<PAGE>   1
                                        
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

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



For the Period Ended               JUNE 30, 1998 
                     -----------------------------------------------------------



Commission File Number                1-1511
                       ---------------------------------------------------------

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


              MICHIGAN                                38-0533580
--------------------------------------------------------------------------------
    (State or other jurisdiction of        (I.R.S. Employer Identification No.)
    incorporation or organization)

    26555 NORTHWESTERN HIGHWAY, SOUTHFIELD, MICHIGAN           48034
--------------------------------------------------------------------------------
        (Address of principal executive offices)             (Zip Code)


                                  (248)354-7700
--------------------------------------------------------------------------------
              (Registrant's telephone number, including area code)


                                 NOT APPLICABLE
--------------------------------------------------------------------------------
              (Former name, former address and former fiscal year,
                         if changed since last report)


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
                                     ---            ---


Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:

                  Common Stock - 53,305,789 of August 10, 1998


                                      -1-

<PAGE>   2


PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

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

<TABLE>
<CAPTION>
                                                                    Three Months Ended             Six Months Ended
                                                                          June 30                      June 30
                                                                   ---------------------        ---------------------
                                                                     1998         1997            1998        1997
                                                                   --------     --------        ---------   ---------
<S>                                                                <C>          <C>             <C>         <C>     
Net sales                                                          $1,214.0     $  481.8        $ 1,872.0   $   967.4
Cost of products sold                                                 896.6        366.5          1,393.3       740.0
                                                                   --------     --------        ---------   ---------

     Gross margin                                                     317.4        115.3            478.7       227.4

Selling, general and administrative expenses                         (180.8)       (70.8)          (278.9)     (146.7)
Amortization                                                          (25.0)        (2.7)           (35.1)       (5.2)
Purchased in-process research and development charge                      -            -            (18.6)          -
Restructuring charges                                                     -            -            (10.5)          -
Adjustment of assets held for sale to fair value                        1.0            -            (19.0)          -
Integration costs                                                      (4.7)           -             (4.7)          -
Interest expense                                                      (52.7)        (9.0)           (66.1)      (18.8)
Interest income                                                         2.1          1.1              6.7         1.8
International currency exchange gains (losses)                         (1.2)          .1             (2.3)          -
Net gain on British pound currency option and
     forward contract                                                     -            -             13.3           -
Other income (expense), net                                            (2.8)          .4             (8.6)       (1.6)
                                                                   --------     --------        ---------   ---------

     Earnings Before Income Taxes
         and Extraordinary Item                                        53.3         34.4             54.9        56.9

Income tax expense                                                     24.9          5.9             33.7        14.5
                                                                   --------     --------        ---------   ---------

     Net Earnings Before Extraordinary Item                            28.4         28.5             21.2        42.4

Extraordinary item - loss on early retirement of debt,
     net of applicable income tax benefits                             31.3          2.6             31.3         2.6
                                                                   --------     --------        ---------   ---------

     Net Earnings (Loss)                                               (2.9)        25.9            (10.1)       39.8

Preferred stock dividends, net of related tax benefits                  0.9          2.1              1.7         4.3
                                                                   --------     --------        ---------   ---------

     Net Earnings (Loss) Available for
         Common Shareholders                                       $   (3.8)    $   23.8        $   (11.8)  $    35.5
                                                                   ========     ========        =========   =========

Earnings Per Common Share

     Basic
         Net earnings before extraordinary item                       $ .63        $ .76            $ .47       $1.09
         Extraordinary item - loss on early retirement of
              debt, net of applicable income tax benefit               (.72)        (.08)            (.75)       (.07)
                                                                      -----        -----            -----       -----
         Net earnings (loss)                                          $(.09)       $ .68            $(.28)      $1.02
                                                                      =====        =====            =====       =====

     Diluted
         Net earnings before extraordinary item                       $ .55        $ .67            $ .42       $ .99
         Extraordinary item - loss on early retirement of
              debt, net of applicable income tax benefit               (.62)        (.06)            (.65)       (.06)
                                                                      -----        -----            -----       -----
         Net earnings (loss)                                          $(.07)       $ .61            $(.23)      $ .93
                                                                      =====        =====            =====       =====
</TABLE>

See accompanying notes.

                                      -2-

<PAGE>   3


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

<TABLE>
<CAPTION>
                                                                                         Unaudited
                                                                                          June 30          December 31
                                                                                           1998                1997
                                                                                         ---------         -----------
<S>                                                                                      <C>               <C>    
Assets
Current assets:
     Cash and equivalents                                                                $   142.1          $   541.4
     Accounts receivable                                                                     624.9              158.9
     Investment in accounts receivable securitization                                        131.7               48.7
     Inventories                                                                             650.2              277.0
     Prepaid expenses and income tax benefits                                                230.2              113.2
     Acquired businesses to be divested                                                      456.7                  -
                                                                                         ---------          ---------
         Total current assets                                                              2,235.8            1,139.2

Property, plant and equipment                                                              1,554.7              313.9
Goodwill                                                                                   2,619.8              143.8
Other intangible assets                                                                      457.7               48.4
Business investments and other assets                                                        585.1              156.8
                                                                                         ---------          ---------

              Total Assets                                                               $ 7,453.1          $ 1,802.1
                                                                                         =========          =========

Liabilities and Shareholders' Equity
Current liabilities:
     Short-term debt, including current portion of long-term debt                        $   197.7          $    28.6
     Accounts payable                                                                        337.9              102.3
     Accrued compensation                                                                    182.9               36.8
     Restructuring and rationalization reserves                                              172.3               31.5
     Current portion of asbestos liability                                                   100.0                  -
     Other accrued liabilities                                                               437.1              130.4
                                                                                         ---------          ---------
         Total current liabilities                                                         1,427.9              329.6

Long-term debt                                                                             2,498.0              273.1
Long-term portion of asbestos liability                                                    1,208.7                  -
Postemployment benefits                                                                      441.0              190.9
Other accrued liabilities                                                                     88.9               50.6
Minority interest in consolidated subsidiaries                                                61.3               13.6
Minority interest - preferred securities of affiliate                                        575.0              575.0
Shareholders' equity:
     Series C ESOP preferred stock                                                            46.5               49.0
     Series E preferred stock                                                                132.7                  -
     Common stock                                                                            266.0              201.0
     Additional paid-in capital                                                              954.5              332.6
     Accumulated deficit                                                                    (133.7)            (123.6)
     Unearned ESOP compensation                                                              (21.5)             (21.8)
     Accumulated other comprehensive income                                                  (88.1)             (65.7)
     Other                                                                                    (4.1)              (2.2)
                                                                                         ---------          ---------
         Total shareholders' equity                                                        1,152.3              369.3
                                                                                         ---------          ---------

              Total Liabilities and Shareholders' Equity                                 $ 7,453.1          $ 1,802.1
                                                                                         =========          =========
</TABLE>

See accompanying notes.


