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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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



For the quarterly period ended September 30, 2003



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)



|Michigan                                                      |  | 38-0533580                         
|------------------------------------------------------------- |  | -----------------------------------
|(State or other jurisdiction ofincorporation or organization) |  | (IRS employeridentification number)



|26555 Northwestern Highway, Southfield, Michigan |  | 48034     
|------------------------------------------------ |  | ----------
|(Address of principal executive offices)         |  | (Zip Code)



(248) 354-7700

(Registrants telephone number, including area code)



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



As of November 3, 2003, there were 87,131,298 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 September 30, 2003



INDEX



|                                                                                               |  | Page No.
|---------------------------------------------------------------------------------------------- |  | --------
|Forward-Looking Statements                                                                     |  | 2       
|Part I  Financial Information                                                                 |  |         
|Item 1  Consolidated 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 |  | 36      
|Item 3  Quantitative and Qualitative Disclosures about Market Risk                            |  | 42      
|Item 4  Disclosure Controls and Procedures                                                    |  | 42      
|Part II  Other Information                                                                    |  |         
|Item 1  Legal Proceedings                                                                     |  | 43      
|Item 3  Defaults Upon Senior Securities                                                       |  | 43      
|Item 6  Exhibits and Reports on Form 8-K                                                      |  | 43      
|Signatures                                                                                     |  | 44      
|Exhibits                                                                                       |  | 45      



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FORWARD-LOOKING STATEMENTS



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



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



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



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



Chapter 11 Filing



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



Legal and Environmental
Proceedings



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



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



Business Environment and Economic Conditions



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



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



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



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



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



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



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| |  | Fluctuations in the global securities markets which directly impact the valuation of assets supporting the Companys pension plans
| | - | ----------------------------------------------------------------------------------------------------------------------------------



Other Factors



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



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



| |  | Legislative activities of governments, agencies, and similar organizations, both in the United States and in foreign countries, that may affect the Company and its operations
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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PART I  FINANCIAL INFORMATION



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



FEDERAL-MOGUL CORPORATION

Consolidated Statements of Operations (Unaudited)

(Millions of Dollars, Except Per Share Amounts)



|                                                                                          |  | Three Months Ended September 30 |         |   | Nine Months Ended September 30 |  
|----------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | -
|                                                                                          |  | 2003                            |         |   | 2002                           |  
|Net sales                                                                                 |  | $                               | 1,346.4 |   |                                | $
|Cost of products sold                                                                     |  |                                 | 1,095.8 |   |                                |  
|                                                                                          |  |                                 |         |   |                                |  
|Gross margin                                                                              |  |                                 | 250.6   |   |                                |  
|Selling, general and administrative expenses                                              |  |                                 | 212.7   |   |                                |  
|Restructuring charges                                                                     |  |                                 | 8.1     |   |                                |  
|Adjustment of assets held for sale and other long-lived assets to fair value              |  |                                 | 0.9     |   |                                |  
|Interest expense, net                                                                     |  |                                 | 23.1    |   |                                |  
|Chapter 11 and Administration related reorganization expenses                             |  |                                 | 25.7    |   |                                |  
|Other (income) expense, net                                                               |  |                                 | (2.9    | ) |                                |  
|                                                                                          |  |                                 |         |   |                                |  
|Loss before income tax expense and cumulative effect of change in accounting principle    |  |                                 | (17.0   | ) |                                |  
|Income tax expense                                                                        |  |                                 | 12.5    |   |                                |  
|                                                                                          |  |                                 |         |   |                                |  
|Loss before cumulative effect of change in accounting principle                           |  |                                 | (29.5   | ) |                                |  
|Cumulative effect of change in accounting principle, net of applicable income tax benefit |  |                                 |        |   |                                |  
|                                                                                          |  |                                 |         |   |                                |  
|Net loss attributable to common shareholders                                              |  | $                               | (29.5   | ) |                                | $
|                                                                                          |  |                                 |         |   |                                |  
|Loss Per Common Share:                                                                    |  |                                 |         |   |                                |  
|Basic and Diluted                                                                         |  |                                 |         |   |                                |  
|Loss per common share before cumulative effect of change in accounting principle          |  | $                               | (0.34   | ) |                                | $
|                                                                                          |  |                                 |         |   |                                |  
|Net loss per common share                                                                 |  | $                               | (0.34   | ) |                                | $
|                                                                                          |  |                                 |         |   |                                |  



See accompanying notes.



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FEDERAL-MOGUL CORPORATION

Consolidated Balance Sheets

(Millions of Dollars)



|                                                             |  | (Unaudited) September 30 2003 |          |   | December 31 2002 |  
|------------------------------------------------------------ |  | ----------------------------- | -------- | - | ---------------- | -
|                                                             |  |                              
|ASSETS                                                       |  |                               |          |   |                  |  
|Cash and equivalents                                         |  | $                             | 472.8    |   |                  | $
|Accounts receivable, net                                     |  |                               | 978.2    |   |                  |  
|Inventories, net                                             |  |                               | 801.9    |   |                  |  
|Prepaid expenses and other current assets                    |  |                               | 223.4    |   |                  |  
|                                                             |  |                               |          |   |                  |  
|Total Current Assets                                         |  |                               | 2,476.3  |   |                  |  
|Property, plant and equipment, net                           |  |                               | 2,323.3  |   |                  |  
|Goodwill and indefinite-lived intangible assets              |  |                               | 1,592.9  |   |                  |  
|Definite-lived intangible assets, net                        |  |                               | 347.5    |   |                  |  
|Asbestos-related insurance recoverable                       |  |                               | 801.3    |   |                  |  
|Prepaid pension costs                                        |  |                               | 294.2    |   |                  |  
|Other noncurrent assets                                      |  |                               | 216.8    |   |                  |  
|                                                             |  |                               |          |   |                  |  
|Total Assets                                                 |  | $                             | 8,052.3  |   |                  | $
|                                                             |  |                               |          |   |                  |  
|                                                             |  |                              
|LIABILITIES AND SHAREHOLDERS DEFICIT                        |  |                               |          |   |                  |  
|Short-term debt, including current portion of long-term debt |  | $                             | 14.3     |   |                  | $
|Accounts payable                                             |  |                               | 340.4    |   |                  |  
|Accrued compensation                                         |  |                               | 236.8    |   |                  |  
|Restructuring reserves                                       |  |                               | 63.9     |   |                  |  
|Accrued income taxes                                         |  |                               | 52.5     |   |                  |  
|Other accrued liabilities                                    |  |                               | 362.8    |   |                  |  
|                                                             |  |                               |          |   |                  |  
|Total Current Liabilities                                    |  |                               | 1,070.7  |   |                  |  
|                                                             |  |                              
|Liabilities subject to compromise                            |  |                               | 6,063.1  |   |                  |  
|                                                             |  |                              
|Long-term debt                                               |  |                               | 321.8    |   |                  |  
|Postemployment benefits                                      |  |                               | 1,589.7  |   |                  |  
|Deferred income taxes                                        |  |                               | 61.0     |   |                  |  
|Other accrued liabilities                                    |  |                               | 211.5    |   |                  |  
|Minority interest in consolidated subsidiaries               |  |                               | 48.6     |   |                  |  
|                                                             |  |                              
|Shareholders Deficit:                                       |  |                               |          |   |                  |  
|Series C ESOP preferred stock                                |  |                               | 28.0     |   |                  |  
|Common stock                                                 |  |                               | 435.6    |   |                  |  
|Additional paid-in capital                                   |  |                               | 2,060.5  |   |                  |  
|Accumulated deficit                                          |  |                               | (2,812.7 | ) |                  |  
|Accumulated other comprehensive loss                         |  |                               | (1,025.5 | ) |                  |  
|Other                                                        |  |                               |         |   |                  |  
|                                                             |  |                               |          |   |                  |  
|Total Shareholders Deficit                                  |  |                               | (1,314.1 | ) |                  |  
|                                                             |  |                               |          |   |                  |  
|Total Liabilities and Shareholders Deficit                  |  | $                             | 8,052.3  |   |                  | $
|                                                             |  |                               |          |   |                  |  



See
accompanying notes.



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FEDERAL-MOGUL CORPORATION

Consolidated Statements of Cash Flows (Unaudited)

(Millions of Dollars)



|                                                                                  |  | Nine Months EndedSeptember 30 |       
|--------------------------------------------------------------------------------- |  | ----------------------------- | ------
|                                                                                  |  | 2003                          |       
|Cash Provided From (Used By) Operating Activities                                 |  |                               |       
|Net loss                                                                          |  | $                             | (68.8 
|Adjustments to reconcile net loss to net cash provided from operating activities: |  |                               |       
|Cumulative effect of change in accounting principle                               |  |                               |      
|Depreciation and amortization                                                     |  |                               | 227.5 
|Restructuring charges                                                             |  |                               | 28.3  
|Chapter 11 and Administration related reorganization expenses                     |  |                               | 85.4  
|Adjustment of assets held for sale and other long-lived assets to fair value      |  |                               | 4.5   
|Loss (gain) on sales of businesses                                                |  |                               | 7.9   
|Change in postemployment benefits, including pensions                             |  |                               | 87.0  
|Deferred taxes                                                                    |  |                               | 26.0  
|Decrease (increase) in accounts receivable                                        |  |                               | 11.7  
|Decrease (increase) in inventories                                                |  |                               | 19.0  
|(Decrease) increase in accounts payable                                           |  |                               | (2.0  
|Changes in other assets and liabilities                                           |  |                               | (34.2 
|Payments against restructuring reserves                                           |  |                               | (59.1 
|Payments for Chapter 11 and Administration related reorganization expenses        |  |                               | (64.1 
|                                                                                  |  |                               |       
|Net Cash Provided From Operating Activities                                       |  |                               | 269.1 
|Cash Provided From (Used By) Investing Activities                                 |  |                               |       
|Expenditures for property, plant and equipment                                    |  |                               | (214.8
|Net proceeds from sales of businesses                                             |  |                               | 23.6  
|                                                                                  |  |                               |       
|Net Cash Used By Investing Activities                                             |  |                               | (191.2
|Cash Provided From (Used By) Financing Activities                                 |  |                               |       
|(Decrease) increase in short-term debt                                            |  |                               | (17.1 
|Borrowings on DIP credit facility                                                 |  |                               | 105.5 
|Principal payments on DIP credit facility                                         |  |                               | (110.2
|(Decrease) increase in other long-term debt                                       |  |                               | (2.5  
|                                                                                  |  |                               |       
|Net Cash Used By Financing Activities                                             |  |                               | (24.3 
|                                                                                  |  |                               |       
|Effect of Foreign Currency Exchange Rate Fluctuations on Cash                     |  |                               | 24.1  
|                                                                                  |  |                               |       
|Increase (Decrease) in Cash and Equivalents                                       |  |                               | 77.7  
|Cash and Equivalents at Beginning of Period                                       |  |                               | 395.1 
|                                                                                  |  |                               |       
|Cash and Equivalents at End of Period                                             |  | $                             | 472.8 
|                                                                                  |  |                               |       



See
accompanying notes.



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FEDERAL-MOGUL CORPORATION

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2003



|1. | BASIS OF PRESENTATION
|-- | ---------------------



Interim Financial Statements



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



New Accounting Pronouncements



Accounting for Costs Associated with Exit or Disposal Activities



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



Consolidation of Variable Interest
Entities



In January 2003, the FASB issued FASB
Interpretation Number 46 (FIN No. 46), Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements. FIN No. 46 provides guidance regarding the
identification of, and financial reporting for entities over which control is achieved through means other than voting rights; such entities are considered variable interest entities. FIN No. 46 requires the consolidation of variable interest
entities in which an enterprise is deemed to be the primary beneficiary, which is determined by the obligation to absorb a majority of the entitys expected losses, the right to receive a majority of an entitys expected residual returns
or both. For variable interest entities entered into prior to February 1, 2003, the provisions of FIN No. 46 are to be applied for the first quarterly or annual period ending after December 15, 2003.



