   | December 312004 |  
|                   |  | (Millions of Dollars) |      
|Raw materials      |  | $                     | 177.3 |   |                 | $ | 185.8   |  
|Work-in-process    |  |                       | 157.6 |   |                 |   | 157.7   |  
|Finished products  |  |                       | 643.7 |   |                 |   | 680.1   |  
|                   |  |                       |       |   |                 |   |         |  
|                   |  |                       | 978.6 |   |                 |   | 1,023.6 |  
|Valuation reserves |  |                       | (69.8 | ) |                 |   | (70.7   | )
|                   |  |                       |       |   |                 |   |         |  
|                   |  | $                     | 908.8 |   |                 | $ | 952.9   |  
|                   |  |                       |       |   |                 |   |         |  



8. Investments in Non-Consolidated
Affiliates



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



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



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



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



9. Accrued Liabilities



Accrued liabilities consisted of the
following:



|                                               |  |                       |       |                 |   |      
|---------------------------------------------- |  | --------------------- | ----- | --------------- | - | -----
|                                               |  | June 302005           |       | December 312004
|                                               |  | (Millions of Dollars)
|Accrued compensation                           |  | $                     | 258.4 |                 | $ | 255.5
|Accrued income taxes                           |  |                       | 71.7  |                 |   | 75.9 
|Accrued rebates                                |  |                       | 68.1  |                 |   | 73.2 
|Accrued Chapter 11 and Administration expenses |  |                       | 36.0  |                 |   | 44.8 
|Non-income taxes payable                       |  |                       | 35.3  |                 |   | 34.5 
|Restructuring reserves                         |  |                       | 24.5  |                 |   | 27.9 
|Accrued product returns                        |  |                       | 18.5  |                 |   | 20.4 
|Accrued warranty                               |  |                       | 13.3  |                 |   | 14.8 
|Accrued professional services                  |  |                       | 13.3  |                 |   | 12.7 
|                                               |  |                       |       |                 |   |      
|                                               |  | $                     | 539.1 |                 | $ | 559.7
|                                               |  |                       |       |                 |   |      



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##### Table of Contents

10. Debt



Long-term debt consisted of the following:



|                                                     |  |                       |        |   |                 |   |        |  
|---------------------------------------------------- |  | --------------------- | ------ | - | --------------- | - | ------ | -
|                                                     |  | June 302005           |        |   | December 312004 |  
|                                                     |  | (Millions of Dollars) |       
|DIP credit facility                                  |  | $                     | 362.8  |   |                 | $ | 277.7  |  
|Other                                                |  |                       | 42.9   |   |                 |   | 42.0   |  
|                                                     |  |                       |        |   |                 |   |        |  
|                                                     |  |                       | 405.7  |   |                 |   | 319.7  |  
|Less: current maturities included in short-term debt |  |                       | (398.2 | ) |                 |   | (309.6 | )
|                                                     |  |                       |        |   |                 |   |        |  
|                                                     |  | $                     | 7.5    |   |                 | $ | 10.1   |  
|                                                     |  |                       |        |   |                 |   |        |  



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



|                         |  |                       |       |                 |   |      
|------------------------ |  | --------------------- | ----- | --------------- | - | -----
|                         |  | June 302005           |       | December 312004
|                         |  | (Millions of Dollars)
|Contractual commitment   |  | $                     | 500.0 |                 | $ | 500.0
|Less: current borrowings |  |                       | 362.8 |                 |   | 277.7
|Less: letters of credit  |  |                       | 24.1  |                 |   | 45.3 
|                         |  |                       |       |                 |   |      
|Available to borrow      |  | $                     | 113.1 |                 | $ | 177.0
|                         |  |                       |       |                 |   |      



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



11. Other Comprehensive Loss



The Companys comprehensive loss consists of the following:



|                                         |  |                           |       |   |                         |   |       |      |  |   |        |   |  |   |       |  
|---------------------------------------- |  | ------------------------- | ----- | - | ----------------------- | - | ----- | ---- |  | - | ------ | - |  | - | ----- | -
|                                         |  | Three Months EndedJune 30 |       |   | Six Months EndedJune 30 |  
|                                         |  | 2005                      |       |   | 2004                    |   |       | 2005 |  |   | 2004   |  
|                                         |  | (Millions of Dollars)     |      
|Net loss                                 |  | $                         | (11.6 | ) |                         | $ | (9.0  | )    |  | $ | (59.9  | ) |  | $ | (29.4 | )
|Foreign currency translation adjustments |  |                           | (73.1 | ) |                         |   | (8.1  | )    |  |   | (147.0 | ) |  |   | (13.2 | )
|                                         |  |                           |       |   |                         |   |       |      |  |   |        |   |  |   |       |  
|                                         |  | $                         | (84.7 | ) |                         | $ | (17.1 | )    |  | $ | (206.9 | ) |  | $ | (42.6 | )
|                                         |  |                           |       |   |                         |   |       |      |  |   |        |   |  |   |       |  



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##### Table of Contents

12. Income Taxes



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



13. Loss Per Common Share



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



|                                                                     |  |                                                           |       |   |                         |   |       |      |  |   |       |   |  |   |       |  
|-------------------------------------------------------------------- |  | --------------------------------------------------------- | ----- | - | ----------------------- | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                                     |  | Three Months EndedJune 30                                 |       |   | Six Months EndedJune 30 |  
|                                                                     |  | 2005                                                      |       |   | 2004                    |   |       | 2005 |  |   | 2004  |  
|                                                                     |  | (Millions of Dollars, Except Share and Per Share Amounts) |      
|Numerator:                                                           |  |                                                           |       |   |                         |   |       |      |  |   |       |   |  |   |       |  
|Loss from continuing operations                                      |  | $                                                         | (11.6 | ) |                         | $ | (6.0  | )    |  | $ | (59.9 | ) |  | $ | (25.2 | )
|Loss from discontinued operations                                    |  |                                                           |      |   |                         |   | (3.0  | )    |  |   |      |   |  |   | (4.2  | )
|                                                                     |  |                                                           |       |   |                         |   |       |      |  |   |       |   |  |   |       |  
|Numerator for basic and diluted loss per common share                |  | $                                                         | (11.6 | ) |                         | $ | (9.0  | )    |  | $ | (59.9 | ) |  | $ | (29.4 | )
|                                                                     |  |                                                           |       |   |                         |   |       |      |  |   |       |   |  |   |       |  
|Denominator:                                                         |  |                                                           |       |   |                         |   |       |      |  |   |       |   |  |   |       |  
|Weighted average shares outstanding, basic and diluted (in millions) |  |                                                           | 89.1  |   |                         |   | 87.1  |      |  |   | 89.1  |   |  |   | 87.1  |  
|                                                                     |  |                                                           |       |   |                         |   |       |      |  |   |       |   |  |   |       |  
|Loss from continuing operations                                      |  | $                                                         | (0.13 | ) |                         | $ | (0.07 | )    |  | $ | (0.67 | ) |  | $ | (0.29 | )
|Loss from discontinued operations, net of income tax expense         |  |                                                           |      |   |                         |   | (0.04 | )    |  |   |      |   |  |   | (0.05 | )
|                                                                     |  |                                                           |       |   |                         |   |       |      |  |   |       |   |  |   |       |  
|Basic and diluted loss per common share                              |  | $                                                         | (0.13 | ) |                         | $ | (0.11 | )    |  | $ | (0.67 | ) |  | $ | (0.34 | )
|                                                                     |  |                                                           |       |   |                         |   |       |      |  |   |       |   |  |   |       |  



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



14. Pensions and Other Postretirement Benefits



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



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##### Table of Contents

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



|                                                |  |                       |       |   |               |   |       |                |  |   |       |   |  |      |       |   |      |   |      |   |  |   |      |  
|----------------------------------------------- |  | --------------------- | ----- | - | ------------- | - | ----- | -------------- |  | - | ----- | - |  | ---- | ----- | - | ---- | - | ---- | - |  | - | ---- | -
|                                                |  | Pension Benefits      |       |   |               |   |       |                | 
|                                                |  | United States         |       |   | International |   |       | Other Benefits | 
|                                                |  | 2005                  |       |   | 2004          |   |       | 2005           |  |   | 2004  |   |  | 2005 |       |   | 2004 |  
|                                                |  | (Millions of Dollars) |      
|Service cost                                    |  | $                     | 7.7   |   |               | $ | 6.9   |                |  | $ | 2.5   |   |  | $    | 4.8   |   |      | $ | 1.3  |   |  | $ | 0.7  |  
|Interest cost                                   |  |                       | 14.3  |   |               |   | 14.5  |                |  |   | 41.4  |   |  |      | 34.1  |   |      |   | 8.5  |   |  |   | 8.4  |  
|Expected return on plan assets                  |  |                       | (14.7 | ) |               |   | (13.7 | )              |  |   | (30.8 | ) |  |      | (32.1 | ) |      |   |     |   |  |   |     |  
|Unrecognized transition obligation              |  |                       |      |   |               |   |      |                |  |   |      |   |  |      |      |   |      |   |     |   |  |   |     |  
|Amortization of unrecognized (gain) loss        |  |                       | 6.6   |   |               |   | 6.3   |                |  |   | 26.6  |   |  |      | 14.3  |   |      |   | (1.0 | ) |  |   | 1.5  |  
|Amortization of unrecognized prior service cost |  |                       | 1.9   |   |               |   | 2.1   |                |  |   |      |   |  |      |      |   |      |   | 3.0  |   |  |   | (0.2 | )
|                                                |  |                       |       |   |               |   |       |                |  |   |       |   |  |      |       |   |      |   |      |   |  |   |      |  
|Net periodic benefit cost                       |  | $                     | 15.8  |   |               | $ | 16.1  |                |  | $ | 39.7  |   |  | $    | 21.1  |   |      | $ | 11.8 |   |  | $ | 10.4 |  
|                                                |  |                       |       |   |               |   |       |                |  |   |       |   |  |      |       |   |      |   |      |   |  |   |      |  



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



|                                                |  |                       |       |   |               |   |       |                |  |   |       |   |  |      |       |   |      |   |      |   |  |   |      |  
|----------------------------------------------- |  | --------------------- | ----- | - | ------------- | - | ----- | -------------- |  | - | ----- | - |  | ---- | ----- | - | ---- | - | ---- | - |  | - | ---- | -
|                                                |  | Pension Benefits      |       |   |               |   |       |                | 
|                                                |  | United States         |       |   | International |   |       | Other Benefits | 
|                                                |  | 2005                  |       |   | 2004          |   |       | 2005           |  |   | 2004  |   |  | 2005 |       |   | 2004 |  
|                                                |  | (Millions of Dollars) |      
|Service cost                                    |  | $                     | 15.4  |   |               | $ | 13.8  |                |  | $ | 5.1   |   |  | $    | 9.6   |   |      | $ | 2.6  |   |  | $ | 1.5  |  
|Interest cost                                   |  |                       | 28.6  |   |               |   | 29.0  |                |  |   | 83.6  |   |  |      | 68.2  |   |      |   | 17.0 |   |  |   | 16.7 |  
|Expected return on plan assets                  |  |                       | (29.4 | ) |               |   | (27.3 | )              |  |   | (62.2 | ) |  |      | (64.2 | ) |      |   |     |   |  |   |     |  
|Unrecognized transition obligation              |  |                       | 2.4   |   |               |   |      |                |  |   |      |   |  |      |      |   |      |   |     |   |  |   |     |  
|Amortization of unrecognized (gain) loss        |  |                       | 13.2  |   |               |   | 12.6  |                |  |   | 53.7  |   |  |      | 28.7  |   |      |   | (2.0 | ) |  |   | 3.0  |  
|Amortization of unrecognized prior service cost |  |                       | 3.8   |   |               |   | 4.1   |                |  |   |      |   |  |      |      |   |      |   | 6.0  |   |  |   | (0.4 | )
|                                                |  |                       |       |   |               |   |       |                |  |   |       |   |  |      |       |   |      |   |      |   |  |   |      |  
|Net periodic benefit cost                       |  | $                     | 34.0  |   |               | $ | 32.2  |                |  | $ | 80.2  |   |  | $    | 42.3  |   |      | $ | 23.6 |   |  | $ | 20.8 |  
|                                                |  |                       |       |   |               |   |       |                |  |   |       |   |  |      |       |   |      |   |      |   |  |   |      |  



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



15. Litigation and Environmental
Matters



T&N Companies Asbestos Litigation



Background



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



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##### Table of Contents

Recorded Liability



In 2000, the Company increased its estimate of asbestos-related liability for the T&N Companies by $751 million and recorded a related insurance recoverable asset of
$577 million. The revision in the estimate of probable asbestos-related liability principally resulted from a study performed by an econometric firm that specializes in these types of matters. The liability (approximately $1.3 billion as of June 30,
2005) represented the Companys estimate prior to the Restructuring Proceedings for claims currently pending and those which were reasonably estimated to be asserted and paid through 2012. The Company did not provide a liability for claims that
may be paid subsequent to this period as it could not reasonably estimate such claims. In estimating the liability prior to the Restructuring Proceedings, the Company made assumptions regarding the total number of claims anticipated to be received
in a future period, the typical cost of settlement (which is sensitive to the industry in which the plaintiff claims exposure, the alleged disease type and the jurisdiction in which the action is being brought), the rate of receipt of claims, the
settlement strategy in dealing with outstanding claims and the timing of settlements. As a result of the Restructuring Proceedings, pending asbestos-related litigation against the Company in the United States and the U.K. is stayed (subject to
certain exceptions in the case of governmental authorities), and no party may take action to pursue or collect on such asbestos claims absent specific authorization of the Bankruptcy Court or the High Court. Since the Restructuring Proceedings, the
Company has ceased making payments with respect to asbestos-related lawsuits. An asbestos creditors committee has been appointed in the U.S. representing asbestos claimants with pending claims against the Company, and the Bankruptcy Court has
appointed a legal representative for the interests of potential future asbestos claimants. In the U.K. a creditors committee consisting in large part of representatives of asbestos claimants has been appointed. The Companys obligations with
respect to present and future claims could be determined through litigation in the Bankruptcy Court, the High Court, and/or through negotiations with each of the official committees appointed.



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



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



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



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##### Table of Contents

Except for the effect of foreign currency, the Company has not adjusted its estimate of the asbestos liability since
September 30, 2001. For the Companys U.S. and U.K. subsidiaries this liability is included in the consolidated balance sheet under the caption Liabilities subject to compromise as of June 30, 2005.