                                      -3-
<PAGE>   4


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

<TABLE>
<CAPTION>
                                                                                               Six Months Ended
                                                                                                    June 30
                                                                                          ---------------------------
                                                                                            1998               1997
                                                                                          ---------          --------
<S>                                                                                       <C>                <C>   
Cash Provided From (Used By) Operating Activities
    Net earnings (loss)                                                                   $   (10.1)         $   39.8
    Adjustments to reconcile net earnings (loss) to net
       cash provided from operating activities
          Depreciation and amortization                                                        89.8              27.3
          Purchased in-process research and development charge                                 18.6                 -
          Restructuring charges                                                                10.5                 -
          Adjustment of assets held for sale to fair value                                     19.0                 -
          Deferred income taxes                                                                 0.2               5.2
          Postemployment benefits                                                               1.3               2.0
          Increase in accounts receivable                                                     (30.0)            (19.9)
          Decrease in inventories                                                              43.8              40.5
          Decrease in accounts payable                                                         (1.3)             (1.0)
          Increase in current liabilities and other                                            50.1              15.3
          Payments against restructuring and reengineering reserves                           (20.7)            (12.5)
          Loss on early retirement of debt                                                     47.1               4.1
          Payments against asbestos liability                                                 (32.7)                -
                                                                                          ---------          --------
              Net Cash Provided From Operating Activities                                     185.6             100.8

Cash Provided From (Used By) Investing Activities
    Expenditures for property, plant and equipment                                            (81.1)            (20.8)
    Proceeds from sale of business investments                                                 53.9              66.6
    Proceeds from sale of options                                                              39.1                 -
    Business acquisitions, net of cash acquired                                            (2,786.5)                -
                                                                                          ---------          --------
              Net Cash Provided From (Used By) Investing Activities                        (2,774.6)             45.8

Cash Provided From (Used By) Financing Activities
    Issuance of common stock                                                                  601.4               9.7
    Net increase (decrease) in debt                                                         1,667.5            (138.8)
    Fees paid for debt issuance                                                               (49.4)                -
    Fees for early retirement of debt                                                         (27.4)             (4.1)
    Investment in accounts receivable securitization                                           10.3             (11.0)
    Dividends                                                                                  (5.9)            (13.5)
    Other                                                                                      (6.8)             (2.4)
                                                                                          ---------          --------
              Net Cash Provided From (Used By) Financing Activities                         2,189.7            (160.1)

              Decrease in Cash and Equivalents                                               (399.3)            (13.5)

Cash and Equivalents at Beginning of Period                                                   541.4              33.1
                                                                                          ---------          --------

              Cash and Equivalents at End of Period                                       $   142.1          $   19.6
                                                                                          =========          ========
</TABLE>

See accompanying notes.

                                      -4-
<PAGE>   5


FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 1998


1.  BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with United States generally accepted accounting
principles (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 generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three- and the
six-month periods ended June 30, 1998 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1998. 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, 1997. Certain items in the prior year condensed consolidated
financial statements have been reclassified to conform with the presentation
used in 1998.

2.  ACQUISITIONS

The Company acquired Fel-Pro, Incorporated and certain affiliated entities,
which constitute the operating businesses of the Fel-Pro group of companies
(Fel-Pro), and acquired T&N plc (T&N) and Bimet S.A. (Bimet) during the first
quarter of 1998. In addition, the Company increased its ownership in the
Summerton, South Carolina gasket business (Summerton) and KFM Bearing Co., Ltd.
(KFM) during the first quarter. Due to the complexity of valuing certain assets
and liabilities acquired and related valuation estimates that are in process,
the purchase allocations may subsequently be adjusted as further information
becomes available. Goodwill recognized in connection with these transactions is
being amortized on a straight-line basis over forty years.

Fel-Pro Transaction

On February 24, 1998, the Company acquired all the equity interests of Fel-Pro,
a privately owned gasket manufacturer headquartered in Skokie, Illinois, for a
total consideration of approximately $717 million, which included 1,030,325.6
shares of Federal-Mogul Series E Mandatory Exchangeable preferred stock (Series
E Stock) with an imputed value of $225 million (refer to Note 8) and
approximately $492 million in cash. The acquisition has been accounted for as a
purchase and, accordingly, the total consideration was allocated to the acquired
assets and assumed liabilities based on estimated fair values as of the
acquisition date. The preliminary purchase price allocation of the total
consideration exceeds the estimated fair value of net assets acquired by $509.3
million which has been recognized as goodwill.

The consolidated statement of operations includes the operating results of the
acquired business, exclusive of the Fel-Pro Chemical Business (refer to the
caption "Acquired Businesses to be Divested," described later in this section),
from the acquisition date.


                                      -5-
<PAGE>   6


T&N plc Transaction

On March 6, 1998, the Company satisfied all regulatory conditions relating to
the acquisition of T&N, a manufacturer based in Manchester, England, and made
its offer wholly unconditional. The Company paid for the outstanding T&N shares
on March 12, 1998.

The Company has paid total consideration (including direct costs of the
acquisition) of $2.413 billion. The Company also acquired cash of approximately
$163 million and debt of approximately $723 million. In addition, the Company is
required to pay 260 pence per share for certain T&N options converted to T&N
shares. The Company has paid $52.8 million, net of cash to be received, for
these T&N options as of June 30, 1998 and reflects an estimated additional
amount to be paid of $7.5 million in the balance sheet current liability section
under the caption "Other Accrued Liabilities". The acquisition has been
accounted for as a purchase and, accordingly, the total consideration was
allocated to the acquired assets and assumed liabilities based on estimated fair
values as of the acquisition date. The preliminary purchase price allocation of
the total consideration exceeds the estimated fair value of net assets acquired
by $2.032 billion which has been recognized as goodwill.

The consolidated statement of operations for the three- and the six-month
periods ended June 30, 1998 include the operating results of T&N, exclusive of
the T&N Bearings Business (refer to the caption "Acquired Businesses to be
Divested," described later in this section), from the acquisition date. The
Company recognized an $18.6 million charge in the first quarter of 1998
associated with the estimated fair value of purchased in process research and
development costs allocated in purchase accounting to a portion of the total
consideration paid.

Acquired Businesses to be Divested

In connection with securing regulatory approvals for the acquisition of T&N, the
Company executed an Agreement Containing Consent Order with the Federal Trade
Commission (FTC) on February 27, 1998. Pursuant to this agreement the Company
must divest the T&N Bearings Business, consisting of T&N's thinwall and dry
bearings (polymer bearings) operations within six months after the FTC declares
the consent order final and must provide for independent management of those
assets pending such divestiture. The agreement stipulates that the T&N Bearings
Business is to be maintained as a viable, independent competitor of the Company
and that the Company shall not attempt to direct the activities of, or exercise
control over, the T&N Bearings Business or have contact with the T&N Bearings
Business outside of normal business activities.

In July 1998, the Company sold the Fel-Pro Chemical Business to Loctite
Corporation, a part of Henkel KGaA, a global specialist in applied chemistry
headquartered in Dusseldorf, Germany for approximately $60 million.

The net assets of the T&N Bearings Business have been recorded at their fair
value based on estimates of selling values less costs to sell, calculated using
multiples of earnings similar to recent comparable industry transactions. The
Company's investment in the T&N Bearings Business is included in the balance
sheet caption "Acquired businesses to be divested." In addition, the Company's
preliminary purchase price allocation for T&N includes an increase of $124
million to adjust the acquired income tax liability related to the anticipated
divestiture of the T&N Bearings Business.


                                      -6-
<PAGE>   7


Operating results for the T&N Bearings and Fel-Pro Chemical Business (which
includes amortization expense for goodwill allocated to the businesses and
interest expense relating to the holding costs of the businesses) have been
excluded from the condensed consolidated statement of operations for the three-
and the six-month periods ended June 30, 1998.

Pro Forma Results

The following unaudited pro forma financial information for the three- and the
six month periods ended June 30, 1998 and 1997 assume the T&N and Fel-Pro
acquisitions occurred as of the beginning of the respective periods, after
giving effect to certain adjustments, including the amortization of intangible
assets, interest expense on acquisition debt, divestitures of the T&N Bearings
Business and Fel-Pro Chemical Business, and income tax effects. The pro forma
results (in millions of dollars, except per share data) have been prepared for
comparative purposes only and are not necessarily indicative of the results of
operations which may occur in the future or that would have occurred had the
acquisitions of T&N and Fel-Pro been consummated on the dates indicated, nor are
they necessarily indicative of the Company's future results of operations (refer
also to Management's Discussion and Analysis of Financial Condition and Results
of Operations - Pro Forma Results).

