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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 UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------



For the quarterly period ended March 31, 2004



or



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 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)



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 April 29, 2004, there were 87,141,007 outstanding shares of the registrants $5.00
stated value common stock.



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FEDERAL-MOGUL CORPORATION



Form 10-Q



For the Quarter Ended March 31, 2004



INDEX



|                                                                                               |  |         
|---------------------------------------------------------------------------------------------- |  | --------
|                                                                                               |  | Page No.
|Forward-Looking Statements                                                                     |  | 2       
|Part I  Financial Information                                                                 |  |         
|Item 1  Financial Statements                                                                  |  |         
|Consolidated Statements of Operations                                                          |  | 4       
|Consolidated Balance Sheets                                                                    |  | 5       
|Consolidated Statements of Cash Flows                                                          |  | 6       
|Notes to the Consolidated Financial Statements                                                 |  | 7       
|Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 40      
|Item 3  Quantitative and Qualitative Disclosures about Market Risk                            |  | 54      
|Item 4  Controls and Procedures                                                               |  | 55      
|Part II  Other Information                                                                    |  |         
|Item 1  Legal Proceedings                                                                     |  | 56      
|Item 3  Defaults Upon Senior Securities                                                       |  | 56      
|Item 6  Exhibits and Reports on Form 8-K                                                      |  | 56      
|Signatures                                                                                     |  | 57      
|Exhibits                                                                                       |  | 58      



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FORWARD-LOOKING STATEMENTS



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



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



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



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



Chapter 11 Filing



| | Factors relating to the Companys filing for Chapter 11 in the U.S. and the filing for Administration by certain of the Company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 or company voluntary arrangements in the U.K.; the outcome of
asbestos litigation proceedings; and the Companys compliance with its existing 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.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



| | 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 Ended March 31                    |        
|                                                              |  | 2004                                           |         |   | 2003 |  
|                                                              |  | (Millions of Dollars,Except Per Share Amounts) |        
|Net sales                                                     |  | $                                              | 1,553.0 |   |      | $ | 1,367.2 |  
|Cost of products sold                                         |  |                                                | 1,256.3 |   |      |   | 1,094.6 |  
|                                                              |  |                                                |         |   |      |   |         |  
|Gross margin                                                  |  |                                                | 296.7   |   |      |   | 272.6   |  
|                                                              |  |                                               
|Selling, general and administrative expenses                  |  |                                                | 243.0   |   |      |   | 224.7   |  
|Interest expense, net                                         |  |                                                | 25.6    |   |      |   | 29.5    |  
|Chapter 11 and Administration related reorganization expenses |  |                                                | 26.0    |   |      |   | 32.8    |  
|Equity earnings of unconsolidated affiliates                  |  |                                                | (9.5    | ) |      |   | (5.8    | )
|Other expense, net                                            |  |                                                | 12.1    |   |      |   | 9.7     |  
|                                                              |  |                                                |         |   |      |   |         |  
|Loss from continuing operations before income tax expense     |  |                                                | (0.5    | ) |      |   | (18.3   | )
|Income tax expense                                            |  |                                                | 19.9    |   |      |   | 18.8    |  
|                                                              |  |                                                |         |   |      |   |         |  
|Loss from continuing operations                               |  |                                                | (20.4   | ) |      |   | (37.1   | )
|Earnings from discontinued operations, net of income taxes    |  |                                                |        |   |      |   | 2.9     |  
|                                                              |  |                                                |         |   |      |   |         |  
|Net loss                                                      |  | $                                              | (20.4   | ) |      | $ | (34.2   | )
|                                                              |  |                                                |         |   |      |   |         |  
|Basic and diluted loss per common share:                      |  |                                                |         |   |      |   |         |  
|Loss from continuing operations                               |  | $                                              | (0.23   | ) |      | $ | (0.42   | )
|Earnings from discontinued operations, net of income taxes    |  |                                                |        |   |      |   | 0.03    |  
|                                                              |  |                                                |         |   |      |   |         |  
|Net loss per common share                                     |  | $                                              | (0.23   | ) |      | $ | (0.39   | )
|                                                              |  |                                                |         |   |      |   |         |  



See accompanying notes
to consolidated financial statements



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FEDERAL-MOGUL CORPORATION

Consolidated Balance Sheets



|                                                             |  |                           |          |   |                  |   |          |  
|------------------------------------------------------------ |  | ------------------------- | -------- | - | ---------------- | - | -------- | -
|                                                             |  | (Unaudited) March 31 2004 |          |   | December 31 2003 |  
|                                                             |  | (Millions of dollars)     |         
|ASSETS                                                       |  |                           |          |   |                  |   |          |  
|Current assets:                                              |  |                           |          |   |                  |   |          |  
|Cash and equivalents                                         |  | $                         | 521.9    |   |                  | $ | 472.4    |  
|Accounts receivable, net                                     |  |                           | 1,050.4  |   |                  |   | 976.5    |  
|Inventories, net                                             |  |                           | 822.9    |   |                  |   | 834.4    |  
|Prepaid expenses and other current assets                    |  |                           | 262.5    |   |                  |   | 257.5    |  
|                                                             |  |                           |          |   |                  |   |          |  
|Total current assets                                         |  |                           | 2,657.7  |   |                  |   | 2,540.8  |  
|                                                             |  |                          
|Property, plant and equipment, net                           |  |                           | 2,354.8  |   |                  |   | 2,404.8  |  
|Goodwill and indefinite-lived intangible assets              |  |                           | 1,517.7  |   |                  |   | 1,517.1  |  
|Definite-lived intangible assets, net                        |  |                           | 345.2    |   |                  |   | 348.0    |  
|Asbestos-related insurance recoverable                       |  |                           | 820.8    |   |                  |   | 806.1    |  
|Prepaid pension costs                                        |  |                           | 288.3    |   |                  |   | 309.2    |  
|Other noncurrent assets                                      |  |                           | 190.2    |   |                  |   | 190.7    |  
|                                                             |  |                           |          |   |                  |   |          |  
|                                                             |  | $                         | 8,174.7  |   |                  | $ | 8,116.7  |  
|                                                             |  |                           |          |   |                  |   |          |  
|LIABILITIES AND SHAREHOLDERS DEFICIT                        |  |                           |          |   |                  |   |          |  
|Current liabilities:                                         |  |                           |          |   |                  |   |          |  
|Short-term debt, including current portion of long-term debt |  | $                         | 320.4    |   |                  | $ | 14.8     |  
|Accounts payable                                             |  |                           | 388.6    |   |                  |   | 332.3    |  
|Accrued liabilities                                          |  |                           | 527.9    |   |                  |   | 513.3    |  
|Other current liabilities                                    |  |                           | 160.4    |   |                  |   | 158.4    |  
|                                                             |  |                           |          |   |                  |   |          |  
|Total current liabilities                                    |  |                           | 1,397.3  |   |                  |   | 1,018.8  |  
|                                                             |  |                          
|Liabilities subject to compromise                            |  |                           | 6,095.5  |   |                  |   | 6,087.8  |  
|                                                             |  |                          
|Long-term debt                                               |  |                           | 11.4     |   |                  |   | 331.2    |  
|Postemployment benefits                                      |  |                           | 1,731.4  |   |                  |   | 1,716.6  |  
|Deferred income taxes                                        |  |                           | 70.3     |   |                  |   | 70.4     |  
|Other accrued liabilities                                    |  |                           | 214.8    |   |                  |   | 214.4    |  
|Minority interest in consolidated subsidiaries               |  |                           | 55.9     |   |                  |   | 54.4     |  
|Shareholders deficit:                                       |  |                           |          |   |                  |   |          |  
|Series C ESOP preferred stock                                |  |                           | 28.0     |   |                  |   | 28.0     |  
|Common stock                                                 |  |                           | 435.6    |   |                  |   | 435.6    |  
|Additional paid-in capital                                   |  |                           | 2,061.0  |   |                  |   | 2,060.5  |  
|Accumulated deficit                                          |  |                           | (2,953.8 | ) |                  |   | (2,933.4 | )
|Accumulated other comprehensive loss                         |  |                           | (972.7   | ) |                  |   | (967.6   | )
|                                                             |  |                           |          |   |                  |   |          |  
|Total shareholders deficit                                  |  |                           | (1,401.9 | ) |                  |   | (1,376.9 | )
|                                                             |  |                           |          |   |                  |   |          |  
|                                                             |  | $                         | 8,174.7  |   |                  | $ | 8,116.7  |  
|                                                             |  |                           |          |   |                  |   |          |  



See accompanying notes
to consolidated financial statements.



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FEDERAL-MOGUL CORPORATION

Consolidated Statements of Cash Flows (Unaudited)



|                                                                                  |  |                            |       |   |      |   |       |  
|--------------------------------------------------------------------------------- |  | -------------------------- | ----- | - | ---- | - | ----- | -
|                                                                                  |  | Three Months EndedMarch 31 |      
|                                                                                  |  | 2004                       |       |   | 2003 |  
|                                                                                  |  | (Millions of Dollars)      |      
|Cash provided from (used by) operating activities                                 |  |                            |       |   |      |   |       |  
|Net loss                                                                          |  | $                          | (20.4 | ) |      | $ | (34.2 | )
|Adjustments to reconcile net loss to net cash provided from operating activities: |  |                            |       |   |      |   |       |  
|Depreciation and amortization                                                     |  |                            | 84.7  |   |      |   | 73.8  |  
|Postemployment benefits, including pensions                                       |  |                            | 30.8  |   |      |   | 29.4  |  
|Deferred taxes                                                                    |  |                            | 0.1   |   |      |   | 13.0  |  
|Changes in operating assets and liabilities:                                      |  |                            |       |   |      |   |       |  
|Increase in accounts receivable                                                   |  |                            | (80.4 | ) |      |   | (46.6 | )
|Increase in inventories, net of involuntary conversion                            |  |                            | (38.2 | ) |      |   | (2.0  | )
|Increase in accounts payable                                                      |  |                            | 58.7  |   |      |   | 20.3  |  
|Changes in other assets and liabilities, net of involuntary conversion            |  |                            | 49.0  |   |      |   | (26.9 | )
|Insurance proceeds from involuntary conversion                                    |  |                            | 35.0  |   |      |   |      |  
|                                                                                  |  |                            |       |   |      |   |       |  
|Net cash provided from operating activities                                       |  |                            | 119.3 |   |      |   | 26.8  |  
|                                                                                  |  |                           
|Cash provided from (used by) investing activities                                 |  |                            |       |   |      |   |       |  
|Expenditures for property, plant and equipment                                    |  |                            | (73.4 | ) |      |   | (65.1 | )
|Proceeds from the sale of property, plant and equipment                           |  |                            | 11.0  |   |      |   | 6.5   |  
|                                                                                  |  |                            |       |   |      |   |       |  
|Net cash used by investing activities                                             |  |                            | (62.4 | ) |      |   | (58.6 | )
|                                                                                  |  |                           
|Cash provided from (used by) financing activities                                 |  |                            |       |   |      |   |       |  
|Proceeds from borrowings on DIP credit facility                                   |  |                            |      |   |      |   | 75.0  |  
|Principal payments on DIP credit facility                                         |  |                            | (10.0 | ) |      |   | (10.2 | )
|Decrease in short-term debt                                                       |  |                            | (4.4  | ) |      |   | (16.7 | )
|Increase (decrease) in other long-term debt                                       |  |                            | 0.2   |   |      |   | (2.5  | )
|                                                                                  |  |                            |       |   |      |   |       |  
|Net cash provided from (used by) financing activities                             |  |                            | (14.2 | ) |      |   | 45.6  |  
|                                                                                  |  |                           
|Effect of foreign currency exchange rate fluctuations on cash                     |  |                            | 6.8   |   |      |   | 1.5   |  
|                                                                                  |  |                            |       |   |      |   |       |  
|Increase in cash and equivalents                                                  |  |                            | 49.5  |   |      |   | 15.3  |  
|                                                                                  |  |                           
|Cash and equivalents at beginning of period                                       |  |                            | 472.4 |   |      |   | 395.1 |  
|                                                                                  |  |                            |       |   |      |   |       |  
|Cash and equivalents at end of period                                             |  | $                          | 521.9 |   |      | $ | 410.4 |  
|                                                                                  |  |                            |       |   |      |   |       |  



See accompanying notes
to consolidated financial statements.



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FEDERAL-MOGUL CORPORATION

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2004



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. 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 period ended December 31, 2003, as filed with the Securities and Exchange Commission.



Operating results for the three-month period ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ended December 31, 2004.
Certain items in the 2003 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 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 the Chapter 11 Cases and therefore, are not currently provided protection from creditors by any bankruptcy court and are operating in normal course.



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.



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 and/or changes
of ownership, is highly uncertain. While operating as debtors-in-possession under the protection of Chapter 11 of the Bankruptcy Code and Administration under the Act, and subject to approval of the Bankruptcy Court, 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 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
majority-owned subsidiaries and other controlled entities. Intercompany accounts and transactions have been eliminated in consolidation. Investments in affiliates of not more than 20% are accounted for using the cost method, while investments
greater than 20% and not more than 50% are accounted for using the equity method. Such investments aggregated $133.4 million and $131.2 million at March 31, 2004 and December 31, 2003, respectively, and are included in the consolidated balance
sheets as other noncurrent assets. These equity investees had approximately $150 million of net sales and approximately $25 million in net income for the three months ended March 31, 2004. As of March 31, 2004, the equity investees had
approximately $250 million in total net assets.



The Companys joint
ventures are businesses established and maintained in connection with its 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.



Pursuant to its
Turkish joint venture arrangement, the Companys joint venture 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 its investment partner. The total amount of the contingent guarantee as of March 31, 2004 approximates $50 million. This put option, if exercised at the current fair value, could have a
material effect on the Companys liquidity position.



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



Discontinued Operations: During 2003, the Company completed divestitures of its U.S. camshaft operations, the majority of its original equipment lighting operations, and its operations located in Hampton,
Virginia and Solon, Ohio. The aggregate net earnings of these divestitures are reported as discontinued operations in the Companys consolidated statements of operations for the three-month period ended March 31, 2003. Additional financial
information related to the Companys discontinued operations is presented in Note 5 to the Companys consolidated financial statements, Discontinued Operations.



2. Voluntary Reorganization under Chapter 11 and Administration



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



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 U.S. Debtors are operating their businesses as debtors-in-possession subject to the provisions of the Bankruptcy Code. The U.K. Debtors are continuing to manage their
operations under the supervision of Administrators



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##### Table of Contents

approved by the High Court. All vendors will be paid for all goods furnished and services provided after the Petition
Date. However, as a consequence of the Restructuring Proceedings, 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
a unified plan of reorganization under the Bankruptcy Code 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 April 22, 2004, the Company filed its
Second Amended Joint Plan of Reorganization (the Plan) and Disclosure Statement Describing the Second Amended Joint Plan of Reorganization with the Bankruptcy Court. This 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). The
disclosure statement hearing has been scheduled for May 11, 2004.



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 technical issues remain to be resolved, 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 or trusts for the benefit of existing and future asbestos claimants, and 49.9% of the newly authorized and issued common stock will be distributed pro
rata to the noteholders. If the classes of holders of common and preferred stock of Federal-Mogul vote in favor of the Plan, the holders of currently outstanding common and preferred stock of Federal-Mogul will receive warrants for the purchase of
common stock of reorganized Federal-Mogul.



Unsecured creditors, including
trade creditors, of the U.S. Debtors will receive cash distributions equal to 35% of their allowed claims, payable in three annual installments, provided that the aggregate distribution on account of all allowed unsecured claims against the U.S.
Debtors is to be capped at an amount that is not yet determined. This 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 cash distributions that vary according to terms specified within the 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 Company Voluntary Arrangements to be submitted for the U.K. Debtors in the U.K. Restructuring
proceedings. These forms of Schemes of Arrangement and Company Voluntary Arrangements 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 Company Voluntary Arrangements. The Administrators have not yet agreed to recommend the Schemes of Arrangement and Company Voluntary Arrangements that parallel
the Plan. The Plan Proponents are working toward an agreement with the Administrators to recommend parallel Schemes of Arrangement and Company Voluntary Arrangements. Alternatively, if such an agreement cannot be achieved, the Plan Proponents will
work toward an agreement with the Administrators to retain the businesses of



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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.



If neither
agreement can be achieved, then one or more of the following may occur with respect to each U.K. Debtor: (a) meetings of creditors shall be convened to resolve, pursuant to the proxies that will be distributed to creditors along with the Disclosure
Statement, to direct the Administrators to either (i) propose Schemes of Arrangement and Company Voluntary Arrangements substantially similar to the forms attached to the Disclosure Statement, or (ii) seek the discharge of the U.K. Administration
orders so that the Schemes of Arrangement and/or Voluntary Arrangements can thereafter be proposed by the U.K. Debtors as appropriate; (b) the U.K. Debtors and the Plan Proponents may ask the High Court to approve the Plan with respect to the U.K.
Debtors as a matter of comity; or (c) Federal-Mogul may bid for those businesses of the U.K. Debtors that are valuable to Federal-Mogul and its customers and any actual or deemed transfer of assets to Federal-Mogul in connection therewith shall be
entitled to the benefits of the injunction pursuant to Section 524(g) of the Bankruptcy Code. If Federal-Mogul 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 Federal-Mogul or its designee. The Plan Proponents believe that Federal-Mogul will be the successful bidder for those assets that are valuable to Federal-Mogul and its customers. Any remaining assets would be
liquidated. The Plan Proponents believe 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
Administrators refusal to agree could be damaging to the interests of such parties.