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



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



Insurance Recoverable



In 1996, T&N Ltd. (formerly T&N, plc) purchased for itself and its then defined global subsidiaries a £500 million layer of insurance which will be triggered should the aggregate costs of claims made or
brought after June 30, 1996, where the exposure occurred prior to that date, exceed £690 million. During 2000, the Company concluded that the aggregate cost of the claims filed after June 30, 1996 would exceed the trigger point and recorded an
insurance recoverable asset under the T&N policy of $577 million. As of June 30, 2005, the recorded insurance recoverable was $644 million. In December 2001, one of the three reinsurers, European International Reinsurance Company Ltd.
(EIR), filed suit in a London, England court to challenge the validity of its insurance contract with the T&N Companies. As a result of this lawsuit, a claim was made against the broker (Sedgwick) that assisted in procuring this
policy for breach of its duties as a broker. This trial commenced in October 2003. Prior to the conclusion of the trial, the parties were able to reach a settlement. As a result of this settlement, the Company recorded a $38.9 million asbestos
charge during the fourth quarter of 2003. Under the terms of the settlement, EIR would be liable for 65.5% of its one-third share of the reinsurance policy. By separate agreement, Sedgwick agreed to be liable for an additional 17.25% of the EIR
share of the reinsurance policy. T&N Ltd. has also agreed to indemnify the insurer for sums paid under the policy for which the insurer is liable to T&N Ltd. for which the insurer has no recovery from the reinsurers or Sedgwick. The
settlement agreements referenced above are being held in escrow pending approval by the Bankruptcy Court and the Administrators of T&N Ltd. of those portions of the above-described settlement agreements that affect the Debtors. A motion seeking
the Bankruptcy Courts approval of the settlement was filed on March 1, 2004.



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



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



28



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##### Table of Contents

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



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



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



Abex and Wagner Asbestos Litigation



Background



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



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



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



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



29



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##### Table of Contents

Recorded Liability



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



As a result of the
Restructuring Proceedings, pending asbestos-related litigation is stayed. The Company issued various letters of credit in connection with asbestos lawsuits that had resulted in verdicts against the Company prior to its filing for bankruptcy
protection. The letters of credit were issued as security for judgments entered against the Company to permit the Company to pursue appeals to these judgments. The Bankruptcy Court has lifted the automatic stay with respect to one letter of credit
for the Company where the letter of credit was in place to allow the appeal of this case to proceed. During 2004, the final appeal in this case was denied and a net draw was made upon this letter of credit of approximately $1 million.



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



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



Insurance Recoverable



Abex maintained
product liability insurance coverage for most of the time that it manufactured products that contained asbestos. This coverage is shared with other third-party companies. The subsidiary of the Company that may be liable for certain indemnity and
defense payments with respect to Abex has the benefit of that insurance up to the extent of that liability. Abex has been in litigation since 1982 with the insurance carriers of its primary layer of liability concerning coverage for asbestos claims.
Abex also has substantial excess layer liability insurance coverage that is shared with other companies that, barring unforeseen insolvencies of excess carriers or other adverse events, should provide coverage for asbestos claims against Abex. The
Abex insurance recoverable was $112.6 million as of June 30, 2005.



Wagner also
maintained product liability insurance coverage for some of the time that it manufactured products that contained asbestos. This coverage is shared with other third-party companies. One of the companies, Dresser Industries, Inc.
(Dresser) initiated an adversary action against the Debtors and a number of insurance carriers in the Companys Restructuring Proceedings. In its complaint, Dresser alleged that it has rights under certain primary and excess general
liability insurance policies that may be shared with one of the Debtors, Federal-Mogul Products (FMP) as the successor to Wagner Electric Corporation. Dresser seeks, among other things, a declaration of the parties respective
rights and obligations under the policies and a partition of the competing rights of Dresser and FMP under the policies. FMP answered Dressers complaint and filed cross-claims against all of the defendant-insurers seeking a declaration of
FMPs rights to the policies. The subsidiary of the Company that may be liable for



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



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



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



Federal-Mogul and Fel-Pro Asbestos Litigation



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



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



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



Aggregate of
Asbestos Liability and Insurance Recoverable Asset



The following is a summary
of the asbestos liability subject to compromise and the insurance recoverable asset as of June 30, 2005 and December 31, 2004:



|                             |  |                       |         |   |      |   |        |  |   |       |   |       |   |     |  |   |         |  
|---------------------------- |  | --------------------- | ------- | - | ---- | - | ------ |  | - | ----- | - | ----- | - | --- |  | - | ------- | -
|                             |  | T&N Companies         |         |   | Abex |   | Wagner |  |   | Other |   | Total |  
|                             |  | (Millions of Dollars) |        
|Liability:                   |  |                       |         |   |      |   |        |  |   |       |   |       |   |     |  |   |         |  
|Balance at December 31, 2004 |  | $                     | 1,367.7 |   |      | $ | 129.5  |  | $ | 84.1  |   |       | $ | 2.7 |  | $ | 1,584.0 |  
|CCR/ Surety settlement       |  |                       | (29.0   | ) |      |   |       |  |   |      |   |       |   |    |  |   | (29.0   | )
|Foreign exchange             |  |                       | (13.5   | ) |      |   |       |  |   |      |   |       |   |    |  |   | (13.5   | )
|                             |  |                       |         |   |      |   |        |  |   |       |   |       |   |     |  |   |         |  
|Balance at June 30, 2005     |  | $                     | 1,325.2 |   |      | $ | 129.5  |  | $ | 84.1  |   |       | $ | 2.7 |  | $ | 1,541.5 |  
|                             |  |                       |         |   |      |   |        |  |   |       |   |       |   |     |  |   |         |  
|Asset:                       |  |                       |         |   |      |   |        |  |   |       |   |       |   |     |  |   |         |  
|Balance at December 31, 2004 |  | $                     | 687.7   |   |      | $ | 112.6  |  | $ | 53.5  |   |       | $ |    |  | $ | 853.8   |  
|Cash receipts                |  |                       |        |   |      |   |       |  |   | (0.5  | ) |       |   |    |  |   | (0.5    | )
|Foreign exchange             |  |                       | (43.1   | ) |      |   |       |  |   |      |   |       |   |    |  |   | (43.1   | )
|                             |  |                       |         |   |      |   |        |  |   |       |   |       |   |     |  |   |         |  
|Balance at June 30, 2005     |  | $                     | 644.6   |   |      | $ | 112.6  |  | $ | 53.0  |   |       | $ |    |  | $ | 810.2   |  
|                             |  |                       |         |   |      |   |        |  |   |       |   |       |   |     |  |   |         |  



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



Fairness in Asbestos Injury Resolution Act of
2005



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



Other Matters



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



Environmental Matters



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



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



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



The Company also has identified certain presently and formerly owned properties at which it
is or may be responsible for cleaning up environmental contamination, in some cases as a result of contractual commitments. The Company is actively seeking to resolve these matters.



Although difficult to quantify based on the complexity of the issues, the Company has accrued amounts corresponding to its best estimate of
the costs associated with such regulatory and contractual matters based upon current available information from site investigations and consultants. Environmental reserves were $58.0 million and $61.0 million at June 30, 2005 and December 31, 2004,
respectively, and are included in the consolidated balance sheets as follows:



|                                    |  |                       |      |                 |   |     
|----------------------------------- |  | --------------------- | ---- | --------------- | - | ----
|                                    |  | June 302005           |      | December 312004
|                                    |  | (Millions of Dollars)
|Other current liabilities           |  | $                     | 9.7  |                 | $ | 11.5
|Other long-term accrued liabilities |  |                       | 23.5 |                 |   | 25.9
|Liabilities subject to compromise   |  |                       | 24.8 |                 |   | 23.6
|                                    |  |                       |      |                 |   |     
|                                    |  | $                     | 58.0 |                 | $ | 61.0
|                                    |  |                       |      |                 |   |     



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



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



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



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



16. Operations by Reporting
Segment



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



The Company has aggregated certain individual product segments within its five reporting segments. The accounting policies of the segments are the same as those of the
Company. Revenues related to Powertrain, Sealing Systems, and Vehicle Safety and Performance products sold to OE customers are recorded within the respective segments. Revenues from such products sold to Aftermarket customers are recorded within the
Aftermarket Products and Services segment. All products transferred into the Aftermarket Products and Services reporting segment from other reporting segments are transferred at cost in the United States and at agreed-upon transfer prices
internationally.



The Company evaluates segment performance principally on a
non-GAAP Operational EBITDA basis. Operational EBITDA is defined as earnings before interest, income taxes, depreciation and amortization and certain nonrecurring items such as restructuring and impairment charges, Chapter 11 and Administration
related reorganization expenses, and gains or losses on the sales of assets. Operational EBITDA for each segment is shown below and is reconciled to its most comparable U.S. GAAP measure in the consolidated financial statements.



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



|                                  |  |                           |       |   |                         |   |       |      |  |   |       |   |  |   |       |  
|--------------------------------- |  | ------------------------- | ----- | - | ----------------------- | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                  |  | Net Sales                 |      
|                                  |  | Three Months EndedJune 30 |       |   | Six Months EndedJune 30 |  
|                                  |  | 2005                      |       |   | 2004                    |   |       | 2005 |  |   | 2004  |  
|                                  |  | (Millions of Dollars)     |      
|Powertrain                        |  | $                         | 585   |   |                         | $ | 544   |      |  | $ | 1,167 |   |  | $ | 1,093 |  
|Sealing Systems                   |  |                           | 127   |   |                         |   | 131   |      |  |   | 254   |   |  |   | 264   |  
|Vehicle Safety and Performance    |  |                           | 196   |   |                         |   | 176   |      |  |   | 390   |   |  |   | 351   |  
|Aftermarket Products and Services |  |                           | 757   |   |                         |   | 720   |      |  |   | 1,488 |   |  |   | 1,410 |  
|                                  |  |                           |       |   |                         |   |       |      |  |   |       |   |  |   |       |  
|                                  |  | $                         | 1,665 |   |                         | $ | 1,571 |      |  | $ | 3,299 |   |  | $ | 3,118 |  
|                                  |  |                           |       |   |                         |   |       |      |  |   |       |   |  |   |       |  
|                                  | 
|                                  |  | Gross Margin              |      
|                                  |  | Three Months EndedJune 30 |       |   | Six Months EndedJune 30 |  
|                                  |  | 2005                      |       |   | 2004                    |   |       | 2005 |  |   | 2004  |  
|                                  |  | (Millions of Dollars)     |      
|Powertrain                        |  | $                         | 88    |   |                         | $ | 87    |      |  | $ | 172   |   |  | $ | 164   |  
|Sealing Systems                   |  |                           | 8     |   |                         |   | 16    |      |  |   | 12    |   |  |   | 30    |  
|Vehicle Safety and Performance    |  |                           | 51    |   |                         |   | 49    |      |  |   | 96    |   |  |   | 98    |  
|Aftermarket Products and Services |  |                           | 171   |   |                         |   | 178   |      |  |   | 336   |   |  |   | 343   |  
|Corporate                         |  |                           | (26   | ) |                         |   | (10   | )    |  |   | (49   | ) |  |   | (18   | )
|                                  |  |                           |       |   |                         |   |       |      |  |   |       |   |  |   |       |  
|                                  |  | $                         | 292   |   |                         | $ | 320   |      |  | $ | 567   |   |  | $ | 617   |  
|                                  |  |                           |       |   |                         |   |       |      |  |   |       |   |  |   |       |  



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Operational EBITDA by reporting segment and the reconciliation of Operational EBITDA to earnings (loss) from continuing
operations before income tax expense is as follows:



|                                                                     |  |                           |      |   |                         |   |      |      |  |   |      |   |  |   |      |  
|-------------------------------------------------------------------- |  | ------------------------- | ---- | - | ----------------------- | - | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                                                                     |  | Three Months EndedJune 30 |      |   | Six Months EndedJune 30 |  
|                                                                     |  | 2005                      |      |   | 2004                    |   |      | 2005 |  |   | 2004 |  
|                                                                     |  | (Millions of Dollars)     |     
|Powertrain                                                           |  | $                         | 102  |   |                         | $ | 89   |      |  | $ | 198  |   |  | $ | 173  |  
|Sealing Systems                                                      |  |                           | 7    |   |                         |   | 19   |      |  |   | 9    |   |  |   | 32   |  
|Vehicle Safety and Performance                                       |  |                           | 45   |   |                         |   | 42   |      |  |   | 86   |   |  |   | 86   |  
|Aftermarket Products and Services                                    |  |                           | 117  |   |                         |   | 123  |      |  |   | 224  |   |  |   | 232  |  
|Corporate                                                            |  |                           | (113 | ) |                         |   | (101 | )    |  |   | (232 | ) |  |   | (212 | )
|                                                                     |  |                           |      |   |                         |   |      |      |  |   |      |   |  |   |      |  
|Total Operational EBITDA                                             |  |                           | 158  |   |                         |   | 172  |      |  |   | 285  |   |  |   | 311  |  
|                                                                     |  |                           |      |  
|Adjustment of long-lived assets to fair value                        |  |                           | (1   | ) |                         |   | (20  | )    |  |   | (4   | ) |  |   | (23  | )
|Depreciation and amortization                                        |  |                           | (86  | ) |                         |   | (82  | )    |  |   | (179 | ) |  |   | (167 | )
|Interest expense, net                                                |  |                           | (34  | ) |                         |   | (24  | )    |  |   | (63  | ) |  |   | (50  | )
|Chapter 11 and Administration related reorganization expenses        |  |                           | (20  | ) |                         |   | (34  | )    |  |   | (50  | ) |  |   | (60  | )
|Discontinued operations and other                                    |  |                           | (4   | ) |                         |   | 3    |      |  |   | 2    |   |  |   | 4    |  
|                                                                     |  |                           |      |   |                         |   |      |      |  |   |      |   |  |   |      |  
|Earnings (loss) from continuing operations before income tax expense |  | $                         | 13   |   |                         | $ | 15   |      |  | $ | (9   | ) |  | $ | 15   |  
|                                                                     |  |                           |      |   |                         |   |      |      |  |   |      |   |  |   |      |  



Total assets by reportable segment are
as follows:



|                                  |  |                       |       |                 |   |      
|--------------------------------- |  | --------------------- | ----- | --------------- | - | -----
|                                  |  | June 302005           |       | December 312004
|                                  |  | (Millions of Dollars)
|Powertrain                        |  | $                     | 1,886 |                 | $ | 2,032
|Sealing Systems                   |  |                       | 807   |                 |   | 791  
|Vehicle Safety and Performance    |  |                       | 979   |                 |   | 1,017
|Aftermarket Products and Services |  |                       | 3,031 |                 |   | 3,057
|Corporate                         |  |                       | 1,245 |                 |   | 1,368
|                                  |  |                       |       |                 |   |      
|                                  |  | $                     | 7,948 |                 | $ | 8,265
|                                  |  |                       |       |                 |   |      