The Company is involved with various entities that may meet the criteria of a
variable interest entity, principally, its joint ventures and operating leases. Management is currently evaluating such entities to determine whether consolidation is required under FIN No. 46 and to quantify the effect that adoption of FIN No. 46
will have on its consolidated financial statements.



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Investments in Non-Consolidated Entities



Equity investments that comprise more than 20% but less than 50% of the
outstanding equity of the investee are accounted for by the equity investment method and are not consolidated. Such investments aggregated $141.5 million and $129.7 million at September 30, 2003 and December 31, 2002, respectively, and are included
in the consolidated balance sheets as other noncurrent assets. Net income from non-consolidated equity investments was $6.2 million and $4.9 million for the quarters ended September 30, 2003 and 2002, respectively. Net income from
non-consolidated equity investments was $20.7 million and $15.9 million for the nine-month periods ended September 30, 2003 and 2002, respectively. Net income from non-consolidated equity investments is included in the statements of operations as
other income (expense), net.



|2. | VOLUNTARY REORGANIZATION UNDER CHAPTER 11 AND ADMINISTRATION
|-- | ------------------------------------------------------------



On October 1, 2001 (the Petition Date), Federal-Mogul Corporation and all of its wholly-owned United States subsidiaries filed voluntary
petitions for reorganization (the U.S. Restructuring) under Chapter 11 of the United States Bankruptcy Code (the Bankruptcy Code) in the United States Bankruptcy Court for the District of Delaware (the Bankruptcy
Court). Also on October 1, 2001, certain of the Companys United Kingdom subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code and petitions for Administration (the U.K.
Restructuring) under the United Kingdom Insolvency Act of 1986 (the Act) in the High Court of Justice, Chancery division in London, England (the High Court). The Company and its U.S. and 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(SLR)). The Chapter 11 Cases do not include any of the
Companys non-U.S. subsidiaries outside of the U.K. subsidiaries mentioned above.



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



Consequences of the Restructuring Proceedings



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



In the U.S., 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 Administrator has appointed a creditors committee, representing both asbestos claimants and general unsecured creditors.



As provided by the Bankruptcy Code, the Debtors initially had the exclusive right to propose a plan of reorganization within 120 days following the
Petition Date with the Bankruptcy Court. Through subsequent court orders, the Bankruptcy Court extended the exclusivity period through March 6, 2003, on which date a plan of reorganization was filed. The filing of the initial plan of reorganization
was followed by the April 21, 2003 filing of a related plan disclosure statement, which detailed the initial reorganization transaction and the U.K. scheme of arrangement. With the filing of the plan of reorganization, the Bankruptcy Court extended
the exclusivity period until August 11, 2003. On July 30, 2003, the Bankruptcy Court further extended this exclusivity period until October 13, 2003.



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On August 27, 2003, the Company announced a proposed $350 million investment in the Company by CitiGroup
Venture Capital Equity Partners L.P. and its affiliates (CVC) and filed a motion with the Bankruptcy Court requesting an exclusive 90 day negotiation period with CVC in order to pursue the potential transaction. This motion was denied by
the Bankruptcy Court on August 29, 2003.



On October 1, 2003,
the Bankruptcy Court issued an order ending the Companys exclusivity period. The effect of ending this exclusivity period is to permit the Committees, or other parties-in-interest, to file alternative plans of reorganization. Subsequently, the
Company reached a consensual agreement with the Unsecured Creditors Committee, the Asbestos Claimants Committee, the Future Asbestos Claimants Representative, the Agent for the Prepretion Bank Lenders and the Equity Committee (collectively referred
to as the Co-Proponents) on an amended plan of reorganization that is consistent with the principal terms of the plan filed on March 6, 2003. The next steps for the Co-Proponents will be completion of the documentation of the amended
plan of reorganization and related disclosure statement and the joint filing of those documents with the Bankruptcy Court. The Bankruptcy Court has scheduled a hearing to approve the disclosure statement prior to year-end.



Although technical issues remain to be resolved, the amended plan of
reorganization will provide that the noteholders and asbestos claimants, present and future, will convert all of their claims into equity of the reorganized Company. Specifically, 49.9% of newly authorized and issued stock will be distributed to the
noteholders, and 50.1% of newly authorized and issued stock will be distributed to a trust or series of trusts established pursuant to Section 524(g) of the Bankruptcy Code for the benefit of existing and future asbestos claimants. United States
trade creditors are expected to receive yet to be determined distributions under the consensual plan. Additionally, the amended plan of reorganization will provide for the cancellation of pre-petition equity interests in exchange for warrants in the
reorganized Company.



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



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



Chapter 11 Financing



In connection with the Restructuring Proceedings, the Company entered into a
$675 million debtor-in-possession (DIP) credit facility to supplement liquidity and fund operations during the restructuring proceedings. In August 2003, the DIP credit facility was amended to expire during February 2005, and the
interest rate was reduced 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 original $675 million commitment was reduced to $600 million in connection with the August 2003 facility amendment, and 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. The borrowing base
available to the Company is



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calculated weekly based upon the value of this underlying collateral. The total commitment and amounts outstanding on the DIP credit facility are as follows
(in millions of dollars):



|                                               |  | September 302003 |       | December 312002 |  
|---------------------------------------------- |  | ---------------- | ----- | --------------- | -
|Contractual commitment                         |  | $                | 600.0 |                 | $
|Mandatory commitment reductions  divestitures |  |                  |      |                 |  
|                                               |  |                  |       |                 |  
|Current commitment                             |  | $                | 600.0 |                 | $
|                                               |  |                  |       |                 |  
|Outstanding:                                   |  |                  |       |                 |  
|Current borrowings                             |  | $                | 310.0 |                 | $
|Letters of credit                              |  |                  | 17.9  |                 |  
|                                               |  |                  |       |                 |  
|Total outstanding                              |  |                  | 327.9 |                 |  
|Available to borrow                            |  |                  | 240.5 |                 |  
|                                               |  |                  |       |                 |  
|Total borrowing base                           |  | $                | 568.4 |                 | $
|                                               |  |                  |       |                 |  



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



Financial Statement Presentation



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



Virtually all of the Companys pre-petition debt is in default. At
September 30, 2003, the Debtors pre-petition debt is classified under the caption Liabilities subject to compromise. This includes debt outstanding of $1,905.3 million under the pre-petition Senior Credit Agreements and $2,118.1
million of other outstanding debt, primarily notes payable at various unsecured rates, less capitalized debt issuance fees of $33.0 million. The carrying value of the pre-petition debt will be adjusted once it has become an allowed claim by the
Bankruptcy Court to the extent the related carrying value differs from the amount of the allowed claim. Such adjustment may be material to the consolidated financial statements.



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



As
reflected in the consolidated financial statements, Liabilities subject to compromise refers to Debtors liabilities incurred prior to the commencement of the Restructuring Proceedings. The amounts of the various liabilities that
are subject to compromise are set forth below. These amounts represent the Companys estimate of known or potential pre-petition claims to be resolved in connection with the Restructuring Proceedings. Such claims



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remain subject to future adjustments. Future adjustments may result from (i) negotiations; (ii) actions of the Bankruptcy Court, High Court or Administrator;
(iii) further developments with respect to disputed claims; (iv) rejection of executory contracts and unexpired leases; (v) the determination as to the value of any collateral securing claims; (vi) proofs of claim; or (vii) other events. Payment
terms for these claims will be established in connection with the Restructuring Proceedings.



Liabilities subject to compromise are comprised of (in millions of dollars):



|                                                    |  | September 302003 |         | December 312002
|--------------------------------------------------- |  | ---------------- | ------- | ---------------
|Debt                                                |  | $                | 3,990.4 |                
|Asbestos liabilities                                |  |                  | 1,571.2 |                
|Company-obligated mandatorily redeemable securities |  |                  | 211.0   |                
|Accounts payable                                    |  |                  | 199.8   |                
|Interest payable                                    |  |                  | 43.0    |                
|Environmental liabilities                           |  |                  | 27.3    |                
|Other liabilities                                   |  |                  | 20.4    |                
|                                                    |  |                  |         |                
|Subtotal                                            |  |                  | 6,063.1 |                
|Intercompany payables to Affiliates                 |  |                  | 3,128.1 |                
|                                                    |  |                  |         |                
|Liabilities subject to compromise                   |  | $                | 9,191.2 |                
|                                                    |  |                  |         |                



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



|                                                 |  | Three Months Ended September 30 |      | Nine Months Ended September 30
|------------------------------------------------ |  | ------------------------------- | ---- | ------------------------------
|                                                 |  | 2003                            |      | 2002                          
|Professional fees directly related to the filing |  | $                               | 23.5 |                               
|Critical employee retention costs                |  |                                 | 1.4  |                               
|Other directly related costs                     |  |                                 | 0.8  |                               
|                                                 |  |                                 |      |                               
|Total                                            |  | $                               | 25.7 |                               
|                                                 |  |                                 |      |                               



In December 2001, the
Company filed with the Bankruptcy Court its schedules of assets and liabilities. Subsequently, the Bankruptcy Court scheduled March 3, 2003 as the property and general bar date for the filing of proofs of claim against the U.S. Debtors.



Approximately 10,500 proofs of claim totaling approximately $158.5 billion
alleging a right to payment from a Debtor were filed in connection with the March 3, 2003 bar date as follows:



| |  | Approximately 2,000 claims, totaling approximately $141.5 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 $4.2 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.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  | 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 Company has not completed its evaluation of the approximate remaining
2,200 claims, totaling approximately $1.3 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. To date, 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.



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.



Debtors Financial Statements



The condensed combined financial statements of the Debtors are presented below. These statements reflect the financial position, results of operations and cash flows of the combined Debtor subsidiaries, including certain amounts and
activities between Debtors and non-Debtor subsidiaries of the Company, which are eliminated in the consolidated financial statements.