<TABLE>
<CAPTION>
                                                           Unaudited Pro Forma Financial Information
                                                 ---------------------------------------------------------------
                                                   Three Months Ended June 30          Six Months Ended June 30
                                                 -----------------------------         -------------------------
                                                   1998                 1997             1998             1997
                                                 ---------            --------         --------         --------
<S>                                               <C>                 <C>              <C>              <C>     
Net sales                                         $1,214.0            $1,270.7         $2,407.7         $2,518.6
Net earnings                                         $28.4               $47.1            $11.9            $45.7
Earnings per share                                    $.63               $1.27             $.24            $1.17
Earnings per share assuming dilution                  $.55               $1.12             $.23            $1.08
</TABLE>

Summerton, KFM and Bimet Transactions

In February 1998, the Company increased its ownership in Summerton in connection
with the Bruss Divestiture Agreement, described in Note 7. In March 1998, the
Company increased its ownership from 30% to 87% in KFM, a Korean joint venture
formed in 1988 with Kukje Special Metal Co., Ltd. Also in March 1998, the
Company acquired Bimet, a manufacturer of engine bearings, bushings and related
products located in Gdansk, Poland. The total cash consideration paid for the
Summerton, KFM and Bimet acquisitions approximated $32 million.

The Summerton, KFM and Bimet transactions have been accounted for as purchases
and, accordingly, the total consideration was allocated to the acquired assets
and assumed liabilities based on their estimated fair values as of the
acquisition dates. The preliminary purchase price allocation of total
consideration over the estimated fair value of net assets acquired of $16.4
million has been recognized as goodwill. The consolidated statement of
operations for the three- and six-month periods ended June 30, 1998 includes the
operating results of the acquired businesses from the applicable date of
acquisition.

                                      -7-

<PAGE>   8


3.  RESTRUCTURING AND RATIONALIZATION OF ACQUIRED BUSINESSES

Restructuring Charge

During the first quarter of 1998, the Company recognized a $10.5 million
restructuring charge related to operations in place prior to the acquisitions of
T&N and Fel-Pro. The restructuring charge included $10.2 million and $0.3
million for severance and exit costs, respectively. Employee severance costs
result from planned terminations in various business operations of the Company.
The severance costs were based on the estimated levels that will be paid to the
affected employees pursuant to the Company's workforce reduction policies and
certain foreign governmental regulations. The Company anticipates that the
actions related to the first quarter 1998 restructuring plan will be completed
primarily within one year.

Rationalization of Acquired Businesses

In connection with the previously discussed acquisitions, the Company recognized
approximately $151 million in reserves related to the rationalization and
integration of acquired businesses. The rationalization reserves provide for
approximately $125 million and $26 million in severance and exit costs,
respectively.

The components of the integration plan include: closure of certain manufacturing
facilities worldwide; relocation of highly manual manufacturing product lines to
lower cost regions or more suitable locations; consolidation of overlapping
manufacturing, technical and sales facilities and joint ventures; closure of two
aftermarket central warehouses and five in-country warehouses; consolidation of
aftermarket marketing and customer support functions; and streamlining of
administrative, sales, marketing and product engineering staffs worldwide. An
anticipated result of the integration plan and the restructuring will be a
reduction of approximately 4,200 full-time employees.

4.  ASBESTOS LIABILITY AND LEGAL PROCEEDINGS

T&N Asbestos

As of June 30, 1998, the Company has provided $1.309 billion as its estimate for
future costs related to resolving asbestos claims. In the United States, the
Company's subsidiary, T&N, and two of T&N's U.S. subsidiaries (the T&N
Companies) are among many defendants named in numerous court actions alleging
personal injury resulting from exposure to asbestos or asbestos-containing
products. T&N is also subject to asbestos-disease litigation, to a lesser
extent, in the United Kingdom and to property damage litigation based upon
asbestos in the United States. Because of the slow onset of asbestos-related
diseases, management anticipates that similar claims will be made in the future.
It is not known how many of such claims may be made nor the expenditure which
may arise therefrom. T&N has appointed the Center for Claims Resolution (CCR) as
its exclusive representative in relation to all asbestos-related personal injury
claims made against the T&N Companies in the United States.

Prior to its acquisition, T&N secured a 500 million pounds sterling 
(approximately $834 million at the June 30, 1998 exchange rate of $1.6685: 1 
pound sterling) layer of insurance which will be triggered should the aggregate
amount of claims filed after June 30, 1996, where the exposure occurred prior
to that date, exceed 690 million pounds sterling (approximately $1,151 million
at the June 30, 1998 exchange rate). At June 30, 1998 the Company has recorded
reserves approximating the insurance level of 690 million pounds sterling for
incurred but not reported claims.


                                      -8-
<PAGE>   9


While management believes that reserves are appropriate for anticipated losses
arising from T&N's asbestos related claims, no assurance can be given that T&N
will not be subject to material additional liabilities and significant
additional litigation relating to asbestos. Any such liabilities or litigation
in amounts in excess of the reserves recorded by the Company and the additional
500 million pounds sterling of insurance coverage could have a material adverse
effect on the Company's results of operations, business, liquidity and financial
condition.

Federal-Mogul and Fel-Pro Asbestos

The Company also is one of a large number of defendants in a number of lawsuits
brought by claimants alleging injury due to exposure to asbestos. In addition,
Fel-Pro has been named as a defendant in a large number of product liability
cases involving asbestos, primarily involving gasket or packing products sold to
ship owners. The majority of these cases are administratively dismissed as
received by the court due to the expiration of the statute of limitations. The
Company is defending all such claims vigorously and believes that it and Fel-Pro
have substantial defenses to liability and adequate insurance coverage for
defense and indemnity. While the outcome of litigation cannot be predicted with
certainty, management believes that asbestos claims pending against
Federal-Mogul Corporation and Fel-Pro as of June 30, 1998 will not have a
material effect on the Company's financial position.

Other

The Company is involved in various other legal actions and claims, directly and
through its subsidiaries (including T&N and Fel-Pro). After taking into
consideration legal counsel's evaluation of such actions, management is of the
opinion that its outcomes are not reasonably likely to have a material adverse
affect on the Company's financial position, operating results, or cash flows.

5.  BRITISH POUND CURRENCY OPTION AND FORWARD CONTRACT

In the fourth quarter of 1997, in anticipation of the then pending T&N
acquisition, the Company purchased a British pound currency option for $28.1
million with a notional amount of $2.5 billion. In January 1998, the Company
settled the option and recognized a loss of $17.3 million.

Also in January 1998, in anticipation of the then pending T&N acquisition, the
Company entered into a forward contract to purchase 1.5 billion pounds sterling
for a notional amount of approximately $2.45 billion. As a result of favorable  
exchange fluctuations in the British pound/U.S. dollar exchange rate
experienced during the contract period, the Company recognized a $30.6 million
gain.

The Company entered into the above transactions to effectively serve as economic
hedges for the purchase of T&N. Such transactions, however, do not qualify for
"hedge accounting" under GAAP, and therefore the loss on the British pound
currency option and the gain on the British pound forward contract are reflected
in the statement of operations caption "Net gain on British pound currency
option and forward contract."

6.  ISSUANCE OF DEBT AND EQUITY

In connection with the acquisition of T&N, the Company entered into a $2.675
billion floating rate Senior Credit Agreement (consisting of a $2.275 billion
term loan facility, and a $400 million revolving loan facility) and a $500
million floating rate Senior Subordinated Credit Agreement, each with The Chase
Manhattan Bank as agent and lender and Chase Securities Inc., as arranger.


                                      -9-
<PAGE>   10


On April 17, 1998, in connection with the Company's efforts to put into place a
permanent capital structure, the Company filed a shelf registration statement on
Form S-3 with the Securities and Exchange Commission for the offering from time
to time of up to an aggregate $2.5 billion of debt or equity securities
(including shares of common stock registered for the account of certain
securityholders).

On June 6, 1998, the Company issued 12,650,000 shares of common stock under the
registration statement previously discussed, including 2.1 million shares which
were converted from Series E Mandatory Exchangeable Preferred Stock (Series E
Stock) (refer to Note 8). The net proceeds from the sale of the common stock
of 592 million were used to prepay the entire outstanding principal amount 
under the Senior Subordinated Credit Agreement and partially repay the Senior 
Credit Agreement.