The Company is unable to predict with a high degree of certainty at this time what treatment will be accorded under any such plan of reorganization to claims 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. Various parties in the Chapter 11 Cases may challenge these arrangements,
transactions, and relationships, and the outcome of those challenges, if any, may have an impact on the treatment of various claims under such plan of reorganization.



The Bankruptcy Court may confirm a plan of reorganization only upon making certain findings required by the Bankruptcy Code, and a plan may
be confirmed over the dissent of non-accepting creditors and equity security holders if certain requirements of the Bankruptcy Code are met. The payment rights and other entitlements of pre-petition creditors and equity security holders may be
substantially altered by any plan of reorganization confirmed in the Chapter 11 Cases. There is no assurance that there will be sufficient assets to satisfy the Debtors pre-petition liabilities in whole or in part, and the pre-petition
creditors of some Debtors may be treated differently than those of other Debtors.



Chapter 11 Financing



In connection with the Restructuring
Proceedings, the Company entered into a $675 million debtor-in-possession (DIP) credit facility to supplement liquidity and fund operations during the restructuring proceedings. In August 2003, the DIP credit facility was amended to
reduce the commitment to $600 million, change the expiration date to February 2005, and reduce the interest rate to either the alternate base rate (ABR) plus 2 percentage points or a formula based on the London Inter-Bank Offered Rate
(LIBOR) plus 3 percentage points. The ABR is the greatest of either the banks prime rate or the base CD rate plus 1 percentage point or the federal funds rate plus 1/2percentage point. The $600 million commitment is mandatorily reduced by a portion of proceeds received from future asset or business divestitures.



The Companys available borrowings under the DIP credit facility
are determined by the underlying collateral at any point in time, consisting of its domestic inventories, domestic accounts receivable, and domestic property, plant, and equipment. 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 8 to the consolidated financial statements.



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



The Bankruptcy Court further ordered additional
adequate protection to the noteholders in the form of either cash payment of one-half of one percent (0.5%) per year of the outstanding notes 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%) per year of the outstanding notes. 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. Accordingly, 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 administrative expense claims, approximating $53 million as of March 31, 2004, have not been accrued.



Financial Statement Classification



Virtually all of the Companys pre-petition debt is in default. At March 31, 2004, the
Debtors pre-petition debt is classified under the caption Liabilities subject to compromise. This includes debt outstanding of $1,932.9 million under the pre-petition Senior Credit Agreements and $2,118.2 million of other
outstanding debt, primarily notes payable at various unsecured rates, less capitalized debt issuance fees of $29.2 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 will no longer have the funds available to pay distributions on the Company-Obligated Mandatorily Redeemable Preferred Securities and stopped
accruing and paying such distributions on October 1, 2001. The affiliate is in default on the Company-Obligated Mandatorily Redeemable Preferred Securities. The Company is a guarantor on the outstanding debentures and, as a result of the default,
the Company has become a debtor to the holders of the debentures directly. This liability is a pre-petition liability. As a result, the Company has classified these securities as Liabilities subject to compromise in the consolidated
balance sheets.



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



|                                                    |  |                       |         |                 |   |        
|--------------------------------------------------- |  | --------------------- | ------- | --------------- | - | -------
|                                                    |  | March 312004          |         | December 312003
|                                                    |  | (Millions of Dollars)
|Debt                                                |  | $                     | 4,021.9 |                 | $ | 4,020.7
|Asbestos liabilities                                |  |                       | 1,573.9 |                 |   | 1,568.4
|Company-obligated mandatorily redeemable securities |  |                       | 210.6   |                 |   | 211.0  
|Accounts payable                                    |  |                       | 201.5   |                 |   | 201.8  
|Interest payable                                    |  |                       | 43.9    |                 |   | 43.9   
|Environmental liabilities                           |  |                       | 23.9    |                 |   | 23.8   
|Other accrued liabilities                           |  |                       | 19.8    |                 |   | 18.2   
|                                                    |  |                       |         |                 |   |        
|                                                    |  |                       | 6,095.5 |                 |   | 6,087.8
|Intercompany payables to affiliates                 |  |                       | 3,237.2 |                 |   | 3,204.9
|                                                    |  |                       |         |                 |   |        
|                                                    |  | $                     | 9,332.7 |                 | $ | 9,292.7
|                                                    |  |                       |         |                 |   |        



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



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



|                                                 |  |                             |      |      |   |     
|------------------------------------------------ |  | --------------------------- | ---- | ---- | - | ----
|                                                 |  | Three Months Ended March 31
|                                                 |  | 2004                        |      | 2003
|                                                 |  | (Millions of Dollars)      
|Professional fees directly related to the filing |  | $                           | 23.2 |      | $ | 26.4
|Critical employee retention costs                |  |                             | 2.0  |      |   | 2.1 
|Other direct costs                               |  |                             | 0.8  |      |   | 4.3 
|                                                 |  |                             |      |      |   |     
|Total                                            |  | $                           | 26.0 |      | $ | 32.8
|                                                 |  |                             |      |      |   |     



Cash payments for Chapter 11 and
Administration related reorganization expenses totaled $24.6 million and $16.2 million for the three months ended March 31, 2004 and 2003, respectively.



Pursuant to the Bankruptcy Code, the Debtors have filed schedules with the Bankruptcy Court setting forth the assets and liabilities of the Debtors as of the Petition
Date. On October 4, 2002, the Debtors issued approximately 100,000 proof of claim forms to its current and prior employees, known creditors, vendors and other parties with whom the Debtors have previously conducted business. To the extent that
recipients disagree with the claims as quantified on these forms, the recipient may file discrepancies with the Bankruptcy Court. Differences between amounts recorded by the Debtors and claims filed by creditors will be investigated and resolved as
part of the Restructuring Proceedings. The Bankruptcy Court ultimately will determine liability amounts that will be allowed for these claims in the Chapter 11 Cases. A March 3, 2003 bar date was set for the filing of proofs of claim against the
Debtors. 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.



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##### Table of Contents

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 2,100 claims, totaling approximately $141.8 billion, which the Company believes should be disallowed by the Bankruptcy Court primarily because these claims appear to
be duplicate or unsubstantiated claims.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| | Approximately 100 claims, totaling approximately $7.1 billion, represent bank and note-holder debt claims. The Company has previously recorded approximately $4.3 billion for these
claims. The Company anticipates any amounts in excess of its books and records are duplicative and will ultimately be resolved in the consensual plan of reorganization.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Approximately 3,800 claims, totaling approximately $200 million, alleging asbestos-related property damage. Based on its review, the Company believes most of these claims are
duplicative or unsubstantiated.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



The Company has
not completed its evaluation of the approximate remaining 2,200 claims, totaling approximately $1.0 billion, alleging rights to payment for financing, environmental, trade accounts payable and other matters. The Company continues to investigate
these unresolved proofs of claim, and intends to file objections to the claims that are inconsistent with its books and records. As of March 31, 2004, the Debtors have filed objections to more than 5,100 proofs of claim, and have obtained
stipulations or orders involving more than 1,000 claims, which either (i) reduce the filed claims to an amount that is consistent with the Debtors books or records, or (ii) completely disallow the claims.



The 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.



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 March 31, 2004 and December 31, 2003, such cash balances were approximately $271 million and $261 million, respectively.



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.



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##### Table of Contents

FEDERAL-MOGUL CORPORATION

Debtors Condensed Consolidated Statements of Operations (Unaudited)



|                                                                                                   |  |                            |       |   |      |   |       |  
|-------------------------------------------------------------------------------------------------- |  | -------------------------- | ----- | - | ---- | - | ----- | -
|                                                                                                   |  | Three months endedMarch 31 |      
|                                                                                                   |  | 2004                       |       |   | 2003 |  
|                                                                                                   |  | (Millions of Dollars)      |      
|Net sales                                                                                          |  | $                          | 907.0 |   |      | $ | 866.5 |  
|Cost of products sold                                                                              |  |                            | 751.6 |   |      |   | 709.6 |  
|                                                                                                   |  |                            |       |   |      |   |       |  
|Gross margin                                                                                       |  |                            | 155.4 |   |      |   | 156.9 |  
|                                                                                                   |  |                           
|Selling, general and administrative expenses                                                       |  |                            | 162.7 |   |      |   | 154.4 |  
|Interest expense, net                                                                              |  |                            | 24.5  |   |      |   | 29.0  |  
|Chapter 11 and Administration related reorganization expenses                                      |  |                            | 26.0  |   |      |   | 32.8  |  
|Intercompany interest income from non-Debtors                                                      |  |                            | (91.5 | ) |      |   | (75.3 | )
|Other (income) expense, net                                                                        |  |                            | (9.9  | ) |      |   | 1.3   |  
|                                                                                                   |  |                            |       |   |      |   |       |  
|Earnings from continuing operations before income taxes and equity loss of non-Debtor subsidiaries |  |                            | 43.6  |   |      |   | 14.7  |  
|Income tax expense                                                                                 |  |                            | 3.6   |   |      |   | 0.2   |  
|                                                                                                   |  |                            |       |   |      |   |       |  
|Earnings from continuing operations before equity loss of non-Debtor subsidiaries                  |  |                            | 40.0  |   |      |   | 14.5  |  
|Equity loss from continuing operations of non-Debtor subsidiaries                                  |  |                            | (60.4 | ) |      |   | (51.6 | )
|                                                                                                   |  |                            |       |   |      |   |       |  
|Loss from continuing operations                                                                    |  |                            | (20.4 | ) |      |   | (37.1 | )
|Earnings from discontinued operations, net of income taxes, Debtors                                |  |                            |      |   |      |   | 1.9   |  
|Earnings from discontinued operations, net of income taxes, non-Debtors                            |  |                            |      |   |      |   | 1.0   |  
|                                                                                                   |  |                            |       |   |      |   |       |  
|Net loss                                                                                           |  | $                          | (20.4 | ) |      | $ | (34.2 | )
|                                                                                                   |  |                            |       |   |      |   |       |  



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##### Table of Contents

FEDERAL-MOGUL CORPORATION

Debtors Condensed Consolidated Balance Sheets



|                                                             |  |                          |          |   |                  |   |          |  
|------------------------------------------------------------ |  | ------------------------ | -------- | - | ---------------- | - | -------- | -
|                                                             |  | (Unaudited)March 31 2004 |          |   | December 31 2003 |  
|                                                             |  | (Millions of Dollars)    |         
|ASSETS                                                       |  |                          |          |   |                  |   |          |  
|Current assets:                                              |  |                          |          |   |                  |   |          |  
|Cash and equivalents                                         |  | $                        | 310.9    |   |                  | $ | 281.5    |  
|Accounts receivable, net                                     |  |                          | 603.9    |   |                  |   | 558.4    |  
|Accounts receivable, non-Debtors                             |  |                          | 390.4    |   |                  |   | 457.7    |  
|Inventories, net                                             |  |                          | 428.2    |   |                  |   | 443.9    |  
|Prepaid expenses and other current assets                    |  |                          | 125.7    |   |                  |   | 116.2    |  
|                                                             |  |                          |          |   |                  |   |          |  
|Total current assets                                         |  |                          | 1,859.1  |   |                  |   | 1,857.7  |  
|                                                             |  |                         
|Property, plant and equipment, net                           |  |                          | 1,109.8  |   |                  |   | 1,127.7  |  
|Goodwill and indefinite-lived intangible assets              |  |                          | 1,343.5  |   |                  |   | 1,341.1  |  
|Definite-lived intangible assets, net                        |  |                          | 292.9    |   |                  |   | 293.5    |  
|Asbestos-related insurance recoverable                       |  |                          | 820.8    |   |                  |   | 806.1    |  
|Loans receivable and investments in non-Debtors              |  |                          | 4,720.4  |   |                  |   | 4,619.1  |  
|Other noncurrent assets                                      |  |                          | 417.3    |   |                  |   | 439.5    |  
|                                                             |  |                          |          |   |                  |   |          |  
|                                                             |  | $                        | 10,563.8 |   |                  | $ | 10,484.7 |  
|                                                             |  |                          |          |   |                  |   |          |  
|LIABILITIES AND SHAREHOLDERS DEFICIT                        |  |                          |          |   |                  |   |          |  
|Current liabilities:                                         |  |                          |          |   |                  |   |          |  
|Short-term debt, including current portion of long-term debt |  | $                        | 310.0    |   |                  | $ |         |  
|Accounts payable and accrued compensation                    |  |                          | 264.9    |   |                  |   | 237.0    |  
|Accounts payable, non-Debtors                                |  |                          | 191.5    |   |                  |   | 174.9    |  
|Other accrued liabilities                                    |  |                          | 263.1    |   |                  |   | 254.3    |  
|                                                             |  |                          |          |   |                  |   |          |  
|Total current liabilities                                    |  |                          | 1,029.5  |   |                  |   | 666.2    |  
|                                                             |  |                         
|Long-term debt                                               |  |                          |         |   |                  |   | 320.0    |  
|Postemployment benefits                                      |  |                          | 1,479.3  |   |                  |   | 1,458.8  |  
|Other accrued liabilities                                    |  |                          | 124.2    |   |                  |   | 123.9    |  
|                                                             |  |                         
|Liabilities subject to compromise                            |  |                          | 9,332.7  |   |                  |   | 9,292.7  |  
|                                                             |  |                         
|Shareholders deficit                                        |  |                          | (1,401.9 | ) |                  |   | (1,376.9 | )
|                                                             |  |                          |          |   |                  |   |          |  
|                                                             |  | $                        | 10,563.8 |   |                  | $ | 10,484.7 |  
|                                                             |  |                          |          |   |                  |   |          |  



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##### Table of Contents

FEDERAL-MOGUL CORPORATION

Debtors Condensed Consolidated Statements of Cash Flows (Unaudited)



|                                                              |  |                            |       |   |      |   |       |  
|------------------------------------------------------------- |  | -------------------------- | ----- | - | ---- | - | ----- | -
|                                                              |  | Three MonthsEnded March 31 |      
|                                                              |  | 2004                       |       |   | 2003 |  
|                                                              |  | (Millions of Dollars)      |      
|Net cash provided from (used by) operating activities         |  | $                          | 58.5  |   |      | $ | (45.0 | )
|                                                              |  |                           
|Cash provided from (used by) investing activities             |  |                            |       |   |      |   |       |  
|Expenditures for property, plant and equipment                |  |                            | (37.4 | ) |      |   | (37.2 | )
|Proceeds from the sale of property, plant and equipment       |  |                            | 11.0  |   |      |   |      |  
|                                                              |  |                            |       |   |      |   |       |  
|Net cash used by investing activities                         |  |                            | (26.4 | ) |      |   | (37.2 | )
|                                                              |  |                           
|Cash provided from (used by) financing activities             |  |                            |       |   |      |   |       |  
|Borrowings on DIP credit facility                             |  |                            |      |   |      |   | 75.0  |  
|Principal payments on DIP credit facility                     |  |                            | (10.0 | ) |      |   | (10.2 | )
|                                                              |  |                            |       |   |      |   |       |  
|Net cash provided from (used by) financing activities         |  |                            | (10.0 | ) |      |   | 64.8  |  
|                                                              |  |                           
|Effect of foreign currency exchange rate fluctuations on cash |  |                            | 7.3   |   |      |   | 1.4   |  
|                                                              |  |                            |       |   |      |   |       |  
|Increase (decrease) in cash and equivalents                   |  |                            | 29.4  |   |      |   | (16.0 | )
|                                                              |  |                           
|Cash and equivalents at beginning of period                   |  |                            | 281.5 |   |      |   | 189.6 |  
|                                                              |  |                            |       |   |      |   |       |  
|Cash and equivalents at end of period                         |  | $                          | 310.9 |   |      | $ | 173.6 |  
|                                                              |  |                            |       |   |      |   |       |  



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##### Table of Contents

3. 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, 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 post employment 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 in which the Company operates, statutory requirements include involuntary termination benefits that extend several
years into the future. Accordingly, severance payments continue well past the date of termination at many international locations. Thus, these programs appear to be ongoing when, in fact, terminations and other activities under these programs have
been substantially completed.



Management expects that future savings resulting
from execution of its restructuring programs will generally result in full pay back within 36 to 60 months. 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 the Companys liquidity and financial position.