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Federal-Mogul Corporation

Debtors Condensed Consolidated Statements of Operations (Unaudited)

(Millions of Dollars)

|                                                                                                                                     |  | Three Months Ended September 30 |       |   | Nine Months Ended September 30 |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------- | ----- | - | ------------------------------ | -
|                                                                                                                                     |  | 2003                            |       |   | 2002                           |  
|Net sales                                                                                                                            |  | $                               | 850.8 |   |                                | $
|Cost of products sold                                                                                                                |  |                                 | 717.5 |   |                                |  
|                                                                                                                                     |  |                                 |       |   |                                |  
|Gross margin                                                                                                                         |  |                                 | 133.3 |   |                                |  
|Selling, general and administrative expenses                                                                                         |  |                                 | 138.8 |   |                                |  
|Restructuring charges                                                                                                                |  |                                 |      |   |                                |  
|Adjustment of assets held for sale and other long-lived assets to fair value                                                         |  |                                 | 0.6   |   |                                |  
|Interest expense, net                                                                                                                |  |                                 | 21.8  |   |                                |  
|Chapter 11 and Administration related reorganization expenses                                                                        |  |                                 | 25.7  |   |                                |  
|Intercompany interest income from non-filers                                                                                         |  |                                 | (80.3 | ) |                                |  
|Other (income) expense, net                                                                                                          |  |                                 | 0.5   |   |                                |  
|                                                                                                                                     |  |                                 |       |   |                                |  
|Earnings (loss) before income taxes, equity loss of non-Debtor subsidiaries, and cumulative effect of change in accounting
principle |  |                                 | 26.2  |   |                                |  
|Income tax (benefit) expense                                                                                                         |  |                                 | 3.3   |   |                                |  
|                                                                                                                                     |  |                                 |       |   |                                |  
|Earnings (loss) before equity loss of non-Debtor subsidiaries and cumulative effect of change in accounting
principle                |  |                                 | 22.9  |   |                                |  
|Equity loss of non-Debtor subsidiaries before cumulative effect of change in accounting principle                                    |  |                                 | (52.4 | ) |                                |  
|                                                                                                                                     |  |                                 |       |   |                                |  
|Loss before cumulative effect of change in accounting principle                                                                      |  |                                 | (29.5 | ) |                                |  
|Cumulative effect of change in accounting principle, Debtors, net of applicable income tax benefit                                   |  |                                 |      |   |                                |  
|Cumulative effect of change in accounting principle, non-Debtors, net of applicable income tax benefit                               |  |                                 |      |   |                                |  
|                                                                                                                                     |  |                                 |       |   |                                |  
|Net Loss                                                                                                                             |  | $                               | (29.5 | ) |                                | $
|                                                                                                                                     |  |                                 |       |   |                                |  



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Federal-Mogul Corporation

Debtors Condensed Consolidated Balance Sheets

(Millions of Dollars)



|                                                             |  | (Unaudited)September 30 2003 |          |   | December 31 2002 |  
|------------------------------------------------------------ |  | ---------------------------- | -------- | - | ---------------- | -
|                                                             |  |                             
|ASSETS                                                       |  |                              |          |   |                  |  
|Cash and equivalents                                         |  | $                            | 242.4    |   |                  | $
|Accounts receivable, net                                     |  |                              | 580.2    |   |                  |  
|Accounts receivable, non-Debtors                             |  |                              | 402.4    |   |                  |  
|Inventories, net                                             |  |                              | 430.6    |   |                  |  
|Prepaid expenses and other current assets                    |  |                              | 104.4    |   |                  |  
|                                                             |  |                              |          |   |                  |  
|Total Current Assets                                         |  |                              | 1,760.0  |   |                  |  
|Property, plant and equipment, net                           |  |                              | 1,131.3  |   |                  |  
|Goodwill and indefinite-lived intangible assets              |  |                              | 1,378.0  |   |                  |  
|Definite-lived intangible assets, net                        |  |                              | 293.9    |   |                  |  
|Asbestos-related insurance recoverable                       |  |                              | 801.3    |   |                  |  
|Loans receivable and investments in non-Debtors              |  |                              | 4,514.0  |   |                  |  
|Other noncurrent assets                                      |  |                              | 448.3    |   |                  |  
|                                                             |  |                              |          |   |                  |  
|Total Assets                                                 |  | $                            | 10,326.8 |   |                  | $
|                                                             |  |                              |          |   |                  |  
|                                                             |  |                             
|LIABILITIES AND SHAREHOLDERS DEFICIT                        |  |                              |          |   |                  |  
|Short-term debt, including current portion of long-term debt |  | $                            |         |   |                  | $
|Accounts payable and accrued compensation                    |  |                              | 260.4    |   |                  |  
|Accounts payable, non-Debtors                                |  |                              | 148.0    |   |                  |  
|Other accrued liabilities                                    |  |                              | 251.5    |   |                  |  
|                                                             |  |                              |          |   |                  |  
|Total Current Liabilities                                    |  |                              | 659.9    |   |                  |  
|Postemployment benefits                                      |  |                              | 1,357.5  |   |                  |  
|Long-term debt                                               |  |                              | 310.0    |   |                  |  
|Other accrued liabilities                                    |  |                              | 122.3    |   |                  |  
|Liabilities subject to compromise                            |  |                              | 9,191.2  |   |                  |  
|Shareholders Deficit                                        |  |                              | (1,314.1 | ) |                  |  
|                                                             |  |                              |          |   |                  |  
|Total Liabilities and Shareholders Deficit                  |  | $                            | 10,326.8 |   |                  | $
|                                                             |  |                              |          |   |                  |  



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Federal-Mogul Corporation

Debtors Condensed Consolidated Statement of Cash Flows (Unaudited)

(Millions of Dollars)



|                                                              |  | Nine Months Ended September 30 |       
|------------------------------------------------------------- |  | ------------------------------ | ------
|                                                              |  | 2003                           |       
|Net Cash Provided From Operating Activities                   |  | $                              | 145.4 
|                                                              |  |                               
|Cash Provided From (Used By) Investing Activities             |  |                                |       
|Expenditures for property, plant and equipment                |  |                                | (109.8
|Net proceeds from sales of businesses                         |  |                                | 16.0  
|                                                              |  |                                |       
|Net Cash Used By Investing Activities                         |  |                                | (93.8 
|                                                              |  |                               
|Cash Provided From (Used By) Financing Activities             |  |                                |       
|Borrowings on DIP credit facility                             |  |                                | 105.5 
|Principal payments on DIP credit facility                     |  |                                | (110.2
|                                                              |  |                                |       
|Net Cash Used By Financing Activities                         |  |                                | (4.7  
|Effect of Foreign Currency Exchange Rate Fluctuations on Cash |  |                                | 5.9   
|                                                              |  |                                |       
|Increase (Decrease) in Cash and Equivalents                   |  |                                | 52.8  
|Cash and Equivalents at Beginning of Period                   |  |                                | 189.6 
|                                                              |  |                                |       
|Cash and Equivalents at End of Period                         |  | $                              | 242.4 
|                                                              |  |                                |       



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|3. | INCOME TAXES
|-- | ------------



For the nine months ended September 30, 2003, the Company recorded income tax expense of $51.6 million on a loss of $17.2 million before income taxes.
This compares to income tax expense of $59.8 million on a loss of $38.7 million before income taxes and cumulative effect of change in accounting principle in the same period of 2002. Income tax expense for the nine month period ended September 30,
2003 resulted primarily from the recognition of income tax expense on earnings in certain foreign jurisdictions without the recognition of income tax benefits on current losses in the U.K. and other countries.



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



|                           |  | September 302003 |         |   | December 312002 |  
|-------------------------- |  | ---------------- | ------- | - | --------------- | -
|Deferred tax assets        |  | $                | 1,486.3 |   |                 | $
|Valuation allowance        |  |                  | (753.4  | ) |                 |  
|                           |  |                  |         |   |                 |  
|Net deferred tax assets    |  |                  | 732.9   |   |                 |  
|Deferred tax liabilities   |  |                  | (810.3  | ) |                 |  
|                           |  |                  |         |   |                 |  
|Net deferred tax liability |  | $                | (77.4   | ) |                 | $
|                           |  |                  |         |   |                 |  



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



|                                          |  | September 302003 |       |   | December 312002 |  
|----------------------------------------- |  | ---------------- | ----- | - | --------------- | -
|Assets                                    |  |                  |       |   |                 |  
|Prepaid expenses and other current assets |  | $                | 7.8   |   |                 | $
|Other noncurrent assets                   |  |                  | 16.8  |   |                 |  
|Liabilities                               |  |                  |       |   |                 |  
|Other accrued liabilities - current       |  |                  | (41.0 | ) |                 |  
|Deferred income taxes                     |  |                  | (61.0 | ) |                 |  
|                                          |  |                  |       |   |                 |  
|Net deferred tax liability                |  | $                | (77.4 | ) |                 | $
|                                          |  |                  |       |   |                 |  



|4. | OPERATIONS BY REPORTABLE SEGMENT
|-- | --------------------------------



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



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



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



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



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



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Other includes Asia Pacific and other Corporate functions.



DivestedOperations include the historical operating results of
the Companys divestitures.



The Company has aggregated
certain individual product segments within its six reportable segments. The accounting policies of the segments are the same as that of the Company. Revenues related to Powertrain, Sealing Systems and Systems Protection, and Friction 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.



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



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



|                                            |  | Net Sales                      
|------------------------------------------- |  | -------------------------------
|                                            |  | Three Months Ended September 30
|                                            |  | 2003                           
|Powertrain                                  |  | $                              
|Sealing Systems and Systems Protection      |  |                                
|Friction                                    |  |                                
|Aftermarket                                 |  |                                
|Other, including Asia Pacific and Corporate |  |                                
|Divested Operations                         |  |                                
|                                            |  |                                
|Total                                       |  | $                              
|                                            |  |                                



|                                            |  | Gross Margin                  |      
|------------------------------------------- |  | ----------------------------- | -----
|                                            |  | Three MonthsEndedSeptember 30 |      
|                                            |  | 2003                          |      
|Powertrain                                  |  | $                             | 58.2 
|Sealing Systems and Systems Protection      |  |                               | 18.7 
|Friction                                    |  |                               | 26.9 
|Aftermarket                                 |  |                               | 149.9
|Other, including Asia Pacific and Corporate |  |                               | (3.7 
|Divested Operations                         |  |                               | 0.6  
|                                            |  |                               |      
|Total                                       |  | $                             | 250.6
|                                            |  |                               |      



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



|                                                                                                                                        |  | Operational EBIT               |      
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | -----
|                                                                                                                                        |  | Three MonthsEnded September 30 |      
|                                                                                                                                        |  | 2003                           |      
|Powertrain                                                                                                                              |  | $                              | 27.5 
|Sealing Systems and Systems Protection                                                                                                  |  |                                | 0.4  
|Friction                                                                                                                                |  |                                | 12.3 
|Aftermarket                                                                                                                             |  |                                | 86.5 
|Other, including Asia Pacific and Corporate                                                                                             |  |                                | (82.4
|Divested Operations                                                                                                                     |  |                                | (2.0 
|                                                                                                                                        |  |                                |      
|Total Operational EBIT                                                                                                                  |  |                                | 42.3 
|                                                                                                                                        |  |                                |      
|Items required to reconcile Operational EBIT to loss before income tax expense and cumulative effect of change in accounting
principle: |  |                                |      
|Interest expense, net                                                                                                                   |  |                                | (23.1
|Restructuring charges                                                                                                                   |  |                                | (8.1 
|Chapter 11 and Administration related reorganization expenses                                                                           |  |                                | (25.7
|Other                                                                                                                                   |  |                                | (2.4 
|                                                                                                                                        |  |                                |      
|Loss before income tax expense and cumulative effect of change in accounting principle                                                  |  | $                              | (17.0
|                                                                                                                                        |  |                                |      



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



|                                       |  | September 302003 |         | December 312002
|-------------------------------------- |  | ---------------- | ------- | ---------------
|Powertrain                             |  | $                | 1,883.1 |                
|Sealing Systems and Systems Protection |  |                  | 1,256.9 |                
|Friction                               |  |                  | 666.5   |                
|Aftermarket                            |  |                  | 2,826.4 |                
|Other, including Corporate             |  |                  | 1,419.4 |                
|                                       |  |                  |         |                
|Total Assets                           |  | $                | 8,052.3 |                
|                                       |  |                  |         |                



|5. | COMPREHENSIVE INCOME (LOSS)
|-- | ---------------------------



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



|                                         |  | Three MonthsEnded September 30 |       |   | Nine Months Ended September 30 |  
|---------------------------------------- |  | ------------------------------ | ----- | - | ------------------------------ | -
|                                         |  | 2003                           |       |   | 2002                           |  
|Net loss                                 |  | $                              | (29.5 | ) |                                | $
|Foreign currency translation adjustments |  |                                | 0.2   |   |                                |  
|                                         |  |                                |       |   |                                |  
|Total Comprehensive Income (Loss)        |  | $                              | (29.3 | ) |                                | $
|                                         |  |                                |       |   |                                |  



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|6. | LOSS PER SHARE
|-- | --------------