In addition, under the above shelf registration statement, the Company issued
$1.0 billion of bonds on June 25, 1998. The bonds have maturities ranging from 6
to 12 years, a weighted average yield of 7.76% and a weighted average coupon of
7.73%. The net proceeds were used to reduce floating rate bank debt.

As of June 30, 1998, the Company had $1.2 billion outstanding related to the
Senior Credit Agreement with quarterly maturities beginning March 1999 and 
continuing through the year 2005 and a weighted average interest rate of 7.9%.
Over 60% of the maturities occur after the year 2003.

In addition, the Company funded a portion of the T&N acquisition through the
December 1997 sale of 11.5 million shares of 7% Trust Convertible Preferred
Securities (generating gross proceeds of $575 million) by Federal-Mogul
Financing Trust, a subsidiary of the Company.

The early retirement of the Senior Subordinated Credit Agreement and the partial
repayment of the Senior Credit Agreement, as well as the early retirement in
April 1998 of $251 million in private placement debt assumed in connection with
the acquisition of T&N, resulted in a $47.1 million pretax ($31.3 million after
tax) extraordinary loss in the second quarter of 1998.

7.  ASSETS HELD FOR SALE AND DIVESTITURES

In addition to the T&N Bearings Business and Fel-Pro Chemical Business held for
sale, during the first quarter of 1998, the Company decided to sell its
subsidiary, Bertolotti Pietro e Figli, S.r.l. (Bertolotti), conducting
aftermarket operations in Italy. The carrying value of Bertolotti's assets have
been reduced to its fair value based on estimates of selling values less costs
to sell, calculated using multiples of earnings similar to recent automotive
industry transactions in Italy. The Company recognized a $20.0 million first
quarter charge primarily associated with the write-down of Bertolotti's assets
to the estimated fair value. The Company expects to complete the sale of
Bertolotti within one year.

In the second quarter, the Company recognized a $1.0 million benefit associated
with the adjustment of the assets of Chile to its estimated fair value.

As part of its 1996 restructuring plan, the Company continued to close or sell
certain retail aftermarket operations during the second quarter of 1998. Net
cash proceeds received for those retail aftermarket locations sold in the first
half of 1998 approximated $5 million. No gain or loss was recognized on the
dispositions of those retail aftermarket locations, as the related assets had
been previously adjusted to fair value.


                                      -10-
<PAGE>   11


Bruss Divestiture Agreement

In February 1998, the Company divested its minority interest in G. Bruss GmbH &
Co. KG, a German manufacturer of seals and gaskets. As part of the divestiture
agreement the Company also increased its ownership to 100% in Summerton. The
Company received net proceeds of approximately $47 million related to the
divestiture agreement and recognized a gain on the divestiture of $6.0 million.
The gain on the divestiture is included as a component of other expense.

Sale of Acquired Options

In addition, the Company received proceeds from the sale of options which were
acquired with the acquisition of T&N. No gain or loss was recognized in
connection with the sale of the options acquired.


8.   EARNINGS PER SHARE, NON-CASH TRANSACTION AND COMPREHENSIVE INCOME

Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per
share for the three- and six-month periods ended June 30, 1998 and 1997 (in
millions, except per share data):

                                      -11-
<PAGE>   12


<TABLE>
<CAPTION>
                                                                     Three Months Ended             Six Months Ended
                                                                          June 30                        June 30
                                                                    -------------------            ------------------
                                                                     1998         1997              1998        1997
                                                                    ------       ------            ------      ------
<S>                                                                 <C>          <C>               <C>         <C>  
Numerator:
    Net earnings (loss) after extraordinary item                     $(2.9)       $25.9            $(10.1)      $39.8
    Extraordinary item - loss on early retirement of
       debt, net of applicable tax benefit                            31.3          2.6              31.3         2.6
                                                                    ------       ------            ------      ------
    Net earnings before extrordinary item                             28.4         28.5              21.2        42.4
    Series C preferred dividend requirement                           (0.6)        (0.6)             (1.1)       (1.2)
    Series D preferred dividend requirement                              -         (1.5)                -        (3.1)
    Series E preferred dividend requirement                           (0.4)           -               (.6)          -
                                                                    ------       ------            ------      ------
    Numerator for basic earnings per share - income
       available to common shareholders
          before extraordinary item                                   27.4         26.4              19.5        38.1
    Effect of dilutive securities:
       Series C preferred dividend requirement                         0.6          0.6               1.1         1.2
       Series D preferred dividend requirement                           -          1.5                 -         3.1
       Series E preferred dividend requirement                         0.4            -               0.6           -
       Additional required ESOP contribution                          (0.6)        (0.6)             (1.0)       (1.0)
                                                                    ------       ------            ------      ------
    Numerator for diluted earnings per share - income
       available to common shareholders after
          assumed conversions before extraordinary item              $27.8        $27.9            $ 20.2       $41.4
                                                                    ======       ======            ======      ======

Numerator for basic earnings per share - income
    (loss) available to common shareholders
       after extraordinary item                                      $(3.9)       $23.8            $(11.8)      $35.5
                                                                    ======       ======            ======      ======
Numerator for diluted earnings per share - income
    (loss) available to shareholders after assumed
       conversions after extraordinary item                          $(3.5)       $25.3            $(11.1)      $38.8
                                                                    ======       ======            ======      ======
Denominator:
    Denominator for basic earnings per share - weighted
       average shares outstanding                                     43.3         34.9              41.7        34.8
    Effect of dilutive securities:
       Dilutive stock options outstanding                              0.9          0.3               0.8         0.3
       Nonvested stock                                                 0.2          0.3               0.2         0.3
       Conversion of Series C preferred stock                          1.5          1.6               1.5         1.6
       Conversion of Series D preferred stock                            -          4.4                 -         4.4
       Conversion of Series E preferred stock                          4.6            -               3.4           -
                                                                     -----       ------             -----      ------
Denominator for dilutive earnings per share adjusted
       weighted average after assumed conversions                     50.5         41.5              47.6        41.4
                                                                    ======       ======            ======      ======

Basic earnings (loss) per share before extraordinary item            $ .63        $ .76            $  .47       $1.09
Basic earnings (loss) per share after extraordinary item              (.09)         .68              (.28)       1.02
Diluted earnings (loss) per share before extraordinary item            .55          .67               .42         .99
Diluted earnings (loss) per share after extraordinary item            (.07)         .61              (.23)        .93
</TABLE>

                                      -12-
<PAGE>   13


Convertible preferred securities redeemable for 11.2 million shares of common
stock were outstanding during the three- and six- month periods ended June 30,
1998. The convertible preferred securitities were not included in the
computation of diluted earnings per share for the three- and six-month periods
ended June 30, 1998 because the effect would be antidilutive.

Quarterly dividends of $0.12 and $0.0025 per common share were declared for the
first and second quarters of 1998 respectively and $0.12 per common share were
declared for both the first and second quarters of 1997.

Non-Cash Transaction

In connection with the Fel-Pro acquisition, the Company issued 1,030,325.6
million shares of Series E Stock with an imputed value of $225 million. The
shares of Series E Stock are exchangeable into shares of the Company's common
stock at a rate of five shares of common stock per share of Series E Stock.
Subsequently, in June 1998, in conjunction with the common stock offering, the
Company converted 422,581 shares of Series E Stock into 2,112,907 shares of
common stock. The remaining 607,745 million shares of Series E Stock are
required to be exchanged into shares of the Company's common stock no later than
February 24, 1999, subject to certain conditions and such shares are paid
quarterly dividends at a rate of $0.12 per common stock equivalent.

Comprehensive Income

During 1997, the Financial Accounting Standards Board issued Statement No. 130,
Reporting Comprehensive Income. This Statement establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. The Company adopted Statement 130 as of
January 1, 1998. The adoption of this Statement had no impact on the Company's
net earnings (loss) or shareholders' equity. Statement 130 requires foreign
currency translation adjustments and unrealized gains or losses on investments
and certain derivative instruments, which prior to the adoption of Statement 130
were reported as a component of shareholders' equity, to be included in other
comprehensive income.