The following is a summary of the Companys consolidated restructuring reserves and
related activity for the three months ended March 31, 2004:



|                                             |  |                       |       |   |      |   |       |  |   |       |  
|-------------------------------------------- |  | --------------------- | ----- | - | ---- | - | ----- |  | - | ----- | -
|                                             |  | Severance             |       |   | Exit |   | Total | 
|                                             |  | (Millions of Dollars) |      
|Balance of reserves at December 31, 2003     |  | $                     | 47.7  |   |      | $ | 10.0  |  | $ | 57.7  |  
|Payments against and adjustments to reserves |  |                       | (14.9 | ) |      |   |      |  |   | (14.9 | )
|                                             |  |                       |       |   |      |   |       |  |   |       |  
|Balance of reserves at March 31, 2004        |  | $                     | 32.8  |   |      | $ | 10.0  |  | $ | 42.8  |  
|                                             |  |                       |       |   |      |   |       |  |   |       |  



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 geographies or to other locations with available capacity.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2. | Consolidation of administrative functions and standardization of manufacturing processes - 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.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Significant restructuring activities for the three months ended March 31, 2004 are described below.



Powertrain - The primary restructuring activities in the Powertain reporting segment
include the following:



| | During December 2003, the Company announced the closure and relocation of its Bradford, United Kingdom piston operations to other existing European manufacturing facilities with
available capacity or with lower cost labor. At March 31, 2004, the Company had remaining reserves of approximately $13.0 million related to this activity.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



17



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| | During 2002, the Company announced the closure of its Bridgwater, United Kingdom piston operation. Production from this operation was relocated to other existing European facilities
with available capacity or with lower cost labor. The closure of the Bridgwater facility was completed during 2003. Approximately $0.3 million of severance payments and adjustments were made against this reserve during the three-months ended March
31, 2004. At March 31, 2004, remaining reserves related to this activity approximate $1.0 million.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | During 2002, the Company initiated administrative function and manufacturing process changes at the Companys piston manufacturing operations located in Nuremburg, Germany.
Approximately $1.0 million of severance payments and adjustments were made against this reserve during the quarter ended March 31, 2004. At March 31, 2004, the Company had remaining reserves of approximately $3.0 million related to this activity.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | During 2002, the Company announced the relocation and closure of its piston manufacturing operations in Flowery Branch, Georgia, Orangeburg, South Carolina and Sumter, South
Carolina to other existing North American manufacturing facilities with available capacity or with lower cost labor. The closures of Orangeburg and Flowery Branch were completed during 2003 and closure of Sumter is expected to be completed during
2004. Approximately $1.0 million of severance payments and adjustments were made against this reserve during the three months ended March 31, 2004. At March 31, 2004, the Company had remaining reserves of approximately $4.0 million related to these
activities.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | During 2002, the Company announced the closure and relocation of its piston ring operations in Sunderland, United Kingdom to other existing European facilities with available
capacity. The closure of the Sunderland facility was completed during 2003. Approximately $4.0 million of severance payments and adjustments were made against this reserve during the three months ended March 31, 2004. At March 31, 2004, the Company
had remaining reserves of approximately $1.0 million related to this activity.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | During 2001, the Companys German engine bearing operations announced restructuring programs to transfer certain low volume production with high labor content to low cost
geographies, specifically Poland. Related severance and exit costs approximating $3.0 million were recorded during the first quarter of 2003. Approximately $3.0 million of severance payments and adjustments were made against this reserve during the
three months ended March 31, 2004. At March 31, 2004, the Company had remaining reserves of approximately $4.0 million related to these activities.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Aftermarket  The primary restructuring activities in the Aftermarket reporting segment include the following:



| | During 2003, the Company began relocation of its Ignition and Wiper operations between facilities located in Aubange, Belgium and Upton, England. No charges related to this program
were recorded in the three months ended March 31, 2004. Related severance and exit costs of approximately $4.0 million were recorded in the three months ended March 31, 2003. Approximately $2.0 million of severance payments and adjustments were made
against this reserve during the three months ended March 31, 2004. At March 31, 2004, the Company had remaining reserves of approximately $3.0 million related to this activity.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | During 2002, the Company announced and began the consolidation of certain distribution operations at its Aftermarket distribution facility located in France into its central
European distribution facility in Belgium. Approximately $0.3 million of severance payments and adjustments were made against this reserve during the three months ended March 31, 2004. At March 31, 2004, the Company had remaining reserves of
approximately $1.0 million related to this activity.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | The Company continues the consolidation of its North America administrative and distribution functions. During the three months ended March 31, 2004, satellite distribution
warehouses located in Monterrey, Mexico and Guadalajara, Mexico were closed and related activities were transferred to the Companys Mexico City central distribution facility. Approximately $1.0 million of severance payments and adjustments
were made against this reserve during the three months ended March 31, 2004. Remaining activities under this program are expected to be completed during 2004. At March 31, 2004, the Company had remaining reserves of approximately $1.0 million
related to this activity.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Significant restructuring activities in the Sealing Systems and Systems Protection and Friction reporting segments were
completed as of December 31, 2003. As of March 31, 2004 reserves for all remaining restructuring activities in these reporting segments approximates $2.0 million and such activities are expected to be completed during 2004.



4. Other Expense, Net



The specific components of Other expense, net are provided in the following table:



|                                                                             |  |                             |      |   |      |   |      |  
|---------------------------------------------------------------------------- |  | --------------------------- | ---- | - | ---- | - | ---- | -
|                                                                             |  | Three Months Ended March 31 |     
|                                                                             |  | 2004                        |      |   | 2003 |  
|                                                                             |  | (Millions of Dollars)       |     
|Amortization of intangible assets                                            |  | $                           | 4.5  |   |      | $ | 4.1  |  
|Adjustment of assets held for sale and other long-lived assets to fair value |  |                             | 3.1  |   |      |   | 1.6  |  
|Restructuring charges                                                        |  |                             |     |   |      |   | 10.3 |  
|Minority interest earnings in consolidated subsidiaries                      |  |                             | 1.5  |   |      |   | (0.7 | )
|Gain on sale of assets                                                       |  |                             | (0.7 | ) |      |   | (6.5 | )
|Foreign currency exchange                                                    |  |                             | 5.3  |   |      |   | (0.6 | )
|Miscellaneous                                                                |  |                             | (1.6 | ) |      |   | 1.5  |  
|                                                                             |  |                             |      |   |      |   |      |  
|Total other expense, net                                                     |  | $                           | 12.1 |   |      | $ | 9.7  |  
|                                                                             |  |                             |      |   |      |   |      |  



5. Discontinued Operations



Summarized operational information related to the Companys
discontinued operations for the three months ended March 31, 2003 is as follows (in millions of dollars):



|                                                                             |  |   |     
|---------------------------------------------------------------------------- |  | - | ----
|Net sales                                                                    |  | $ | 42.6
|Cost of products sold                                                        |  |   | 37.4
|                                                                             |  |   |     
|Gross margin                                                                 |  |   | 5.2 
|Selling, general and administrative expenses                                 |  |   | 1.3 
|Adjustment of assets held for sale and other long-lived assets to fair value |  |   | 0.1 
|Net loss on divestitures                                                     |  |   | 0.3 
|Other expense, net                                                           |  |   | 0.5 
|                                                                             |  |   |     
|Income before income taxes                                                   |  |   | 3.0 
|Income tax expense                                                           |  |   | 0.1 
|                                                                             |  |   |     
|Earnings from discontinued operations                                        |  | $ | 2.9 
|                                                                             |  |   |     



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##### Table of Contents

6. Inventories



Inventories are stated at the lower of cost or market. Cost determined by the last-in, first-out (LIFO) method was used for 46% of the inventory at both March 31, 2004
and December 31, 2003. The remaining inventories are recorded using the first-in, first-out (FIFO) method. Inventories are reduced by an allowance for excess and obsolete inventories based on managements review of on-hand inventories compared
to historical and estimated future sales and usage. A summary of inventories is provided in the table below:



|                   |  |                       |       |   |                 |   |       |  
|------------------ |  | --------------------- | ----- | - | --------------- | - | ----- | -
|                   |  | March 312004          |       |   | December 312003 |  
|                   |  | (Millions of Dollars) |      
|Raw materials      |  | $                     | 167.7 |   |                 | $ | 167.7 |  
|Work-in-process    |  |                       | 142.9 |   |                 |   | 136.6 |  
|Finished products  |  |                       | 580.6 |   |                 |   | 597.9 |  
|                   |  |                       |       |   |                 |   |       |  
|                   |  |                       | 891.2 |   |                 |   | 902.2 |  
|Valuation reserves |  |                       | (68.3 | ) |                 |   | (67.8 | )
|                   |  |                       |       |   |                 |   |       |  
|                   |  | $                     | 822.9 |   |                 | $ | 834.4 |  
|                   |  |                       |       |   |                 |   |       |  



7. Accrued Liabilities



Accrued liabilities consisted of the following:



|                                               |  |                       |       |                 |   |      
|---------------------------------------------- |  | --------------------- | ----- | --------------- | - | -----
|                                               |  | March 312004          |       | December 312003
|                                               |  | (Millions of Dollars)
|Accrued compensation                           |  | $                     | 258.6 |                 | $ | 247.0
|Accrued rebates                                |  |                       | 59.9  |                 |   | 59.7 
|Restructuring reserves                         |  |                       | 42.8  |                 |   | 57.7 
|Non-income taxes payable                       |  |                       | 42.6  |                 |   | 40.0 
|Accrued income taxes                           |  |                       | 36.6  |                 |   | 31.4 
|Accrued Chapter 11 and Administration expenses |  |                       | 35.3  |                 |   | 34.0 
|Accrued product returns                        |  |                       | 22.4  |                 |   | 21.0 
|Accrued professional services                  |  |                       | 16.4  |                 |   | 11.1 
|Accrued warranty                               |  |                       | 13.3  |                 |   | 11.4 
|                                               |  |                       |       |                 |   |      
|Total accrued liabilities                      |  | $                     | 527.9 |                 | $ | 513.3
|                                               |  |                       |       |                 |   |      



8. Debt



Long-term debt consisted of the following:



|                                                     |  |                       |       |                 |   |      
|---------------------------------------------------- |  | --------------------- | ----- | --------------- | - | -----
|                                                     |  | March 312004          |       | December 312003
|                                                     |  | (Millions of Dollars)
|DIP credit facility                                  |  | $                     | 310.0 |                 | $ | 320.0
|Other                                                |  |                       | 21.8  |                 |   | 26.0 
|                                                     |  |                       |       |                 |   |      
|                                                     |  |                       | 331.8 |                 |   | 346.0
|Less: current maturities included in short-term debt |  |                       | 320.4 |                 |   | 14.8 
|                                                     |  |                       |       |                 |   |      
|Total long-term debt                                 |  | $                     | 11.4  |                 | $ | 331.2
|                                                     |  |                       |       |                 |   |      



The Company has a $600 million
debtor-in-possession (DIP) credit facility to supplement liquidity and fund operations during the Restructuring Proceedings. The outstanding balance of $310.0 million on the DIP credit facility was reclassified from long-term debt to
short-term debt during the quarter ended March 31, 2004 as the DIP credit facility expires in February 2005. The Company intends to renegotiate its DIP credit facility prior to its expiration, if necessary.



20



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##### Table of Contents

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



|                                               |  |                       |       |                 |   |      
|---------------------------------------------- |  | --------------------- | ----- | --------------- | - | -----
|                                               |  | March 312004          |       | December 312003
|                                               |  | (Millions of Dollars)
|Contractual commitment                         |  | $                     | 600.0 |                 | $ | 600.0
|Mandatory commitment reductions  divestitures |  |                       |      |                 |   |     
|                                               |  |                       |       |                 |   |      
|Current commitment                             |  | $                     | 600.0 |                 | $ | 600.0
|                                               |  |                       |       |                 |   |      
|Outstanding:                                   |  |                       |       |                 |   |      
|Current borrowings                             |  | $                     | 310.0 |                 | $ | 320.0
|Letters of credit                              |  |                       | 19.9  |                 |   | 17.9 
|                                               |  |                       |       |                 |   |      
|Total outstanding                              |  |                       | 329.9 |                 |   | 337.9
|Available to borrow                            |  |                       | 266.8 |                 |   | 236.6
|                                               |  |                       |       |                 |   |      
|Total borrowing base                           |  | $                     | 596.7 |                 | $ | 574.5
|                                               |  |                       |       |                 |   |      



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



9. Comprehensive Loss



Comprehensive income (loss) is defined as all changes in a Companys net assets except changes resulting from transactions with stockholders. It differs from net
income (loss) in that certain items currently recorded in equity would be included in comprehensive income (loss). A summary of the Companys comprehensive loss is shown in the table below:



|                                         |  |                             |       |   |      |   |       |  
|---------------------------------------- |  | --------------------------- | ----- | - | ---- | - | ----- | -
|                                         |  | Three Months Ended March 31 |      
|                                         |  | 2004                        |       |   | 2003 |  
|                                         |  | (Millions of Dollars)       |      
|Net loss                                 |  | $                           | (20.4 | ) |      | $ | (34.2 | )
|Foreign currency translation adjustments |  |                             | (5.1  | ) |      |   | 12.2  |  
|                                         |  |                             |       |   |      |   |       |  
|Total comprehensive loss                 |  | $                           | (25.5 | ) |      | $ | (22.0 | )
|                                         |  |                             |       |   |      |   |       |  



10. Income Taxes



For the three months ended March 31, 2004, the Company recorded income tax expense of $19.9
million on a loss from continuing operations before income taxes of $0.5 million. This compares to income tax expense of $18.8 million on a loss from continuing operations before income taxes of $18.3 million in the same period of 2003. Income tax
expense for the three month period ended March 31, 2004 resulted primarily from the recognition of income tax expense on earnings in certain foreign jurisdictions and no recognition of income tax benefits on current losses in the U.K. and other
countries.



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11. Loss Per Common Share



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



|                                                                     |  |                                                |       |   |      |   |       |  
|-------------------------------------------------------------------- |  | ---------------------------------------------- | ----- | - | ---- | - | ----- | -
|                                                                     |  | Three Months Ended March 31                    |      
|                                                                     |  | 2004                                           |       |   | 2003 |  
|                                                                     |  | (Millions of Dollars, ExceptPer Share Amounts) |      
|Numerator:                                                           |  |                                                |       |   |      |   |       |  
|Net loss from continuing operations                                  |  | $                                              | (20.4 | ) |      | $ | (37.1 | )
|Earnings from discontinued operations                                |  |                                                |      |   |      |   | 2.9   |  
|                                                                     |  |                                                |       |   |      |   |       |  
|Numerator for basic and diluted loss per common share                |  | $                                              | (20.4 | ) |      | $ | (34.2 | )
|                                                                     |  |                                                |       |   |      |   |       |  
|Denominator:                                                         |  |                                                |       |   |      |   |       |  
|Weighted average shares outstanding, basic and diluted (in millions) |  | $                                              | 87.1  |   |      | $ | 87.1  |  
|                                                                     |  |                                                |       |   |      |   |       |  
|Basic and diluted loss per common share                              |  | $                                              | (0.23 | ) |      | $ | (0.39 | )
|                                                                     |  |                                                |       |   |      |   |       |  



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



12. Incentive Stock Plans



The Company
has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations in accounting for its employee stock awards. Accordingly, no compensation cost has been
recognized for its stock option grants, as the exercise price of the Companys employee stock options equals the underlying stock price on the date of grant. Had compensation cost for the Companys stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123 Accounting for Stock Based Compensation, the Companys net loss and loss per share amounts would not have
changed in either of the three month periods ended March 31, 2004 and 2003.



13. Pensions and Other Postretirement Benefits



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



Components of net periodic benefit cost for the three-month periods ended March 31 are as follows:



|                                |  |                       |       |   |                     |   |       |                  |  |   |      |   |  |      |      |   |      |   |       |   |  |   |       |  
|------------------------------- |  | --------------------- | ----- | - | ------------------- | - | ----- | ---------------- |  | - | ---- | - |  | ---- | ---- | - | ---- | - | ----- | - |  | - | ----- | -
|                                |  | United States Plans   |       |   | International Plans |  
|                                |  | Pension Benefits      |       |   | Other Benefits      |   |       | Pension Benefits | 
|                                |  | 2004                  |       |   | 2003                |   |       | 2004             |  |   | 2003 |   |  | 2004 |      |   | 2003 |  
|                                |  | (Millions of Dollars) |      
|Service cost                    |  | $                     | 6.9   |   |                     | $ | 6.3   |                  |  | $ | 0.7  |   |  | $    | 0.6  |   |      | $ | 4.9   |   |  | $ | 4.1   |  
|Interest cost                   |  |                       | 14.5  |   |                     |   | 14.7  |                  |  |   | 8.4  |   |  |      | 8.5  |   |      |   | 34.7  |   |  |   | 31.3  |  
|Expected return on plan assets  |  |                       | (13.7 | ) |                     |   | (12.1 | )                |  |   |     |   |  |      |     |   |      |   | (32.6 | ) |  |   | (29.9 | )
|Unrecognized loss               |  |                       | 6.3   |   |                     |   | 8.0   |                  |  |   | 1.5  |   |  |      | 0.8  |   |      |   | 14.6  |   |  |   | 12.0  |  
|Unrecognized prior service cost |  |                       | 2.1   |   |                     |   | 2.1   |                  |  |   | (0.2 | ) |  |      | (0.2 | ) |      |   |      |   |  |   |      |  
|                                |  |                       |       |   |                     |   |       |                  |  |   |      |   |  |      |      |   |      |   |       |   |  |   |       |  
|Net periodic benefit cost       |  | $                     | 16.1  |   |                     | $ | 19.0  |                  |  | $ | 10.4 |   |  | $    | 9.7  |   |      | $ | 21.6  |   |  | $ | 17.5  |  
|                                |  |                       |       |   |                     |   |       |                  |  |   |      |   |  |      |      |   |      |   |       |   |  |   |       |  



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On December 8, 2003, the Medicare Prescription Drug Improvement and Modernization Act was signed into law. This law
provides for a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to the benefit established by the law. The FASB has not yet issued definitive authoritative accounting
guidance related to this new law. As such, the Company has not recorded any benefit for any subsidies that could ultimately be received. Such amounts could materially affect the Companys financial statements in future periods.