17. Stock-Based Compensation



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



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



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



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



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



18. Consolidating Condensed Financial Information of Guarantor Subsidiaries



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



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



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



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



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



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



As a result of the Restructuring Proceedings (see Note 2
Voluntary Reorganization Under Chapter 11 and Administration) certain of the liabilities at June 30, 2005, as shown below, were liabilities subject to compromise as of the Petition date:



|                                                    |  |                       |         |                       |   |                           |  |              |         |  |   |        
|--------------------------------------------------- |  | --------------------- | ------- | --------------------- | - | ------------------------- |  | ------------ | ------- |  | - | -------
|                                                    |  | Parent                |         | GuarantorSubsidiaries |   | Non-GuarantorSubsidiaries |  | Consolidated
|                                                    |  | (Millions of Dollars)
|Debt                                                |  | $                     | 4,050.2 |                       | $ | 0.2                       |  | $            |        |  | $ | 4,050.4
|Asbestos liabilities                                |  |                       | 1.4     |                       |   | 236.3                     |  |              | 1,303.8 |  |   | 1,541.5
|Accounts payable                                    |  |                       | 59.1    |                       |   | 116.2                     |  |              | 28.4    |  |   | 203.7  
|Company-obligated mandatorily redeemable securities |  |                       |        |                       |   |                          |  |              | 114.6   |  |   | 114.6  
|Interest payable                                    |  |                       | 43.8    |                       |   | 0.2                       |  |              |        |  |   | 44.0   
|Environmental liabilities                           |  |                       | 24.8    |                       |   |                          |  |              |        |  |   | 24.8   
|Other accrued liabilities                           |  |                       | 9.8     |                       |   | 0.9                       |  |              | 10.1    |  |   | 20.8   
|                                                    |  |                       |         |                       |   |                           |  |              |         |  |   |        
|                                                    |  | $                     | 4,189.1 |                       | $ | 353.8                     |  | $            | 1,456.9 |  | $ | 5,999.8
|                                                    |  |                       |         |                       |   |                           |  |              |         |  |   |        



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Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Operations

Three Months Ended June 30, 2005



|                                                                               |  |                       |       |   |                        |   |       |                             |  |   |              |   |  |              |        |   |  |   |         |  
|------------------------------------------------------------------------------ |  | --------------------- | ----- | - | ---------------------- | - | ----- | --------------------------- |  | - | ------------ | - |  | ------------ | ------ | - |  | - | ------- | -
|                                                                               |  | Unconsolidated        |       |   |                        |   |       |                             | 
|                                                                               |  | Parent                |       |   | Guarantor Subsidiaries |   |       | Non- Guarantor Subsidiaries |  |   | Eliminations |   |  | Consolidated |       
|                                                                               |  | (Millions of Dollars) |      
|Net sales                                                                      |  | $                     | 327.8 |   |                        | $ | 717.3 |                             |  | $ | 1,118.0      |   |  | $            | (497.7 | ) |  | $ | 1,665.4 |  
|Cost of products sold                                                          |  |                       | 277.5 |   |                        |   | 622.0 |                             |  |   | 971.8        |   |  |              | (497.7 | ) |  |   | 1,373.6 |  
|                                                                               |  |                       |       |   |                        |   |       |                             |  |   |              |   |  |              |        |   |  |   |         |  
|Gross margin                                                                   |  |                       | 50.3  |   |                        |   | 95.3  |                             |  |   | 146.2        |   |  |              |       |   |  |   | 291.8   |  
|                                                                               |  |                       |       |   |                       
|Selling, general and administrative expenses                                   |  |                       | 56.9  |   |                        |   | 60.7  |                             |  |   | 108.7        |   |  |              |       |   |  |   | 226.3   |  
|Adjustment of long-lived assets to fair value                                  |  |                       |      |   |                        |   |      |                             |  |   | 1.0          |   |  |              |       |   |  |   | 1.0     |  
|Interest expense (income), net                                                 |  |                       | 37.4  |   |                        |   |      |                             |  |   | (3.6         | ) |  |              |       |   |  |   | 33.8    |  
|Chapter 11 and Administration related reorganization expenses                  |  |                       | 20.2  |   |                        |   |      |                             |  |   |             |   |  |              |       |   |  |   | 20.2    |  
|Equity earnings of unconsolidated subsidiaries                                 |  |                       |      |   |                        |   | (1.4  | )                           |  |   | (10.6        | ) |  |              |       |   |  |   | (12.0   | )
|Other (income) expense, net                                                    |  |                       | (12.2 | ) |                        |   | (32.5 | )                           |  |   | 54.2         |   |  |              |       |   |  |   | 9.5     |  
|                                                                               |  |                       |       |   |                        |   |       |                             |  |   |              |   |  |              |        |   |  |   |         |  
|Earnings (loss) before income taxes and equity earnings (loss) of subsidiaries |  |                       | (52.0 | ) |                        |   | 68.5  |                             |  |   | (3.5         | ) |  |              |       |   |  |   | 13.0    |  
|Income tax expense (benefit)                                                   |  |                       | (0.5  | ) |                        |   | 1.2   |                             |  |   | 23.9         |   |  |              |       |   |  |   | 24.6    |  
|                                                                               |  |                       |       |   |                        |   |       |                             |  |   |              |   |  |              |        |   |  |   |         |  
|Earnings (loss) before equity earnings (loss) of subsidiaries                  |  |                       | (51.5 | ) |                        |   | 67.3  |                             |  |   | (27.4        | ) |  |              |       |   |  |   | (11.6   | )
|Equity earnings (loss) of subsidiaries                                         |  |                       | 39.9  |   |                        |   | 24.8  |                             |  |   |             |   |  |              | (64.7  | ) |  |   |        |  
|                                                                               |  |                       |       |   |                        |   |       |                             |  |   |              |   |  |              |        |   |  |   |         |  
|Net earnings (loss)                                                            |  | $                     | (11.6 | ) |                        | $ | 92.1  |                             |  | $ | (27.4        | ) |  | $            | (64.7  | ) |  | $ | (11.6   | )
|                                                                               |  |                       |       |   |                        |   |       |                             |  |   |              |   |  |              |        |   |  |   |         |  



38



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##### Table of Contents

Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Operations

Six Months Ended June 30, 2005



|                                                                               |  |                       |        |   |                        |   |         |                             |  |   |              |   |  |              |        |   |  |   |         |  
|------------------------------------------------------------------------------ |  | --------------------- | ------ | - | ---------------------- | - | ------- | --------------------------- |  | - | ------------ | - |  | ------------ | ------ | - |  | - | ------- | -
|                                                                               |  | Unconsolidated        |        |   |                        |   |         |                             | 
|                                                                               |  | Parent                |        |   | Guarantor Subsidiaries |   |         | Non- Guarantor Subsidiaries |  |   | Eliminations |   |  | Consolidated |       
|                                                                               |  | (Millions of Dollars) |       
|Net sales                                                                      |  | $                     | 638.7  |   |                        | $ | 1,412.1 |                             |  | $ | 2,213.6      |   |  | $            | (965.8 | ) |  | $ | 3,298.6 |  
|Cost of products sold                                                          |  |                       | 562.5  |   |                        |   | 1,216.0 |                             |  |   | 1,919.2      |   |  |              | (965.8 | ) |  |   | 2,731.9 |  
|                                                                               |  |                       |        |   |                        |   |         |                             |  |   |              |   |  |              |        |   |  |   |         |  
|Gross margin                                                                   |  |                       | 76.2   |   |                        |   | 196.1   |                             |  |   | 294.4        |   |  |              |       |   |  |   | 566.7   |  
|                                                                               |  |                       |        |   |                       
|Selling, general and administrative expenses                                   |  |                       | 130.4  |   |                        |   | 123.8   |                             |  |   | 221.8        |   |  |              |       |   |  |   | 476.0   |  
|Adjustment of long-lived assets to fair value                                  |  |                       | 3.0    |   |                        |   |        |                             |  |   | 1.0          |   |  |              |       |   |  |   | 4.0     |  
|Interest expense (income), net                                                 |  |                       | 69.9   |   |                        |   |        |                             |  |   | (7.3         | ) |  |              |       |   |  |   | 62.6    |  
|Chapter 11 and Administration related reorganization expenses                  |  |                       | 50.2   |   |                        |   |        |                             |  |   |             |   |  |              |       |   |  |   | 50.2    |  
|Equity earnings of unconsolidated subsidiaries                                 |  |                       |       |   |                        |   | (2.9    | )                           |  |   | (18.4        | ) |  |              |       |   |  |   | (21.3   | )
|Other (income) expense, net                                                    |  |                       | (30.9  | ) |                        |   | (66.3   | )                           |  |   | 101.1        |   |  |              |       |   |  |   | 3.9     |  
|                                                                               |  |                       |        |   |                        |   |         |                             |  |   |              |   |  |              |        |   |  |   |         |  
|Earnings (loss) before income taxes and equity earnings (loss) of subsidiaries |  |                       | (146.4 | ) |                        |   | 141.5   |                             |  |   | (3.8         | ) |  |              |       |   |  |   | (8.7    | )
|Income tax expense                                                             |  |                       | 0.7    |   |                        |   | 2.3     |                             |  |   | 48.2         |   |  |              |       |   |  |   | 51.2    |  
|                                                                               |  |                       |        |   |                        |   |         |                             |  |   |              |   |  |              |        |   |  |   |         |  
|Earnings (loss) before equity earnings (loss) of subsidiaries                  |  |                       | (147.1 | ) |                        |   | 139.2   |                             |  |   | (52.0        | ) |  |              |       |   |  |   | (59.9   | )
|Equity earnings (loss) of subsidiaries                                         |  |                       | 87.2   |   |                        |   | 49.6    |                             |  |   |             |   |  |              | (136.8 | ) |  |   |        |  
|                                                                               |  |                       |        |   |                        |   |         |                             |  |   |              |   |  |              |        |   |  |   |         |  
|Net earnings (loss)                                                            |  | $                     | (59.9  | ) |                        | $ | 188.8   |                             |  | $ | (52.0        | ) |  | $            | (136.8 | ) |  | $ | (59.9   | )
|                                                                               |  |                       |        |   |                        |   |         |                             |  |   |              |   |  |              |        |   |  |   |         |  



39



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##### Table of Contents

Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Operations

Three Months Ended June 30, 2004



|                                                                                                          |  |                       |       |   |                        |   |       |                             |  |   |                         |   |  |                |      |   |              |   |        |   |  |   |         |  
|--------------------------------------------------------------------------------------------------------- |  | --------------------- | ----- | - | ---------------------- | - | ----- | --------------------------- |  | - | ----------------------- | - |  | -------------- | ---- | - | ------------ | - | ------ | - |  | - | ------- | -
|                                                                                                          |  | Unconsolidated        |       |   | Eliminations           |   |       |                             | 
|                                                                                                          |  | Parent                |       |   | Guarantor Subsidiaries |   |       | Non- Guarantor Subsidiaries |  |   | Discontinued Operations |   |  | Inter- Company |      |   | Consolidated |  
|                                                                                                          |  | (Millions of Dollars) |      
|Net sales                                                                                                 |  | $                     | 304.3 |   |                        | $ | 547.1 |                             |  | $ | 1,048.2                 |   |  | $              | (5.3 | ) |              | $ | (323.1 | ) |  | $ | 1,571.2 |  
|Cost of products sold                                                                                     |  |                       | 250.9 |   |                        |   | 436.3 |                             |  |   | 893.7                   |   |  |                | (6.6 | ) |              |   | (323.1 | ) |  |   | 1,251.2 |  
|                                                                                                          |  |                       |       |   |                        |   |       |                             |  |   |                         |   |  |                |      |   |              |   |        |   |  |   |         |  
|Gross margin                                                                                              |  |                       | 53.4  |   |                        |   | 110.8 |                             |  |   | 154.5                   |   |  |                | 1.3  |   |              |   |       |   |  |   | 320.0   |  
|                                                                                                          |  |                       |       |   |                        |  
|Selling, general and administrative expenses                                                              |  |                       | 76.4  |   |                        |   | 55.0  |                             |  |   | 103.6                   |   |  |                | (1.0 | ) |              |   |       |   |  |   | 234.0   |  
|Adjustment of long-lived assets to fair value                                                             |  |                       |      |   |                        |   |      |                             |  |   | 20.0                    |   |  |                |     |   |              |   |       |   |  |   | 20.0    |  
|Interest expense (income), net                                                                            |  |                       | 24.9  |   |                        |   |      |                             |  |   | (0.6                    | ) |  |                |     |   |              |   |       |   |  |   | 24.3    |  
|Chapter 11 and Administration related reorganization expenses                                             |  |                       | 34.4  |   |                        |   |      |                             |  |   |                        |   |  |                |     |   |              |   |       |   |  |   | 34.4    |  
|Equity earnings of unconsolidated subsidiaries                                                            |  |                       |      |   |                        |   | (1.9  | )                           |  |   | (8.8                    | ) |  |                |     |   |              |   |       |   |  |   | (10.7   | )
|Other (income) expense, net                                                                               |  |                       | (10.9 | ) |                        |   | (31.4 | )                           |  |   | 47.3                    |   |  |                | (1.6 | ) |              |   |       |   |  |   | 3.4     |  
|                                                                                                          |  |                       |       |   |                        |   |       |                             |  |   |                         |   |  |                |      |   |              |   |        |   |  |   |         |  
|Earnings (loss) from continuing operations before income taxes and equity earnings (loss) of subsidiaries |  |                       | (71.4 | ) |                        |   | 89.1  |                             |  |   | (7.0                    | ) |  |                | 3.9  |   |              |   |       |   |  |   | 14.6    |  
|Income tax expense (benefit)                                                                              |  |                       | (7.3  | ) |                        |   | 1.2   |                             |  |   | 25.8                    |   |  |                | 0.9  |   |              |   |       |   |  |   | 20.6    |  
|                                                                                                          |  |                       |       |   |                        |   |       |                             |  |   |                         |   |  |                |      |   |              |   |        |   |  |   |         |  
|Earnings (loss) from continuing operations before equity earnings (loss) of subsidiaries                  |  |                       | (64.1 | ) |                        |   | 87.9  |                             |  |   | (32.8                   | ) |  |                | 3.0  |   |              |   |       |   |  |   | (6.0    | )
|Earnings from discontinued operations, net of income taxes                                                |  |                       |      |   |                        |   |      |                             |  |   |                        |   |  |                | (3.0 | ) |              |   |       |   |  |   | (3.0    | )
|Equity earnings (loss) of subsidiaries                                                                    |  |                       | 55.1  |   |                        |   | 21.6  |                             |  |   |                        |   |  |                |     |   |              |   | (76.7  | ) |  |   |        |  
|                                                                                                          |  |                       |       |   |                        |   |       |                             |  |   |                         |   |  |                |      |   |              |   |        |   |  |   |         |  
|Net earnings (loss)                                                                                       |  | $                     | (9.0  | ) |                        | $ | 109.5 |                             |  | $ | (32.8                   | ) |  | $              |     |   |              | $ | (76.7  | ) |  | $ | (9.0    | )
|                                                                                                          |  |                       |       |   |                        |   |       |                             |  |   |                         |   |  |                |      |   |              |   |        |   |  |   |         |  