Total comprehensive income (loss), net of the related estimated tax, was $(19.7)
million and $22.0 million for the three months ended June 30, 1998 and 1997,
respectively and $(24.2) million and $27.3 million for the six months ended June
30, 1998 and 1997, respectively.

9.   INVENTORIES

At June 30, 1998 and December 31, 1997, inventories consisted of the following
(in millions of dollars):

<TABLE>
<CAPTION>
                                                                                 1998                  1997
                                                                                ------                ------
<S>                                                                             <C>                   <C>   
Finished products                                                               $460.1                $254.6
Work-in-process                                                                   84.0                  21.8
Raw materials                                                                    152.9                  15.7
                                                                                ------                ------
                                                                                 697.0                 292.1
Reserve for inventory valuation                                                  (46.8)                (15.1)
                                                                                ------                ------
                                                                                $650.2                $277.0
                                                                                ======                ======
</TABLE>



The significant increase in inventory was primarily due to the previously
described acquisitions in Note 2.

                                      -13-
<PAGE>   14


10.  INCOME TAXES

During the first half of 1998, the Company recognized charges for adjustment of
assets held for sale to fair value and purchased in-process research and
development and recognized a net gain on the British pound currency option and
forward contract. These transactions resulted in a pre-tax net charge of $25.3
million. The net income tax benefit related to these transactions totaled $2.1
million. In addition, due to the acquisitions of T&N and Fel-Pro, the Company
recognized approximately $14 million in non-deductible goodwill amortization
expense.

10.   UNAUDITED 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 Agreement with The Chase Manhattan Bank, NA, ("Chase").

T&N Holding Companies
---------------------
Federal-Mogul Dutch Holdings Inc.
Federal-Mogul UK Holdings Inc.
Federal-Mogul Global Inc.

Federal-Mogul Subsidiaries
--------------------------
Federal-Mogul Venture Corporation
Federal-Mogul Global Properties Inc.
Carter Automotive Company
Federal-Mogul Worldwide Inc.

Fel-Pro Subsidiaries
--------------------
Fel-Pro Chemical Products LP
Felt Products Mfg. Co.
Fel-Pro Management Co.

The Company issued $1.0 billion of bonds on June 25, 1998, ("New Note") pursuant
to the Company's Shelf Registration Statement which is guaranteed by the
Guarantor Subsidiaries. The Guarantor Subsidiaries also guarantee the Company's
previously existing publicly registered Medium-term notes and Senior notes (the
"Notes").

The T&N Holding Companies (as listed above) are wholly owned subsidiaries of the
Company and were incorporated in January 1998 in order to effectuate the
Company's acquisition of T&N plc. These subsidiaries have no operations and act
solely as holding companies of subsidiaries which will not provide a guarantee
fully and unconditionally on a joint and several basis, the obligation to pay
principal and interest of the New Notes or the Notes (the "Guarantees").

In addition, certain other wholly owned subsidiaries of the Company, the
Federal-Mogul Subsidiaries (as listed above), will provide the Guarantees. The
Federal-Mogul Subsidiaries are included in the Company's consolidated financial
statements for all periods presented in the Company's Annual Report on Form 10-K
dated December 31, 1997.

                                      -14-
<PAGE>   15


The Fel-Pro Subsidiaries (as listed above) were acquired on February 24, 1998,
are wholly owned subsidiaries of the Company and also will provide the
Guarantees.

The financial statements of Felt Products Mfg. Co. were filed with the
Securities and Exchange Commission on Form 8-K on April 17, 1998, since the
stock of Felt Products Mfg. Co. was pledged as collateral for the Notes. On June
10, 1998, Felt Products Mfg. Co. declared a dividend to the Company whereby
substantially all of its assets were transferred to the Company. As a result of
the dividend to its parent, Felt Products Mfg. No longer meets the substantial
collateral threshold of Rule 3-10 of the Securitites and Exchange Commission's
Regulation S-X. Therefore, the Company will no longer file separate financial
statements of Felt Products Mfg. Co.

In lieu of providing separate audited 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.


                                      -15-
<PAGE>   16


Federal-Mogul Corporation
Notes to Consolidated Financial Statements
Unaudited Consolidating Condensed Balance Sheet
June 30, 1998
(Millions of Dollars)

<TABLE>
<CAPTION>
                                                   (Unconsolidated)
                                   -----------------------------------------------
                                                    Guarantor        Non-Guarantor
                                     Parent        Subsidiaries      Subsidiaries        Eliminations      Consolidated
                                   ---------       ------------      -------------       ------------      ------------
<S>                                <C>             <C>               <C>                 <C>               <C>      
Current assets:
Cash and equivalents               $    35.0        $       -          $   107.1          $       -         $   142.1
Accounts receivable                     59.3                -              565.6                  -             624.9
Investment in accounts
   receivable securitization               -                -              131.7                  -             131.7
Inventories                            235.0                -              415.2                  -             650.2
Prepaid expenses and
   income tax benefits                 127.6                -              102.6                  -             230.2
Acquired businesses
   to be divested                          -             63.0              393.7                  -             456.7
                                   ---------        ---------          ---------          ---------         ---------
Total current assets                   456.9             63.0            1,715.9                  -           2,235.8
Property, plant and equipment          249.8              2.0            1,302.9                  -           1,554.7
Goodwill                               486.9                -            2,132.9                  -           2,619.8
Other intangible assets                151.9             10.1              295.7                  -             457.7
Business investments
   and other assets                    100.1                -              485.0                  -             585.1
Investment in subsidiaries           3,225.1            730.5                   -          (3,955.6)                -
Intercompany accounts, net            (480.0)         1,729.9           (1,249.9)                 -                 -
                                   ---------        ---------          ---------          ---------         ---------
Total Assets                       $ 4,190.7        $ 2,535.5          $ 4,682.5          $(3,955.6)        $ 7,453.1
                                   =========        =========          =========          =========         =========

Current liabilities:
Short-term debt, including
   current portion of
   long-term debt                  $   100.8        $       -          $    96.9          $       -         $   197.7
Accounts payable                        97.0                -              240.9                  -             337.9
Accrued compensation                    58.1              0.4              124.4                  -             182.9
Restructuring and
   rationalization reserves              9.2                -              163.1                  -             172.3
Current portion of
   asbestos liability                      -                -              100.0                  -             100.0
Other accrued liabilities              126.8             13.6              296.7                  -             437.1
                                   ---------        ---------          ---------          ---------         ---------
Total current liabilities              391.9             14.0            1,022.0                  -           1,427.9
Long-term debt                       2,439.1                -               58.9                  -           2,498.0
Long-term portion of
   asbestos liability                      -                -            1,208.7                  -           1,208.7
Postemployment benefits                191.1                -              249.9                  -             441.0
Other accrued liabilities                8.4                -               80.5                  -              88.9
Minority interest in
   consolidated subsidiaries             8.2                -               53.1                  -              61.3
Minority interest - preferred
   securities of affiliate                 -                -              575.0                  -             575.0
Shareholders' equity                 1,152.0          2,521.5            1,434.4           (3,955.6)          1,152.3
                                   ---------        ---------          ---------          ---------         ---------
Total Liabilities and
   Shareholders' Equity            $ 4,190.7        $ 2,535.5          $ 4,682.5          $(3,955.6)        $ 7,453.1
                                   =========        =========          =========          =========         =========
</TABLE>

                                      -16-
<PAGE>   17


Federal-Mogul Corporation
Notes to Consolidated Financial Statements
Unaudited Consolidating Condensed Balance Sheet
December 31, 1997
(Millions of Dollars)
<TABLE>
<CAPTION>

                                                  (Unconsolidated)
                                   -----------------------------------------------
                                                     Guarantor       Non-Guarantor
                                     Parent        Subsidiaries       Subsidiaries       Eliminations      Consolidated
                                   ---------       ------------      -------------       ------------      ------------
<S>                                <C>              <C>               <C>               <C>                 <C>      
Current assets:
Cash and equivalents               $   504.9        $     0.1          $    36.4          $       -          $  541.4
Accounts receivable                     47.1                -              111.8                  -             158.9
Investment in accounts
   receivable securitization               -                -               48.7                  -              48.7
Inventories                            166.3                -              110.7                  -             277.0
Prepaid expenses and
   income tax benefits                  99.9                -               13.3                  -             113.2
                                   ---------        ---------          ---------          ---------          --------
Total current assets                   818.2              0.1              320.9                  -           1,139.2