14. Litigation and Environmental Matters



T&N Companies Asbestos Litigation



Background



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



Recorded Liability



In 2000, the Company increased its estimate of asbestos-related liability for the T&N
Companies by $751 million and recorded a related insurance recoverable asset of $577 million. The revision in the estimate of probable asbestos-related liability principally resulted from a study performed by an econometric firm that specializes in
these types of matters. The liability (approximately $1.4 billion as of March 31, 2004) 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. March 3, 2003 was the bar date for the filing of all asbestos-related property damage claims. The Companys obligations with respect to present and future claims could be
determined through litigation in Bankruptcy Court, the High Court, and/or through negotiations with each of the official committees appointed.



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 now seeks to draw on the surety bonds to fund past and future payments although the basis of such draw, the validity of such claims under the pre-petition bond terms, and whether such draw may be utilized to pay obligations of
other CCR members



23



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##### Table of Contents

are all disputed. On March 28, 2003, the Federal District Court Judge held that, with respect to phase one, the CCR has
the right to draw upon the bonds to the extent that a settlement between an individual and the CCR member was consummated, i.e., a release has been obtained from such individual. The CCR has appealed and the ruling was modified to require a
state-by-state analysis of what constitutes a release. This is in process, as is a yet to be heard second phase of litigation, which will ultimately determine the amount of any such draw. As a result of information obtained during the initial
discovery phase of this litigation, the Company along with other defendants, sought and obtained leave to five amended complaints against the CCR.



The Company also 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 the judgments entered against the Company 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 were denied, and draws were made upon the letters of credit of approximately $16.0 million. The draws
on these letters of credit are classified within liabilities subject to compromise. At March 31, 2004, there are approximately $2.1 million of additional letters of credit available.



Except for the effect of foreign currency, the Company has not adjusted its estimate of the asbestos liability since September 30, 2001.
This liability is included in the consolidated balance sheet under the caption Liabilities subject to compromise as of March 31, 2004, for the Companys U.S. and U.K. subsidiaries.



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 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 March 31, 2004, the recorded insurance recoverable was $654.6 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 an asbestos charge in 2003 of $38.9 million. 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 was filed on March 1, 2004.



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Subsequent thereto, the other two reinsurers, Munchener Ruckversicherungs-Gesellschaft AG and Centre Reinsurance
International Co., a subsidiary of the Zurich Financial Services Group, notified the Company of their belief that the settlements may breach one or more provisions of the Reinsurance Agreement. The hearing on the motion has been postponed pending
further investigation. The Company believes that, based on its review of the insurance policies and advice from outside legal counsel, it is probable that the T&N Companies will be entitled to receive payment from the reinsurers for the cost of
the claims in excess of the trigger point of the insurance.



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



During the three months ended March 31, 2004, the security rating of Centre Reinsurance
International Co. (CRIC) 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 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 March 31, 2004, the $654.6 million insurance recoverable asset includes an exchange rate premium of approximately $44.0 million.



Abex and Wagner Asbestos Litigation



Background



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



The
liability of the Company with respect to claims alleging exposure to Wagner products arises from the 1998 stock purchase from Cooper Industries, 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.



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Recorded Liability



The liability (comprised of $129.5 million in Abex liabilities and $85.0 million in Wagner liabilities as of March 31, 2004) 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.



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 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 $112.7 million as of March 31, 2004.



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



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and defense costs for Wagner asbestos claims until exhaustion of aggregate limits. Wagner also has substantial excess
layer liability insurance coverage which, barring unforeseen insolvencies of excess carriers or other adverse events, should provide coverage for asbestos claims against Wagner. The Wagner insurance recoverable was $53.5 million as of March 31,
2004.



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 as a result of the
Restructuring Proceedings.



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



Federal-Mogul and Fel-Pro Asbestos Litigation



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



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



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Aggregate of Asbestos Liability and Insurance Recoverable Asset



The following is a summary of the asbestos liability and the insurance recoverable asset as
of March 31, 2004 and December 31, 2003:



|                             |  |                       |         |      |   |        |  |       |      |       |   |     |  |   |        
|---------------------------- |  | --------------------- | ------- | ---- | - | ------ |  | ----- | ---- | ----- | - | --- |  | - | -------
|                             |  | T&N Companies         |         | Abex |   | Wagner |  | Other |      | Total
|                             |  | (Millions of Dollars)
|Liability:                   |  |                       |         |      |   |        |  |       |      |       |   |     |  |   |        
|Balance at December 31, 2003 |  | $                     | 1,351.2 |      | $ | 129.5  |  | $     | 85.0 |       | $ | 2.7 |  | $ | 1,568.4
|Foreign exchange             |  |                       | 5.5     |      |   |       |  |       |     |       |   |    |  |   | 5.5    
|                             |  |                       |         |      |   |        |  |       |      |       |   |     |  |   |        
|Balance at March 31, 2004    |  | $                     | 1,356.7 |      | $ | 129.5  |  | $     | 85.0 |       | $ | 2.7 |  | $ | 1,573.9
|                             |  |                       |         |      |   |        |  |       |      |       |   |     |  |   |        
|Asset:                       |  |                       |         |      |   |        |  |       |      |       |   |     |  |   |        
|Balance at December 31, 2003 |  | $                     | 636.9   |      | $ | 115.7  |  | $     | 53.5 |       | $ |    |  | $ | 806.1  
|Cash receipts                |  |                       |        |      |   | 3.0    |  |       |     |       |   |    |  |   | 3.0    
|Foreign exchange             |  |                       | 17.7    |      |   |       |  |       |     |       |   |    |  |   | 17.7   
|                             |  |                       |         |      |   |        |  |       |      |       |   |     |  |   |        
|Balance at March 31, 2004    |  | $                     | 654.6   |      | $ | 112.7  |  | $     | 53.5 |       | $ |    |  | $ | 820.8  
|                             |  |                       |         |      |   |        |  |       |      |       |   |     |  |   |        



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
2004



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 leading legislative vehicle is S. 2290, the Fairness in Asbestos Injury Resolution Act of 2004 (the FAIR Act). The
principal focus of the FAIR Act is to replace the existing state and federal tort systems as means of compensating asbestos-related personal injury claimants with a no-fault mandatory federal compensation scheme. The FAIR Act envisions the creation
of an Office of Asbestos Injury Claims Resolution to administer an Asbestos Injury Claims Resolution Fund (the Fund) and make payments from the Fund to claimants who are determined to be eligible for compensation. Under the proposed
legislation, compensation would be based on eligibility categories defined by diagnostic, medical, exposure and latency criteria. The Fund would be funded by annual, mandatory contributions from asbestos-defendant companies and insurance companies
over a 27-year period. The Plan Proponents believe that the payments that would be due from the Debtors under the FAIR Act would be in excess of $2 billion, a significant percentage of that amount payable during the first five (5) years after the
FAIR Acts passage.



The FAIR Act, if approved, would also prohibit
defendant companies from discharging their asbestos liabilities pursuant to Section 524(g) of the Bankruptcy Code, as envisioned by the Plan. In other words, companies that had been named as defendants in asbestos-related litigation that had not
confirmed a chapter 11 plan containing an injunction pursuant to Section 524(g) of the Bankruptcy Code (or a similar injunction) as of the effective date of the FAIR Act would only be able to resolve their asbestos-related liabilities through
contributions to the Fund in the amounts specified in the FAIR Act.



The Plan
Proponents believe that the Plan provides a superior and more comprehensive resolution of the Debtors asbestos-related liabilities than the FAIR Act. The Plan Proponents believe that the FAIR Act, in its current form, would have a significant
negative impact on the Debtors if it were to become law. Among other things, the FAIR Act would not address asbestos claims asserted against the U.K. Debtors. Such claims are, as noted in the Disclosure Statement, a significant source of the
Debtors asbestos-related liabilities. The FAIR Act may also jeopardize certain insurance assets of the Debtors that may otherwise be available to satisfy asbestos-related claims that may be asserted against them outside of the United States.



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There is significant uncertainty as to whether or not the FAIR Act will become law, either in 2004 or thereafter. There
is also significant uncertainty as to whether any version of the FAIR Act that may ultimately be enacted will contain all of the material provisions, outlined above, that are in the current draft of the proposed legislation.



Other



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 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, which also sent wastes, often numbering in the hundreds or more, generally include large, solvent publicly owned companies, and in most such situations the government agencies and courts have
imposed liability in some reasonable relationship to contribution of waste.



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



Environmental reserves were $66.8 million and
$66.0 million at March 31, 2004 and December 31, 2003, respectively, and are included in the consolidated balance sheets as follows:



|                                  |  |                       |      |                  |   |     
|--------------------------------- |  | --------------------- | ---- | ---------------- | - | ----
|                                  |  | March 312004          |      | December 31 2003
|                                  |  | (Millions of Dollars)
|Current liabilities               |  | $                     | 17.3 |                  | $ | 15.1
|Long-term accrued liabilities     |  |                       | 25.6 |                  |   | 27.1
|Liabilities subject to compromise |  |                       | 23.9 |                  |   | 23.8
|                                  |  |                       |      |                  |   |     
|                                  |  | $                     | 66.8 |                  | $ | 66.0
|                                  |  |                       |      |                  |   |     



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 March 31, 2004, management estimates that reasonably possible material additional losses above and beyond managements best estimate of required remediation costs as recorded
approximates $40 million.



Environmental reserves subject to compromise include
those that may be reduced in the Companys bankruptcy proceeding because they may be determined to be dischargeable debts incurred prior to the Companys filing for



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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 a bankrupt entity such as the Company
owns and either operates or formerly operated.



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



15. Operations by Reporting Segment



The Companys operations are organized into five reporting segments; Powertrain, Sealing Systems and Systems Protection, Friction, Aftermarket and Other. The Company has aggregated certain individual product segments within its five
reporting segments. The accounting policies of the segments are the same as that of the Company. Revenues related to Powertrain, Sealing Systems and Systems Protection, and Friction products sold to OE customers are recorded within the respective
segments. Revenues from such products sold to aftermarket customers are recorded within the Aftermarket segment. All products transferred into the Aftermarket 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 EBIT basis. Operational EBIT is defined as earnings before interest, income taxes, restructuring and impairment charges, Chapter 11 and Administration related reorganization
expenses, and gains or losses on the sales of businesses. Operational EBIT for each segment is shown below, as it is most consistent with the corresponding consolidated financial statements.



Net Sales and Gross Margin information by reporting segment is as follows:



|                                       |  |                            |         |                            |   |         |  |   |       |   |  |   |       |  
|-------------------------------------- |  | -------------------------- | ------- | -------------------------- | - | ------- |  | - | ----- | - |  | - | ----- | -
|                                       |  | Net Sales                  |         | Gross Margin               |  
|                                       |  | Three Months EndedMarch 31 |         | Three Months EndedMarch 31 |  
|                                       |  | 2004                       |         | 2003                       |   | 2004    |  |   | 2003  |  
|                                       |  | (Millions of Dollars)      |        
|Powertrain                             |  | $                          | 546.6   |                            | $ | 465.5   |  | $ | 76.1  |   |  | $ | 66.7  |  
|Sealing Systems and Systems Protection |  |                            | 177.7   |                            |   | 163.5   |  |   | 31.8  |   |  |   | 29.6  |  
|Friction                               |  |                            | 125.8   |                            |   | 105.0   |  |   | 29.7  |   |  |   | 31.0  |  
|Aftermarket                            |  |                            | 679.9   |                            |   | 616.4   |  |   | 163.3 |   |  |   | 147.7 |  
|Other                                  |  |                            | 23.0    |                            |   | 16.8    |  |   | (4.2  | ) |  |   | (2.4  | )
|                                       |  |                            |         |                            |   |         |  |   |       |   |  |   |       |  
|Total                                  |  | $                          | 1,553.0 |                            | $ | 1,367.2 |  | $ | 296.7 |   |  | $ | 272.6 |  
|                                       |  |                            |         |                            |   |         |  |   |       |   |  |   |       |  



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



|                                                              |  |                             |        |   |      |   |       |  
|------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ----- | -
|                                                              |  | Three Months Ended March 31 |       
|                                                              |  | 2004                        |        |   | 2003 |  
|                                                              |  | (Millions of Dollars)       |       
|Powertrain                                                    |  | $                           | 41.7   |   |      | $ | 39.5  |  
|Sealing Systems and Systems Protection                        |  |                             | 13.1   |   |      |   | 11.2  |  
|Friction                                                      |  |                             | 15.1   |   |      |   | 16.0  |  
|Aftermarket                                                   |  |                             | 94.6   |   |      |   | 85.6  |  
|Other                                                         |  |                             | (110.8 | ) |      |   | (92.1 | )
|                                                              |  |                             |        |   |      |   |       |  
|Total Operational EBIT                                        |  |                             | 53.7   |   |      |   | 60.2  |  
|                                                              |  |                            
|Interest expense, net                                         |  |                             | 25.6   |   |      |   | 29.5  |  
|Chapter 11 and Administration related reorganization expenses |  |                             | 26.0   |   |      |   | 32.8  |  
|Other                                                         |  |                             | 2.6    |   |      |   | 16.2  |  
|                                                              |  |                             |        |   |      |   |       |  
|Loss from continuing operations before income tax expense     |  | $                           | (0.5   | ) |      | $ | (18.3 | )
|                                                              |  |                             |        |   |      |   |       |  



Total assets by reporting segment are
as follows:



|                                       |  |                       |         |                 |   |        
|-------------------------------------- |  | --------------------- | ------- | --------------- | - | -------
|                                       |  | March 312004          |         | December 312003
|                                       |  | (Millions of Dollars)
|Powertrain                             |  | $                     | 1,905.8 |                 | $ | 1,956.8
|Sealing Systems and Systems Protection |  |                       | 1,270.9 |                 |   | 1,249.1
|Friction                               |  |                       | 701.3   |                 |   | 696.2  
|Aftermarket                            |  |                       | 2,850.0 |                 |   | 2,912.4
|Other                                  |  |                       | 1,446.7 |                 |   | 1,302.2
|                                       |  |                       |         |                 |   |        
|Total                                  |  | $                     | 8,174.7 |                 | $ | 8,116.7
|                                       |  |                       |         |                 |   |        



16. Smithville, Tennessee
Distribution Center Fire



On March 5, 2004, a fire at the Companys
Smithville, Tennessee distribution center resulted in extensive damage to the facility and the loss of substantially all of its related equipment and inventory. The 244,000 square foot facility was the principal distribution center for Moog and TRW
chassis aftermarket products in the United States. Operations at the Smithville facility are currently suspended; the Company resumed operations at a temporary facility based in Smyrna, Tennessee on March 12, 2004.



In addition to other coverage, the Companys insurance policies provide for replacement
of damaged property, sales value of destroyed inventory, reimbursement for losses due to interruption of business operations, and reimbursement of expenditures incurred to restore operations. Information regarding the Companys insurance
coverage and related accounting for costs and recoveries for the Smithville, Tennessee fire is summarized below:



Real and Personal Property: Insurance provides for coverage of buildings and related contents, including inventory, machinery and equipment, and office furniture.
Property, plant and equipment are insured at replacement value, while inventory is covered at sales value. Substantially all of the property, plant and equipment and inventory located at the Smithville facility was destroyed. Accordingly, the net
book value of these assets was reduced to zero during the quarter ended March 31, 2004. These losses were offset by an insurance recovery, as such amounts were determined to be estimable and probable of recovery. No amounts have been recorded for
any expected gains related to the incremental replacement or sales value of such assets. The Company continues to evaluate its claim for insurance recoveries and expects to record a gain on the recovery of the replacement value of property, plant
and equipment and inventory selling price in excess of net book value. Recoveries will be recorded as gains when the claims are settled.