40



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##### Table of Contents

Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Operations

Six Months Ended June 30, 2004



|                                                                                                          |  |                       |        |   |                        |   |         |                             |  |   |                         |   |  |                |       |   |              |   |        |   |  |   |         |  
|--------------------------------------------------------------------------------------------------------- |  | --------------------- | ------ | - | ---------------------- | - | ------- | --------------------------- |  | - | ----------------------- | - |  | -------------- | ----- | - | ------------ | - | ------ | - |  | - | ------- | -
|                                                                                                          |  | Unconsolidated        |        |   | Eliminations           |   |         |                             | 
|                                                                                                          |  | Parent                |        |   | Guarantor Subsidiaries |   |         | Non- Guarantor Subsidiaries |  |   | Discontinued Operations |   |  | Inter- Company |       |   | Consolidated |  
|                                                                                                          |  | (Millions of Dollars) |       
|Net sales                                                                                                 |  | $                     | 597.2  |   |                        | $ | 1,082.0 |                             |  | $ | 2,091.2                 |   |  | $              | (11.8 | ) |              | $ | (640.9 | ) |  | $ | 3,117.7 |  
|Cost of products sold                                                                                     |  |                       | 495.9  |   |                        |   | 866.6   |                             |  |   | 1,792.5                 |   |  |                | (12.9 | ) |              |   | (640.9 | ) |  |   | 2,501.2 |  
|                                                                                                          |  |                       |        |   |                        |   |         |                             |  |   |                         |   |  |                |       |   |              |   |        |   |  |   |         |  
|Gross margin                                                                                              |  |                       | 101.3  |   |                        |   | 215.4   |                             |  |   | 298.7                   |   |  |                | 1.1   |   |              |   |       |   |  |   | 616.5   |  
|                                                                                                          |  |                       |        |   |                        |  
|Selling, general and administrative expenses                                                              |  |                       | 156.7  |   |                        |   | 109.4   |                             |  |   | 211.9                   |   |  |                | (2.2  | ) |              |   |       |   |  |   | 475.8   |  
|Adjustment of long-lived assets to fair value                                                             |  |                       |       |   |                        |   |        |                             |  |   | 23.1                    |   |  |                |      |   |              |   |       |   |  |   | 23.1    |  
|Interest expense (income), net                                                                            |  |                       | 51.7   |   |                        |   |        |                             |  |   | (1.8                    | ) |  |                |      |   |              |   |       |   |  |   | 49.9    |  
|Chapter 11 and Administration related reorganization expenses                                             |  |                       | 60.4   |   |                        |   |        |                             |  |   |                        |   |  |                |      |   |              |   |       |   |  |   | 60.4    |  
|Equity earnings of unconsolidated subsidiaries                                                            |  |                       |       |   |                        |   | (3.9    | )                           |  |   | (16.3                   | ) |  |                |      |   |              |   |       |   |  |   | (20.2   | )
|Other (income) expense, net                                                                               |  |                       | (17.7  | ) |                        |   | (65.5   | )                           |  |   | 97.2                    |   |  |                | (1.9  | ) |              |   |       |   |  |   | 12.1    |  
|                                                                                                          |  |                       |        |   |                        |   |         |                             |  |   |                         |   |  |                |       |   |              |   |        |   |  |   |         |  
|Earnings (loss) from continuing operations before income taxes and equity earnings (loss) of subsidiaries |  |                       | (149.8 | ) |                        |   | 175.4   |                             |  |   | (15.4                   | ) |  |                | 5.2   |   |              |   |       |   |  |   | 15.4    |  
|Income tax expense (benefit)                                                                              |  |                       | (6.3   | ) |                        |   | 2.2     |                             |  |   | 43.7                    |   |  |                | 1.0   |   |              |   |       |   |  |   | 40.6    |  
|                                                                                                          |  |                       |        |   |                        |   |         |                             |  |   |                         |   |  |                |       |   |              |   |        |   |  |   |         |  
|Earnings (loss) from continuing operations before equity earnings (loss) of subsidiaries                  |  |                       | (143.5 | ) |                        |   | 173.2   |                             |  |   | (59.1                   | ) |  |                | 4.2   |   |              |   |       |   |  |   | (25.2   | )
|Earnings from discontinued operations, net of income taxes                                                |  |                       |       |   |                        |   |        |                             |  |   |                        |   |  |                | (4.2  | ) |              |   |       |   |  |   | (4.2    | )
|Equity earnings (loss) of subsidiaries                                                                    |  |                       | 114.1  |   |                        |   | 39.2    |                             |  |   |                        |   |  |                |      |   |              |   | (153.3 | ) |  |   |        |  
|                                                                                                          |  |                       |        |   |                        |   |         |                             |  |   |                         |   |  |                |       |   |              |   |        |   |  |   |         |  
|Net earnings (loss)                                                                                       |  | $                     | (29.4  | ) |                        | $ | 212.4   |                             |  | $ | (59.1                   | ) |  | $              |      |   |              | $ | (153.3 | ) |  | $ | (29.4   | )
|                                                                                                          |  |                       |        |   |                        |   |         |                             |  |   |                         |   |  |                |       |   |              |   |        |   |  |   |         |  



41



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##### Table of Contents

Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Balance Sheet

June 30, 2005



|                                                             |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  
|------------------------------------------------------------ |  | --------------------- | -------- | - | ---------------------- | - | --------------------------- |  | ------------ | ------- |  | ------------ | -------- | - |  | - | -------- | -
|                                                             |  | Unconsolidated        |          |   |                        |   |                             | 
|                                                             |  | Parent                |          |   | Guarantor Subsidiaries |   | Non- Guarantor Subsidiaries |  | Eliminations |         |  | Consolidated |         
|                                                             |  | (Millions of Dollars) |         
|ASSETS                                                       |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  
|Current assets:                                              |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  
|Cash and equivalents                                         |  | $                     | 4.7      |   |                        | $ |                            |  | $            | 751.4   |  | $            |         |   |  | $ | 756.1    |  
|Accounts receivable, net                                     |  |                       | 220.2    |   |                        |   | 312.2                       |  |              | 583.1   |  |              |         |   |  |   | 1,115.5  |  
|Inventories, net                                             |  |                       | 114.3    |   |                        |   | 306.2                       |  |              | 488.3   |  |              |         |   |  |   | 908.8    |  
|Prepaid expenses and other current assets                    |  |                       | 51.1     |   |                        |   | 31.3                        |  |              | 147.6   |  |              |         |   |  |   | 230.0    |  
|                                                             |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  
|Total current assets                                         |  |                       | 390.3    |   |                        |   | 649.7                       |  |              | 1,970.4 |  |              |         |   |  |   | 3,010.4  |  
|                                                             |  |                       |          |   |                       
|Property, plant and equipment, net                           |  |                       | 259.0    |   |                        |   | 558.6                       |  |              | 1,325.9 |  |              |         |   |  |   | 2,143.5  |  
|Goodwill and indefinite-lived intangible assets              |  |                       | 488.2    |   |                        |   | 595.7                       |  |              | 194.8   |  |              |         |   |  |   | 1,278.7  |  
|Definite-lived intangible assets, net                        |  |                       | 66.6     |   |                        |   | 80.1                        |  |              | 165.7   |  |              |         |   |  |   | 312.4    |  
|Investment in subsidiaries                                   |  |                       | 6,482.0  |   |                        |   | 3,026.7                     |  |              |        |  |              | (9,508.7 | ) |  |   |         |  
|Intercompany accounts, net                                   |  |                       | (4,213.2 | ) |                        |   | 3,466.6                     |  |              | 746.6   |  |              |         |   |  |   |         |  
|Asbestos-related insurance recoverable                       |  |                       |         |   |                        |   | 165.6                       |  |              | 644.6   |  |              |         |   |  |   | 810.2    |  
|Prepaid pension costs                                        |  |                       |         |   |                        |   |                            |  |              | 178.6   |  |              |         |   |  |   | 178.6    |  
|Other noncurrent assets                                      |  |                       | 30.7     |   |                        |   | 26.0                        |  |              | 157.4   |  |              |         |   |  |   | 214.1    |  
|                                                             |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  
|                                                             |  | $                     | 3,503.6  |   |                        | $ | 8,569.0                     |  | $            | 5,384.0 |  | $            | (9,508.7 | ) |  | $ | 7,947.9  |  
|                                                             |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  
|LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)               |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  
|Current liabilities:                                         |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  
|Short-term debt, including current portion of long-term debt |  | $                     | 362.8    |   |                        | $ |                            |  | $            | 35.4    |  | $            |         |   |  | $ | 398.2    |  
|Accounts payable                                             |  |                       | 74.7     |   |                        |   | 83.4                        |  |              | 249.3   |  |              |         |   |  |   | 407.4    |  
|Accrued liabilities                                          |  |                       | 104.2    |   |                        |   | 58.4                        |  |              | 376.5   |  |              |         |   |  |   | 539.1    |  
|Other current liabilities                                    |  |                       | 31.4     |   |                        |   | 18.3                        |  |              | 86.9    |  |              |         |   |  |   | 136.6    |  
|                                                             |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  
|Total current liabilities                                    |  |                       | 573.1    |   |                        |   | 160.1                       |  |              | 748.1   |  |              |         |   |  |   | 1,481.3  |  
|                                                             |  |                       |          |   |                       
|Liabilities subject to compromise                            |  |                       | 4,189.1  |   |                        |   | 353.8                       |  |              | 1,456.9 |  |              |         |   |  |   | 5,999.8  |  
|                                                             |  |                       |          |   |                       
|Long-term debt                                               |  |                       |         |   |                        |   |                            |  |              | 7.5     |  |              |         |   |  |   | 7.5      |  
|Postemployment benefits                                      |  |                       | 741.9    |   |                        |   |                            |  |              | 1,498.0 |  |              |         |   |  |   | 2,239.9  |  
|Long-term portion of deferred income taxes                   |  |                       |         |   |                        |   |                            |  |              | 107.9   |  |              |         |   |  |   | 107.9    |  
|Other accrued liabilities                                    |  |                       | 104.0    |   |                        |   |                            |  |              | 106.2   |  |              |         |   |  |   | 210.2    |  
|Minority interest in consolidated subsidiaries               |  |                       | 25.4     |   |                        |   | 5.8                         |  |              |        |  |              |         |   |  |   | 31.2     |  
|Shareholders equity (deficit)                               |  |                       | (2,129.9 | ) |                        |   | 8,049.3                     |  |              | 1,459.4 |  |              | (9,508.7 | ) |  |   | (2,129.9 | )
|                                                             |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  
|                                                             |  | $                     | 3,503.6  |   |                        | $ | 8,569.0                     |  | $            | 5,384.0 |  | $            | (9,508.7 | ) |  | $ | 7,947.9  |  
|                                                             |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  



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Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Consolidating Condensed Balance Sheet

December 31, 2004



|                                                             |  |                       |          |   |                        |   |                             |  |   |              |   |  |              |          |   |  |   |          |  
|------------------------------------------------------------ |  | --------------------- | -------- | - | ---------------------- | - | --------------------------- |  | - | ------------ | - |  | ------------ | -------- | - |  | - | -------- | -
|                                                             |  | Unconsolidated        |          |   |                        |   |                             |  |  
|                                                             |  | Parent                |          |   | Guarantor Subsidiaries |   | Non- Guarantor Subsidiaries |  |   | Eliminations |   |  | Consolidated |         
|                                                             |  | (Millions of Dollars) |         
|ASSETS                                                       |  |                       |          |   |                        |   |                             |  |   |              |   |  |              |          |   |  |   |          |  
|Current assets:                                              |  |                       |          |   |                        |   |                             |  |   |              |   |  |              |          |   |  |   |          |  
|Cash and equivalents                                         |  | $                     | 8.9      |   |                        | $ |                            |  | $ | 691.7        |   |  | $            |         |   |  | $ | 700.6    |  
|Accounts receivable, net                                     |  |                       | 201.8    |   |                        |   | 291.0                       |  |   | 556.7        |   |  |              |         |   |  |   | 1,049.5  |  
|Inventories, net                                             |  |                       | 133.8    |   |                        |   | 292.8                       |  |   | 526.3        |   |  |              |         |   |  |   | 952.9    |  
|Prepaid expenses and other current assets                    |  |                       | 50.4     |   |                        |   | 31.9                        |  |   | 148.6        |   |  |              |         |   |  |   | 230.9    |  
|                                                             |  |                       |          |   |                        |   |                             |  |   |              |   |  |              |          |   |  |   |          |  
|Total current assets                                         |  |                       | 394.9    |   |                        |   | 615.7                       |  |   | 1,923.3      |   |  |              |         |   |  |   | 2,933.9  |  
|Property, plant and equipment, net                           |  |                       | 259.7    |   |                        |   | 577.0                       |  |   | 1,527.2      |   |  |              |         |   |  |   | 2,363.9  |  
|Goodwill and indefinite-lived intangible assets              |  |                       | 478.1    |   |                        |   | 595.5                       |  |   | 210.1        |   |  |              |         |   |  |   | 1,283.7  |  
|Definite-lived intangible assets, net                        |  |                       | 67.9     |   |                        |   | 82.4                        |  |   | 185.0        |   |  |              |         |   |  |   | 335.3    |  
|Investment in subsidiaries                                   |  |                       | 6,460.1  |   |                        |   | 2,982.7                     |  |   |             |   |  |              | (9,442.8 | ) |  |   |         |  
|Intercompany accounts, net                                   |  |                       | (4,080.8 | ) |                        |   | 3,316.9                     |  |   | 763.9        |   |  |              |         |   |  |   |         |  
|Asbestos-related insurance recoverable                       |  |                       |         |   |                        |   | 166.1                       |  |   | 687.7        |   |  |              |         |   |  |   | 853.8    |  
|Prepaid pension costs                                        |  |                       | 5.1      |   |                        |   |                            |  |   | 252.3        |   |  |              |         |   |  |   | 257.4    |  
|Other noncurrent assets                                      |  |                       | 41.2     |   |                        |   | 28.5                        |  |   | 167.5        |   |  |              |         |   |  |   | 237.2    |  
|                                                             |  |                       |          |   |                        |   |                             |  |   |              |   |  |              |          |   |  |   |          |  
|                                                             |  | $                     | 3,626.2  |   |                        | $ | 8,364.8                     |  | $ | 5,717.0      |   |  | $            | (9,442.8 | ) |  | $ | 8,265.2  |  
|                                                             |  |                       |          |   |                        |   |                             |  |   |              |   |  |              |          |   |  |   |          |  
|LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)               |  |                       |          |   |                        |   |                             |  |   |              |   |  |              |          |   |  |   |          |  
|Current liabilities:                                         |  |                       |          |   |                        |   |                             |  |   |              |   |  |              |          |   |  |   |          |  
|Short-term debt, including current portion of long-term debt |  | $                     | 277.9    |   |                        | $ |                            |  | $ | 31.7         |   |  | $            |         |   |  | $ | 309.6    |  
|Accounts payable                                             |  |                       | 65.7     |   |                        |   | 81.7                        |  |   | 288.5        |   |  |              |         |   |  |   | 435.9    |  
|Accrued liabilities                                          |  |                       | 120.7    |   |                        |   | 51.5                        |  |   | 387.5        |   |  |              |         |   |  |   | 559.7    |  
|Other current liabilities                                    |  |                       | 51.6     |   |                        |   | 11.8                        |  |   | 82.2         |   |  |              |         |   |  |   | 145.6    |  
|                                                             |  |                       |          |   |                        |   |                             |  |   |              |   |  |              |          |   |  |   |          |  
|Total current liabilities                                    |  |                       | 515.9    |   |                        |   | 145.0                       |  |   | 789.9        |   |  |              |         |   |  |   | 1,450.8  |  
|                                                             |  |                       |          |   |                       
|Liabilities subject to compromise                            |  |                       | 4,163.4  |   |                        |   | 353.5                       |  |   | 1,501.6      |   |  |              |         |   |  |   | 6,018.5  |  
|                                                             |  |                       |          |   |                       
|Long-term debt                                               |  |                       |         |   |                        |   |                            |  |   | 10.1         |   |  |              |         |   |  |   | 10.1     |  
|Postemployment benefits                                      |  |                       | 742.8    |   |                        |   |                            |  |   | 1,613.1      |   |  |              |         |   |  |   | 2,355.9  |  
|Long-term portion of deferred income taxes                   |  |                       |         |   |                        |   |                            |  |   | 102.0        |   |  |              |         |   |  |   | 102.0    |  
|Other accrued liabilities                                    |  |                       | 102.6    |   |                        |   | 0.2                         |  |   | 118.4        |   |  |              |         |   |  |   | 221.2    |  
|Minority interest in consolidated subsidiaries               |  |                       | 27.2     |   |                        |   | 5.6                         |  |   | (0.4         | ) |  |              |         |   |  |   | 32.4     |  
|Shareholders equity (deficit)                               |  |                       | (1,925.7 | ) |                        |   | 7,860.5                     |  |   | 1,582.3      |   |  |              | (9,442.8 | ) |  |   | (1,925.7 | )
|                                                             |  |                       |          |   |                        |   |                             |  |   |              |   |  |              |          |   |  |   |          |  
|                                                             |  | $                     | 3,626.2  |   |                        | $ | 8,364.8                     |  | $ | 5,717.0      |   |  | $            | (9,442.8 | ) |  | $ | 8,265.2  |  
|                                                             |  |                       |          |   |                        |   |                             |  |   |              |   |  |              |          |   |  |   |          |  