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



|                                                                                                                                                     |  | Three MonthsEndedSeptember 30 |       |   | Nine MonthsEnded September 30 |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------- | ----- | - | ----------------------------- | -
|                                                                                                                                                     |  | 2003                          |       |   | 2002                          |  
|Numerator:                                                                                                                                           |  |                               |       |   |                               |  
|Net Loss                                                                                                                                             |  | $                             | (29.5 | ) |                               | $
|Cumulative effect of change in accounting principle, net of applicable income tax benefit                                                            |  |                               |      |   |                               |  
|                                                                                                                                                     |  |                               |       |   |                               |  
|Numerator for basic and diluted loss per share  loss attributable to common shareholders before cumulative effect of change
in accounting principle |  | $                             | (29.5 | ) |                               | $
|                                                                                                                                                     |  |                               |       |   |                               |  
|Numerator for basic and diluted loss per share                                                                                                       |  | $                             | (29.5 | ) |                               | $
|                                                                                                                                                     |  |                               |       |   |                               |  
|Denominator:                                                                                                                                         |  |                               |       |   |                               |  
|Denominator for basic and diluted loss per share  weighted average shares (in millions)                                                             |  |                               | 87.1  |   |                               |  
|                                                                                                                                                     |  |                               |       |   |                               |  
|Basic and Diluted loss per share before cumulative effect of change in accounting principle                                                          |  | $                             | (0.34 | ) |                               | $
|                                                                                                                                                     |  |                               |       |   |                               |  
|Basic and Diluted loss per share                                                                                                                     |  | $                             | (0.34 | ) |                               | $
|                                                                                                                                                     |  |                               |       |   |                               |  



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



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|7. | INCENTIVE STOCK PLANS
|-- | ---------------------



The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and
related interpretations in accounting for its employee stock awards. Accordingly, no compensation cost has been recognized for its stock option grants, as the exercise price of the Companys employee stock options equals the underlying stock
price on the date of grant. Had compensation cost for the Companys stock-based compensation plans been determined based on the fair value at the grant dates for awards granted in 2000 and 2001 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 would have been adjusted to the pro forma amounts below (in millions of dollars, except per share amounts):



|                                                                |  | Three MonthsEndedSeptember 30 |       |   | Nine Months Ended September 30 |  
|--------------------------------------------------------------- |  | ----------------------------- | ----- | - | ------------------------------ | -
|                                                                |  | 2003                          |       |   | 2002                           |  
|Net loss as reported                                            |  | $                             | (29.5 | ) |                                | $
|Additional compensation expense for fair value of stock options |  |                               | (0.1  | ) |                                |  
|                                                                |  |                               |       |   |                                |  
|Pro forma net loss                                              |  | $                             | (29.6 | ) |                                | $
|                                                                |  |                               |       |   |                                |  
|Basic and diluted loss per share as reported                    |  | $                             | (0.34 | ) |                                | $
|                                                                |  |                               |       |   |                                |  
|Pro forma basic and diluted loss per share                      |  | $                             | (0.34 | ) |                                | $
|                                                                |  |                               |       |   |                                |  



|8. | ASBESTOS LIABILITY AND LEGAL PROCEEDINGS
|-- | ----------------------------------------



T&N Companies Asbestos Litigation



Background



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



Recorded Liability



In 2000, the Company increased its estimate of asbestos-related liability
for the T&N Companies by $751 million and recorded a related insurance recoverable asset of $577 million. The revision in the estimate of probable asbestos-related liability principally resulted from a study performed by an econometric firm that
specializes in these types of matters. The liability (approximately $1.4 billion as of September 30, 2003) represented the Companys estimate prior to the Restructuring Proceedings for claims currently pending and those which were reasonably
estimated to be asserted and paid through 2012. The Company did not provide a liability for claims that may be paid subsequent to this period as it could not reasonably estimate such claims. In estimating the liability prior to the Restructuring
Proceedings, the Company made assumptions regarding the total number of claims anticipated to be received in a future period, the typical cost of settlement (which is sensitive to the industry in which the plaintiff claims exposure, the alleged
disease type and the jurisdiction in which the action is being brought), the rate of receipt of claims, the settlement strategy in dealing with outstanding claims and the timing of settlements. As a result of the Restructuring Proceedings (see Note
2), 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



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respect to asbestos-related lawsuits. An asbestos creditors committee has been appointed in the U.S. representing asbestos claimants with pending
claims against the Company, and the Bankruptcy Court has appointed a legal representative for the interests of potential future asbestos claimants. In the U.K. a creditors committee consisting in large part of representatives of asbestos claimants
has been appointed. March 3, 2003 was the bar date for the filing of all asbestos-related property damage claims. As part of the Restructuring Proceedings, it will be determined which asbestos claims should be allowed, or compensated, and the
aggregate value of such claims. The Companys obligations with respect to present and future claims could be determined through litigation in Bankruptcy Court, the High Court, and/or through negotiations with each of the official committees
appointed.



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



Except for 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 September 30, 2003 for the Companys U.S. and U.K. subsidiaries.



While the Company believes that the liability recorded was appropriate for
anticipated losses arising from asbestos-related claims against the T&N Companies through 2012, it is the Companys view that, as a result of the Restructuring Proceedings, there is even greater uncertainty in estimating the future asbestos
liability and related insurance recovery for pending and future claims. There are significant differences in the treatment of asbestos claims in a bankruptcy proceeding as compared to the tort litigation system. Among other things, it is uncertain
at this time as to the number of asbestos-related claims that will be filed in the Restructuring Proceedings, the number of future claims that will be included in a plan of reorganization, how claims for punitive damages and claims by persons with
no asbestos-related physical impairment will be treated and whether such claims will be allowed, and the impact that historical settlement values for asbestos claims may have on the estimation of asbestos liability in the 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 September 30, 2003, the recorded insurance recoverable was $631.5 million. In December 2001, one of the three reinsurers filed suit in a London, England court to challenge the validity of its
insurance contract with the T&N Companies. This trial commenced in October 2003. In December 2002, the remaining two reinsurers issued separate declaratory proceedings seeking clarification of policy requirements related to the Asbestos
Liability Policy. The Company believes that, based on its review of the insurance policies and advice from outside legal counsel, it is probable that the T&N Companies will be entitled to receive payment from the reinsurers for the cost of the
claims in excess of the trigger point of the insurance.



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



The Company has
reviewed the financial viability and legal obligations of the three reinsurance companies involved and has concluded that currently there is little risk that the reinsurers will not be able to meet their obligation to pay, once the claims filed
after June 30, 1996 exceed the £690 million trigger point. The U.S. claims costs applied against this policy are converted at a fixed exchange rate of $1.69/£. As such, if the market exchange rate is less then $1.69/£, the
Company will effectively have a discount from 100% recovery on claims paid. As of September 30, 2003, the $631.5 million insurance recoverable asset is net of an exchange rate discount of approximately $10.6 million.



Abex and Wagner Asbestos Litigation



Background



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



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



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



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



Recorded Liability



The liability (comprised of $129.5 million in Abex liabilities and $85.0 million in Wagner liabilities as of September 30,
2003) represented the Companys estimate prior to the Restructuring Proceedings for claims currently pending and those which were reasonably estimated to be asserted and paid through 2012. The Company did not provide a liability for claims that
may be 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



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the total number of claims anticipated to be received in a future period, the typical cost of settlement (which is sensitive to the industry in which the
plaintiff claims exposure, the alleged disease type and the jurisdiction in which the action is being brought), the rate of receipt of claims, the settlement strategy in dealing with outstanding claims and the timing of settlements.



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



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



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



Insurance Recoverable



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



Wagner also maintained product liability
insurance coverage for some of the time that it manufactured products that contained asbestos. This coverage is shared with other third-party companies. The subsidiary of the Company that may be liable for asbestos claims against Wagner has the
benefit of that insurance, subject to the rights of other potential insureds under the policies. Primary layer liability insurance coverage for asbestos claims against Wagner is the subject of an agreement with Wagners solvent primary
carriers. The agreement provides for partial reimbursement of indemnity and defense costs for Wagner asbestos claims until exhaustion of aggregate limits. Wagner also has substantial excess layer liability insurance coverage which, barring
unforeseen insolvencies of excess carriers or other adverse events, should provide coverage for asbestos claims against Wagner. The Wagner insurance recoverable was $53.5 million as of September 30, 2003.



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



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



Federal-Mogul and Fel-Pro Asbestos Litigation



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



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



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



Aggregate of Asbestos Liability and Insurance Recoverable Asset



The following is a summary of the asbestos liability and the insurance recoverable asset as of December 31, 2002 and
September 30, 2003 (in millions of dollars):



|                              |  | T&N Companies |         | Abex |   | Wagner |  | Other |      | Total
|----------------------------- |  | ------------- | ------- | ---- | - | ------ |  | ----- | ---- | -----
|Liability:                    |  |              
|Balance at December 31, 2002  |  | $             | 1,347.9 |      | $ | 129.5  |  | $     | 85.0 |      
|Foreign exchange              |  |               | 6.1     |      |   |       |  |       |     |      
|                              |  |               |         |      |   |        |  |       |      |      
|Balance at September 30, 2003 |  | $             | 1,354.0 |      | $ | 129.5  |  | $     | 85.0 |      
|                              |  |               |         |      |   |        |  |       |      |      
|Asset:                        |  |               |         |      |   |        |  |       |      |      
|Balance at December 31, 2002  |  | $             | 610.8   |      | $ | 116.3  |  | $     | 53.5 |      
|Foreign exchange              |  |               | 20.7    |      |   |       |  |       |     |      
|                              |  |               |         |      |   |        |  |       |      |      
|Balance at September 30, 2003 |  | $             | 631.5   |      | $ | 116.3  |  | $     | 53.5 |      
|                              |  |               |         |      |   |        |  |       |      |      



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



Other Legal Matters



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



Environmental Matters



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



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



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



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



Environmental reserves were $67.3 million and $64.6 million as of September 30, 2003 and December 31, 2002, respectively.
Management believes that such reserves will be adequate to cover the Companys estimated liability for its exposure in respect to such matters. In the event that such liabilities were to significantly exceed the amounts recorded by the Company,
the Companys results of operations and financial condition could be materially affected. As a result of the Restructuring Proceedings, $27.3 million and $22.9 million of environmental reserves as of September 30, 2003 and December 31, 2002,
respectively, have been classified as liabilities subject to compromise in the consolidated balance sheet.



|9. | INVENTORIES
|-- | -----------



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



|                        |  | September 30 2003 |       |   | December 31 2002 |  
|----------------------- |  | ----------------- | ----- | - | ---------------- | -
|Raw materials           |  | $                 | 164.3 |   |                  | $
|Work-in-process         |  |                   | 132.6 |   |                  |  
|Finished products       |  |                   | 565.2 |   |                  |  
|                        |  |                   |       |   |                  |  
|                        |  |                   | 862.1 |   |                  |  
|Reserves and allowances |  |                   | (60.2 | ) |                  |  
|                        |  |                   |       |   |                  |  
|                        |  | $                 | 801.9 |   |                  | $
|                        |  |                   |       |   |                  |  



|10. | RESTRUCTURING
|--- | -------------



The Company recorded $28 million of restructuring charges during the first nine months of 2003. These charges primarily consisted of severance costs for
European and North American site consolidation and headcount reduction programs. Aftermarket recorded $14 million of these charges, and Powertrain recorded $10 million of these charges. Restructuring charges for Sealing Systems and Systems
Protection totaled $4 million for the nine-month period ending September 30, 2003 primarily relating to previously announced programs.



Total employee reductions for all current Company restructuring programs are expected to be approximately 3,300 of which approximately 2,900 have been
terminated as of September 30, 2003.