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Costs to restore operations: Insurance provides for reimbursement of costs incurred for the purpose of restoring
operations to their condition prior to the fire. Such costs include but are not limited to expedited freight, overtime premium, incremental material costs and decontamination costs. Such costs are being recorded as they are incurred, with related
estimated insurance recoveries recorded as they are considered to be probable, up to the amount of the actual costs incurred.



Business interruption: Insurance provides for the value associated with lost sales resulting from an inability to fulfill customer orders as a result of the fire.
Insurance recoveries related to such losses will be recorded as gains when the related claims are settled.



The table below provides, by insurance coverage stream, the net book value of the assets destroyed and costs to restore operations, the amount of insurance recovery, and insurance proceeds. While the Company
ultimately expects to record a gain on the involuntary asset conversion, no such amounts were recorded as of March 31, 2004.



|                              |  |                                 |      |                                 |   |                                     |  |                             |   |  |   |     
|----------------------------- |  | ------------------------------- | ---- | ------------------------------- | - | ----------------------------------- |  | --------------------------- | - |  | - | ----
|                              |  | Property Losses and Other Costs |      | Estimated Insurance Recoverable |   | Gain on InvoluntaryAsset Conversion |  | Insurance Proceeds Received
|                              |  | (Millions of Dollars)          
|Real and personal property    |  |                                 |      |                                 |   |                                     |  |                             |   |  |   |     
|Inventory                     |  | $                               | 43.7 |                                 | $ | 43.7                                |  | $                           |  |  | $ | 33.0
|Property, plant and equipment |  |                                 | 6.0  |                                 |   | 6.0                                 |  |                             |  |  |   |    
|Costs to restore operations   |  |                                 | 0.6  |                                 |   | 0.6                                 |  |                             |  |  |   | 2.0 
|Business interruption*        |  |                                 | 5.0  |                                 |   |                                    |  |                             |  |  |   |    
|                              |  |                                 |      |                                 |   |                                     |  |                             |   |  |   |     
|Total                         |  | $                               | 55.3 |                                 | $ | 50.3                                |  | $                           |  |  | $ | 35.0
|                              |  |                                 |      |                                 |   |                                     |  |                             |   |  |   |     

---

|* | Estimated gross margin on lost sales during the three-months ended March 31, 2004. Recovery amounts have not yet been determined.
|- | ---------------------------------------------------------------------------------------------------------------------------------



Real and personal property losses, costs to restore operations and related insurance
recoveries have been recorded in the statement of operations as Other expense, net. Insurance recoveries recorded for which proceeds have not been received and insurance proceeds received in excess of costs to restore operations are recorded in the
consolidated balance sheet as of March 31, 2004, as follows:



|                     |  |                       |       |   |                           |   |      |  
|-------------------- |  | --------------------- | ----- | - | ------------------------- | - | ---- | -
|                     |  | InsuranceReceivable   |       |   | DeferredInsuranceRecovery |  
|                     |  | (Millions of Dollars) |      
|Insurance recoveries |  | $                     | 49.7  |   |                           | $ | 0.6  |  
|Insurance proceeds   |  |                       | (33.0 | ) |                           |   | (2.0 | )
|                     |  |                       |       |   |                           |   |      |  
|Total                |  | $                     | 16.7  |   |                           | $ | (1.4 | )
|                     |  |                       |       |   |                           |   |      |  



The insurance receivable amount of
$16.7 and the deferred insurance recovery amount of $1.4 are classified within the balance sheet as of March 31, 2004 as other current assets and other current liabilities, respectively.



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17. Consolidating Condensed Financial Information of Guarantor Subsidiaries



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



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



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



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



Subsequent to the Restructuring Proceedings, no dividends have been paid to the Federal-Mogul parent company by any of its subsidiaries. Additionally, as a result of the Restructuring Proceedings (see Note 2 Voluntary Reorganization
Under Chapter 11 and Administration) certain pre-petition liabilities, as shown below, were liabilities subject to compromise as of March 31, 2004:



|                                                    |  |                       |         |                        |   |                            |  |              |         |  |   |        
|--------------------------------------------------- |  | --------------------- | ------- | ---------------------- | - | -------------------------- |  | ------------ | ------- |  | - | -------
|                                                    |  | Parent                |         | Guarantor Subsidiaries |   | Non-Guarantor Subsidiaries |  | Consolidated
|                                                    |  | (Millions of Dollars)
|Debt                                                |  | $                     | 4,020.9 |                        | $ | 1.0                        |  | $            |        |  | $ | 4,021.9
|Asbestos liabilities                                |  |                       | 1.5     |                        |   | 237.7                      |  |              | 1,334.7 |  |   | 1,573.9
|Company-obligated mandatorily redeemable securities |  |                       |        |                        |   |                           |  |              | 210.6   |  |   | 210.6  
|Accounts payable                                    |  |                       | 57.3    |                        |   | 114.4                      |  |              | 29.8    |  |   | 201.5  
|Interest payable                                    |  |                       | 43.7    |                        |   | 0.2                        |  |              |        |  |   | 43.9   
|Environmental liabilities                           |  |                       | 23.4    |                        |   |                           |  |              | 0.5     |  |   | 23.9   
|Other liabilities                                   |  |                       | 8.0     |                        |   | 1.0                        |  |              | 10.8    |  |   | 19.8   
|                                                    |  |                       |         |                        |   |                            |  |              |         |  |   |        
|Liabilities subject to compromise                   |  | $                     | 4,154.8 |                        | $ | 354.3                      |  | $            | 1,586.4 |  | $ | 6,095.5
|                                                    |  |                       |         |                        |   |                            |  |              |         |  |   |        



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Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Operations

Three Months Ended March 31, 2004



|                                                                    |  |                       |       |   |                        |   |       |                             |  |   |                |   |  |              |        |   |  |   |         |  
|------------------------------------------------------------------- |  | --------------------- | ----- | - | ---------------------- | - | ----- | --------------------------- |  | - | -------------- | - |  | ------------ | ------ | - |  | - | ------- | -
|                                                                    |  | Unconsolidated        |       |   | Eliminations           |  
|                                                                    |  | Parent                |       |   | Guarantor Subsidiaries |   |       | Non- Guarantor Subsidiaries |  |   | Inter- Company |   |  | Consolidated |       
|                                                                    |  | (Millions of Dollars) |      
|Net sales                                                           |  | $                     | 292.9 |   |                        | $ | 426.8 |                             |  | $ | 1,151.2        |   |  | $            | (317.9 | ) |  | $ | 1,553.0 |  
|Cost of products sold                                               |  |                       | 245.0 |   |                        |   | 322.2 |                             |  |   | 1,007.0        |   |  |              | (317.9 | ) |  |   | 1,256.3 |  
|                                                                    |  |                       |       |   |                        |   |       |                             |  |   |                |   |  |              |        |   |  |   |         |  
|Gross margin                                                        |  |                       | 47.9  |   |                        |   | 104.6 |                             |  |   | 144.2          |   |  |              |       |   |  |   | 296.7   |  
|                                                                    |  |                       |       |   |                       
|Selling, general and administrative expenses                        |  |                       | 80.3  |   |                        |   | 54.4  |                             |  |   | 108.3          |   |  |              |       |   |  |   | 243.0   |  
|Interest expense (income), net                                      |  |                       | 26.8  |   |                        |   |      |                             |  |   | (1.2           | ) |  |              |       |   |  |   | 25.6    |  
|Chapter 11 and Administration related reorganization expenses       |  |                       | 26.0  |   |                        |   |      |                             |  |   |               |   |  |              |       |   |  |   | 26.0    |  
|Equity earnings of unconsolidated subsidiaries                      |  |                       |      |   |                        |   | (2.0  | )                           |  |   | (7.5           | ) |  |              |       |   |  |   | (9.5    | )
|Other (income) expense, net                                         |  |                       | (6.8  | ) |                        |   | (34.1 | )                           |  |   | 53.0           |   |  |              |       |   |  |   | 12.1    |  
|                                                                    |  |                       |       |   |                        |   |       |                             |  |   |                |   |  |              |        |   |  |   |         |  
|Earnings (loss) before income taxes and equity loss of subsidiaries |  |                       | (78.4 | ) |                        |   | 86.3  |                             |  |   | (8.4           | ) |  |              |       |   |  |   | (0.5    | )
|Income tax expense                                                  |  |                       | 1.0   |   |                        |   | 1.0   |                             |  |   | 17.9           |   |  |              |       |   |  |   | 19.9    |  
|                                                                    |  |                       |       |   |                        |   |       |                             |  |   |                |   |  |              |        |   |  |   |         |  
|Earnings (loss) before equity loss of subsidiaries                  |  |                       | (79.4 | ) |                        |   | 85.3  |                             |  |   | (26.3          | ) |  |              |       |   |  |   | (20.4   | )
|Equity earnings (loss) of subsidiaries                              |  |                       | 59.0  |   |                        |   | 21.6  |                             |  |   |               |   |  |              | (80.6  | ) |  |   |        |  
|                                                                    |  |                       |       |   |                        |   |       |                             |  |   |                |   |  |              |        |   |  |   |         |  
|Net earnings (loss)                                                 |  | $                     | (20.4 | ) |                        | $ | 106.9 |                             |  | $ | (26.3          | ) |  | $            | (80.6  | ) |  | $ | (20.4   | )
|                                                                    |  |                       |       |   |                        |   |       |                             |  |   |                |   |  |              |        |   |  |   |         |  



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Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Operations

Three Months Ended March 31, 2003



|                                                                                               |  |                       |       |   |                        |   |       |                             |  |   |                         |   |  |                |       |   |              |   |        |   |  |   |         |  
|---------------------------------------------------------------------------------------------- |  | --------------------- | ----- | - | ---------------------- | - | ----- | --------------------------- |  | - | ----------------------- | - |  | -------------- | ----- | - | ------------ | - | ------ | - |  | - | ------- | -
|                                                                                               |  | Unconsolidated        |       |   | Eliminations           |   |       |                             | 
|                                                                                               |  | Parent                |       |   | Guarantor Subsidiaries |   |       | Non- Guarantor Subsidiaries |  |   | Discontinued Operations |   |  | Inter- Company |       |   | Consolidated |  
|                                                                                               |  | (Millions of Dollars) |      
|Net sales                                                                                      |  | $                     | 281.5 |   |                        | $ | 425.5 |                             |  | $ | 964.6                   |   |  | $              | (42.6 | ) |              | $ | (261.8 | ) |  | $ | 1,367.2 |  
|Cost of products sold                                                                          |  |                       | 230.4 |   |                        |   | 326.9 |                             |  |   | 836.5                   |   |  |                | (37.4 | ) |              |   | (261.8 | ) |  |   | 1,094.6 |  
|                                                                                               |  |                       |       |   |                        |   |       |                             |  |   |                         |   |  |                |       |   |              |   |        |   |  |   |         |  
|Gross margin                                                                                   |  |                       | 51.1  |   |                        |   | 98.6  |                             |  |   | 128.1                   |   |  |                | (5.2  | ) |              |   |       |   |  |   | 272.6   |  
|                                                                                               |  |                       |       |   |                        |  
|Selling, general and administrative expenses                                                   |  |                       | 78.5  |   |                        |   | 54.2  |                             |  |   | 93.3                    |   |  |                | (1.3  | ) |              |   |       |   |  |   | 224.7   |  
|Interest expense (income), net                                                                 |  |                       | 30.0  |   |                        |   |      |                             |  |   | (0.5                    | ) |  |                |      |   |              |   |       |   |  |   | 29.5    |  
|Chapter 11 and Administration related reorganization expenses                                  |  |                       | 32.8  |   |                        |   |      |                             |  |   |                        |   |  |                |      |   |              |   |       |   |  |   | 32.8    |  
|Equity earnings of unconsolidated subsidiaries                                                 |  |                       |      |   |                        |   | (1.7  | )                           |  |   | (4.1                    | ) |  |                |      |   |              |   |       |   |  |   | (5.8    | )
|Other (income) expense, net                                                                    |  |                       | (5.1  | ) |                        |   | (26.8 | )                           |  |   | 42.5                    |   |  |                | (0.9  | ) |              |   |       |   |  |   | 9.7     |  
|                                                                                               |  |                       |       |   |                        |   |       |                             |  |   |                         |   |  |                |       |   |              |   |        |   |  |   |         |  
|Earnings (loss) from continuing operations before income taxes and equity loss of subsidiaries |  |                       | (85.1 | ) |                        |   | 72.9  |                             |  |   | (3.1                    | ) |  |                | (3.0  | ) |              |   |       |   |  |   | (18.3   | )
|Income tax expense                                                                             |  |                       | 1.2   |   |                        |   | 1.0   |                             |  |   | 16.7                    |   |  |                | (0.1  | ) |              |   |       |   |  |   | 18.8    |  
|                                                                                               |  |                       |       |   |                        |   |       |                             |  |   |                         |   |  |                |       |   |              |   |        |   |  |   |         |  
|Earnings (loss) from continuing operations before equity loss of subsidiaries                  |  |                       | (86.3 | ) |                        |   | 71.9  |                             |  |   | (19.8                   | ) |  |                | (2.9  | ) |              |   |       |   |  |   | (37.1   | )
|Earnings from discontinued operations, net of income taxes                                     |  |                       |      |   |                        |   |      |                             |  |   |                        |   |  |                | 2.9   |   |              |   |       |   |  |   | 2.9     |  
|Equity earnings (loss) of subsidiaries                                                         |  |                       | 52.1  |   |                        |   | 23.2  |                             |  |   | (19.8                   | ) |  |                |      |   |              |   | (75.3  | ) |  |   |        |  
|                                                                                               |  |                       |       |   |                        |   |       |                             |  |   |                         |   |  |                |       |   |              |   |        |   |  |   |         |  
|Net earnings (loss)                                                                            |  | $                     | (34.2 | ) |                        | $ | 95.1  |                             |  | $ | (19.8                   | ) |  | $              |      |   |              | $ | (75.3  | ) |  | $ | (34.2   | )
|                                                                                               |  |                       |       |   |                        |   |       |                             |  |   |                         |   |  |                |       |   |              |   |        |   |  |   |         |  



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Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Balance Sheet