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Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Cash Flows

Six Months Ended June 30, 2005



|                                                              |  |                       |       |   |                       |   |        |                            |  |   |              |   |              |   |   |  |   |       |  
|------------------------------------------------------------- |  | --------------------- | ----- | - | --------------------- | - | ------ | -------------------------- |  | - | ------------ | - | ------------ | - | - |  | - | ----- | -
|                                                              |  | (Unconsolidated)      |       |   |                       |   |        |                           
|                                                              |  | Parent                |       |   | GuarantorSubsidiaries |   |        | Non- GuarantorSubsidiaries |  |   | Eliminations |   | Consolidated |  
|                                                              |  | (Millions of Dollars) |      
|Net cash provided from (used by) operating activities         |  | $                     | 11.1  |   |                       | $ | 110.2  |                            |  | $ | (43.3        | ) |              | $ |  |  | $ | 78.0  |  
|                                                              |  |                       |       |   |                      
|Cash provided from (used by) investing activities:            |  |                       |       |   |                       |   |        |                            |  |   |              |   |              |   |   |  |   |       |  
|Expenditures for property, plant and equipment                |  |                       | (6.8  | ) |                       |   | (9.0   | )                          |  |   | (69.1        | ) |              |   |  |  |   | (84.9 | )
|Net proceeds from sale of property, plant and equipment       |  |                       |      |   |                       |   |       |                            |  |   | 10.4         |   |              |   |  |  |   | 10.4  |  
|                                                              |  |                       |       |   |                       |   |        |                            |  |   |              |   |              |   |   |  |   |       |  
|Net cash used by investing activities                         |  |                       | (6.8  | ) |                       |   | (9.0   | )                          |  |   | (58.7        | ) |              |   |  |  |   | (74.5 | )
|                                                              |  |                       |       |   |                      
|Cash provided from (used by) financing activities:            |  |                       |       |   |                       |   |        |                            |  |   |              |   |              |   |   |  |   |       |  
|Proceeds from borrowings on DIP credit facility               |  |                       | 75.6  |   |                       |   |       |                            |  |   | 9.5          |   |              |   |  |  |   | 85.1  |  
|Increase in short-term debt                                   |  |                       |      |   |                       |   |       |                            |  |   | 7.2          |   |              |   |  |  |   | 7.2   |  
|Decrease in other long-term debt                              |  |                       |      |   |                       |   |       |                            |  |   | (1.6         | ) |              |   |  |  |   | (1.6  | )
|Change in intercompany accounts                               |  |                       | (45.4 | ) |                       |   | (101.2 | )                          |  |   | 146.6        |   |              |   |  |  |   |      |  
|                                                              |  |                       |       |   |                       |   |        |                            |  |   |              |   |              |   |   |  |   |       |  
|Net cash provided from (used by) financing activities         |  |                       | 30.2  |   |                       |   | (101.2 | )                          |  |   | 161.7        |   |              |   |  |  |   | 90.7  |  
|Effect of foreign currency exchange rate fluctuations on cash |  |                       | (38.7 | ) |                       |   |       |                            |  |   |             |   |              |   |  |  |   | (38.7 | )
|                                                              |  |                       |       |   |                       |   |        |                            |  |   |              |   |              |   |   |  |   |       |  
|Net increase (decrease) in cash and equivalents               |  | $                     | (4.2  | ) |                       | $ |       |                            |  | $ | 59.7         |   |              | $ |  |  | $ | 55.5  |  
|                                                              |  |                       |       |   |                       |   |        |                            |  |   |              |   |              |   |   |  |   |       |  



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Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Cash Flows

Six Months Ended June 30, 2004



|                                                              |  |                       |       |   |                       |   |        |                            |  |   |              |   |              |   |   |  |   |        |  
|------------------------------------------------------------- |  | --------------------- | ----- | - | --------------------- | - | ------ | -------------------------- |  | - | ------------ | - | ------------ | - | - |  | - | ------ | -
|                                                              |  | (Unconsolidated)      |       |   |                       |   |        |                           
|                                                              |  | Parent                |       |   | GuarantorSubsidiaries |   |        | Non- GuarantorSubsidiaries |  |   | Eliminations |   | Consolidated |  
|                                                              |  | (Millions of Dollars) |      
|Net cash provided from (used by) operating activities         |  | $                     | (15.4 | ) |                       | $ | 293.8  |                            |  | $ | 2.4          |   |              | $ |  |  | $ | 280.8  |  
|                                                              |  |                       |       |   |                      
|Cash provided from (used by) investing activities:            |  |                       |       |   |                       |   |        |                            |  |   |              |   |              |   |   |  |   |        |  
|Expenditures for property, plant and equipment                |  |                       | (20.0 | ) |                       |   | (38.6  | )                          |  |   | (73.5        | ) |              |   |  |  |   | (132.1 | )
|Net proceeds from the sale of property, plant and equipment   |  |                       |      |   |                       |   |       |                            |  |   | 13.0         |   |              |   |  |  |   | 13.0   |  
|                                                              |  |                       |       |   |                       |   |        |                            |  |   |              |   |              |   |   |  |   |        |  
|Net cash used by investing activities                         |  |                       | (20.0 | ) |                       |   | (38.6  | )                          |  |   | (60.5        | ) |              |   |  |  |   | (119.1 | )
|                                                              |  |                       |       |   |                      
|Cash provided from (used by) financing activities:            |  |                       |       |   |                       |   |        |                            |  |   |              |   |              |   |   |  |   |        |  
|Principal payments on DIP credit facility                     |  |                       | (41.7 | ) |                       |   |       |                            |  |   |             |   |              |   |  |  |   | (41.7  | )
|Decrease in short-term debt                                   |  |                       |      |   |                       |   |       |                            |  |   | (3.5         | ) |              |   |  |  |   | (3.5   | )
|Decrease in other long-term debt                              |  |                       |      |   |                       |   |       |                            |  |   | (1.7         | ) |              |   |  |  |   | (1.7   | )
|Change in intercompany accounts                               |  |                       | 81.5  |   |                       |   | (255.2 | )                          |  |   | 173.7        |   |              |   |  |  |   |       |  
|                                                              |  |                       |       |   |                       |   |        |                            |  |   |              |   |              |   |   |  |   |        |  
|Net cash provided from (used by) financing activities         |  |                       | 39.8  |   |                       |   | (255.2 | )                          |  |   | 168.5        |   |              |   |  |  |   | (46.9  | )
|                                                              |  |                       |       |   |                      
|Effect of foreign currency exchange rate fluctuations on cash |  |                       | 3.7   |   |                       |   |       |                            |  |   |             |   |              |   |  |  |   | 3.7    |  
|                                                              |  |                       |       |   |                       |   |        |                            |  |   |              |   |              |   |   |  |   |        |  
|Net increase in cash and equivalents                          |  | $                     | 8.1   |   |                       | $ |       |                            |  | $ | 110.4        |   |              | $ |  |  | $ | 118.5  |  
|                                                              |  |                       |       |   |                       |   |        |                            |  |   |              |   |              |   |   |  |   |        |  





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



Overview



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



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



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



For a more detailed description of the Companys business, products, industry, operating strategy and associated risks, refer to the Companys Annual Report on Form 10-K for the year ended December 31, 2004.



Voluntary reorganization under Chapter 11 and Administration



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



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



Consequences of the Restructuring Proceedings



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



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



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



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



On February 2, 2005,
the Company entered into an employment agreement with José Maria Alapont under which Mr. Alapont has become the Companys President and Chief Executive Officer. As part of this employment agreement, the Plan Proponents have agreed to
amend the Plan to provide Mr. Alapont with non-qualified stock options to purchase common stock of the reorganized Federal-Mogul. Significant terms and conditions of the contemplated stock options are outlined in the employment agreement previously
filed with the SEC on Form 8-K dated February 2, 2005.



The Plan provides that
asbestos personal injury claimants, both present and future, will be permanently channeled to a trust or series of trusts established pursuant to Section 524(g) of the Bankruptcy Code, thereby protecting Federal-Mogul and its affiliates in the
Chapter 11 Cases from existing and future asbestos liability. Although certain issues remain to be resolved, including the issues of the quantity and amount of asbestos and pension claims against the



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U.K. Debtors, the Plan provides that all currently outstanding stock of Federal-Mogul will be cancelled, and 50.1% of newly authorized and issued common
stock of reorganized Federal-Mogul will be distributed to the asbestos trusts, and 49.9% of the newly authorized and issued common stock will be distributed pro rata to the noteholders. In addition, the holders of currently outstanding common and
preferred stock of Federal-Mogul will receive warrants that may be used to purchase shares of reorganized Federal-Mogul at a predetermined exercise price.



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



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



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



In October, 2004, the Administrators applied to the High Court for directions related to: 1) questions of fairness of the Plan; 2) the approach of the High Court to CVAs and schemes of arrangement designed to implement the Plan within the
U.K.; 3) the compatibility with English pension laws of the proposals for the trustees of pension schemes of the U.K. debtors; and 4) the impact under English insolvency law should the Administrators not propose CVAs and schemes of arrangement. In
response to the application for directions, the High Court directed the Administrators to not propose schemes of arrangement and CVAs consistent with the draft schemes and draft CVAs included within the currently filed Plan without further order of
the High Court. In addition, the High Court directed the Administrators to not convene meetings of creditors of the U.K. Companies pursuant to any demands or requisitions made pursuant to the Plan. Additionally, the High Court granted the
Administrators leave to modify their consent, if necessary, with the directors of the U.K. Debtors exercising their powers either to a) promote and/or confirm the Plan; or b) file or continue any motion in the Bankruptcy Court which seeks relief in
relation to the Administrators or the U.K. Debtors. This was part of the Administrators efforts, and those of certain creditors of the U.K. Debtors, to oppose the Plan.



If the Plan Proponents and the Administrators cannot reach an agreement regarding either Schemes of Arrangement and CVAs that parallel the
Plan or the means by which the Company will retain the businesses of those U.K. Debtors that are valuable to the Company and its customers, then the Company believes one or more of the following may occur with respect to each U.K. Debtor: (a) the
High Court may be asked by the Plan Proponents to approve the Plan with respect to the U.K. Debtors as a matter of comity; or (b) the Company may bid for those businesses and/or assets of the U.K. Debtors that are valuable to the Company and its
customers and any actual or deemed transfer of assets to the Company in connection therewith shall be entitled to the benefits of the injunction pursuant to Section 524(g) of the Bankruptcy Code. The Plan provides that if the Company is not the
successful bidder, the injunction pursuant to Section 524(g) of the Bankruptcy Code shall not apply to the transfer of any assets



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to any entity other than the Company or its designee. The Company believes that, in the event the assets of the U.K. debtors are marketed for public sale,
the Company ultimately will be the successful bidder for those assets that are valuable to the Company and its customers. Any remaining assets would be liquidated. The Company believes that such a non-consensual process with the Administrators is
not in the best interest of the creditors of the U.K. Debtors, including pension creditors, and employees of the U.K. Debtors, and that the failure to arrive at a consensual plan could be damaging to the interests of such parties.



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



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



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



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



The
Company continues to consolidate all of its Debtor subsidiaries that are more than 50% owned in accordance with Company policy and with Accounting Research Bulletin No. 51, Consolidated Financial Statements. The Debtors are operating
their businesses as debtors-in-possession subject to the provisions of the Bankruptcy Code. The U.K. Debtors are continuing to manage their operations under the supervision of Administrators approved by the High Court. The Company believes that the
facts and circumstances related to the Restructuring Proceedings continue to require consolidation of the U.K. Debtors as follows:



| |  |  | Pursuant to an agreement (Protocol) between the Administrators and the Company, the Company is currently in control of the day to day business of all of the U.K.
Debtors. However, as described below, the Administrator has filed an Application with the U.K. Court to terminate the Protocol. The Administrators and the Company continue to engage in discussions regarding a potential consensual realization of the
U.K. Debtors and an understanding by which the U.K. Debtors will remain debtors in possession while consensual realization is explored.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The current proposed Plan of Reorganization provides that the parent, which is also a Debtor entity, will emerge from the U.S. Restructuring concurrently with all Debtor
subsidiaries.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  | The U.K. Debtor subsidiaries filed for the U.K. Restructuring Proceedings to resolve asbestos claims. To the extent any such U.K. Debtor subsidiary is unable to emerge from the
Restructuring Proceedings in accordance with the Bankruptcy Code, that subsidiary would not receive the benefit from the permanent channeling of asbestos personal injury claimants to a trust or series of trusts established pursuant to section 524(g)
of the Bankruptcy Code.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



Asbestos Liabilities and Related Insurance Recoverable



In 1996, T&N Ltd. (formerly T&N, plc) purchased for itself and its then defined
global subsidiaries a £500 million layer of insurance which will be triggered should the aggregate costs of claims made or brought after June 30, 1996, where the exposure occurred prior to that date, exceed £690 million. During 2000, the
Company concluded that the aggregate cost of the claims filed after June 30, 1996 would exceed the trigger point and recorded an insurance recoverable asset under the T&N policy of $577 million. As of June 30, 2005, the recorded insurance
recoverable was $644 million. In December 2001, one of the three reinsurers, European International Reinsurance Company Ltd. (EIR), filed suit in a London, England court to challenge the validity of its insurance contract with the
T&N Companies. As a result of this lawsuit, a claim was made against the broker (Sedgwick) that assisted in procuring this policy for breach of its duties as a broker. This trial commenced in October 2003. Prior to the conclusion of the trial,
the parties were able to reach a settlement. As a result of this settlement, the Company recorded $38.9 million asbestos charge during the fourth quarter of 2003. Under the terms of the settlement, EIR would be liable for 65.5% of its one-third
share of the reinsurance policy. By separate agreement, Sedgwick agreed to be liable for an additional 17.25% of the EIR share of the reinsurance policy. T&N Ltd. has also agreed to indemnify the insurer for sums paid under the policy for which
the insurer is liable to T&N Ltd. for which the insurer has no recovery from the reinsurers of Sedgwick. The settlement agreements referenced above are being held in escrow pending approval by the Bankruptcy Court and the Administrators of
T&N Ltd. of those portions of the above-described settlement agreements that affect the Debtors. A motion seeking the Bankruptcy Courts approval of the settlement was filed on March 1, 2004.