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



|Balance of restructuring reserves as of December 31, 2002  |  | $ | 90.8  |  
|---------------------------------------------------------- |  | - | ----- | -
|Restructuring charges                                      |  |   | 10.3  |  
|Effect of foreign exchange                                 |  |   | 0.5   |  
|Payments against restructuring reserves                    |  |   | (17.4 | )
|                                                           |  |   |       |  
|Balance of restructuring reserves as of March 31, 2003     |  |   | 84.2  |  
|Restructuring charges                                      |  |   | 9.9   |  
|Effect of foreign exchange                                 |  |   | 3.4   |  
|Payments against restructuring reserves                    |  |   | (20.2 | )
|                                                           |  |   |       |  
|Balance of restructuring reserves as of June 30, 2003      |  |   | 77.3  |  
|Restructuring charges                                      |  |   | 8.1   |  
|Effect of foreign exchange                                 |  |   |      |  
|Payments against restructuring reserves                    |  |   | (21.5 | )
|                                                           |  |   |       |  
|Balance of restructuring reserves as of September 30, 2003 |  | $ | 63.9  |  
|                                                           |  |   |       |  



|11. | ACQUISITION AND DIVESTITURES
|--- | ----------------------------



On January 30, 2003, the Company announced that it had entered into a letter of intent to acquire principally all of the Bendix friction materials
business of Honeywell International, Inc. (Honeywell). The terms of the transaction are under negotiation, and the Company continues to assess the acquisition and work with Honeywell and the Companys appointed committees in the
Restructuring Proceedings to finalize the terms of the transaction. The Company continues to make progress on satisfying the regulatory conditions to the transaction. The consummation of this acquisition is expressly conditional upon Honeywell
receiving a bankruptcy court-issued permanent injunction shielding it from all current and future asbestos liabilities related to the friction materials business. In addition, the completion of the acquisition is subject to Bankruptcy Court
approval. The Bendix friction business has annual sales of approximately $700 million, and includes 13 manufacturing plants and 5 major engineering facilities in nine countries. In September 2003, in response to this proposed transaction,
DaimlerChrysler Corporation, Ford Motor Company and General Motors Corporation jointly filed suit against the Company and Honeywell International, Inc. seeking declaratory judgment to enjoin the transaction. The Company continues to evaluate the
bases for the claims.



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



During the third quarter of 2003, the Company divested of its lighting
operations located in Hampton, Virginia and Solon, Ohio. These divested operations had 2003 year-to-date net sales of $32.7 million compared to $34.3 million for the same period of 2002. The Company received aggregate net cash proceeds of $2.1
million and recognized an aggregate loss of $0.8 million for its divestitures in the third quarter of 2003.



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|12. | CONSOLIDATING CONDENSED FINANCIAL INFORMATION OF GUARANTOR SUBSIDIARIES
|--- | -----------------------------------------------------------------------



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



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



The Company issued
notes in 1998 and 1999 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 unaudited consolidating condensed financial statements based on the Companys understanding of the Securities and Exchange Commissions interpretation and application of
Rule 3-10 of the Securities and Exchange Commissions Regulation S-X and Staff Accounting Bulletin 53. Management does not believe that separate financial statements of the Guarantor Subsidiaries are material to investors. Therefore, separate
financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented.



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



As a result of the Restructuring Proceedings (see Note 2 Voluntary
Reorganization Under Chapter 11 and Administration) certain pre-petition liabilities, as shown below, were liabilities subject to compromise as of September 30, 2003 (in millions of dollars):



|                                                    |  | Parent |         | GuarantorSubsidiaries |   | Non-GuarantorSubsidiaries |  | Consolidated
|--------------------------------------------------- |  | ------ | ------- | --------------------- | - | ------------------------- |  | ------------
|Debt                                                |  | $      | 3,989.4 |                       | $ | 1.0                       |  | $           
|Asbestos liabilities                                |  |        | 1.4     |                       |   | 237.7                     |  |             
|Company-obligated mandatorily redeemable securities |  |        |        |                       |   |                          |  |             
|Accounts payable                                    |  |        | 57.5    |                       |   | 115.0                     |  |             
|Interest payable                                    |  |        | 42.8    |                       |   | 0.2                       |  |             
|Environmental liabilities                           |  |        | 26.8    |                       |   |                          |  |             
|Other liabilities                                   |  |        | 6.2     |                       |   | 1.2                       |  |             
|                                                    |  |        |         |                       |   |                           |  |             
|Liabilities subject to compromise                   |  | $      | 4,124.1 |                       | $ | 355.1                     |  | $           
|                                                    |  |        |         |                       |   |                           |  |             



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Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Operations

Three Months Ended September 30, 2003

(Millions of Dollars)



|                                                                                  |  | (Unconsolidated) |       |   |                       |   |       |                           | 
|--------------------------------------------------------------------------------- |  | ---------------- | ----- | - | --------------------- | - | ----- | ------------------------- | 
|                                                                                  |  | Parent           |       |   | GuarantorSubsidiaries |   |       | Non-GuarantorSubsidiaries | 
|Net sales                                                                         |  | $                | 265.3 |   |                       | $ | 406.6 |                           | 
|Cost of products sold                                                             |  |                  | 223.1 |   |                       |   | 322.1 |                           | 
|                                                                                  |  |                  |       |   |                       |   |       |                           | 
|Gross margin                                                                      |  |                  | 42.2  |   |                       |   | 84.5  |                           | 
|Selling, general and administrative expenses                                      |  |                  | 66.7  |   |                       |   | 54.8  |                           | 
|Restructuring charges                                                             |  |                  |      |   |                       |   | 1.6   |                           | 
|Adjustment of assets held for sale and other long-lived assets to fair value      |  |                  |      |   |                       |   | 0.6   |                           | 
|Interest expense (income), net                                                    |  |                  | 23.3  |   |                       |   |      |                           | 
|Chapter 11 and Administration related reorganization expenses                     |  |                  | 25.7  |   |                       |   |      |                           | 
|Other expense (income), net                                                       |  |                  | (11.6 | ) |                       |   | (29.1 | )                         | 
|                                                                                  |  |                  |       |   |                       |   |       |                           | 
|Earnings (loss) before income taxes and equity in earnings (loss) of subsidiaries |  |                  | (61.9 | ) |                       |   | 56.6  |                           | 
|Income tax expense                                                                |  |                  | 1.2   |   |                       |   | 1.0   |                           | 
|                                                                                  |  |                  |       |   |                       |   |       |                           | 
|Earnings (loss) before equity in earnings (loss) of subsidiaries                  |  |                  | (63.1 | ) |                       |   | 55.6  |                           | 
|Equity in earnings (loss) of subsidiaries                                         |  |                  | 33.6  |   |                       |   | 11.5  |                           | 
|                                                                                  |  |                  |       |   |                       |   |       |                           | 
|Net Earnings (Loss)                                                               |  | $                | (29.5 | ) |                       | $ | 67.1  |                           | 
|                                                                                  |  |                  |       |   |                       |   |       |                           | 



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Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Operations

Nine Months Ended September 30, 2003

(Millions of Dollars)



|                                                                                  |  | (Unconsolidated) |        |   |                       |   |         |                           | 
|--------------------------------------------------------------------------------- |  | ---------------- | ------ | - | --------------------- | - | ------- | ------------------------- | 
|                                                                                  |  | Parent           |        |   | GuarantorSubsidiaries |   |         | Non-GuarantorSubsidiaries | 
|Net sales                                                                         |  | $                | 838.2  |   |                       | $ | 1,254.0 |                           | 
|Cost of products sold                                                             |  |                  | 690.4  |   |                       |   | 975.9   |                           | 
|                                                                                  |  |                  |        |   |                       |   |         |                           | 
|Gross margin                                                                      |  |                  | 147.8  |   |                       |   | 278.1   |                           | 
|Selling, general and administrative expenses                                      |  |                  | 226.1  |   |                       |   | 162.2   |                           | 
|Restructuring charges                                                             |  |                  |       |   |                       |   | 2.2     |                           | 
|Adjustment of assets held for sale and other long-lived assets to fair value      |  |                  |       |   |                       |   | 0.7     |                           | 
|Interest expense (income), net                                                    |  |                  | 76.3   |   |                       |   |        |                           | 
|Chapter 11 and Administration related reorganization expenses                     |  |                  | 85.4   |   |                       |   |        |                           | 
|Other expense (income), net                                                       |  |                  | (26.7  | ) |                       |   | (89.6   | )                         | 
|                                                                                  |  |                  |        |   |                       |   |         |                           | 
|Earnings (loss) before income taxes and equity in earnings (loss) of subsidiaries |  |                  | (213.3 | ) |                       |   | 202.6   |                           | 
|Income tax expense                                                                |  |                  | 3.6    |   |                       |   | 2.9     |                           | 
|                                                                                  |  |                  |        |   |                       |   |         |                           | 
|Earnings (loss) before equity in earnings (loss) of subsidiaries                  |  |                  | (216.9 | ) |                       |   | 199.7   |                           | 
|Equity in earnings (loss) of subsidiaries                                         |  |                  | 148.1  |   |                       |   | 50.3    |                           | 
|                                                                                  |  |                  |        |   |                       |   |         |                           | 
|Net Earnings (Loss)                                                               |  | $                | (68.8  | ) |                       | $ | 250.0   |                           | 
|                                                                                  |  |                  |        |   |                       |   |         |                           | 



29



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Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Operations

Three Months Ended September 30, 2002

(Millions of Dollars)



|                                                                                                                                       |  | (Unconsolidated) |       |   |                       |   |       |                           | 
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ----- | - | --------------------- | - | ----- | ------------------------- | 
|                                                                                                                                       |  | Parent           |       |   | GuarantorSubsidiaries |   |       | Non-GuarantorSubsidiaries | 
|Net sales                                                                                                                              |  | $                | 291.2 |   |                       | $ | 444.1 |                           | 
|Cost of products sold                                                                                                                  |  |                  | 232.9 |   |                       |   | 362.5 |                           | 
|                                                                                                                                       |  |                  |       |   |                       |   |       |                           | 
|Gross margin                                                                                                                           |  |                  | 58.3  |   |                       |   | 81.6  |                           | 
|Selling, general and administrative expenses                                                                                           |  |                  | 52.3  |   |                       |   | 68.6  |                           | 
|Restructuring charges                                                                                                                  |  |                  |      |   |                       |   | 3.6   |                           | 
|Adjustment of assets held for sale and other long-lived assets to fair value                                                           |  |                  |      |   |                       |   | 5.7   |                           | 
|Interest expense (income), net                                                                                                         |  |                  | 31.4  |   |                       |   |      |                           | 
|Chapter 11 and Administration related reorganization expenses                                                                          |  |                  | 33.4  |   |                       |   |      |                           | 
|Other expense (income), net                                                                                                            |  |                  | 17.7  |   |                       |   | (27.2 | )                         | 
|                                                                                                                                       |  |                  |       |   |                       |   |       |                           | 
|Earnings (loss) before income taxes, cumulative effect of change in accounting principle and equity in earnings (loss) of
subsidiaries |  |                  | (76.5 | ) |                       |   | 30.9  |                           | 
|Income tax expense                                                                                                                     |  |                  | 0.4   |   |                       |   | 0.5   |                           | 
|                                                                                                                                       |  |                  |       |   |                       |   |       |                           | 
|Earnings (Loss) before equity in loss of subsidiaries                                                                                  |  |                  | (76.9 | ) |                       |   | 30.4  |                           | 
|Equity in earnings (loss) of subsidiaries                                                                                              |  |                  | 3.6   |   |                       |   | (12.8 | )                         | 
|                                                                                                                                       |  |                  |       |   |                       |   |       |                           | 
|Net Earnings (Loss)                                                                                                                    |  | $                | (73.3 | ) |                       | $ | 17.6  |                           | 
|                                                                                                                                       |  |                  |       |   |                       |   |       |                           | 