March 31, 2004



|                                                             |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  
|------------------------------------------------------------ |  | --------------------- | -------- | - | ---------------------- | - | --------------------------- |  | ------------ | ------- |  | ------------ | -------- | - |  | - | -------- | -
|                                                             |  | Unconsolidated        |          |   |                        |   |                             | 
|                                                             |  | Parent                |          |   | Guarantor Subsidiaries |   | Non- Guarantor Subsidiaries |  | Eliminations |         |  | Consolidated |         
|                                                             |  | (Millions of Dollars) |         
|ASSETS                                                       |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  
|Current assets:                                              |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  
|Cash and equivalents                                         |  | $                     | 40.2     |   |                        | $ |                            |  | $            | 481.7   |  | $            |         |   |  | $ | 521.9    |  
|Accounts receivable, net                                     |  |                       | 206.9    |   |                        |   | 301.3                       |  |              | 542.2   |  |              |         |   |  |   | 1,050.4  |  
|Inventories, net                                             |  |                       | 101.4    |   |                        |   | 263.4                       |  |              | 458.1   |  |              |         |   |  |   | 822.9    |  
|Prepaid expenses                                             |  |                       | 59.1     |   |                        |   | 47.3                        |  |              | 156.1   |  |              |         |   |  |   | 262.5    |  
|                                                             |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  
|Total current assets                                         |  |                       | 407.6    |   |                        |   | 612.0                       |  |              | 1,638.1 |  |              |         |   |  |   | 2,657.7  |  
|                                                             |  |                       |          |   |                       
|Property, plant and equipment, net                           |  |                       | 276.0    |   |                        |   | 617.8                       |  |              | 1,461.0 |  |              |         |   |  |   | 2,354.8  |  
|Goodwill and indefinite-lived intangible assets              |  |                       | 540.5    |   |                        |   | 641.3                       |  |              | 335.9   |  |              |         |   |  |   | 1,517.7  |  
|Definite-lived intangible assets, net                        |  |                       | 78.3     |   |                        |   | 85.8                        |  |              | 181.1   |  |              |         |   |  |   | 345.2    |  
|Investment in subsidiaries                                   |  |                       | 6,462.9  |   |                        |   | 2,979.9                     |  |              |        |  |              | (9,442.8 | ) |  |   |         |  
|Intercompany accounts, net                                   |  |                       | (3,638.5 | ) |                        |   | 3,097.9                     |  |              | 540.6   |  |              |         |   |  |   |         |  
|Asbestos-related insurance recoverable                       |  |                       |         |   |                        |   | 168.0                       |  |              | 652.8   |  |              |         |   |  |   | 820.8    |  
|Prepaid pension costs                                        |  |                       | 8.1      |   |                        |   |                            |  |              | 280.2   |  |              |         |   |  |   | 288.3    |  
|Other noncurrent assets                                      |  |                       | 22.8     |   |                        |   | 29.7                        |  |              | 137.7   |  |              |         |   |  |   | 190.2    |  
|                                                             |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  
|                                                             |  | $                     | 4,157.7  |   |                        | $ | 8,232.4                     |  | $            | 5,227.4 |  | $            | (9,442.8 | ) |  | $ | 8,174.7  |  
|                                                             |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  
|LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)               |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  
|Current liabilities:                                         |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  
|Short-term debt, including current portion of long-term debt |  | $                     | 310.2    |   |                        | $ |                            |  | $            | 10.2    |  | $            |         |   |  | $ | 320.4    |  
|Accounts payable                                             |  |                       | 53.1     |   |                        |   | 79.3                        |  |              | 256.2   |  |              |         |   |  |   | 388.6    |  
|Accrued liabilities                                          |  |                       | 132.9    |   |                        |   | 61.8                        |  |              | 333.2   |  |              |         |   |  |   | 527.9    |  
|Other current liabilities                                    |  |                       | 46.4     |   |                        |   | 7.9                         |  |              | 106.1   |  |              |         |   |  |   | 160.4    |  
|                                                             |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  
|Total current liabilities                                    |  |                       | 542.6    |   |                        |   | 149.0                       |  |              | 705.7   |  |              |         |   |  |   | 1,397.3  |  
|                                                             |  |                       |          |   |                       
|Liabilities subject to compromise                            |  |                       | 4,154.8  |   |                        |   | 354.3                       |  |              | 1,586.4 |  |              |         |   |  |   | 6,095.5  |  
|                                                             |  |                       |          |   |                       
|Long-term debt                                               |  |                       |         |   |                        |   |                            |  |              | 11.4    |  |              |         |   |  |   | 11.4     |  
|Post employment benefits                                     |  |                       | 741.0    |   |                        |   |                            |  |              | 990.4   |  |              |         |   |  |   | 1,731.4  |  
|Deferred income taxes                                        |  |                       |         |   |                        |   |                            |  |              | 70.3    |  |              |         |   |  |   | 70.3     |  
|Other accrued liabilities                                    |  |                       | 90.7     |   |                        |   | 0.6                         |  |              | 123.5   |  |              |         |   |  |   | 214.8    |  
|Minority interest in consolidated subsidiaries               |  |                       | 30.5     |   |                        |   | 25.4                        |  |              |        |  |              |         |   |  |   | 55.9     |  
|                                                             |  |                       |          |   |                       
|Shareholders equity (deficit)                               |  |                       | (1,401.9 | ) |                        |   | 7,703.1                     |  |              | 1,739.7 |  |              | (9,442.8 | ) |  |   | (1,401.9 | )
|                                                             |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  
|                                                             |  | $                     | 4,157.7  |   |                        | $ | 8,232.4                     |  | $            | 5,227.4 |  | $            | (9,442.8 | ) |  | $ | 8,174.7  |  
|                                                             |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  



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Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Consolidating Condensed Balance Sheet

December 31, 2003



|                                                             |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  
|------------------------------------------------------------ |  | --------------------- | -------- | - | ---------------------- | - | --------------------------- |  | ------------ | ------- |  | ------------ | -------- | - |  | - | -------- | -
|                                                             |  | Unconsolidated        |          |   |                        |   |                             | 
|                                                             |  | Parent                |          |   | Guarantor Subsidiaries |   | Non- Guarantor Subsidiaries |  | Eliminations |         |  | Consolidated |         
|                                                             |  | (Millions of Dollars) |         
|ASSETS                                                       |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  
|Current assets:                                              |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  
|Cash and equivalents                                         |  | $                     | 21.7     |   |                        | $ |                            |  | $            | 450.7   |  | $            |         |   |  | $ | 472.4    |  
|Accounts receivable, net                                     |  |                       | 180.3    |   |                        |   | 290.1                       |  |              | 506.1   |  |              |         |   |  |   | 976.5    |  
|Inventories, net                                             |  |                       | 100.3    |   |                        |   | 280.7                       |  |              | 453.4   |  |              |         |   |  |   | 834.4    |  
|Prepaid expenses                                             |  |                       | 65.3     |   |                        |   | 29.3                        |  |              | 162.9   |  |              |         |   |  |   | 257.5    |  
|                                                             |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  
|Total current assets                                         |  |                       | 367.6    |   |                        |   | 600.1                       |  |              | 1,573.1 |  |              |         |   |  |   | 2,540.8  |  
|                                                             |  |                       |          |   |                       
|Property, plant and equipment, net                           |  |                       | 277.9    |   |                        |   | 625.0                       |  |              | 1,501.9 |  |              |         |   |  |   | 2,404.8  |  
|Goodwill and indefinite-lived intangible assets              |  |                       | 517.6    |   |                        |   | 664.3                       |  |              | 335.2   |  |              |         |   |  |   | 1,517.1  |  
|Definite-lived intangible assets, net                        |  |                       | 79.5     |   |                        |   | 87.0                        |  |              | 181.5   |  |              |         |   |  |   | 348.0    |  
|Investment in subsidiaries                                   |  |                       | 6,461.0  |   |                        |   | 2,991.0                     |  |              |        |  |              | (9,452.0 | ) |  |   |         |  
|Intercompany accounts, net                                   |  |                       | (3,539.2 | ) |                        |   | 2,957.0                     |  |              | 582.2   |  |              |         |   |  |   |         |  
|Asbestos-related insurance recoverable                       |  |                       |         |   |                        |   | 171.3                       |  |              | 634.8   |  |              |         |   |  |   | 806.1    |  
|Prepaid pension costs                                        |  |                       | 22.9     |   |                        |   |                            |  |              | 286.3   |  |              |         |   |  |   | 309.2    |  
|Other noncurrent assets                                      |  |                       | 21.0     |   |                        |   | 29.2                        |  |              | 140.5   |  |              |         |   |  |   | 190.7    |  
|                                                             |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  
|                                                             |  | $                     | 4,208.3  |   |                        | $ | 8,124.9                     |  | $            | 5,235.5 |  | $            | (9,452.0 | ) |  | $ | 8,116.7  |  
|                                                             |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  
|LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)               |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  
|Current liabilities:                                         |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  
|Short-term debt, including current portion of long-term debt |  | $                     | 0.2      |   |                        | $ |                            |  | $            | 14.6    |  | $            |         |   |  | $ | 14.8     |  
|Accounts payable                                             |  |                       | 44.1     |   |                        |   | 54.2                        |  |              | 234.0   |  |              |         |   |  |   | 332.3    |  
|Accrued liabilities                                          |  |                       | 127.1    |   |                        |   | 61.1                        |  |              | 325.1   |  |              |         |   |  |   | 513.3    |  
|Other accrued liabilities                                    |  |                       | 79.9     |   |                        |   | 8.0                         |  |              | 70.5    |  |              |         |   |  |   | 158.4    |  
|                                                             |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  
|Total current liabilities                                    |  |                       | 251.3    |   |                        |   | 123.3                       |  |              | 644.2   |  |              |         |   |  |   | 1,018.8  |  
|                                                             |  |                       |          |   |                       
|Liabilities subject to compromise                            |  |                       | 4,152.6  |   |                        |   | 349.6                       |  |              | 1,585.6 |  |              |         |   |  |   | 6,087.8  |  
|                                                             |  |                       |          |   |                       
|Long-term debt                                               |  |                       | 320.0    |   |                        |   |                            |  |              | 11.2    |  |              |         |   |  |   | 331.2    |  
|Post employment benefits                                     |  |                       | 740.6    |   |                        |   |                            |  |              | 976.0   |  |              |         |   |  |   | 1,716.6  |  
|Deferred income taxes                                        |  |                       |         |   |                        |   |                            |  |              | 70.4    |  |              |         |   |  |   | 70.4     |  
|Other accrued liabilities                                    |  |                       | 91.3     |   |                        |   | 0.1                         |  |              | 123.0   |  |              |         |   |  |   | 214.4    |  
|Minority interest in consolidated subsidiaries               |  |                       | 29.4     |   |                        |   | 25.0                        |  |              |        |  |              |         |   |  |   | 54.4     |  
|                                                             |  |                       |          |   |                       
|Shareholders equity (deficit)                               |  |                       | (1,376.9 | ) |                        |   | 7,626.9                     |  |              | 1,825.1 |  |              | (9,452.0 | ) |  |   | (1,376.9 | )
|                                                             |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  
|                                                             |  | $                     | 4,208.3  |   |                        | $ | 8,124.9                     |  | $            | 5,235.5 |  | $            | (9,452.0 | ) |  | $ | 8,116.7  |  
|                                                             |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  



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Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Cash Flows

Three Months Ended March 31, 2004



|                                                                          |  |                       |       |   |                        |   |        |                             |  |   |              |   |              |   |   |  |   |       |  
|------------------------------------------------------------------------- |  | --------------------- | ----- | - | ---------------------- | - | ------ | --------------------------- |  | - | ------------ | - | ------------ | - | - |  | - | ----- | -
|                                                                          |  | (Unconsolidated)      |       |   |                        |   |        |                            
|                                                                          |  | Parent                |       |   | Guarantor Subsidiaries |   |        | Non- Guarantor Subsidiaries |  |   | Eliminations |   | Consolidated |  
|                                                                          |  | (Millions of Dollars) |      
|Net cash provided from (used by) operating activities                     |  | $                     | (55.4 | ) |                        | $ | 164.8  |                             |  | $ | 9.9          |   |              | $ |  |  | $ | 119.3 |  
|                                                                          |  |                       |       |   |                       
|Cash provided from (used by) investing activities:                        |  |                       |       |   |                        |   |        |                             |  |   |              |   |              |   |   |  |   |       |  
|Expenditures for property, plant and equipment and other long-term assets |  |                       | (9.0  | ) |                        |   | (21.8  | )                           |  |   | (42.6        | ) |              |   |  |  |   | (73.4 | )
|Proceeds from the sale of property, plant and equipment                   |  |                       |      |   |                        |   |       |                             |  |   | 11.0         |   |              |   |  |  |   | 11.0  |  
|                                                                          |  |                       |       |   |                        |   |        |                             |  |   |              |   |              |   |   |  |   |       |  
|Net cash used by investing activities                                     |  |                       | (9.0  | ) |                        |   | (21.8  | )                           |  |   | (31.6        | ) |              |   |  |  |   | (62.4 | )
|                                                                          |  |                       |       |   |                       
|Cash provided from (used by) financing activities:                        |  |                       |       |   |                        |   |        |                             |  |   |              |   |              |   |   |  |   |       |  
|Principal payments on DIP credit facility                                 |  |                       | (10.0 | ) |                        |   |       |                             |  |   |             |   |              |   |  |  |   | (10.0 | )
|Decrease in short-term debt                                               |  |                       |      |   |                        |   |       |                             |  |   | (4.4         | ) |              |   |  |  |   | (4.4  | )
|Increase in other long-term debt                                          |  |                       |      |   |                        |   |       |                             |  |   | 0.2          |   |              |   |  |  |   | 0.2   |  
|Change in intercompany accounts                                           |  |                       | 92.9  |   |                        |   | (143.0 | )                           |  |   | 50.1         |   |              |   |  |  |   |      |  
|                                                                          |  |                       |       |   |                        |   |        |                             |  |   |              |   |              |   |   |  |   |       |  
|Net cash provided from (used by) financing activities                     |  |                       | 82.9  |   |                        |   | (143.0 | )                           |  |   | 45.9         |   |              |   |  |  |   | (14.2 | )
|                                                                          |  |                       |       |   |                       
|Effect of foreign currency exchange rate fluctuations on cash             |  |                       |      |   |                        |   |       |                             |  |   | 6.8          |   |              |   |  |  |   | 6.8   |  
|                                                                          |  |                       |       |   |                        |   |        |                             |  |   |              |   |              |   |   |  |   |       |  
|Net increase (decrease) in cash and equivalents                           |  | $                     | 18.5  |   |                        | $ |       |                             |  | $ | 31.0         |   |              | $ |  |  | $ | 49.5  |  
|                                                                          |  |                       |       |   |                        |   |        |                             |  |   |              |   |              |   |   |  |   |       |  



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Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Cash Flows

Three Months Ended March 31, 2003



|                                                                          |  |                       |        |   |                        |   |       |                             |  |   |              |   |              |   |   |  |   |       |  
|------------------------------------------------------------------------- |  | --------------------- | ------ | - | ---------------------- | - | ----- | --------------------------- |  | - | ------------ | - | ------------ | - | - |  | - | ----- | -
|                                                                          |  | (Unconsolidated)      |        |   |                        |   |       |                            
|                                                                          |  | Parent                |        |   | Guarantor Subsidiaries |   |       | Non- Guarantor Subsidiaries |  |   | Eliminations |   | Consolidated |  
|                                                                          |  | (Millions of Dollars) |       
|Net cash provided from (used by) operating activities                     |  | $                     | (121.6 | ) |                        | $ | 111.1 |                             |  | $ | 37.3         |   |              | $ |  |  | $ | 26.8  |  
|                                                                          |  |                       |        |   |                       
|Cash provided from (used by) investing activities:                        |  |                       |        |   |                        |   |       |                             |  |   |              |   |              |   |   |  |   |       |  
|Expenditures for property, plant and equipment and other long-term assets |  |                       | (10.4  | ) |                        |   | (18.9 | )                           |  |   | (35.8        | ) |              |   |  |  |   | (65.1 | )
|Proceeds from the sale of property, plant and equipment                   |  |                       |       |   |                        |   |      |                             |  |   | 6.5          |   |              |   |  |  |   | 6.5   |  
|                                                                          |  |                       |        |   |                        |   |       |                             |  |   |              |   |              |   |   |  |   |       |  
|Net cash used by investing activities                                     |  |                       | (10.4  | ) |                        |   | (18.9 | )                           |  |   | (29.3        | ) |              |   |  |  |   | (58.6 | )
|                                                                          |  |                       |        |   |                       
|Cash provided from (used by) financing activities:                        |  |                       |        |   |                        |   |       |                             |  |   |              |   |              |   |   |  |   |       |  
|Decrease in other long-term debt                                          |  |                       |       |   |                        |   |      |                             |  |   | (2.5         | ) |              |   |  |  |   | (2.5  | )
|Borrowings from DIP credit facility                                       |  |                       | 75.0   |   |                        |   |      |                             |  |   |             |   |              |   |  |  |   | 75.0  |  
|Principal payments on DIP credit facility                                 |  |                       | (10.2  | ) |                        |   |      |                             |  |   |             |   |              |   |  |  |   | (10.2 | )
|Decrease in short-term debt                                               |  |                       |       |   |                        |   |      |                             |  |   | (16.7        | ) |              |   |  |  |   | (16.7 | )
|Change in intercompany accounts                                           |  |                       | 58.9   |   |                        |   | (92.2 | )                           |  |   | 33.3         |   |              |   |  |  |   |      |  
|                                                                          |  |                       |        |   |                        |   |       |                             |  |   |              |   |              |   |   |  |   |       |  
|Net cash provided from (used by) financing activities                     |  |                       | 123.7  |   |                        |   | (92.2 | )                           |  |   | 14.1         |   |              |   |  |  |   | 45.6  |  
|                                                                          |  |                       |        |   |                       
|Effect of foreign currency exchange rate fluctuations on cash             |  |                       | 1.5    |   |                        |   |      |                             |  |   |             |   |              |   |  |  |   | 1.5   |  
|                                                                          |  |                       |        |   |                        |   |       |                             |  |   |              |   |              |   |   |  |   |       |  
|Net increase (decrease) in cash and equivalents                           |  | $                     | (6.8   | ) |                        | $ |      |                             |  | $ | 22.1         |   |              | $ |  |  | $ | 15.3  |  
|                                                                          |  |                       |        |   |                        |   |       |                             |  |   |              |   |              |   |   |  |   |       |  



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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 and Systems Protection, Friction, Aftermarket and Other. The Company has operations in established markets including the United States, Germany, United Kingdom,
France, Italy, Mexico and Canada, and emerging markets including China, India, Thailand and Korea. 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 manufacturers such as 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, Advance Automotive, 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, 2003.



Voluntary reorganization under Chapter 11 and Administration



On October 1, 2001 (the Petition Date), Federal-Mogul 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 and U.K. Restructuring are herein referred to as the Debtors. The U.S. Restructuring and U.K. Restructuring are herein referred to as the Restructuring Proceedings. The Chapter
11 cases of the Debtors (collectively, the Chapter 11 Cases) have been consolidated for purposes of joint administration 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 the Chapter 11 Cases and, therefore, are not currently provided protection from creditors by any bankruptcy court and are operating in 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.