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



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



The ultimate realization of insurance proceeds is directly related to the amount of related covered claims paid by the Company. If the ultimate asbestos claims are higher
than the recorded liability, the Company expects the ultimate insurance recoverable to be higher than the recorded amount, up to the cap of the insurance layer. If the ultimate asbestos claims are lower than the recorded liability, the Company
expects the ultimate insurance recoverable to be



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lower than the recorded amount. While the Restructuring Proceedings will impact the timing and amount of the asbestos claims and the insurance recoverable,
there has been no change, other than to reflect the settlement discussed above and foreign exchange translation, to the recorded amounts since the Company initiated the Restructuring Proceedings. Accordingly, the recorded amounts for this insurance
recoverable asset could change significantly based upon events that occur from the Restructuring Proceedings.



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



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



Fairness in Asbestos Injury Resolution Act of 2005



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



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, 2004.



Consolidated Results



Net sales by reporting segment were:



|                                  |  |                            |       |      |   |        |  |   |    |  
|--------------------------------- |  | -------------------------- | ----- | ---- | - | ------ |  | - | -- | -
|                                  |  | Three Months Ended June 30 |      
|                                  |  | 2005                       |       | 2004 |   | Change | 
|                                  |  | (Millions of Dollars)      |      
|Powertrain                        |  | $                          | 585   |      | $ | 544    |  | $ | 41 |  
|Sealing Systems                   |  |                            | 127   |      |   | 131    |  |   | (4 | )
|Vehicle Safety and Performance    |  |                            | 196   |      |   | 176    |  |   | 20 |  
|Aftermarket Products and Services |  |                            | 757   |      |   | 720    |  |   | 37 |  
|                                  |  |                            |       |      |   |        |  |   |    |  
|                                  |  | $                          | 1,665 |      | $ | 1,571  |  | $ | 94 |  
|                                  |  |                            |       |      |   |        |  |   |    |  



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Gross margin by reporting segment was:



|                                  |  |                            |     |   |      |   |     |        |  |   |     |  
|--------------------------------- |  | -------------------------- | --- | - | ---- | - | --- | ------ |  | - | --- | -
|                                  |  | Three Months Ended June 30 |    
|                                  |  | 2005                       |     |   | 2004 |   |     | Change | 
|                                  |  | (Millions of Dollars)      |    
|Powertrain                        |  | $                          | 88  |   |      | $ | 87  |        |  | $ | 1   |  
|Sealing Systems                   |  |                            | 8   |   |      |   | 16  |        |  |   | (8  | )
|Vehicle Safety and Performance    |  |                            | 51  |   |      |   | 49  |        |  |   | 2   |  
|Aftermarket Products and Services |  |                            | 171 |   |      |   | 178 |        |  |   | (7  | )
|Corporate                         |  |                            | (26 | ) |      |   | (10 | )      |  |   | (16 | )
|                                  |  |                            |     |   |      |   |     |        |  |   |     |  
|                                  |  | $                          | 292 |   |      | $ | 320 |        |  | $ | (28 | )
|                                  |  |                            |     |   |      |   |     |        |  |   |     |  



Net sales increased by $94 million, or
6%, to $1,665 million for the second quarter of 2005 from $1,571 million in the same period of 2004. The increase in sales resulted from new business of $46 million across the OE and Aftermarket sectors, foreign currency of $37 million and $18
million of increased volumes from North American Aftermarket customers and European OEMs, partially offset by $7 million of customer price reductions, net of recoveries. New business and increased sales were driven by increased demand for the
Companys products in the North American Aftermarket, increased demand for the Companys heavy duty products in North America and further penetration of the European market for diesel products.



Gross margin decreased by $28 million, or 9%, to $292 million for the second quarter of 2005
from $320 million in the same period of 2004. Raw material cost inflation related to steel, non-ferrous metals and hydrocarbon based materials of $17 million and increased pension costs of $16 million were partially offset by the favorable impact of
increased sales volumes and customer price reductions, net of recoveries.



In
order to maintain sales levels of new vehicles and retain or gain market share, many OEMs continue to provide extensive pricing incentives and financing alternatives to consumers. These actions have placed pressures on the OEMs profits and, in
turn, the OEMs expect certain recovery from their supply base. During the quarter ended June 30, 2005, the Company continued to experience pressure from its customers to reduce prices beyond those reductions contractually required. The Company
continues to identify and implement product innovation and cost reduction activities to fund such price reductions to customers. Such activities include, among other things, the implementation of a centralized supply chain function focused on the
reduction of global material costs; headcount reduction programs to reduce selling, general and administrative costs; implementation of standard manufacturing methods across business segments to achieve operational efficiencies and decrease
production costs; and modified capital expenditure processes to ensure capital funds are directed at the most strategically appropriate investments with the highest rates of return.



Through its centralized supply chain functions, the Company continues to work with its suppliers to reduce its global material costs.
However, during the quarter ended June 30, 2005, increasing costs of steel, non-ferrous and hydrocarbon based raw materials adversely affected the Companys operating results. The Company expects raw material steel supply will continue to be
constrained and the impact of increasing material costs or disruptions in supply over the remainder of the year or longer term will likely continue to pressure the Companys operating results.



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Reporting Segment Results  Three Months Ended June 30, 2005 compared to June 30, 2004



The following table provides a reconciliation of changes in net sales and gross margin for
the three months ended June 30, 2005 compared with the three months ended June 30, 2004 for each of the Companys reporting segments. SS, VSP and APS represent Sealing Systems, Vehicle Safety and Performance
and Aftermarket Products and Services, respectively.



|                                      |  |                       |     |   |    |   |     |     |  |   |     |   |  |           |     |   |       |   |     |   |  |   |       |  
|------------------------------------- |  | --------------------- | --- | - | -- | - | --- | --- |  | - | --- | - |  | --------- | --- | - | ----- | - | --- | - |  | - | ----- | -
|                                      |  | Powertrain            |     |   | SS |   |     | VSP |  |   | APS |   |  | Corporate |     |   | Total |  
|                                      |  | (Millions of Dollars) |    
|Net Sales                             |  |                       |     |   |    |   |     |     |  |   |     |   |  |           |     |   |       |   |     |   |  |   |       |  
|Three months ended June 30, 2004      |  | $                     | 544 |   |    | $ | 131 |     |  | $ | 176 |   |  | $         | 720 |   |       | $ |    |   |  | $ | 1,571 |  
|Foreign currency                      |  |                       | 18  |   |    |   | 2   |     |  |   | 4   |   |  |           | 13  |   |       |   |    |   |  |   | 37    |  
|Sales volumes                         |  |                       | 27  |   |    |   | (5  | )   |  |   | 16  |   |  |           | 26  |   |       |   |    |   |  |   | 64    |  
|Customer pricing                      |  |                       | (4  | ) |    |   | (1  | )   |  |   |    |   |  |           | (2  | ) |       |   |    |   |  |   | (7    | )
|                                      |  |                       |     |   |    |   |     |     |  |   |     |   |  |           |     |   |       |   |     |   |  |   |       |  
|Three months ended June 30, 2005      |  | $                     | 585 |   |    | $ | 127 |     |  | $ | 196 |   |  | $         | 757 |   |       | $ |    |   |  | $ | 1,665 |  
|                                      |  |                       |     |   |    |   |     |     |  |   |     |   |  |           |     |   |       |   |     |   |  |   |       |  
|                                      |  |                       |     |   |    |  
|                                      |  | Powertrain            |     |   | SS |   |     | VSP |  |   | APS |   |  | Corporate |     |   | Total |  
|                                      |  | (Millions of Dollars) |    
|Gross Margin                          |  |                       |     |   |    |   |     |     |  |   |     |   |  |           |     |   |       |   |     |   |  |   |       |  
|Three months ended June 30, 2004      |  | $                     | 87  |   |    | $ | 16  |     |  | $ | 49  |   |  | $         | 178 |   |       | $ | (10 | ) |  | $ | 320   |  
|Foreign currency                      |  |                       |    |   |    |   |    |     |  |   | (1  | ) |  |           | 2   |   |       |   |    |   |  |   | 1     |  
|Sales volumes / mix                   |  |                       | 6   |   |    |   | (5  | )   |  |   | 9   |   |  |           | 1   |   |       |   |    |   |  |   | 11    |  
|Customer pricing                      |  |                       | (4  | ) |    |   | (1  | )   |  |   |    |   |  |           | (2  | ) |       |   |    |   |  |   | (7    | )
|Depreciation and pension expense      |  |                       |    |   |    |   |    |     |  |   |    |   |  |           | (1  | ) |       |   | (16 | ) |  |   | (17   | )
|Productivity losses, net of inflation |  |                       | (1  | ) |    |   | (2  | )   |  |   | (6  | ) |  |           | (7  | ) |       |   |    |   |  |   | (16   | )
|                                      |  |                       |     |   |    |   |     |     |  |   |     |   |  |           |     |   |       |   |     |   |  |   |       |  
|Three months ended June 30, 2005      |  | $                     | 88  |   |    | $ | 8   |     |  | $ | 51  |   |  | $         | 171 |   |       | $ | (26 | ) |  | $ | 292   |  
|                                      |  |                       |     |   |    |   |     |     |  |   |     |   |  |           |     |   |       |   |     |   |  |   |       |  



Powertrain



Increased volumes of $27 million and favorable foreign currency of $18 million were
partially offset by $4 million in customer price reductions, net of recoveries. Approximately $19 million of the sales volume increase was in connection with existing platforms, while approximately $8 million was the result of new business. The
sales volume increase is representative of increased heavy-duty demand in North America and increased medium and heavy truck production in Europe. Net sales increased during the period despite declines in the North American and European light
vehicle production levels.



Gross margin increased by $6 million as a result of
increased sales volumes. This increase was partially offset by the adverse impacts of customer price reductions, net of recoveries of $4 million and $1 million of inflation in excess of productivity. Through various cost reduction and restructuring
efforts the Companys Powertrain operations largely offset the unfavorable impact of $5 million in raw material cost inflation.



Sealing Systems



Net sales decreased by $4 million, primarily representing unfavorable production volumes associated with certain North American OEM customers and platforms.



Gross margin decreased $5 million due to lower sales volumes during the period. Raw material
cost inflation of $4 million more than offset productivity improvements resulting from cost reductions and restructuring activities.



Vehicle Safety and Performance



Net sales increased $20 million reflecting favorable sales volumes of $16 million and foreign currency of $4 million. Sales volumes increased due to $13 million of new business associated with customer program
launches for various domestic and international OEMs and $3 million of increased volumes primarily associated with medium and heavy duty applications in Europe.



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Gross margin increased by $9 million as a result of higher sales volumes. However, raw material cost inflation of $8
million, primarily related to steel backing plates used in disc pad production was only partially offset by the favorable impact of cost reduction and restructuring activities.



Aftermarket Products and Services



Net sales increased as a result of $26 million in sales volumes and $13 million in foreign currency, partially offset by customer price reductions of $2 million, net of
recoveries. Sales volume increases were the result of $15 million in new business, and $11 million of increased shipments due to the non-recurrence of a fire that destroyed the Smithville, TN distribution center in 2004. New business gains were
primarily in North America, reflecting continued market share performance of the Companys products, particularly under-car applications such as vehicle safety and performance, drum and rotor and wheel-end products.



Gross margin was $171 million for the second quarter of 2005 compared with $178 million, in
the same period of 2004. The gross margin decrease of $7 million relates to inflation in excess of productivity of $7 million, which was driven by raw material cost inflation of $4 million and material scrap of $2 million. Raw material cost
inflation relates to the unfavorable impact of steel, non-ferrous metals and hydrocarbon-based materials. Materials scrap relates to product returns associated with higher sales volumes and stock lifts in support of new business.



Corporate



Corporate expenses are comprised primarily of certain central headquarters functions as well as employee post-retirement benefits and other
general insurance coverages. The increase of $16 million in Corporate expenses is primarily due to increased pension expense attributable to actual versus expected returns on pension plan assets in prior years and changes in underlying assumptions.



Selling, General and Administrative Expenses



Selling, general and administrative expenses were $226 million, or 14% of net sales, for the
second quarter of 2005 as compared to $234 million, or 15% of net sales, for the same quarter of 2004. Selling, general and administrative expenses decreased primarily due to productivity associated with cost reduction and restructuring activities.



Interest Expense, Net



Interest expense, net was $34 million in the second quarter of 2005 compared to $24 million
for the same quarter of 2004. This increase represents higher interest expense on the DIP credit facility resulting from higher average outstanding borrowings, higher interest rates on all outstanding borrowings.



As a condition of the DIP credit facility, the Bankruptcy Court ordered that the noteholders
receive, in cash, adequate protection payments equal to one-half of one percent (0.5%) of the outstanding notes. These cash payments, which approximate $2.6 million per quarter, are recorded as interest expense in the statement of operations. All
cash adequate protection payments made to the noteholders are provisional in nature and are subject to recharacterization, credit against allowed claims or other relief if the Bankruptcy Court were to conclude that the noteholders were not entitled
to such payments.



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



Restructuring Activities



The Company has undertaken various restructuring activities to streamline its operations, consolidate and take advantage of available capacity and resources, and
ultimately achieve net cost reductions. Restructuring activities



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include efforts to integrate and rationalize the Companys businesses and to relocate manufacturing operations to lower cost markets. The Company
defines restructuring expense to include costs directly associated with exit or disposal activities accounted for in accordance with SFAS No. 146 Accounting for Costs Associated with Exit or Disposal Activities, employee severance
costs incurred as a result of an exit or disposal activity accounted for in accordance with SFAS Nos. 88 and 112, and pension and other postemployment benefit costs incurred as a result of an exit or disposal activity accounted for in accordance
with SFAS Nos. 87 and 106.