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Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Operations

Nine Months Ended September 30, 2002

(Millions of Dollars)



|                                                                                                                                       |  | (Unconsolidated) |          |   |                       |   |          |                           | 
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | -------- | - | --------------------- | - | -------- | ------------------------- | 
|                                                                                                                                       |  | Parent           |          |   | GuarantorSubsidiaries |   |          | Non-GuarantorSubsidiaries | 
|Net sales                                                                                                                              |  | $                | 945.2    |   |                       | $ | 1,360.9  |                           | 
|Cost of products sold                                                                                                                  |  |                  | 760.0    |   |                       |   | 1,096.4  |                           | 
|                                                                                                                                       |  |                  |          |   |                       |   |          |                           | 
|Gross margin                                                                                                                           |  |                  | 185.2    |   |                       |   | 264.5    |                           | 
|Selling, general and administrative expenses                                                                                           |  |                  | 167.3    |   |                       |   | 199.3    |                           | 
|Restructuring charges                                                                                                                  |  |                  |         |   |                       |   | 7.7      |                           | 
|Adjustment of assets held for sale and other long-lived assets to fair value                                                           |  |                  |         |   |                       |   | 6.0      |                           | 
|Interest expense (income), net                                                                                                         |  |                  | 94.3     |   |                       |   |         |                           | 
|Chapter 11 and Administration related reorganization expenses                                                                          |  |                  | 76.4     |   |                       |   |         |                           | 
|Other expense (income), net                                                                                                            |  |                  | (13.8    | ) |                       |   | (85.3    | )                         | 
|                                                                                                                                       |  |                  |          |   |                       |   |          |                           | 
|Earnings (loss) before income taxes, cumulative effect of change in accounting principle and equity in earnings (loss) of
subsidiaries |  |                  | (139.0   | ) |                       |   | 136.8    |                           | 
|Income tax expense                                                                                                                     |  |                  | 1.1      |   |                       |   | 24.2     |                           | 
|                                                                                                                                       |  |                  |          |   |                       |   |          |                           | 
|Earnings (loss) before cumulative effect of change in accounting principle and equity in earnings (loss) of
subsidiaries               |  |                  | (140.1   | ) |                       |   | 112.6    |                           | 
|Cumulative effect of change in accounting principle, net of applicable tax benefits                                                    |  |                  | (3.8     | ) |                       |   | 432.8    |                           | 
|                                                                                                                                       |  |                  |          |   |                       |   |          |                           | 
|Loss before equity in loss of subsidiaries                                                                                             |  |                  | (136.3   | ) |                       |   | (320.2   | )                         | 
|Equity in earnings (loss) of subsidiaries                                                                                              |  |                  | (1,380.1 | ) |                       |   | (703.7   | )                         | 
|                                                                                                                                       |  |                  |          |   |                       |   |          |                           | 
|Net Loss                                                                                                                               |  | $                | (1,516.4 | ) |                       | $ | (1,023.9 | )                         | 
|                                                                                                                                       |  |                  |          |   |                       |   |          |                           | 



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Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Balance Sheet

September 30, 2003

(Millions of Dollars)



|                                                             |  | (Unconsolidated) |          |   |                       |   |                           | 
|------------------------------------------------------------ |  | ---------------- | -------- | - | --------------------- | - | ------------------------- | 
|                                                             |  | Parent           |          |   | GuarantorSubsidiaries |   | Non-GuarantorSubsidiaries | 
|ASSETS                                                       |  |                  |          |   |                       |   |                           | 
|Cash and equivalents                                         |  | $                | 53.0     |   |                       | $ |                          | 
|Accounts receivable, net                                     |  |                  | 180.3    |   |                       |   | 304.5                     | 
|Inventories                                                  |  |                  | 78.5     |   |                       |   | 292.1                     | 
|Prepaid expenses and other current assets                    |  |                  | 61.3     |   |                       |   | 32.0                      | 
|                                                             |  |                  |          |   |                       |   |                           | 
|Total Current Assets                                         |  |                  | 373.1    |   |                       |   | 628.6                     | 
|Property, plant and equipment, net                           |  |                  | 256.7    |   |                       |   | 638.8                     | 
|Goodwill and indefinite-lived intangible assets              |  |                  | 535.8    |   |                       |   | 682.2                     | 
|Definite-lived intangible assets, net                        |  |                  | 85.6     |   |                       |   | 88.2                      | 
|Investment in subsidiaries                                   |  |                  | 6,406.1  |   |                       |   | 2,996.1                   | 
|Intercompany accounts, net                                   |  |                  | (3,378.2 | ) |                       |   | 2,772.1                   | 
|Asbestos-related insurance recoverable                       |  |                  |         |   |                       |   | 171.9                     | 
|Prepaid pension costs                                        |  |                  | 18.1     |   |                       |   |                          | 
|Other noncurrent assets                                      |  |                  | 24.6     |   |                       |   | 33.6                      | 
|                                                             |  |                  |          |   |                       |   |                           | 
|Total Assets                                                 |  | $                | 4,321.8  |   |                       | $ | 8,011.5                   | 
|                                                             |  |                  |          |   |                       |   |                           | 
|                                                             |  |                  |          |   |                      
|LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)               |  |                  |          |   |                       |   |                           | 
|Short-term debt, including current portion of long-term debt |  | $                | 0.1      |   |                       | $ |                          | 
|Accounts payable                                             |  |                  | 48.1     |   |                       |   | 76.2                      | 
|Accrued compensation                                         |  |                  | 65.2     |   |                       |   | 22.3                      | 
|Restructuring reserves                                       |  |                  | 8.4      |   |                       |   | 10.2                      | 
|Accrued income taxes                                         |  |                  | 7.1      |   |                       |   |                          | 
|Other accrued liabilities                                    |  |                  | 132.5    |   |                       |   | 35.2                      | 
|                                                             |  |                  |          |   |                       |   |                           | 
|Total Current Liabilities                                    |  |                  | 261.4    |   |                       |   | 143.9                     | 
|Liabilities subject to compromise                            |  |                  | 4,124.1  |   |                       |   | 355.1                     | 
|Long-term debt                                               |  |                  | 310.0    |   |                       |   |                          | 
|Postemployment benefits                                      |  |                  | 816.5    |   |                       |   |                          | 
|Deferred income taxes                                        |  |                  | 2.5      |   |                       |   |                          | 
|Other accrued liabilities                                    |  |                  | 96.5     |   |                       |   | 1.1                       | 
|Minority interest in consolidated subsidiaries               |  |                  | 24.9     |   |                       |   | 23.6                      | 
|Shareholders Equity (Deficit)                               |  |                  | (1,314.1 | ) |                       |   | 7,487.8                   | 
|                                                             |  |                  |          |   |                       |   |                           | 
|Total Liabilities and Shareholders Equity (Deficit)         |  | $                | 4,321.8  |   |                       | $ | 8,011.5                   | 
|                                                             |  |                  |          |   |                       |   |                           | 



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Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Consolidating Condensed Balance Sheet

December 31, 2002

(Millions of Dollars)



|                                                             |  | (Unconsolidated) |          |   |                       |   |                           | 
|------------------------------------------------------------ |  | ---------------- | -------- | - | --------------------- | - | ------------------------- | 
|                                                             |  | Parent           |          |   | GuarantorSubsidiaries |   | Non-GuarantorSubsidiaries | 
|ASSETS                                                       |  |                  |          |   |                       |   |                           | 
|Cash and equivalents                                         |  | $                | 31.9     |   |                       | $ |                          | 
|Accounts receivable                                          |  |                  | 171.8    |   |                       |   | 310.0                     | 
|Inventories                                                  |  |                  | 62.5     |   |                       |   | 351.9                     | 
|Prepaid expenses                                             |  |                  | 41.1     |   |                       |   | 33.0                      | 
|                                                             |  |                  |          |   |                       |   |                           | 
|Total Current Assets                                         |  |                  | 307.3    |   |                       |   | 694.9                     | 
|Property, plant and equipment, net                           |  |                  | 244.6    |   |                       |   | 687.4                     | 
|Goodwill and indefinite-lived intangible assets              |  |                  | 536.3    |   |                       |   | 681.1                     | 
|Definite-lived intangible assets, net                        |  |                  | 87.6     |   |                       |   | 91.7                      | 
|Investment in subsidiaries                                   |  |                  | 6,394.2  |   |                       |   | 2,977.5                   | 
|Intercompany accounts, net                                   |  |                  | (3,424.6 | ) |                       |   | 2,295.2                   | 
|Asbestos-related insurance recoverable                       |  |                  |         |   |                       |   | 171.9                     | 
|Prepaid pension costs                                        |  |                  | 71.2     |   |                       |   |                          | 
|Other noncurrent assets                                      |  |                  | 43.7     |   |                       |   | 36.5                      | 
|                                                             |  |                  |          |   |                       |   |                           | 
|Total Assets                                                 |  | $                | 4,260.3  |   |                       | $ | 7,636.2                   | 
|                                                             |  |                  |          |   |                       |   |                           | 
|                                                             |  |                  |          |   |                      
|LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)               |  |                  |          |   |                       |   |                           | 
|Short-term debt, including current portion of long-term debt |  | $                | 314.7    |   |                       | $ |                          | 
|Accounts payable                                             |  |                  | 44.5     |   |                       |   | 67.0                      | 
|Accrued compensation                                         |  |                  | 91.4     |   |                       |   | 25.3                      | 
|Restructuring reserves                                       |  |                  | 13.9     |   |                       |   | 18.1                      | 
|Accrued income taxes                                         |  |                  | 9.2      |   |                       |   |                          | 
|Other accrued liabilities                                    |  |                  | 138.1    |   |                       |   | 41.6                      | 
|                                                             |  |                  |          |   |                       |   |                           | 
|Total Current Liabilities                                    |  |                  | 611.8    |   |                       |   | 152.0                     | 
|Liabilities subject to compromise                            |  |                  | 4,111.1  |   |                       |   | 363.6                     | 
|Long-term debt                                               |  |                  |         |   |                       |   |                          | 
|Postemployment benefits                                      |  |                  | 813.5    |   |                       |   |                          | 
|Deferred income taxes                                        |  |                  | 2.5      |   |                       |   |                          | 
|Other accrued liabilities                                    |  |                  | 102.7    |   |                       |   | 1.4                       | 
|Minority interest in consolidated subsidiaries               |  |                  | 22.3     |   |                       |   | 23.4                      | 
|Shareholders Equity (Deficit)                               |  |                  | (1,403.6 | ) |                       |   | 7,095.8                   | 
|                                                             |  |                  |          |   |                       |   |                           | 
|Total Liabilities and Shareholders Equity (Deficit)         |  | $                | 4,260.3  |   |                       | $ | 7,636.2                   | 
|                                                             |  |                  |          |   |                       |   |                           | 



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Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Cash Flows