The U.S. Debtors are operating their businesses as debtors-in-possession subject to the
provisions of the Bankruptcy Code. The U.K. Debtors are continuing to manage their operations under the supervision of Administrators approved by the High Court. All vendors will be paid for all goods furnished and services provided after the
Petition Date. However, as a consequence of the Restructuring Proceedings, pending litigation against the Debtors as of the Petition Date is stayed (subject to certain exceptions in the case of governmental authorities), and no party may take any
action to pursue or collect pre-petition claims except pursuant to an order of the Bankruptcy Court or the High Court as applicable. It is the Debtors intention to address all pending and future asbestos-related claims and all other
pre-petition claims through a unified plan of reorganization under the Bankruptcy Code or 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 April 22, 2004, the
Company filed its Second Amended Joint Plan of Reorganization (the Plan) and Disclosure Statement Describing Second Amended Joint Plan of Reorganization with the Bankruptcy Court. This 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). The disclosure statement hearing has been scheduled for May 11, 2004.



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 technical issues remain to be resolved, 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 or trusts for the benefit of existing and future asbestos claimants, and 49.9% of the newly authorized and
issued common stock will be distributed pro rata to the noteholders. If the classes of holders of common and preferred stock of Federal-Mogul vote in favor of the Plan, the holders of currently outstanding common and preferred stock of Federal-Mogul
will receive warrants for the purchase of common stock of reorganized Federal-Mogul.



Unsecured creditors, including trade creditors, of the U.S. Debtors will receive cash distributions equal to 35% of their allowed claims, payable in three annual installments, provided that the aggregate distribution on account of all
allowed unsecured claims against the U.S. Debtors is to be capped at an amount that is not yet determined. This 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 cash distributions that vary according to terms specified within the 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.



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The Plan Proponents have prepared forms of Schemes of Arrangement and Company Voluntary Arrangements to be submitted for
the U.K. Debtors in the U.K. Restructuring proceedings. These forms of Schemes of Arrangement and Company Voluntary Arrangements 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 Company Voluntary Arrangements. The Administrators have not yet agreed to recommend the Schemes of Arrangement and
Company Voluntary Arrangements that parallel the Plan. The Plan Proponents are working toward an agreement with the Administrators to recommend parallel Schemes of Arrangement and Company Voluntary Arrangements. Alternatively, if such an agreement
cannot be achieved, 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.



If neither agreement can be
achieved, then one or more of the following may occur with respect to each U.K. Debtor: (a) meetings of creditors shall be convened to resolve, pursuant to the proxies that will be distributed to creditors along with the Disclosure Statement, to
direct the Administrators to either (i) propose Schemes of Arrangement and Company Voluntary Arrangements substantially similar to the forms attached to the Disclosure Statement, or (ii) seek the discharge of the U.K. Administration orders so that
the Schemes of Arrangement and/or Voluntary Arrangements can thereafter be proposed by the U.K. Debtors as appropriate; (b) the U.K. Debtors and the Plan Proponents may ask the High Court to approve the Plan with respect to the U.K. Debtors as a
matter of comity; or (c) Federal-Mogul may bid for those businesses of the U.K. Debtors that are valuable to Federal-Mogul and its customers and any actual or deemed transfer of assets to Federal-Mogul in connection therewith shall be entitled to
the benefits of the injunction pursuant to Section 524(g) of the Bankruptcy Code. If Federal-Mogul 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 Federal-Mogul or its designee. The Plan Proponents believe that Federal-Mogul will be the successful bidder for those assets that are valuable to Federal-Mogul and its customers. Any remaining assets would be liquidated. The Plan
Proponents believe 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 Administrators refusal
to agree could be damaging to the interests of such parties.



The Company is
unable to predict with a high degree of certainty at this time what treatment will be accorded under any such plan of reorganization to claims 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. Various parties in the Chapter 11 Cases may challenge these arrangements, transactions, and relationships, and the outcome of
those challenges, if any, may have an impact on the treatment of various claims under such plan of reorganization.



The Bankruptcy Court may confirm a plan of reorganization only upon making certain findings required by the Bankruptcy Code, and a plan may be confirmed over the dissent
of non-accepting creditors and equity security holders if certain requirements of the Bankruptcy Code are met. The payment rights and other entitlements of pre-petition creditors and equity security holders may be substantially altered by any plan
of reorganization confirmed in the Chapter 11 Cases. There is no assurance that there will be sufficient assets to satisfy the Debtors pre-petition liabilities in whole or in part, and the pre-petition creditors of some Debtors may be treated
differently than those of other Debtors.



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 and/or changes of ownership, is highly uncertain. While operating as debtors-in-possession under the protection of Chapter 11 of the Bankruptcy Code and Administration under the Act, and subject to approval of the
Bankruptcy Court, 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 or scheme of arrangement could materially change the amounts and classifications in the historical consolidated financial statements.



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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 in the U.K. under Administration;
and (vi) the Companys ability to achieve profitability following such confirmations.



Asbestos Liabilities and Related Insurance Recoverable



The Companys United Kingdom subsidiary, T&N Ltd., two United States subsidiaries (T&N Companies), and two of the Companys subsidiaries formerly owned by Cooper Industries, Inc., known
as Abex and Wagner, are among many defendants named in numerous court actions in the United States alleging personal injury resulting from exposure to asbestos or asbestos-related products. T&N Ltd. is also subject to asbestos-disease
litigation, to a lesser extent, in the United Kingdom and France. The recorded liability at March 31, 2004 represents 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 asbestos 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 rate of receipt of claims, the typical cost of settlement, the settlement strategy in dealing with
outstanding claims and the timing of settlements. While the Company believes that the liability recorded was appropriate for anticipated losses arising from asbestos-related claims through 2012, it is the Companys view that, as a result of the
Restructuring Proceedings, there is even greater uncertainty in estimating the asbestos liability for pending and future claims.



T&N Ltd. 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
of certain asbestos policies and accordingly recorded an insurance recoverable asset.



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 the effect of foreign
currency, 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.



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 an asbestos charge in 2003 of $38.9 million. 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.



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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 was filed on March 1, 2004. Subsequent thereto, the other two reinsurers,
Munchener Ruckversicherungs-Gesellschaft AG and Centre Reinsurance International Co., a subsidiary of the Zurich Financial Services Group notified the Company of their belief that the settlements may breach one or more provisions of the Reinsurance
Agreement. The hearing on the motion has been postponed pending further investigation. The Company believes that, based on its review of the insurance policies and advice from outside legal counsel, it is probable that the T&N Companies will be
entitled to receive payment from the reinsurers for the cost of the claims in excess of the trigger point of the insurance.



During the three months ended March 31, 2004, the security rating of Centre Reinsurance International Co. (CRIC), one of the three reinsurers, 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.



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##### Table of Contents

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, 2003.



Consolidated Results



Sales by
reporting segment were:



|                                       |  |                             |       |      |   |        |  |   |    
|-------------------------------------- |  | --------------------------- | ----- | ---- | - | ------ |  | - | ---
|                                       |  | Three Months Ended March 31
|                                       |  | 2004                        |       | 2003 |   | Change
|                                       |  | (Millions of Dollars)      
|Powertrain                             |  | $                           | 547   |      | $ | 466    |  | $ | 81 
|Sealing Systems and Systems Protection |  |                             | 177   |      |   | 163    |  |   | 14 
|Friction                               |  |                             | 126   |      |   | 105    |  |   | 21 
|Aftermarket                            |  |                             | 680   |      |   | 616    |  |   | 64 
|Other                                  |  |                             | 23    |      |   | 17     |  |   | 6  
|                                       |  |                             |       |      |   |        |  |   |    
|Total                                  |  | $                           | 1,553 |      | $ | 1,367  |  | $ | 186
|                                       |  |                             |       |      |   |        |  |   |    



Gross margin by reporting segment was:



|                                       |  |                             |     |   |      |   |     |        |  |   |    |  
|-------------------------------------- |  | --------------------------- | --- | - | ---- | - | --- | ------ |  | - | -- | -
|                                       |  | Three Months Ended March 31 |    
|                                       |  | 2004                        |     |   | 2003 |   |     | Change | 
|                                       |  | (Millions of Dollars)       |    
|Powertrain                             |  | $                           | 76  |   |      | $ | 67  |        |  | $ | 9  |  
|Sealing Systems and Systems Protection |  |                             | 32  |   |      |   | 30  |        |  |   | 2  |  
|Friction                               |  |                             | 30  |   |      |   | 31  |        |  |   | (1 | )
|Aftermarket                            |  |                             | 164 |   |      |   | 148 |        |  |   | 16 |  
|Other                                  |  |                             | (5  | ) |      |   | (3  | )      |  |   | (2 | )
|                                       |  |                             |     |   |      |   |     |        |  |   |    |  
|Total                                  |  | $                           | 297 |   |      | $ | 273 |        |  | $ | 24 |  
|                                       |  |                             |     |   |      |   |     |        |  |   |    |  



Net sales from continuing operations
increased by $186 million, or 14%, to $1,553 million for the first quarter of 2004 from $1,367 million in the same period of 2003. Net sales from continuing operations were favorably impacted by $100 million of foreign currency, higher OE volumes
reflecting vehicle production in North America and Europe and market share performance in both the OE market and the Aftermarket. These favorable impacts were partially offset by customer price reductions of $24 million and the impact of business
interruption of $14 million resulting from a fire at the Companys Smithville, Tennessee distribution facility.



Gross margin increased by $24 million, or 9%, to $297 million for the first quarter of 2004 from $273 million in the same period of 2003. Gross margin was favorably
impacted by $17 million of foreign currency, increased sales volumes and continued net productivity resulting from the Companys cost reduction and restructuring activities. These positive factors were offset by customer price reductions of $24
million and the impact of business interruption of $5 million resulting from a fire at the Companys Smithville, Tennessee distribution facility.



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 OEMs profits and, in turn, the OEMs expect certain recovery from their supply base. Accordingly, the Company continued to experience downward price pressure from its customers during the
quarter ended March 31, 2004. 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.



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##### Table of Contents

Through its centralized supply chain functions, the Company continues to work with its suppliers to reduce global
material costs. Accordingly, during the quarter ended March 31, 2004 the impact of increasing steel costs did not have a material impact on the Companys operating results. However, the impact of increasing material costs or disruptions in
supply over the remainder of the year or longer term may adversely impact the Companys earnings.



Reporting Segment Results  Three Months Ended March 31, 2004 compared to March 31, 2003



The following table provides a reconciliation of changes in sales and gross margin for the three months ended March 31, 2004 compared with the three months ended March
31, 2003 for each of the Companys reporting segments. SSP and AM represent Sealing Systems and Systems Protection and Aftermarket, respectively.



|                                  |  |                       |     |   |     |   |     |          |  |   |     |   |  |       |     |       |  |   |    |  |   |       |  
|--------------------------------- |  | --------------------- | --- | - | --- | - | --- | -------- |  | - | --- | - |  | ----- | --- | ----- |  | - | -- |  | - | ----- | -
|                                  |  | Powertrain            |     |   | SSP |   |     | Friction |  |   | AM  |   |  | Other |     | Total | 
|                                  |  | (Millions of Dollars) |    
|Sales                             |  |                       |     |   |     |   |     |          |  |   |     |   |  |       |     |       |  |   |    |  |   |       |  
|Three-months ended March 31, 2003 |  | $                     | 466 |   |     | $ | 163 |          |  | $ | 105 |   |  | $     | 616 |       |  | $ | 17 |  | $ | 1,367 |  
|Foreign currency                  |  |                       | 49  |   |     |   | 8   |          |  |   | 12  |   |  |       | 31  |       |  |   |   |  |   | 100   |  
|Sales volumes                     |  |                       | 44  |   |     |   | 10  |          |  |   | 11  |   |  |       | 53  |       |  |   | 6  |  |   | 124   |  
|Price reductions                  |  |                       | (12 | ) |     |   | (4  | )        |  |   | (2  | ) |  |       | (6  | )     |  |   |   |  |   | (24   | )
|Smithville business interruption  |  |                       |    |   |     |   |    |          |  |   |    |   |  |       | (14 | )     |  |   |   |  |   | (14   | )
|                                  |  |                       |     |   |     |   |     |          |  |   |     |   |  |       |     |       |  |   |    |  |   |       |  
|Three-months ended March 31, 2004 |  | $                     | 547 |   |     | $ | 177 |          |  | $ | 126 |   |  | $     | 680 |       |  | $ | 23 |  | $ | 1,553 |  
|                                  |  |                       |     |   |     |   |     |          |  |   |     |   |  |       |     |       |  |   |    |  |   |       |  



|                                              |  |                       |     |   |     |   |    |          |  |   |    |   |  |       |     |   |       |   |    |   |  |   |     |  
|--------------------------------------------- |  | --------------------- | --- | - | --- | - | -- | -------- |  | - | -- | - |  | ----- | --- | - | ----- | - | -- | - |  | - | --- | -
|                                              |  | Powertrain            |     |   | SSP |   |    | Friction |  |   | AM |   |  | Other |     |   | Total |  
|                                              |  | (Millions of Dollars) |    
|Gross Margin                                  |  |                       |     |   |     |   |    |          |  |   |    |   |  |       |     |   |       |   |    |   |  |   |     |  
|Three-months ended March 31, 2003             |  | $                     | 67  |   |     | $ | 30 |          |  | $ | 31 |   |  | $     | 148 |   |       | $ | (3 | ) |  | $ | 273 |  
|Foreign currency                              |  |                       | 7   |   |     |   | 2  |          |  |   | 4  |   |  |       | 5   |   |       |   | (1 | ) |  |   | 17  |  
|Production volumes / mix                      |  |                       | 15  |   |     |   | 2  |          |  |   | (1 | ) |  |       | 24  |   |       |   |   |   |  |   | 40  |  
|Price reductions                              |  |                       | (12 | ) |     |   | (4 | )        |  |   | (2 | ) |  |       | (6  | ) |       |   |   |   |  |   | (24 | )
|Smithville business interruption              |  |                       |    |   |     |   |   |          |  |   |   |   |  |       | (5  | ) |       |   |   |   |  |   | (5  | )
|Depreciation and pension expense              |  |                       | (2  | ) |     |   | (1 | )        |  |   | (4 | ) |  |       |    |   |       |   | (3 | ) |  |   | (10 | )
|                                              |  |                       |     |   |     |   |    |          |  |   |    |   |  |       |     |   |       |   |    |   |  |   |     |  
|Productivity gains (losses), net of inflation |  |                       | 1   |   |     |   | 3  |          |  |   | 2  |   |  |       | (2  | ) |       |   | 2  |   |  |   | 6   |  
|                                              |  |                       |     |   |     |   |    |          |  |   |    |   |  |       |     |   |       |   |    |   |  |   |     |  
|Three-months ended March 31, 2004             |  | $                     | 76  |   |     | $ | 32 |          |  | $ | 30 |   |  | $     | 164 |   |       | $ | (5 | ) |  | $ | 297 |  
|                                              |  |                       |     |   |     |   |    |          |  |   |    |   |  |       |     |   |       |   |    |   |  |   |     |  



Powertrain



Sales increased by $81 million, or 17%, to $547 million for the first quarter of 2004 from
$466 million in the same period of 2003. The increase in sales was due to favorable foreign currency of $49 million and increased sales volumes of $44 million comprised of North American and European increases of $9 million and $35 million,
respectively. Favorable exchange and volumes were partially offset by customer price reductions of $12 million.



Gross margin increased by $9 million to $76 million, or 14% of sales, for the first quarter of 2004 compared to $67 million, or 14% of sales for the first quarter of
2003.Foreign currency, increased production volumes and productivity gains in excess of inflation contributed $7 million, $15 million and $1 million, respectively. These favorable impacts were offset by customer price reductions of $12
million and increases in depreciation and pension expense of $2 million.



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##### Table of Contents

Sealing Systems and Systems Protection



Sales increased by $14 million, or 9%, to $177 million for the first quarter of 2004 from $163 million in the same period of 2003. The
increase in sales resulted from favorable foreign currency of $7 million and increased sales volumes of $10 million originating in North America. Favorable foreign currency and sales volumes were partially offset by customer price reductions of $4
million.



Gross margin increased by $2 million to $32 million, or 18% of sales,
for the first quarter of 2004 compared to $30 million, or 18% of sales for the first quarter of 2003. Gross margin was favorably impacted by $2 million of foreign currency, $2 million of production volumes and $2 million of productivity in excess of
inflation. These favorable impacts were partially offset by customer price reductions of $4 million and increased depreciation and pension expense of $1 million.



Friction



Sales increased by $21 million, or 20%, to $126 million for the first quarter of 2004 from $105 million in the same period of 2003. The increase in sales resulted from
favorable foreign currency of $12 million and increased sales volumes of $11 million, originating in Europe. These favorable impacts were partially offset by customer price reductions of $2 million.



Gross margin was $30 million, or 24% of sales, for the first quarter of 2004 compared to $31
million, or 30% of sales for the first quarter of 2003. Gross margin was favorably impacted by foreign currency of $4 million and productivity gains in excess of inflation of $2 million. These favorable impacts were offset by adverse product mix of
$1 million, price reductions of $2 million and increased depreciation and pension expense of $4 million.