Property, plant and equipment          162.5              2.0              149.4                  -             313.9
Goodwill                               107.0                -               36.8                  -             143.8
Other intangible assets                 28.3                -               20.1                  -              48.4
Business investments
   and other assets                     61.9                -               94.9                  -             156.8
Investment in subsidiaries             503.1              5.8                   -            (508.9)                -
Intercompany accounts, net            (702.8)             9.7              693.1                  -                 -
                                   ---------        ---------          ---------          ---------          --------
Total Assets                       $   978.2        $    17.6          $ 1,315.2          $  (508.9)         $1,802.1
                                   =========        =========          =========          =========          ========


Current liabilities:
Short-term debt, including
   current portion of
   long-term debt                  $    16.8        $       -          $    11.8          $       -          $   28.6
Accounts payable                        60.5                -               41.8                  -             102.3
Accrued compensation                    27.7                -                9.1                  -              36.8
Restructuring and
   rationalization reserves             19.9                -               11.6                  -              31.5
Other accrued liabilities               39.7             13.3               77.4                  -             130.4
                                   ---------        ---------          ---------          ---------          --------
Total current liabilities              164.6             13.3              151.7                  -             329.6

Long-term debt                         266.7                -                6.4                  -             273.1
Postemployment benefits                164.0                -               26.9                  -             190.9
Other accrued liabilities                  -                -               50.6                  -              50.6
Minority interest in
   consolidated subsidiaries            13.6                -                  -                  -              13.6
Minority interest - preferred
   securities of affiliate                 -                -              575.0                  -             575.0
Shareholders' equity                   369.3              4.3              504.6             (508.9)            369.3
                                   ---------        ---------          ---------          ---------          --------
Total Liabilities and
   Shareholders' Equity            $   978.2        $    17.6          $ 1,315.2          $  (508.9)         $1,802.1
                                   =========        =========          =========          =========          ========
</TABLE>


                                      -17-
<PAGE>   18


Federal-Mogul Corporation
Notes to Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Operations
Three Months Ended June 30, 1998
(Millions of Dollars)

<TABLE>
<CAPTION>
                                                 (Unconsolidated)
                                   ----------------------------------------------
                                                   Guarantor        Non-Guarantor
                                     Parent      Subsidiaries       Subsidiaries        Eliminations     Consolidated
                                   ---------     ------------       -------------       ------------     -------------
<S>                               <C>             <C>                  <C>                <C>             <C>     
Net sales                          $   335.2        $       -          $   904.8          $   (26.0)         $1,214.0
Cost of products sold                  232.9                -              689.7              (26.0)            896.6
                                   ---------        ---------          ---------          ---------          --------
   Gross margin                        102.3                -              215.1                  -             317.4
Selling, general and
   administrative expenses             (94.7)               -              (86.1)                 -            (180.8)
Amortization                            (4.6)               -              (20.4)                 -             (25.0)
Adjustment of assets held for
   sale to fair value                      -                -                1.0                  -               1.0
Integration costs                       (2.6)               -               (2.1)                 -              (4.7)
Interest expense                       (66.5)               -              (38.8)              52.6             (52.7)
Interest income                         12.3             34.6                7.8              (52.6)              2.1
International currency
   exchange gains (losses)              (0.5)             0.4               (1.1)                 -              (1.2)
Other income (expense), net             14.0              3.5              (20.3)                 -              (2.8)
                                   ---------        ---------          ---------          ---------          --------
      Earnings (loss) before
         income taxes                  (40.3)            38.5               55.1                  -              53.3
Income tax expense (benefit)           (16.0)            (5.3)              46.2                  -              24.9
                                   ---------        ---------          ---------          ---------          --------
      Earnings (loss) before
         extraordinary item            (24.3)            43.8                8.9                  -              28.4
Extraordinary item - loss on
   early retirement of debt,
   net of applicable income
   tax benefit                          12.4                -               18.9                  -              31.3
                                   ---------        ---------          ---------          ---------          --------
      Net earnings (loss)          $   (36.7)       $    43.8          $   (10.0)         $       -          $   (2.9)
                                   =========        =========          =========          =========          ========
</TABLE>

                                      -18-

<PAGE>   19


Federal-Mogul Corporation
Notes to Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Operations
Three Months Ended June 30, 1997
(Millions of Dollars)

<TABLE>
<CAPTION>
                                                (Unconsolidated)
                                   ----------------------------------------------
                                                   Guarantor        Non-Guarantor
                                     Parent      Subsidiaries       Subsidiaries        Eliminations     Consolidated
                                   ---------     ------------       -------------       ------------     -------------
<S>                                <C>             <C>                 <C>                <C>               <C>   
Net sales                          $   295.1        $       -          $   214.6          $   (27.9)         $  481.8
Cost of products sold                  222.4                -              172.0              (27.9)            366.5
                                   ---------        ---------          ---------          ---------          --------
   Gross margin                         72.7                -               42.6                  -             115.3
Selling, general and
   administrative expenses             (44.5)             0.1              (26.4)                 -             (70.8)
Amortization                            (2.0)               -               (0.7)                 -              (2.7)
Interest expense                        (7.5)               -               (3.4)               1.9              (9.0)
Interest income                          3.0                -                  -               (1.9)              1.1
International currency
   exchange gains (losses)               0.2                -               (0.1)                 -               0.1
Other income (expense), net             (6.3)             4.0                2.7                  -               0.4
                                   ---------        ---------          ---------          ---------          --------
      Earnings before
         income taxes and
         extraordinary item             15.6              4.1               14.7                  -              34.4
Income tax expense (benefit)             2.1             (0.9)               4.7                  -               5.9
                                   ---------        ---------          ---------          ---------          --------
      Earnings before
         extraordinary item             13.5              5.0               10.0                  -              28.5
Extraordinary item - loss on
   early retirement of debt,
   net of applicable income
   tax benefit                           2.6                -                  -                  -               2.6
                                   ---------        ---------          ---------          ---------          --------
      Net earnings                 $    10.9        $     5.0          $    10.0          $       -          $   25.9
                                   =========        =========          =========          =========          ========
</TABLE>

                                      -19-
<PAGE>   20
Federal-Mogul Corporation
Notes to Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Operations
Six Months Ended June 30, 1998
(Millions of Dollars)

<TABLE>
<CAPTION>
                                                      (Unconsolidated)
                                      ---------------------------------------------
                                                     Guarantor        Non-Guarantor
                                      Parent        Subsidiaries       Subsidiaries      Eliminations      Consolidated
                                      ------        ------------      -------------      ------------      ------------
<S>                                   <C>              <C>              <C>                <C>               <C>     
Net sales                             $615.3           $ 36.2           $1,272.2           $(51.7)           $1,872.0
Cost of products sold                  436.3             23.1              985.6            (51.7)            1,393.3
                                      ------           ------           --------           ------            --------
   Gross margin                        179.0             13.1              286.6                -               478.7
Selling, general and
   administrative expenses            (148.3)            (7.5)            (123.1)               -              (278.9)
Amortization                            (7.4)            (0.6)             (27.1)               -               (35.1)
Purchased research and
   development charge                      -                -              (18.6)               -               (18.6)
Restructuring charge                       -                -              (10.5)               -               (10.5)
Adjustment of assets held for
   sale to fair value                      -                -              (19.0)               -               (19.0)
Integration costs                       (2.6)               -               (2.1)               -                (4.7)
Interest expense                       (84.7)            (1.5)             (44.2)            64.3               (66.1)
Interest income                         19.0             42.3                9.7            (64.3)                6.7
International currency
   exchange gains (losses)              (0.6)             0.4               (2.1)               -                (2.3)
Net gain on British pound
   currency option and
   forward contract                     13.3                -                  -                -                13.3
Other income (expense), net             13.4              9.6              (31.6)               -                (8.6)
                                      ------           ------           --------           ------            --------
      Earnings (loss) before
         income taxes                  (18.9)            55.8               18.0                -                54.9
Income tax expense (benefit)           (12.9)             1.6               45.0                -                33.7
                                      ------           ------           --------           ------            --------
      Earnings (loss) before
         extraordinary item             (6.0)            54.2              (27.0)               -                21.2
Extraordinary item - loss on
   early retirement of debt,
   net of applicable income
   tax benefit                          12.4                -               18.9                -                31.3
                                      ------           ------           --------           ------            --------
      Net earnings (loss)             $(18.4)          $ 54.2           $  (45.9)          $    -            $  (10.1)
                                      ======           ======           ========           ======            ========
</TABLE>