Nine Months Ended September 30, 2003

(Millions of Dollars)



|                                                                          |  | (Unconsolidated) |        |   |                       |   |        |                          
|------------------------------------------------------------------------- |  | ---------------- | ------ | - | --------------------- | - | ------ | -------------------------
|                                                                          |  | Parent           |        |   | GuarantorSubsidiaries |   |        | Non-GuarantorSubsidiaries
|Net Cash Provided From (Used By) Operating Activities                     |  | $                | (191.5 | ) |                       | $ | 338.8  |                          
|                                                                          |  |                  |        |   |                      
|Cash Provided From (Used By) Investing Activities:                        |  |                  |        |   |                       |   |        |                          
|Expenditures for property, plant and equipment and other long-term assets |  |                  | (30.9  | ) |                       |   | (58.9  | )                        
|Proceeds from sale of businesses                                          |  |                  |       |   |                       |   | 23.3   |                          
|                                                                          |  |                  |        |   |                       |   |        |                          
|Net Cash Used By Investing Activities                                     |  |                  | (30.9  | ) |                       |   | (35.6  | )                        
|                                                                          |  |                  |        |   |                      
|Cash Provided From (Used By) Financing Activities:                        |  |                  |        |   |                       |   |        |                          
|Proceeds from issuance of long-term debt                                  |  |                  |       |   |                       |   |       |                          
|Principal payments on long-term debt                                      |  |                  |       |   |                       |   |       |                          
|Borrowings from DIP credit facility                                       |  |                  | 105.5  |   |                       |   |       |                          
|Principal payments on DIP credit facility                                 |  |                  | (110.2 | ) |                       |   |       |                          
|Decrease in short-term debt                                               |  |                  |       |   |                       |   |       |                          
|Change in intercompany accounts                                           |  |                  | 246.7  |   |                       |   | (303.2 | )                        
|                                                                          |  |                  |        |   |                       |   |        |                          
|Net Cash Provided From (Used By) Financing Activities                     |  |                  | 242.0  |   |                       |   | (303.2 | )                        
|Effect of Foreign Currency Exchange Rate Fluctuations on Cash             |  |                  | 1.5    |   |                       |   |       |                          
|                                                                          |  |                  |        |   |                       |   |        |                          
|Net Increase in Cash and Equivalents                                      |  | $                | 21.1   |   |                       | $ |       |                          
|                                                                          |  |                  |        |   |                       |   |        |                          



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Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Cash Flows

Nine Months Ended September 30, 2002

(Millions of Dollars)



|                                                                          |  | (Unconsolidated) |       |   |                       |   |        |                          
|------------------------------------------------------------------------- |  | ---------------- | ----- | - | --------------------- | - | ------ | -------------------------
|                                                                          |  | Parent           |       |   | GuarantorSubsidiaries |   |        | Non-GuarantorSubsidiaries
|Net Cash Provided From (Used By) Operating Activities                     |  | $                | (38.4 | ) |                       | $ | 166.9  |                          
|                                                                          |  |                  |       |   |                      
|Cash Provided From (Used By) Investing Activities:                        |  |                  |       |   |                       |   |        |                          
|Expenditures for property, plant and equipment and other long-term assets |  |                  | (23.6 | ) |                       |   | (61.6  | )                        
|Net proceeds from sales of businesses                                     |  |                  | 5.9   |   |                       |   | 6.0    |                          
|                                                                          |  |                  |       |   |                       |   |        |                          
|Net Cash Used By Investing Activities                                     |  |                  | (17.7 | ) |                       |   | (55.6  | )                        
|                                                                          |  |                  |       |   |                      
|Cash Provided From (Used By) Financing Activities:                        |  |                  |       |   |                       |   |        |                          
|Proceeds from the issuance of long-term debt                              |  |                  |      |   |                       |   |       |                          
|Principal payments on long-term debt                                      |  |                  |      |   |                       |   |       |                          
|Principal payments on DIP credit facility                                 |  |                  | (10.0 | ) |                       |   |       |                          
|Increase (decrease) in short-term debt                                    |  |                  |      |   |                       |   | 0.7    |                          
|Change in intercompany accounts                                           |  |                  | (8.5  | ) |                       |   | (115.2 | )                        
|                                                                          |  |                  |       |   |                       |   |        |                          
|Net Cash Provided From (Used By) Financing Activities                     |  |                  | (18.5 | ) |                       |   | (114.5 | )                        
|Effect of Foreign Currency Exchange Rate Fluctuations on Cash             |  |                  | 12.5  |   |                       |   |       |                          
|                                                                          |  |                  |       |   |                       |   |        |                          
|Net Increase (Decrease) in Cash and Equivalents                           |  | $                | (62.1 | ) |                       | $ | (3.2   | )                        
|                                                                          |  |                  |       |   |                       |   |        |                          



35



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



OVERVIEW



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



VOLUNTARY BANKRUPTCY FILING



On October 1, 2001 (the Petition Date), the Company and all of its wholly-owned United States subsidiaries filed voluntary petitions for
reorganization (the U.S. Restructuring) under Chapter 11 of the United States Bankruptcy Code (the Bankruptcy Code) in the United States Bankruptcy Court for the District of Delaware (the Bankruptcy Court). Also
on October 1, 2001, certain of the Companys United Kingdom subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code and petitions for Administration (the U.K. Restructuring) under the United
Kingdom Insolvency Act of 1986 (the Act) in the High Court of Justice, Chancery division in London, England (the High Court). The Company and its U.S. and U.K. subsidiaries included in the U.S. Restructuring and U.K.
Restructuring are herein referred to as the Debtors. The U.S. Restructuring and U.K. Restructuring are herein referred to as the Restructuring Proceedings. The Chapter 11 cases of the Debtors (collectively, the Chapter
11 Cases) have been consolidated for purposes of joint administration as In re: Federal-Mogul Global Inc., T&N Limited, et. al (Case No. 01-10578(SLR)). The Chapter 11 Cases do not include any of the Companys non-U.S.
subsidiaries outside of the U.K. subsidiaries mentioned above.



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



CONTINUING OPERATIONS



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



RESULTS OF OPERATIONS



The following Managements Discussion and Analysis of financial
condition and results of operations (MD&A) should be read in conjunction with the MD&A included in the Companys Annual Report on Form 10-K for the year ended December 31, 2002.



36



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##### Table of Contents

Net Sales



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



|                                            |  | 2003 |         | 2002 |   | Change  | 
|------------------------------------------- |  | ---- | ------- | ---- | - | ------- | 
|Powertrain                                  |  | $    | 426.6   |      | $ | 412.8   | 
|Sealing Systems and Systems Protection      |  |      | 142.4   |      |   | 158.1   | 
|Friction                                    |  |      | 101.5   |      |   | 95.5    | 
|Aftermarket                                 |  |      | 643.8   |      |   | 603.8   | 
|Other, including Asia Pacific and Corporate |  |      | 23.4    |      |   | 19.7    | 
|Divested Operations                         |  |      | 8.7     |      |   | 55.3    | 
|                                            |  |      |         |      |   |         | 
|Total                                       |  | $    | 1,346.4 |      | $ | 1,345.2 | 
|                                            |  |      |         |      |   |         | 



Gross Margin



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



|                                            |  | 2003 |       |   | 2002 |   | Change | 
|------------------------------------------- |  | ---- | ----- | - | ---- | - | ------ | 
|Powertrain                                  |  | $    | 58.2  |   |      | $ | 60.3   | 
|Sealing Systems and Systems Protection      |  |      | 18.7  |   |      |   | 29.8   | 
|Friction                                    |  |      | 26.9  |   |      |   | 23.8   | 
|Aftermarket                                 |  |      | 149.9 |   |      |   | 130.1  | 
|Other, including Asia Pacific and Corporate |  |      | (3.7  | ) |      |   | 0.9    | 
|Divested Operations                         |  |      | 0.6   |   |      |   | 4.8    | 
|                                            |  |      |       |   |      |   |        | 
|Total                                       |  | $    | 250.6 |   |      | $ | 249.7  | 
|                                            |  |      |       |   |      |   |        | 



Consolidated Results



Net sales for the third quarter of 2003 were $1,346
million compared to $1,345 in the same period of 2002. Favorable foreign currency approximating $66 million was mostly offset by business divestitures, lower sales volumes and customer price reductions.



Gross margin was $251 million, or 19% of net sales, for the third quarter of
2003 compared to $250 million, or 19% in the same period of 2002. Favorable foreign currency approximating $12 million and productivity programs were offset by business divestitures, customer price reductions, lower production volumes, and increased
pension costs.



Powertrain



Net sales for the third quarter of 2003 were $427 million compared to $413
million in the same quarter of 2002. Favorable foreign currency approximating $32 million combined with increased European sales volumes of approximately $5 million were partially offset by reduced sales volumes in the Americas and by customer price
reductions.



Gross margin was $58 million, or 14% of net sales,
for the third quarter of 2003 compared to $60 million, or 15% of net sales, for the same quarter in 2002. The impact of favorable foreign currency, productivity programs, and increased production volumes in Europe were more than offset by reduced
production volumes in the Americas, increased warranty and product costs, and customer price reductions.



Sealing Systems and Systems Protection



Net sales for the third quarter of 2003 were $142 million compared to $158 million in the same quarter of 2002. Favorable foreign currency of approximately $4 million was more than offset by customer price reductions
and decreased sales volumes.



Gross margin was $19 million, or
13% of net sales, for the third quarter of 2003 compared to $30 million, or 19% of net sales, for the same quarter in 2002. Favorable productivity and foreign currency were more than offset by the effects of decreased production volumes and customer
price reductions.



Friction



Net sales for the third quarter of 2003 were $102 million compared to $96
million in the same quarter of 2002. Favorable foreign currency of approximately $6 million combined with increased sales volumes in Europe more than offset decreased sales volumes in the Americas.



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Gross margin was $27 million, or 27% of net sales, for the third quarter of 2003 compared to $24 million,
or 25% of net sales, for the same quarter of 2002. Favorable foreign currency, productivity programs, and increased production volumes in Europe more than offset decreased production volumes in the Americas.



Aftermarket



Net sales for the third quarter of 2003 were $644 million compared to $604 million in the same quarter of 2002. Favorable
foreign currency and increased sales volumes in the Americas were partially offset by decreased sales volumes in Europe.



Gross margin was $150 million, or 23% of net sales, for the third quarter of 2003 compared to $130 million, or 22% of net sales, for the same quarter of
2002. This increase is the result of increased production volumes, productivity programs and favorable foreign currency.



Other



Other primarily includes Asia Pacific and other Corporate functions. Net sales for the third quarter of 2003 in the Asia Pacific region and other Corporate functions were $23 million, compared to $20 million in the
same quarter of 2002. This increase is primarily the result of increased sales volumes in the Asia Pacific region. Gross margin was positively impacted by increased production volumes in Asia Pacific, which were more than offset by increased pension
costs included in Corporate functions.



Selling, General and Administrative
Expenses



Selling, general and administrative expenses
were $213 million, or 16% of net sales, for the third quarter of 2003 as compared to $206 million, or 15% of net sales, for the same quarter of 2002. Foreign currency and increased current year pension expense due to lower than expected returns on
the Companys pension plan assets in the prior year were partially offset by operating and corporate cost reductions.



Interest Expense, net



Interest expense, net was $23 million in the third quarter of 2003 compared to $30 million for the same quarter of 2002. The decline is principally
attributable to interest income associated with U.S. tax refunds, combined with reduced interest expense on the DIP credit facility resulting from favorable interest rates and lower average outstanding borrowings.



Income Tax Expense



For the three months ended September 30, 2003, the Company recorded income tax expense of $13 million on a loss of $17
million before income taxes. This compares to income tax expense of $9 million on a loss of $64 million before income taxes in the same period of 2002. Income tax expense for the three month period ended September 30, 2003 resulted primarily from
the recognition of income tax expense on earnings in certain foreign jurisdictions without the recognition of income tax benefits on current losses in the U.K. and other countries.



Restructuring Charges



During the three months ended September 30, 2003 and 2002, the Company recorded restructuring charges of $8 million and $17 million, respectively. Charges
for 2003 primarily relate to severance charges for North American and European Powertrain, Aftermarket and Sealing Systems and Systems Protection restructuring programs initiated during the three months ended September 30, 2003 as well as severance
charges for previously announced European distribution site consolidations and closures in the Sealing Systems and Systems Protection and Aftermarket businesses.