Aftermarket



Sales increased by $64 million,
or 10%, to $680 million for the first quarter of 2004 from $616 million in the same period of 2003. The increase in sales resulted from $31 million of favorable foreign currency and increased sales volumes of $53 million, originating in North and
Latin America. These favorable impacts were offset by price reductions of $6 million and business interruption of $14 million resulting from a fire at the Companys Smithville, TN distribution facility.



Gross margin increased by $16 million to $164 million, or 24% of sales, for the first quarter
of 2004 from $148 million, or 24% of sales, in the same period of 2003. Favorable foreign currency of $5 million and increased sales volumes of $19 million were partially offset by the impact of customer price reductions of $6 million and inflation
in excess of productivity of $2 million.



On March 5, 2004, a fire at the
Companys Smithville, Tennessee aftermarket distribution facility resulted in the loss of substantially all of the facilitys equipment and inventory. The 244,000 square foot facility was the principal distribution center for Moog and TRW
chassis aftermarket products in the United States. Operations at the Smithville facility are currently suspended; the Company resumed operations at a temporary facility in Smyrna, Tennessee on March 12, 2004.



In addition to other coverage, the Companys insurance policies provide for replacement
of damaged property, sales value of destroyed inventory, reimbursement for losses due to interruption of business operations, and reimbursement of expenditures incurred to restore operations. The Company expects costs incurred as a result of this
fire to be covered by such insurance policies. Accordingly, the results of operations have not and should not be adversely affected by this event.



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##### Table of Contents

Other



Other includes Asia Pacific operations and Corporate functions. Sales for the first quarter of 2004 in the Asia Pacific region and other Corporate functions were $23
million, compared to $17 million in the same quarter of 2003. This increase is due to increased sales volumes in the Asia Pacific region. Gross margin was adversely impacted by unfavorable foreign currency and increased pension costs recorded in
Corporate.



Selling, General and Administrative Expenses



Selling, general and administrative expenses were $243 million, or 16% of net sales, for the
first quarter of 2004 as compared to $225 million, or 16% of net sales, for the same quarter of 2003. Selling, general and administrative expenses, while remaining constant as a percentage of sales, increased by $18 million primarily due to foreign
currency.



Interest Expense, net



Interest expense, net was $26 million in the first quarter of 2004 compared to $30 million
for the same quarter of 2003. The decrease is due to reduced interest expense on the DIP credit facility resulting from favorable interest rates and lower average outstanding borrowings.



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.



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.



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##### Table of Contents

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 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, 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 post employment 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 in which the Company operates, statutory requirements include involuntary termination benefits that extend several
years into the future. Accordingly, severance payments continue well past the date of termination at many international locations. Thus, these programs appear to be ongoing when, in fact, terminations and other activities under these programs have
been substantially completed.



Management expects that future savings resulting
from execution of its restructuring programs will generally result in full pay back within 36 to 60 months. Management expects to finance these restructuring programs through cash generated from its ongoing operations or through cash available under
its existing DIP facility, subject to the terms of applicable covenants. Management does not expect that the execution of these programs will have an adverse impact on the Companys liquidity and financial position.



The following is a summary of the Companys consolidated restructuring reserves and
related activity for the three months ended March 31, 2004:



|                                             |  |                       |       |   |      |   |       |  |   |       |  
|-------------------------------------------- |  | --------------------- | ----- | - | ---- | - | ----- |  | - | ----- | -
|                                             |  | Severance             |       |   | Exit |   | Total | 
|                                             |  | (Millions of Dollars) |      
|Balance of reserves at December 31, 2003     |  | $                     | 47.7  |   |      | $ | 10.0  |  | $ | 57.7  |  
|Payments against and adjustments to reserves |  |                       | (14.9 | ) |      |   |      |  |   | (14.9 | )
|                                             |  |                       |       |   |      |   |       |  |   |       |  
|Balance of reserves at March 31, 2004        |  | $                     | 32.8  |   |      | $ | 10.0  |  | $ | 42.8  |  
|                                             |  |                       |       |   |      |   |       |  |   |       |  



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 geographies or to other locations with available capacity.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2. | Consolidation of administrative functions and standardization of manufacturing processes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.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Significant restructuring activities for the three months ended March 31, 2004 are described below.



Powertrain - The primary restructuring activities in the Powertain reporting segment
include the following:



| | In December 2003, the Company announced the closure and relocation of its Bradford, United Kingdom piston operations to other existing European manufacturing facilities with
available capacity or with lower cost labor. At March 31, 2004, the Company had remaining reserves of approximately $13.0 million related to this activity.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | During 2002, the Company announced the closure of its Bridgwater, United Kingdom piston operation. Production from this operation was relocated to other existing European facilities
with available capacity or
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| | with lower cost labor. The closure of the Bridgwater facility was completed during 2003. Approximately $0.3 million of severance payments and adjustments
were made against this reserve during the three-months ended March 31, 2004. At March 31, 2004, remaining reserves related to this activity approximate $1.0 million.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | During 2002, the Company initiated administrative function and manufacturing process changes at the Companys piston manufacturing operations located in Nuremburg, Germany.
Approximately $1.0 million of severance payments and adjustments were made against this reserve during the quarter ended March 31, 2004. At March 31, 2004, the Company had remaining reserves of approximately $3.0 million related to this activity.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | During 2002, the Company announced the relocation and closure of its piston manufacturing operations in Flowery Branch, Georgia, Orangeburg, South Carolina and Sumter, South
Carolina to other existing North American manufacturing facilities with available capacity or with lower cost labor. The closures of Orangeburg and Flowery Branch were completed during 2003 and closure of Sumter is expected to be completed during
2004. Approximately $1.0 million of severance payments and adjustments were made against this reserve during the three months ended March 31, 2004. At March 31, 2004, the Company had remaining reserves of approximately $4.0 million related to these
activities.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | During 2002, the Company announced the closure and relocation of its piston ring operations in Sunderland, United Kingdom to other existing European facilities with available
capacity. The closure of the Sunderland facility was completed during 2003. Approximately $4.0 million of severance payments and adjustments were made against this reserve during the three months ended March 31, 2004. At March 31, 2004, the Company
had remaining reserves of approximately $3.0 million related to this activity.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | During 2001, the Companys German engine bearing operations announced restructuring programs to transfer certain low volume production with high labor content to low cost
geographies, specifically Poland. Related severance and exit costs approximating $3.0 million were recorded during the first quarter of 2003. Approximately $3.0 million of severance payments and adjustments were made against this reserve during the
three months ended March 31, 2004. At March 31, 2004, the Company had remaining reserves of approximately $4.0 million related to these activities.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Aftermarket  The primary restructuring activities in the Aftermarket reporting segment include the following:



| | During 2003, the Company began relocation of its Ignition and Wiper operations between facilities located in Aubange, Belgium and Upton, England. No charges related to this program
were recorded in the three months ended March 31, 2004. Related severance and exit costs of approximately $4.0 million were recorded in the three months ended March 31, 2003. Approximately $2.0 million of severance payments and adjustments were made
against this reserve during the three months ended March 31, 2004. At March 31, 2004, the Company had remaining reserves of approximately $3.0 million related to this activity.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | During 2002, the Company announced and began the consolidation of certain distribution operations at its Aftermarket distribution facility located in France into its central
European distribution facility in Belgium. Approximately $0.3 million of severance payments and adjustments were made against this reserve during the three months ended March 31, 2004. At March 31, 2004, the Company had remaining reserves of
approximately $1.0 million related to this activity.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | The Company continues the consolidation of its North America administrative and distribution functions. During the three months ended March 31, 2004, satellite distribution
warehouses located in Monterrey, Mexico and Guadalajara, Mexico were closed and related activities were transferred to the Companys Mexico City central distribution facility. Approximately $1.0 million of severance payments and adjustments
were made against this reserve during the three months ended March 31, 2004. Remaining activities under this program are expected to be completed during 2004. At March 31, 2004, the Company had remaining reserves of approximately $1.0 million
related to this activity.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Significant restructuring activities
in the Sealing Systems and Systems Protection and Friction reporting segments were completed as of December 31, 2003. As of March 31, 2004 reserves for all remaining restructuring activities in these reporting segments approximates $2.0 million and
such activities are expected to be completed during 2004.



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##### Table of Contents

Chapter 11 and Administration Related Reorganization Expenses



During the three months ended March 31, 2004 and 2003, the Company recorded Chapter 11 and
Administration related reorganization expenses of $26.0 million and $32.8 million, respectively. These expenses consist of legal, financial and advisory fees, including the costs of the U.K. Administrators, critical employee retention costs and
other directly related internal costs. 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 EndedMarch 31
|                                                 |  | 2004                       |      | 2003
|                                                 |  | (Millions of Dollars)     
|Professional fees directly related to the filing |  | $                          | 23.2 |      | $ | 26.4
|Critical employee retention costs                |  |                            | 2.0  |      |   | 2.1 
|Other direct costs                               |  |                            | 0.8  |      |   | 4.3 
|                                                 |  |                            |      |      |   |     
|Total                                            |  | $                          | 26.0 |      | $ | 32.8
|                                                 |  |                            |      |      |   |     



Cash payments for Chapter 11 and
Administration related reorganization expenses totaled $24.6 million and $16.2 million for the three months ended March 31, 2004 and 2003, respectively.



Income Tax Expense



For the three months ended March 31, 2004, the Company recorded income tax expense of $19.9 million on a loss from continuing operations before income taxes of $0.5 million. This compares to income tax expense of
$18.8 million on a loss from continuing operations before income taxes of $18.3 million in the same period of 2003. Income tax expense for the three month period ended March 31, 2004 resulted primarily from the recognition of income tax expense on
earnings in certain foreign jurisdictions and no recognition of income tax benefits on current losses in the U.K. and other countries.



Labor Matters



The Company has entered into collective bargaining agreements with various unions that cover approximately one-half of its wholly owned US manufacturing facilities, and include approximately 43% of its manufacturing
workforce. Almost all of the Companys unionized facilities have separate contracts with differing expiration dates. Six local union agreements are scheduled to expire within one year.



In three of the Companys facilities, located in Greenville and St. Johns, Michigan and
Winchester, Virginia, the Company is pursuing wage and benefit concessions from the United Auto Workers (UAW) to reduce operating expenses at those locations. If the Company is unable to reach agreement with the UAW, the Company may
consider, among other options, closing those facilities. Simultaneously, the UAW is pursuing the concept of a neutrality agreement with the Company that would obligate the Company to assist the UAW in attempting to organize the Companys
non-union facilities. The Company strongly objects to the notion of a neutrality agreement with the UAW. The UAW has threatened to commence an industrial action in the event the Company and the UAW do not reach a favorable resolution on the
collective bargaining issues at the three plants or on the concept of a neutrality agreement. The Company is unable to predict at this time whether it will be able to successfully conclude negotiations with the UAW, and the Company is currently
taking certain actions designed to mitigate the effect that such an industrial action could have on its operations.



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##### Table of Contents

Litigation and Environmental Contingencies



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



Liquidity and Capital
Resources



Cash Flow



Cash flow provided from operating activities was $119 million for the first quarter of 2004
compared to $27 million in the same period of 2003. The improvement in cash provided from operating activities was due to a decrease in net loss of $14 million during the first quarter of 2004, receipt of advance insurance proceeds of $35 million
from the Smithville, Tennessee distribution center fire in March 2004 and the net change in other assets and liabilities of $76 million. The net change in other assets and liabilities is principally due to timing of commercial settlements and
payroll-related payments, tax payments and foreign currency. These positive factors were partially offset by an increase in inventory of $36 million (net of involuntary conversion) resulting from seasonal inventory build and increased sales volumes
and the net impact of increases in accounts receivable and accounts payable of $5 million.



Cash flow used by investing activities was $62 million in the first three months of 2004. Capital expenditures of $73 million were partially offset by proceeds from the sale of property plant and equipment of $11
million. Cash flow used by financing activities was $14 million for the first three months of 2004 resulting from a net paydown of the Companys debtor-in-possession (DIP) credit facility of $10 million, combined with repayments of
certain short-term and international debt.



Reorganization Financing



In connection with the Restructuring Proceedings, the Company entered
into a $675 million DIP credit facility to supplement liquidity and fund operations during the restructuring proceedings. In August 2003, the DIP credit facility was amended to reduce the commitment to $600 million, change the expiration date to
February 2005, and reduce the interest rate to either the alternate base rate (ABR) plus 2 percentage points or a formula based on the London Inter-Bank Offered Rate (LIBOR) plus 3 percentage points. The ABR is the greatest
of either the banks prime rate or the base CD rate plus 1 percentage point or the federal funds rate plus 1⁄2 percentage point. The $600 million commitment is mandatorily reduced by a portion of proceeds received from future asset or
business divestitures. As of March 31, 2004 the outstanding balance of $310.0 million related to the DIP credit facility has been reclassified to short-term debt. The Company intends to renegotiate the DIP credit facility prior to its expiration, if
necessary.



The Companys available borrowings under the DIP credit
facility are determined by the underlying collateral at any point in time, consisting of its domestic inventories, domestic accounts receivable, and domestic property, plant, and equipment. The DIP lenders received permission from the lenders of the
Senior Credit Agreements to have priority over their collateral interest. At March 31, 2004, the Company had $310.0 million of borrowings outstanding and has issued $17.9 million in letters of credit under this facility. Based upon the collateral
securing the DIP credit facility, the Company had $266.8 million available for borrowings at March 31, 2004.



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



The Company has pledged 100% of the capital stock of certain U.S. subsidiaries, 65% of
capital stock of certain foreign subsidiaries and certain intercompany loans to secure the Senior Credit Agreements of the Company. Certain of such pledges also extend to the Notes, Medium-Term Notes and Senior Notes of the Company. In addition,
certain subsidiaries of the Company have guaranteed the senior debt.



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The Companys ability to obtain cash adequate to fund its needs depends generally on the results of its operations,
restructuring initiatives, the Bankruptcy Courts approval of managements plans and the availability of financing. Management believes that cash on hand, cash flow from operations, and available borrowings under its DIP credit facility,
will be sufficient to fund capital expenditures and meet its post-petition operating obligations for the next fiscal year. In the longer term, the Company believes that the benefits from its announced restructuring programs and favorable resolution
of its asbestos liability through Chapter 11 and Administration 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 March 31, 2004 the Company was in compliance with all debt covenants under its existing
DIP credit facility. Based on current forecasts, the Company expects to be in compliance through the expiration of the facility. Changes in the business environment, market factors, macroeconomic factors, 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 March 31, 2004 and December 31, 2003, such cash balances were
$271 million and $261 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 $133.4 million and $131.2 million as of March 31, 2004 and December 31, 2003, respectively.



The Companys joint ventures are businesses established and maintained in connection with its 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.



Pursuant to its Turkish joint venture arrangement, the Companys joint venture 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 its investment partner. The total amount of the
contingent guarantee as of March 31, 2004 approximates $50 million. This put option, if exercised at the current fair value, could have a material effect on the Companys liquidity position.



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



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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 purchases 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. The Company manufactures and
sells its products in North America, South America, Asia, Europe and Africa. As a result, the Companys financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions
in 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.



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.



Additionally, the Company entered into a debtor-in-possession (DIP) credit
facility to supplement liquidity and fund operations during the restructuring proceedings. The DIP credit facility expires in February 2005, and the interest rate is either the alternate base rate (ABR) plus 2 percentage points or a
formula based on the London Inter-Bank Offered Rate (LIBOR) plus 3 percentage points. The ABR is the greatest of either the banks prime rate or the base CD rate plus 1 percentage point or the federal funds rate plus 1⁄2
percentage point. Accordingly, the Companys variable interest expense is sensitive to changes in the general level of global market interest rates as related to the DIP facility.



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.



Commodity Price Risk



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



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ITEM 4. CONTROLS AND PROCEDURES



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



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



As of March 31, 2004, an evaluation was performed under the
supervision and with the participation of the Companys management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and
procedures. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Companys disclosure controls and procedures were effective as of March 31, 2004, subject to the limitations previously
described.



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PART II

OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



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



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



ITEM 3. DEFAULTS UPON SENIOR SECURITIES



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



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



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



| | (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.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | Reports on Form 8-K:
| | --- | --------------------



| | (1) | On March 5, 2004, the Company filed a Current Report on Form 8-K to report the filing of an amended consensual Plan of Reorganization and Disclosure Statement with the U.S.
Bankruptcy Court in Delaware.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | On February 18, 2004, the Company filed a Current Report on Form 8-K to report the issuance of a press release announcing its financial results for the fourth quarter and the full
year ended December 31, 2003.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | On January 13, 2004, the Company filed a Current Report on Form 8-K to report the issuance of a press release announcing the appointment of Robert S. Miller, Jr. as non-executive
Chairman of the Board of Directors.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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/ William G. Quigley IIIWilliam G. Quigley IIIVice President and Controller,Chief Accounting Officer




Dated: May 3, 2004



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