                                      -20-
<PAGE>   21
Federal-Mogul Corporation
Notes to Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Operations
Six Months Ended June 30, 1997
(Millions of Dollars)

<TABLE>
<CAPTION>
                                                    (Unconsolidated)
                                      ---------------------------------------------
                                                     Guarantor        Non-Guarantor
                                      Parent        Subsidiaries      Subsidiaries       Eliminations      Consolidated
                                      ------        ------------      -------------      ------------      ------------
<S>                                   <C>              <C>              <C>                <C>               <C>     
Net sales                             $584.7           $   -            $ 440.5            $(57.8)           $  967.4
Cost of products sold                  446.7               -              351.1             (57.8)              740.0
                                      ------           -----            -------            ------            --------
   Gross margin                        138.0               -               89.4                 -               227.4
Selling, general and
   administrative expenses             (89.6)            0.1              (57.2)                -              (146.7)
Amortization                            (4.0)              -               (1.2)                -                (5.2)
Interest expense                       (15.0)              -               (7.7)              3.9               (18.8)
Interest income                          5.7               -                  -              (3.9)                1.8
Other income (expense), net            (10.3)            6.4                2.3                 -                (1.6)
                                      ------           -----            -------            ------            --------
      Earnings before
         income taxes and
         extraordinary item             24.8             6.5               25.6                 -                56.9
Income tax expense                       5.6               -                8.9                 -                14.5
                                      ------           -----            -------            ------            --------
      Earnings before
         extraordinary item             19.2             6.5               16.7                 -                42.4
Extraordinary item - loss on
   early retirement of debt,
   net of applicable income
   tax benefit                           2.6               -                  -                 -                 2.6
                                      ------           -----            -------            ------            --------
      Net earnings                    $ 16.6           $ 6.5            $  16.7            $    -            $   39.8
                                      ======           =====            =======            ======            ========
</TABLE>

                                      -21-
<PAGE>   22
Federal-Mogul Corporation
Notes to Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Cash Flows
Six Months Ended June 30, 1998
(Millions of Dollars)

<TABLE>
<CAPTION>
                                                    (Unconsolidated)
                                      ---------------------------------------------
                                                     Guarantor        Non-Guarantor
                                      Parent        Subsidiaries      Subsidiaries       Eliminations      Consolidated
                                      ------        ------------      -------------      ------------      ------------
<S>                                 <C>              <C>                <C>                <C>               <C>     
Net Cash Provided From
   Operating Activities             $  128.6         $    53.7          $     3.3          $       -         $   185.6
Expenditures for property,
   plant and equipment                 (17.2)             (3.0)             (60.9)                 -             (81.1)
Proceeds from sale of
   business investments                  3.4                 -               50.5                  -              53.9
Proceeds from sale of options              -                 -               39.1                  -              39.1
Business acquisitions, net of
   cash acquired                      (541.4)                -           (2,245.1)                 -          (2,786.5)
                                    --------         ---------          ---------          ---------         ---------

   Net Cash Used By
      Investing Activities            (555.2)             (3.0)          (2,216.4)                 -          (2,774.6)

Issuance of common stock               601.4                 -                  -                  -             601.4
Net increase in debt                 1,619.4                 -               48.1                  -           1,667.5
Fees paid for debt issuance            (49.4)                -                  -                  -             (49.4)
Contributions paid to
   affiliates                       (2,217.4)           (565.4)                 -            2.782.8                 -
Contributions received
   from affiliates                         -           2,217.4              565.4           (2,782.8)                -
Change in intercompany
   accounts                             25.9          (1,702.8)           1,676.9                  -                 -
Other                                   (2.4)                -              (27.4)                 -             (29.8)
                                    --------         ---------          ---------          ---------         ---------

   Net Cash Provided From
      (Used By) Financing
      Activities                       (22.5)            (50.8)           2,263.0                  -           2,189.7
                                    --------         ---------          ---------          ---------         ---------

   Net Increase (Decrease)
      in Cash                       $ (449.1)        $     (.1)         $    49.9          $       -         $  (399.3)
                                    ========         =========          =========          =========         =========
</TABLE>


                                      -22-
<PAGE>   23
Federal-Mogul Corporation
Notes to Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Cash Flows
Six Months Ended June 30, 1997
(Millions of Dollars)

<TABLE>
<CAPTION>
                                                    (Unconsolidated)
                                      ---------------------------------------------
                                                     Guarantor        Non-Guarantor
                                      Parent        Subsidiaries      Subsidiaries       Eliminations      Consolidated
                                      ------        ------------      -------------      ------------      ------------
<S>                                  <C>               <C>              <C>                 <C>               <C>     
Net Cash Provided From
   Operating Activities              $  82.7           $  1.7           $  16.4             $   -             $ 100.8
Expenditures for property,
   plant and equipment                 (12.9)               -              (7.9)                -               (20.8)
Proceeds from sale of
   business investments                    -                -              66.6                 -                66.6
                                     -------           ------           -------             -----             -------

   Net Cash Provided From
      (Used By) Investing
      Activities                       (12.9)               -              58.7                 -                45.8
Net decrease in debt                   (98.4)            (1.7)            (38.7)                -              (138.8)
Change in intercompany
   accounts                             45.1                -             (45.1)                -                   -
Other                                  (21.1)               -                 -                 -               (21.1)
                                     -------           ------           -------             -----             -------

   Net Cash Used By
      Financing Activities             (74.6)            (1.7)            (83.8)                -              (160.1)
                                     -------           ------           -------             -----             -------

   Net Decrease in Cash              $  (4.8)          $    -           $  (8.7)            $   -             $ (13.5)
                                     =======           ======           =======             =====             =======
</TABLE>


                                      -23-
<PAGE>   24

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

OVERVIEW

The Company is a leading global manufacturer and distributor of a broad range of
vehicular components for automobiles and light trucks, heavy duty trucks, farm
and construction vehicles and industrial products. Such parts include powertrain
systems components (primarily bearings and piston products), sealing systems
components (dynamic seals and gaskets) and general products (primarily
camshafts, friction products, sintered products and systems protection
products). The Company markets its products to many of the world's major
original equipment manufacturers of automobiles, light trucks, heavy duty
trucks, farm and construction vehicles and industrial products. The Company also
manufactures and supplies its products and related parts to the aftermarket. The
Company operates facilities at over 240 locations in 24 countries.

The following summarizes net sales by manufacturing division, geographic region
and customer group as a percentage of total net sales for the year ended
December 31, 1997, on a pro forma basis.

<TABLE>
<CAPTION>
Manufacturing Division:           Geographic Region:             Customer Group:
----------------------            -----------------              --------------
<S>                     <C>       <C>                 <C>        <C>                    <C>
Powertrain Products     40%       North America       49%        Original Equipment     52%
Sealing Systems         22%       Europe              40%        Aftermarket            48%
General Products        38%       Rest of World       11%
</TABLE>

ACQUISITIONS

The Company acquired Fel-Pro, Incorporated and certain affiliated entities,
which constitute the operating businesses of the Fel-Pro group of companies
(Fel-Pro), and acquired T&N plc (T&N) and Bimet S.A. (Bimet) during the first
quarter of 1998. In addition, the Company increased its ownership in the
Summerton, South Carolina gasket business (Summerton) and KFM Bearing Co., Ltd.
(KFM) during the first quarter. Due to the complexity of valuing certain assets
and liabilities acquired and related valuation estimates that are in process,
the purchase allocation may subsequently be adjusted as further information
becomes available. Goodwill recognized in connection with these transactions is
being amortized on a straight-line basis over forty years.