Chapter 11 and Administration Related Reorganization Expenses



During the three months ended September 30, 2003 and 2002, the Company recorded Chapter 11 and Administration related
reorganization expenses of $26 million and $33 million, respectively. These expenses consist of legal, financial and advisory fees, critical employee retention costs and other directly related internal costs, and



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



NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 2002



RESULTS OF OPERATIONS



The following Managements Discussion and Analysis of financial
condition and results of operations (MD&A) should be read in conjunction with the MD&A included in the Companys Annual Report on Form 10-K for the year ended December 31, 2002.



Net Sales



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



|                                            |  | 2003 |         | 2002 |   | Change  | 
|------------------------------------------- |  | ---- | ------- | ---- | - | ------- | 
|Powertrain                                  |  | $    | 1,366.9 |      | $ | 1,246.2 | 
|Sealing Systems and Systems Protection      |  |      | 469.4   |      |   | 489.3   | 
|Friction                                    |  |      | 316.2   |      |   | 278.1   | 
|Aftermarket                                 |  |      | 1,912.2 |      |   | 1,872.3 | 
|Other, including Asia Pacific and Corporate |  |      | 68.6    |      |   | 56.3    | 
|Divested Operations                         |  |      | 67.6    |      |   | 191.4   | 
|                                            |  |      |         |      |   |         | 
|Total                                       |  | $    | 4,200.9 |      | $ | 4,133.6 | 
|                                            |  |      |         |      |   |         | 



Gross Margin



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



|                                            |  | 2003 |       |   | 2002 |   |       | Change | 
|------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ------ | 
|Powertrain                                  |  | $    | 195.6 |   |      | $ | 199.8 |        | 
|Sealing Systems and Systems Protection      |  |      | 79.8  |   |      |   | 98.4  |        | 
|Friction                                    |  |      | 90.7  |   |      |   | 76.0  |        | 
|Aftermarket                                 |  |      | 457.1 |   |      |   | 417.4 |        | 
|Other, including Asia Pacific and Corporate |  |      | (6.2  | ) |      |   | (1.0  | )      | 
|Divested Operations                         |  |      | 9.2   |   |      |   | 11.7  |        | 
|                                            |  |      |       |   |      |   |       |        | 
|Total                                       |  | $    | 826.2 |   |      | $ | 802.3 |        | 
|                                            |  |      |       |   |      |   |       |        | 

Consolidated Results



Net sales for the first nine months of 2003 were $4,201 million compared to $4,134 in the same period of 2002. Favorable
foreign currency approximating $259 million was partially offset by business divestitures, lower sales volumes and customer price reductions.



Gross margin was $826 million, or 20% of net sales, for the first nine months of 2003 compared to $802 million, or 19% of net sales, for the same period
in 2002. Favorable foreign currency approximating $48 million and productivity programs were partially offset by business divestitures, customer price reductions, lower production volumes, and increased pension costs.



Powertrain



Net sales for the first nine months of 2003 were $1,367 million compared to $1,246 million in the same period of 2002.
Favorable foreign currency approximating $132 million combined with increased European sales volumes of approximately $46 million were partially offset by reduced sales volumes in the Americas and by customer price reductions.



Gross margin was $196 million, or 14% of net sales, for the first nine months
of 2003 compared to $200 million, or 16% of net sales, for the same period in 2002. Increased production volumes in Europe and productivity programs were more than offset by reduced production volumes in the Americas, increased warranty and product
costs, and customer price reductions.



Sealing Systems and Systems
Protection



Net sales for the first nine months of 2003
were $469 million compared to $489 million in the same period of 2002. Favorable foreign currency of approximately $20 million was more than offset by the impacts of customer price reductions and decreased sales volumes.



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Gross margin was $80 million, or 17% of net sales, for the first nine months of 2003 compared to $98
million, or 20% of net sales, for the same period in 2002. Favorable productivity and foreign currency were more than offset by the effects of decreased production volumes and customer price reductions.



Friction



Net sales for the first nine months of 2003 were $316 million compared to $278 million in the same period of 2002. Favorable
foreign currency of approximately $27 million combined with increased sales volumes more than offset the impact of customer price reductions.



Gross margin was $91 million, or 29% of net sales, for the first nine months of 2003 compared to $76 million, or 27% of net sales, for the same period of
2002. Favorable production volumes and foreign currency more than offset customer price reductions.



Aftermarket



Net sales
for the first nine months of 2003 were $1,912 million compared to $1,872 million in the same period of 2002. Favorable foreign currency more than offset decreased sales volumes in both the Americas and Europe.



Gross margin was $457 million, or 24% of net sales, for the first nine months
of 2003 compared to $417 million, or 22% of net sales, for the same period of 2002. Gross margin was favorably impacted by productivity programs and favorable foreign currency, which were partially offset by a decline in production volumes.



Other



Net sales for the first nine months of 2003 in the Asia Pacific region and other Corporate functions were $69 million
compared to $56 million in the same period of 2002. This increase is primarily the result of increased sales volumes in the Asia Pacific region. Gross margin was positively impacted by increased production volumes in Asia Pacific, which were more
than offset by increased pension costs included in Corporate functions.



Selling, General and Administrative Expenses



Selling, general and administrative expenses were $668 million, or 16% of net sales, for the first nine months of 2003 as compared to $624 million, or 15% of net sales, for the same period of 2002. Foreign currency and increased current
year pension expense due to lower than expected returns on the Companys pension plan assets in the prior year were partially offset by operating and corporate cost reductions.



Interest Expense, net



Interest expense, net was $74 million in the first nine months of 2003 compared to $90 million for the same period of 2002. The decline is principally
attributable to interest income associated with U.S. tax refunds resulting from claims filed for prior years, combined with reduced interest expense on the DIP credit facility resulting from favorable interest rates and lower average outstanding
borrowings.



Income Tax Expense



For the nine months ended September 30, 2003, the Company recorded income
tax expense of $52 million on a loss of $17 million before income taxes. This compares to income tax expense of $60 million on a loss of $39 million before income taxes and cumulative effect of change in accounting principle in the same period of
2002. Income tax expense for the nine month period ended September 30, 2003 resulted primarily from the recognition of income tax expense on earnings in certain foreign jurisdictions without the recognition of income tax benefits on current losses
in the U.K. and other countries.



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Restructuring Charges



During the nine months ended September 30, 2003 and 2002, the Company recorded restructuring charges of $28 million and $28 million, respectively. Charges
for 2003 primarily relate to severance charges for North American and European Powertrain, Sealing Systems and Systems Protection, and Aftermarket restructuring programs initiated during the first nine months of 2003 as well as severance charges for
previously announced European distribution site consolidations and closures in the Powertrain, Sealing Systems and Systems Protection and Aftermarket businesses.



Chapter 11 and Administration Related Reorganization Expenses



During the nine months ended September 30, 2003 and 2002, the Company recorded Chapter 11 and Administration related
reorganization expenses of $85 million and $76 million, respectively. These expenses consist of legal, financial and advisory fees, critical employee retention costs and other directly related internal costs, and fluctuate largely based upon the
necessity for professional services by third-party vendors in connection with the pace and degree of the Restructuring Proceedings.



LITIGATION & ENVIRONMENTAL CONTINGENCIES



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



LIQUIDITY AND
CAPITAL RESOURCES



Cash Flow Provided From Operating Activities



Cash flow provided from operating activities was $269
million for the first nine months of 2003. Among the factors impacting operating cash flows were positive operational EBIT and working capital improvements, and timing issues on various accounts. Operational EBIT is defined as earnings before
interest, income taxes, cumulative effect of change in accounting principle and certain items such as restructuring and impairment charges.



Cash Flow Used By Investing Activities



Cash flow used by investing activities was $191 million in the first nine months of 2003. Investing cash flows were comprised principally of capital
expenditures made for property, plant and equipment to implement process improvements, increase manufacturing capacity and production, and introduce new products.



Cash Flow Used By Financing Activities



Cash flow used by financing activities was $24 million for the first nine months of 2003 resulting from a net paydown of the Companys DIP credit
facility of $5 million, combined with repayments of certain short-term and international debt.



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 expire during February 2005, and the interest rate was reduced 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 original $675
million commitment was reduced to $600 million in connection with the August 2003 facility amendment, and is mandatorily reduced by a portion of proceeds received from future asset or business divestitures.



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



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



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



As of September 30, 2003, the Company
was in compliance with all debt covenants under its existing DIP credit facility. Based on current forecasts, the Company expects to be in compliance through the expiration of the facility. Changes in the business environment, market factors,
macroeconomic factors, and the Companys ability to achieve its forecasts and other factors outside of the Companys control, could adversely impact its ability to remain in compliance with debt covenants. If the Company were to not be in
compliance at a measurement date, the Company would be required to renegotiate its facility. No assurance can be provided as to the outcome of such negotiations.



|Item 3. |  | Quantitative And Qualitative Disclosures About Market Risk
|------- |  | ----------------------------------------------------------



The Company is subject to the risk of changes in foreign currency exchange rates due to its operations in foreign jurisdictions. As a result, the
Companys financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which the Company manufactures and distributes its products. The
Companys operating results are primarily exposed to changes in exchange rates between the U.S. dollar and European currencies.



As currency exchange rates change, translation of the statements of operations of the Companys international businesses into United States dollars
affects year-over-year comparability of operating results. The Company does not generally hedge operating translation risks because cash flows from international operations are generally reinvested locally. Changes in foreign currency exchange rates
are generally reported as a component of shareholders equity for the Companys foreign subsidiaries reporting in local currencies, and as a component of income for its foreign subsidiaries using the U.S. dollar as the functional currency.
The Companys equity was increased by $158.2 million during the nine months ended September 30, 2003, due to cumulative translation adjustments primarily resulting from changes in the U.S. dollar to the Euro and the British Pound.



|Item 4. |  | Disclosure Controls And Procedures
|------- |  | ----------------------------------



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



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



As of September 30, 2003, 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 our 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 September 30, 2003, subject to the limitations previously described.



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PART II - OTHER INFORMATION



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



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



Note 8 to the Consolidated Financial Statements, Asbestos Liability and Legal Proceedings, that is included in Part I of this report, is
incorporated herein by reference.



|Item 3. |  | Defaults Upon Senior Securities
|------- |  | -------------------------------



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



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



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



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



|     | 
|---- | 
|31.1 | 
|     | 
|31.2 | 
|     | 
|32   | 



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



| | (1) | On July 10, 2003, the Company filed a Current Report on Form 8-K to report the issuance of a press release announcing the appointment of Charles G. McClure as Chief Executive
Officer and President.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | On July 29, 2003, the Company filed a Current Report on Form 8-K to report the issuance of a press release announcing its second quarter earnings for the period ended June 30, 2003.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | On August 6, 2003, the Company filed a Current Report on Form 8-K to report the filing of a motion with the U.S. Bankruptcy Court in Delaware for approval of its Amended and
Restated Revolving Credit, Term Loan and Guaranty Agreement, dated as of August 6, 2003, with JP Morgan Chase Bank, as Administrative Agent for the lenders.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) | On August 27, 2003, the Company filed a Current Report on Form 8-K to report the issuance of a press release announcing its filing of a motion with the U.S. Bankruptcy Court in
Delaware seeking an order (1) authorizing reimbursement of fees and expenses incurred in connection with a proposed $350 million investment in the Company by CitiGroup Venture Capital Equity Partners L.P. and its affiliates (CVC), (2) approving the
grant of indemnity by the Company in favor of CVC, and (3) approving an exclusive 90 day negotiating period with CVC in order to pursue the potential transaction.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (5) | On August 29, 2003, the Company filed a Current Report on Form 8-K to report the U.S. Bankruptcy Courts denial of its motion described in (4) above.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------



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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 andChief Financial Officer,Principal Financial Officer




By:

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




Dated: November 5, 2003



44