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



|                                      |  |                       |      |   |    |   |      |     |  |   |      |   |  |           |      |   |       |   |      |   |  |   |      |  
|------------------------------------- |  | --------------------- | ---- | - | -- | - | ---- | --- |  | - | ---- | - |  | --------- | ---- | - | ----- | - | ---- | - |  | - | ---- | -
|                                      |  | Powertrain            |      |   | SS |   |      | VSP |  |   | APS  |   |  | Corporate |      |   | Total |  
|                                      |  | (Millions of dollars) |     
|Balance of reserves at March 31, 2005 |  |                       | 17.2 |   |    |   | 3.4  |     |  |   | 1.6  |   |  |           | 2.1  |   |       |   | 1.8  |   |  |   | 26.1 |  
|Provisions                            |  |                       | 2.9  |   |    |   | 0.3  |     |  |   | 0.1  |   |  |           | 2.3  |   |       |   |     |   |  |   | 5.6  |  
|Reversals                             |  |                       | (0.1 | ) |    |   |     |     |  |   | (0.4 | ) |  |           |     |   |       |   | (0.3 | ) |  |   | (0.8 | )
|Payments                              |  |                       | (3.1 | ) |    |   | (0.7 | )   |  |   | (0.2 | ) |  |           | (0.2 | ) |       |   | (0.9 | ) |  |   | (5.1 | )
|Foreign currency                      |  |                       | (0.9 | ) |    |   | (0.2 | )   |  |   | (0.1 | ) |  |           | (0.1 | ) |       |   |     |   |  |   | (1.3 | )
|                                      |  |                       |      |   |    |   |      |     |  |   |      |   |  |           |      |   |       |   |      |   |  |   |      |  
|Balance of reserves at June 30, 2005  |  | $                     | 16.0 |   |    | $ | 2.8  |     |  | $ | 1.0  |   |  | $         | 4.1  |   |       | $ | 0.6  |   |  | $ | 24.5 |  
|                                      |  |                       |      |   |    |   |      |     |  |   |      |   |  |           |      |   |       |   |      |   |  |   |      |  



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



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



Chapter 11 and Administration Related Reorganization Expenses



During the three months ended June 30, 2005 and 2004, the Company recorded Chapter 11 and
Administration related reorganization expenses of $20.2 million and $34.4 million, respectively. These expenses fluctuate largely based upon the necessity for professional services by third-party advisors in connection with the Restructuring
Proceedings. Chapter 11 and Administration related reorganization expenses in the consolidated statements of operations consist of legal, financial and advisory fees, including fees of the U.K. Administrators, critical employee retention costs, and
other directly related internal costs as follows:



|                                                 |  |                           |      |      |   |     
|------------------------------------------------ |  | ------------------------- | ---- | ---- | - | ----
|                                                 |  | Three Months EndedJune 30
|                                                 |  | 2005                      |      | 2004
|                                                 |  | (Millions of Dollars)    
|Professional fees directly related to the filing |  | $                         | 17.2 |      | $ | 30.7
|Critical employee retention costs                |  |                           | 2.8  |      |   | 2.0 
|Other directly related costs                     |  |                           | 0.2  |      |   | 1.7 
|                                                 |  |                           |      |      |   |     
|                                                 |  | $                         | 20.2 |      | $ | 34.4
|                                                 |  |                           |      |      |   |     



Cash payments for Chapter 11 and
Administration related reorganization expenses totaled $25 million and $27 million for the three months ended June 30, 2005 and 2004, respectively.



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Income Tax Expense



For the three months ended June 30, 2005, the Company recorded income tax expense of $24.6 million on earnings from continuing operations before income taxes of $13.0
million. This compares to income tax expense of $20.6 million on earnings from continuing operations before income taxes of $14.6 million in the same period of 2004. Income tax expense for the three month period ended June 30, 2005 resulted
primarily from taxable income generated by certain international subsidiaries, non-recognition of income tax benefits on certain United Kingdom operating losses and certain non-deductible items in various jurisdictions.



Consolidated Results  Six Months Ended June 30, 2005 compared to June 30, 2004



Net sales by reporting segment were:



|                                  |  |                          |       |      |   |        |  |   |     |  
|--------------------------------- |  | ------------------------ | ----- | ---- | - | ------ |  | - | --- | -
|                                  |  | Six Months Ended June 30 |      
|                                  |  | 2005                     |       | 2004 |   | Change | 
|                                  |  | (Millions of Dollars)    |      
|Powertrain                        |  | $                        | 1,167 |      | $ | 1,093  |  | $ | 74  |  
|Sealing Systems                   |  |                          | 254   |      |   | 264    |  |   | (10 | )
|Vehicle Safety and Performance    |  |                          | 390   |      |   | 351    |  |   | 39  |  
|Aftermarket Products and Services |  |                          | 1,488 |      |   | 1,410  |  |   | 78  |  
|                                  |  |                          |       |      |   |        |  |   |     |  
|                                  |  | $                        | 3,299 |      | $ | 3,118  |  | $ | 181 |  
|                                  |  |                          |       |      |   |        |  |   |     |  



Gross margin by reporting segment was:



|                                  |  |                          |     |   |      |   |     |        |  |   |     |  
|--------------------------------- |  | ------------------------ | --- | - | ---- | - | --- | ------ |  | - | --- | -
|                                  |  | Six Months Ended June 30 |    
|                                  |  | 2005                     |     |   | 2004 |   |     | Change | 
|                                  |  | (Millions of Dollars)    |    
|Powertrain                        |  | $                        | 172 |   |      | $ | 164 |        |  | $ | 8   |  
|Sealing Systems                   |  |                          | 12  |   |      |   | 30  |        |  |   | (18 | )
|Vehicle Safety and Performance    |  |                          | 96  |   |      |   | 98  |        |  |   | (2  | )
|Aftermarket Products and Services |  |                          | 336 |   |      |   | 343 |        |  |   | (7  | )
|Corporate                         |  |                          | (49 | ) |      |   | (18 | )      |  |   | (31 | )
|                                  |  |                          |     |   |      |   |     |        |  |   |     |  
|                                  |  | $                        | 567 |   |      | $ | 617 |        |  | $ | (50 | )
|                                  |  |                          |     |   |      |   |     |        |  |   |     |  



Net sales increased by $181 million,
or 6%, to $3,299 million for the six months ended June 30, 2005 from $3,118 million in the same period of 2004. Net sales were favorably impacted by $82 million in new business, $76 million of foreign currency and $28 million of increased volumes,
partially offset by customer price reductions, net of recoveries, of $5 million. Increased sales volumes reflect heavy-duty vehicle production and mix in North America and Europe and new business gains and market share performance in both the OE
market and the Aftermarket.



Gross margin decreased by $50 million, or 8%, to
$567 million for the six months ended June 30, 2005 from $617 million in the same period of 2004. Raw material cost inflation of $38 million and increased pension costs of $29 million were partially offset by $17 million in new business and
increased volumes. Raw material cost inflation was concentrated in steel, non-ferrous metals and hydrocarbon based commodities.



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Reporting Segment Results  Six Months Ended June 30, 2005 compared to June 30, 2004



The following table provides a reconciliation of changes in net sales and gross margin for
the six months ended June 30, 2005 compared with the six months ended June 30, 2004 for each of the Companys reporting segments. SS, VSP and APS represent Sealing Systems, Vehicle Safety and Performance and
Aftermarket Products and Services, respectively.



|                                              |  |                       |       |   |    |   |     |     |  |   |     |   |  |           |       |   |       |   |     |   |  |   |       |  
|--------------------------------------------- |  | --------------------- | ----- | - | -- | - | --- | --- |  | - | --- | - |  | --------- | ----- | - | ----- | - | --- | - |  | - | ----- | -
|                                              |  | Powertrain            |       |   | SS |   |     | VSP |  |   | APS |   |  | Corporate |       |   | Total |  
|                                              |  | (Millions of Dollars) |      
|Sales                                         |  |                       |       |   |    |   |     |     |  |   |     |   |  |           |       |   |       |   |     |   |  |   |       |  
|Six months ended June 30, 2004                |  | $                     | 1,093 |   |    | $ | 264 |     |  | $ | 351 |   |  | $         | 1,410 |   |       | $ |    |   |  | $ | 3,118 |  
|Foreign currency                              |  |                       | 38    |   |    |   | 3   |     |  |   | 10  |   |  |           | 25    |   |       |   |    |   |  |   | 76    |  
|Sales volumes                                 |  |                       | 44    |   |    |   | (12 | )   |  |   | 31  |   |  |           | 47    |   |       |   |    |   |  |   | 110   |  
|Customer pricing                              |  |                       | (8    | ) |    |   | (1  | )   |  |   | (2  | ) |  |           | 6     |   |       |   |    |   |  |   | (5    | )
|                                              |  |                       |       |   |    |   |     |     |  |   |     |   |  |           |       |   |       |   |     |   |  |   |       |  
|Six months ended June 30, 2005                |  | $                     | 1,167 |   |    | $ | 254 |     |  | $ | 390 |   |  | $         | 1,488 |   |       | $ |    |   |  | $ | 3,299 |  
|                                              |  |                       |       |   |    |   |     |     |  |   |     |   |  |           |       |   |       |   |     |   |  |   |       |  
|                                              |  |                       |       |   |    |  
|                                              |  | Powertrain            |       |   | SS |   |     | VSP |  |   | APS |   |  | Corporate |       |   | Total |  
|                                              |  | (Millions of Dollars) |      
|Gross Margin                                  |  |                       |       |   |    |   |     |     |  |   |     |   |  |           |       |   |       |   |     |   |  |   |       |  
|Six months ended June 30, 2004                |  | $                     | 164   |   |    | $ | 30  |     |  | $ | 98  |   |  | $         | 343   |   |       | $ | (18 | ) |  | $ | 617   |  
|Foreign currency                              |  |                       | 1     |   |    |   | 1   |     |  |   |    |   |  |           | 4     |   |       |   | (1  | ) |  |   | 5     |  
|Sales volumes / mix                           |  |                       | 14    |   |    |   | (12 | )   |  |   | 15  |   |  |           | 4     |   |       |   |    |   |  |   | 21    |  
|Customer pricing                              |  |                       | (8    | ) |    |   | (1  | )   |  |   | (2  | ) |  |           | 6     |   |       |   |    |   |  |   | (5    | )
|Depreciation and pension expense              |  |                       |      |   |    |   | (2  | )   |  |   | (3  | ) |  |           | (2    | ) |       |   | (29 | ) |  |   | (36   | )
|Productivity gains (losses), net of inflation |  |                       | 1     |   |    |   | (4  | )   |  |   | (12 | ) |  |           | (19   | ) |       |   | (1  | ) |  |   | (35   | )
|                                              |  |                       |       |   |    |   |     |     |  |   |     |   |  |           |       |   |       |   |     |   |  |   |       |  
|Six months ended June 30, 2005                |  | $                     | 172   |   |    | $ | 12  |     |  | $ | 96  |   |  | $         | 336   |   |       | $ | (49 | ) |  | $ | 567   |  
|                                              |  |                       |       |   |    |   |     |     |  |   |     |   |  |           |       |   |       |   |     |   |  |   |       |  



Powertrain



Net sales increased due to $44 million in increased sales volumes and $38 million foreign
currency, which were partially offset by $8 million in customer price reductions, net of recoveries. Sales volumes increased due to $15 million in new customer program launches and $29 million of favorable North American and European heavy-duty
production volumes and growth in key vehicle platforms served by the Company.



Gross margin increased primarily due to $14 million in sales volumes, partially offset by $8 million in customer price reductions, net of recoveries. Raw material cost inflation of $13 million was more than offset by productivity associated
with cost reduction and restructuring activities.



Sealing Systems



Net sales decreased by $10 million primarily representing unfavorable production volumes
associated with certain North American OEM customers and platforms.



Gross
margin was adversely impacted by $12 million associated with decreased volumes. Productivity associated with cost reduction and restructuring activities partially offset the impact of $8 million in raw material cost inflation attributable to the
increased cost of stainless steel, aluminum and other materials used in the manufacture of gaskets and seals in North America.



Vehicle Safety and Performance



Net sales increased due to $31 million in sales volumes and $10 million in foreign currency, partially offset by $2 million in customer price reductions, net of recoveries. Sales volumes consist of $24 million in new
business associated with customer program launches for various domestic and international OEMs and $7 million in favorable light vehicle and heavy-duty production levels in Europe.



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Gross margin decreased by $2 million primarily due to the net impact of $15 million of increased sales volumes offset by
raw material cost inflation of $12 million, depreciation and pension expense of $3 million and customer price reductions, net of recoveries of $2 million. Raw material cost inflation was primarily attributable to steel backing plates used in disc
pad production.



Aftermarket Products and Services



Net sales increased due to $47 million of sales volumes, $25 million in foreign currency and
$6 million in customer pricing. Sales volumes increased due to $26 million of new business and $21 million in increased shipments due to the non-recurrence of a fire that destroyed the Smithville, TN distribution center in 2004. New business gains
were primarily in North America, reflecting continued market share performance of the Companys products, particularly under-car applications such as vehicle safety and performance, drum and rotor and wheel-end products.



Gross margin was $336 million for the six months ended June 30, 2005 compared to $343 million
for the same quarter of 2004. The gross margin decrease of $7 million relates to inflation in excess of productivity of $19 million and increased depreciation and pension expense of $2 million, partially offset by favorable foreign currency, sales
volumes and pricing of $14 million. Inflation in excess of productivity was driven by raw material cost inflation of $8 million and material scrap increases of $8 million. Raw material cost inflation relates to the unfavorable impact of steel,
non-ferrous metals and hydrocarbon-based materials. Materials scrap relates to product returns associated with higher sales volumes and stock lifts in support of new business.



Corporate



Corporate expenses are comprised primarily of certain central headquarters functions as well as employee post-retirement benefits and other general insurance coverages.
The increase of $31 million in Corporate expenses is primarily due to increased pension expense attributable to actual versus expected returns on pension plan assets in prior years and changes to underlying assumptions.



Selling, General and Administrative Expenses



Selling, general and administrative expenses were $476 million, or 14% of net sales, for the
six months ended June 30, 2005 as compared to $476 million, or 15% of net sales, for the same period of 2004.



Interest Expense, Net



Interest expense, net
was $63 million for the six months ended June 30, 2005 compared to $50 million for the same period of 2004. This increase represents higher interest expense on the DIP credit facility resulting from higher average outstanding borrowings, higher
interest rates on all outstanding borrowings.



As a condition of the DIP credit
facility, the Bankruptcy Court ordered that the noteholders receive, in cash, adequate protection payments equal to one-half of one percent (0.5%) of the outstanding notes. These cash payments, which approximate $2.6 million per quarter, are
recorded as interest expense in the statement of operations. All cash adequate protection payments made to the noteholders are provisional in nature and are subject to recharacterization, credit against allowed claims or other relief if the
Bankruptcy Court were to conclude that the noteholders were not entitled to such payments.



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



Restructuring Activities



The Company has undertaken various restructuring activities to streamline its operations,
consolidate and take advantage of available capacity and resources, and ultimately achieve net cost reductions. Restructuring activities include efforts to integrate and rationalize the Companys businesses and to relocate manufacturing
operations to



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##### Table of Contents

lower cost markets. The Company defines restructuring expense to include costs directly associated with exit or disposal activities accounted for in
accordance with SFAS No. 146 Accounting for Costs Associated with Exit or Disposal Activities, employee severance costs incurred as a result of an exit or disposal activity accounted for in accordance with SFAS Nos. 88 and 112, and
pension and other postemployment benefit costs incurred as a result of an exit or disposal activity accounted for in accordance with SFAS Nos. 87 and 106.



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



|                                         |  |                       |      |   |    |   |      |     |  |   |      |   |  |           |      |   |       |   |      |   |  |   |      |  
|---------------------------------------- |  | --------------------- | ---- | - | -- | - | ---- | --- |  | - | ---- | - |  | --------- | ---- | - | ----- | - | ---- | - |  | - | ---- | -
|                                         |  | Powertrain            |      |   | SS |   |      | VSP |  |   | APS  |   |  | Corporate |      |   | Total |  
|                                         |  | (Millions of dollars) |     
|Balance of reserves at December 31, 2004 |  | $                     | 18.7 |   |    | $ | 3.8  |     |  | $ | 1.6  |   |  | $         | 2.9  |   |       | $ | 0.9  |   |  | $ | 27.9 |  
|Provisions                               |  |                       | 2.7  |   |    |   |     |     |  |   |     |   |  |           |     |   |       |   | 0.9  |   |  |   | 3.6  |  
|Reversals                                |  |                       |     |   |    |   |     |     |  |   |     |   |  |           | (0.6 | ) |       |   | (0.2 | ) |  |   | (0.8 | )
|Payments                                 |  |                       | (3.1 | ) |    |   | (0.2 | )   |  |   | (0.1 | ) |  |           | (0.2 | ) |       |   |     |   |  |   | (3.6 | )
|Foreign currency                         |  |                       | (1.1 | ) |    |   | (0.2 | )   |  |   | 0.1  |   |  |           |     |   |       |   | 0.2  |   |  |   | (1.0 | )
|                                         |  |                       |      |   |    |   |      |     |  |   |      |   |  |           |      |   |       |   |      |   |  |   |      |  
|Balance of reserves at March 31, 2005    |  |                       | 17.2 |   |    |   | 3.4  |     |  |   | 1.6  |   |  |           | 2.1  |   |       |   | 1.8  |   |  |   | 26.1 |  
|Provisions                               |  |                       | 2.9  |   |    |   | 0.3  |     |  |   | 0.1  |   |  |           | 2.3  |   |       |   |     |   |  |   | 5.6  |  
|Reversals                                |  |                       | (0.1 | ) |    |   |     |     |  |   | (0.4 | ) |  |           |     |   |       |   | (0.3 | ) |  |   | (0.8 | )
|Payments                                 |  |                       | (3.1 | ) |    |   | (0.7 | )   |  |   | (0.2 | ) |  |           | (0.2 | ) |       |   | (0.9 | ) |  |   | (5.1 | )
|Foreign currency                         |  |                       | (0.9 | ) |    |   | (0.2 | )   |  |   | (0.1 | ) |  |           | (0.1 | ) |       |   |     |   |  |   | (1.3 | )
|                                         |  |                       |      |   |    |   |      |     |  |   |      |   |  |           |      |   |       |   |      |   |  |   |      |  
|Balance of reserves at June 30, 2005     |  | $                     | 16.0 |   |    | $ | 2.8  |     |  | $ | 1.0  |   |  | $         | 4.1  |   |       | $ | 0.6  |   |  | $ | 24.5 |  
|                                         |  |                       |      |   |    |   |      |     |  |   |      |   |  |           |      |   |       |   |      |   |  |   |      |  



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



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



Chapter 11 and Administration Related Reorganization Expenses



During the six months ended June 30, 2005 and 2004, the Company recorded
Chapter 11 and Administration related reorganization expenses of $50.2 million and $60.4 million, respectively. These expenses fluctuate largely based upon the necessity for professional services by third-party advisors in connection with the
Restructuring Proceedings.



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



|                                                 |  |                         |      |      |   |     
|------------------------------------------------ |  | ----------------------- | ---- | ---- | - | ----
|                                                 |  | Six Months EndedJune 30
|                                                 |  | 2005                    |      | 2004
|                                                 |  | (Millions of Dollars)  
|Professional fees directly related to the filing |  | $                       | 44.4 |      | $ | 53.9
|Critical employee retention costs                |  |                         | 5.6  |      |   | 4.0 
|Other direct costs                               |  |                         | 0.2  |      |   | 2.5 
|                                                 |  |                         |      |      |   |     
|                                                 |  | $                       | 50.2 |      | $ | 60.4
|                                                 |  |                         |      |      |   |     



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Cash payments for Chapter 11 and Administration related reorganization expenses totaled $59 million and $44 million for
the six months ended June 30, 2005 and 2004, respectively.



Income Tax
Expense



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



Litigation and Environmental Contingencies



For a summary of
material litigation and environmental contingencies, refer to Note 15 of the accompanying financial statements, Litigation and Environmental Matters.



Liquidity and Capital Resources



Cash Flow



Cash flow provided from operating activities was $78 million for the six months ended June 30, 2005, representing a decline of $203 million as compared to the same period of 2004. The net change in cash provided from
operating activities was primarily attributable to a decrease in the Companys 2005 net earnings and the inclusion of the involuntary conversion of assets associated with a fire at the Companys Smithville, TN distribution center during
the six-month period ended June 30, 2004, which did not reoccur during the same period of 2005.



Cash flow used by investing activities was $75 million in the first six months of 2005. Capital expenditures of $85 million were partially offset by proceeds from the sale of property, plant and equipment of $10
million. Cash flow provided from financing activities was $91 million for the first six months of 2005 resulting from a net increase in borrowing on the Companys debtor-in-possession (DIP) credit facility of $85 million, increase
in short-term debt of $7 million, partially offset by $2 million in payments on other long-term debt.



Chapter 11 Financing



In connection
with the Restructuring Proceedings, the Company entered into a DIP credit facility to supplement liquidity and fund operations during the restructuring proceedings. The December 2004 DIP credit facility expires in December 2005, and the interest
rate is either the alternate base rate (ABR) plus 11⁄4 percentage points or the London Inter-Bank Offered Rate (LIBOR) plus 21⁄4 percentage points. The ABR is the greater of either the banks base rate or the
federal funds rate plus 1⁄2 percentage point. In addition, the commitment available under the DIP credit facility is mandatorily reduced by a portion of proceeds received from future asset or business divestitures.



The Companys available borrowings under the existing DIP credit facility are determined
by the underlying collateral at any point in time, consisting of its domestic inventories and domestic accounts receivable. The DIP lenders received permission from the lenders of the Senior Credit Agreements to have priority over their collateral
interest. Amounts available and outstanding on the DIP credit facility are further discussed in Note 10 to the consolidated financial statements.



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



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



The Companys ability to obtain cash adequate to fund its needs depends generally on the results of its operations, restructuring initiatives, the Bankruptcy
Courts approval of managements plans and the availability of financing. Management believes that cash on hand, cash flow from operations, and available borrowings under its DIP credit facility, will be sufficient to fund capital
expenditures and meet its post-petition operating obligations through the December 2005 expiration of the DIP credit facility. The Company intends to renegotiate its DIP credit facility upon its expiration. In the longer term, the Company believes
that the benefits from its announced restructuring programs and favorable resolution of its asbestos liability through Chapter 11 and Administration, combined with post-emergence financing to be obtained as part of the Restructuring Proceedings,
will provide adequate long-term cash flows. However, there can be no assurance that such initiatives are achievable in this regard or that the terms available for any future financing, if required, would be available or favorable to the Company.
Also, resolutions of certain obligations, particularly asbestos obligations, are impacted by factors outside the Companys control.



At June 30, 2005, the Company was in compliance with all debt covenants under its DIP credit facility. Based on current forecasts, the Company expects to be in compliance
through the expiration of the facility. Changes in the business environment, market factors, macroeconomic factors, or the Companys ability to achieve its forecasts and other factors outside of the Companys control, could adversely
impact its ability to remain in compliance with debt covenants. If the Company were to not be in compliance at a measurement date, the Company would be required to renegotiate its facility. No assurance can be provided as to the impact of such
actions.



Restricted Cash



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



Other Liquidity and Capital Resource Items



The Company maintains investments in various non-consolidated affiliates, which are located
in Turkey, China, Korea, India, Japan, the United States and Mexico. The Companys direct ownership in such affiliates ranges from approximately 5% to 50%. The aggregate investment in these affiliates approximates $153 million and $160 million
at June 30, 2005 and December 31, 2004, respectively. The decrease in the Companys aggregate investment in these affiliates resulted from dividends received by the Company and foreign currency, partially offset by equity earnings.



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



The Company holds a 50% non-controlling interest in a joint venture located in
Turkey. This joint venture was established for the purpose of manufacturing and marketing automotive parts including pistons, pins, piston rings, and cylinder liners to original equipment (OE) and Aftermarket customers. Pursuant to the
joint venture agreement, the Companys partner holds an option to put its shares to a subsidiary of the Company at the higher of the current fair value or at a guaranteed minimum amount. The guaranteed minimum amount represents a contingent
guarantee of the initial investment of the investment partner. The contingent guarantee can be exercised at the discretion of the joint venture partner. The term of the contingent guarantee is indefinite, consistent with the terms of the joint
venture agreement. However, the contingent guarantee would not survive termination of the joint venture agreement. As of June 30, 2005, the total amount of the contingent guarantee, were all triggering events to occur, approximated $58 million.
Management believes that this contingent guarantee is substantially less than the



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estimated current fair value of the guarantees interest in the affiliate. Management also believes that exercise of the put option is not reasonably
likely within the foreseeable future. However, if this put option is exercised at its estimated current fair value, such exercise would have a material effect on the Companys liquidity. Any value in excess of the minimum guaranteed amount of
the put option would be the subject of negotiation between the Company and its investment partner.



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





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ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK



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



Foreign Currency Risk



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



As currency exchange rates
change, translation of the statements of operations of the Companys international businesses into United States dollars affects year-over-year comparability of operating results. The Company does not generally hedge operating translation risks
because cash flows from international operations are generally reinvested locally. Changes in foreign currency exchange rates are generally reported as a component of stockholders equity for the Companys foreign subsidiaries reporting in
local currencies and as a component of income for its foreign subsidiaries using the U.S. dollar as the functional currency. The Companys other comprehensive loss was increased by $147.0 million and $13.2 million in 2005 and 2004,
respectively, due to cumulative translation adjustments resulting primarily from changes in the U.S. Dollar to the Euro and British Pound.



The Company manages certain aspects of its foreign currency activities and larger transactions through the use of foreign currency options or forward contracts. The
Company generally tries to utilize natural hedges within its foreign currency activities, including the matching of revenues and costs. The Company did not have any contracts outstanding at June 30, 2005.



Interest Rate Risk



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



In connection with the Restructuring Proceedings, the Company entered into a debtor-in-possession (DIP) credit facility to supplement liquidity and fund operations during the restructuring proceedings. The
December 2004 DIP credit facility expires in December 2005, and the interest rate is either the alternate base rate (ABR) plus 11⁄4 percentage points or a formula based on the London Inter-Bank Offered Rate (LIBOR) plus
21⁄4 percentage points. The ABR is the greater of either the banks base rate or the federal funds rate plus 1⁄2 percentage point. The commitment available under the DIP credit facility is mandatorily reduced by a portion of proceeds
received from future asset or business divestitures. The amount outstanding from the DIP facility as of June 30, 2005 was approximately $386.9 million.



Management believes that interest rate risk to the Company is low while the Restructuring Proceedings continue. However, management cannot predict with any certainty the
level of interest rate risk that may exist following the completion of the Restructuring Proceedings.



Commodity Price Risk



The Company is
dependent upon the supply of certain raw materials used in its production processes; these raw materials are exposed to price fluctuations on the open market. On a limited basis, the Company engages in commodity price hedging activities to manage
the volatility associated with these raw materials. The Company monitors its commodity price risk exposures periodically to maximize the overall effectiveness of its commodity



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forward contracts. Principal raw materials hedged include natural gas, copper, nickel, lead, high-grade aluminum and aluminum alloy. Forward contracts used
to mitigate commodity price risk associated with raw materials, for up to eighteen months in the future, are designated as cash flow hedging instruments. These instruments are intended to offset the effect of changes in raw materials prices on
forecasted purchases. The Company had fourteen contracts outstanding with a combined notional value of $12.3 million at June 30, 2005, and three contracts outstanding with a combined notional value of $6.5 million at December 31, 2004.



Increases in certain raw material costs, primarily steel, non-ferrous metals and
hydrocarbon-based materials have had a significant adverse impact on the Companys operating results during the second quarter of 2005. Through its centralized supply chain functions, the Company continues to work with its suppliers to reduce
global material costs. Additionally, the sharing of increased raw material costs has been and will continue to be the subject of ongoing negotiation with the Companys customers. However, the Company expects raw material supplies will continue
to be constrained and the impact of increasing raw material costs will likely continue to pressure the Companys operating results.





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ITEM 4. CONTROLS AND PROCEDURES



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



Disclosure Controls
and Procedures



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



As of June 30, 2005, an evaluation was performed under the supervision and
with the participation of the Companys management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures. Based upon
that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Companys disclosure controls and procedures were effective as of June 30, 2005, subject to the limitations previously described.



Changes to Internal Control Over Financial Reporting



Management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the U.S. Securities Exchange Act of 1934. As of June 30, 2005, the Companys management, with the participation of the principal executive and financial
officers, has evaluated for disclosure, changes to the Companys internal control over financial reporting that occurred during the fiscal quarter ended June 30, 2005 that have materially affected, or are reasonably likely to materially affect,
the Companys internal control over financial reporting.



No such changes
to internal control over financial reporting were noted.





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PART II

OTHER INFORMATION



ITEM1. LEGAL PROCEEDINGS



| | (a) | Contingencies.
| | --- | --------------



Note 15 to the Consolidated Financial Statements, Litigation and Environmental Matters, that is included in Part I of this report, is
incorporated herein by reference.



ITEM 3. DEFAULTS UPON SENIOR SECURITIES



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



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



ITEM 6. EXHIBITS



| | (a) | Exhibits:
| | --- | ---------



|     |  |                                                                                                                                                                                  
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification by the Companys Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.                                                        
|     | 
|31.2 |  | Certification by the Companys Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.                                                        
|     | 
|32   |  | Certification by the Companys Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, and Rule 13a-14(b) of the Securities Exchange Act of
1934.



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SIGNATURES



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



FEDERAL-MOGUL CORPORATIONBy:

/s/ G. Michael LynchG. Michael LynchExecutive Vice President and Chief Financial Officer, Principal Financial OfficerBy:

/s/ Michael J. WidgrenMichael J. WidgrenChief Accounting Officer




Dated: July 28, 2005



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