Fel-Pro Transaction

On February 24, 1998, the Company acquired all the equity interests of Fel-Pro,
a privately owned gasket manufacturer headquartered in Skokie, Illinois, for a
total consideration of approximately $717 million, which included 1,030,325.6
shares of Federal-Mogul Series E Stock with an imputed value of $225 million
(refer also to Note 8) and approximately $492 million in cash. The acquisition
has been accounted for as a purchase and, accordingly, the total consideration
was allocated to the acquired assets and assumed liabilities based on estimated
fair values as of the acquisition date. The preliminary purchase price
allocation of the total consideration exceeds the estimated fair value of net
assets acquired by $507.3 million, which has been recognized as goodwill.

Fel-Pro is a leading gaskets manufacturer for the North American aftermarket and
OE heavy duty market. In 1997, Fel-Pro had sales of approximately $500 million.
At the time of the acquisition, Fel-Pro's primary product lines consisted of
gaskets, heavy duty diesel engine products, diesel products,


                                      -24-
<PAGE>   25

high performance gaskets and other equipment and Chemical products. Fel-Pro
employed approximately 2,700 employees in 16 locations. On July 31, 1998, the
Company completed the sale of Fel-Pro's Chemical manufacturing operations
representing approximately $33 million of Fel-Pro's 1997 net sales (refer to the
caption "Acquired Businesses to be Divested").

The consolidated statement of operations for the three- and six-month periods
ended June 30, 1998 includes the operating results of the acquired business,
exclusive of the Fel-Pro Chemical Business, from the acquisition date.

T&N Transaction

On March 6, 1998, the Company satisfied all regulatory conditions relating to
the acquisition of T&N, a manufacturer based in Manchester, England, and made
its offer wholly unconditional. The Company paid for the outstanding T&N shares
on March 12, 1998.

The Company has paid total consideration (including direct costs of the
acquisition) of $2.413 billion. The Company also acquired cash of approximately
$163 million and debt of approximately $723 million. In addition, the Company is
required to pay 260 pence per share for certain T&N options expected to be
converted to T&N shares. As of June 30, 1998, the Company has paid $52.8
million, net of cash received, for these T&N options and reflects an estimated
additional amount to be paid of $7.5 million in the balance sheet current
liability section under the caption "Other accrued liabilities." The acquisition
has been accounted for as a purchase and, accordingly, the total consideration
was allocated to the acquired assets and assumed liabilities based on estimated
fair values as of the acquisition date. The preliminary purchase price
allocation of the total consideration exceeds the estimated fair value of net
assets acquired by $2.032 billion which has been recognized as goodwill.

In connection with the acquisition of T&N, the Company entered into a $2.675
billion floating rate Senior Credit Agreement (consisting of a $2.275 billion
term loan facility and a $400 million revolving loan facility) and a $500
million floating rate Senior Subordinated Credit Agreement, each with Chase
Manhattan Bank as agent and lender and Chase Securities, Inc. as Arranger.

In addition, the Company funded a portion of the T&N acquisition through the
December 1997 sale of 11.5 million shares of 7% Trust Convertible Preferred
Securities (generating gross proceeds of $575 million) by Federal-Mogul
Financing Trust, a subsidiary of the Company.

T&N manufactures and supplies high technology engineered automotive components
and industrial materials. In 1997, T&N had sales of approximately 1.8 pounds 
sterling billion ($2.9 billion at the 1997 average exchange rate) with  about
80% of such sales relating to the global automotive industry. At the time of
its acquisition, T&N's major product lines consisted of piston products,
bearings, friction products, composites and camshafts (incorporating sintered
products) and sealing products and it was active in both the original equipment
and the aftermarket markets. T&N operated in approximately 200 locations in 24
countries, employed over 28,000 people worldwide and served customers globally.
T&N's assets included technical centers in the U.K., Germany and North America.

The consolidated statement of operations for the three- and six- month periods
ended June 30, 1998 includes the operating results of T&N, exclusive of the T&N
Bearings Business (refer to the caption "Acquired Businesses to be Divested,"
described later in this section), from the acquisition date.


                                      -25-
<PAGE>   26

Acquired Businesses to be Divested

In connection with securing regulatory approvals for the acquisition of T&N, the
Company executed an Agreement Containing Consent Order with the FTC on February
27, 1998. Pursuant to this agreement the Company must divest the T&N Bearings
Business, consisting of T&N's thinwall and dry bearings (polymer bearings)
operations within six months after the FTC declares the consent order final and
must provide for independent management of those assets pending such
divestiture. The agreement stipulates that the T&N Bearings Business is to be
maintained as a viable, independent competitor of the Company and that the
Company shall not attempt to direct the activities of, or exercise control over,
the T&N Bearings Business or have contact with the T&N Bearings Business outside
of normal business activities.

On July 31, 1998, the Company sold the Fel-Pro Chemical Business to Loctite
Corporation, a part of Henkel KGaA, a global specialist in applied chemistry
headquartered in Dusseldorf, Germany for approximately $60 million.

The net assets of the T&N Bearings Business and the Fel-Pro Chemical Business
have been recorded at their fair value based on estimates of selling values less
costs to sell, calculated using multiples of earnings similar to recent
comparable industry transactions. The Company's investment in the T&N Bearings
Business and Fel-Pro Chemical Business is included in the balance sheet caption
"Acquired businesses to be divested." In addition, the Company's preliminary
purchase price allocation for T&N includes an increase of $124 million to adjust
the acquired income tax liability related to the anticipated divestiture of the
T&N Bearings Business.

Operating results for the T&N Bearings and Fel-Pro Chemical Business (which
includes amortization expense for goodwill allocated to the businesses and
interest expense relating to the holding costs of the businesses) have been
excluded from the condensed consolidated statement of operations for the three-
and six-month periods ended June 30, 1998.

Summerton, KFM and Bimet Transactions

In February 1998, the Company increased its ownership in Summerton in connection
with the Bruss Divestiture Agreement, described in Note 7. In March 1998, the
Company increased its ownership from 30% to 87% in KFM, a Korean joint venture
formed in 1988 with Kukje Special Metal Co., Ltd.

Also in March 1998, the Company acquired Bimet, a manufacturer of engine
bearings, bushings and related products located in Gdansk, Poland. The total
cash consideration paid for the Summerton, KFM and Bimet acquisitions
approximated $32 million.

The Summerton, KFM and Bimet transactions have been accounted for as purchases
and, accordingly, the total consideration was allocated to the acquired assets
and assumed liabilities based on its estimated fair values as of the acquisition
dates. The preliminary purchase price allocation of total consideration over the
estimated fair value of net assets acquired of $16.4 million has been recognized
as goodwill. The consolidated statement of operations for the three- and
six-month periods ended June 30, 1998 includes the operating results of the
acquired businesses from the applicable date of acquisition.


                                      -26-
<PAGE>   27

Acquisition Strategy

One of the Company's principal business strategies is to expand its core
competencies in manufacturing and distribution through acquisitions of companies
that the Company identifies as complementary to its existing businesses and
capable of achieving satisfactory rates of return. The Company is engaged in
various stages of evaluation of potential acquisition candidates. Currently, the
Company is in the process of pursuing one or more potential acquisitions, at
least one of which would be material if consummated. Any such acquisitions would
be paid for through the incurrence of a significant amount of additional debt,
the issuance of a significant amount of capital stock or both. If the Company
determines that any one or more of these potential acquisitions or other
transactions would meet its criteria and may be accomplished on appropriate
terms, it expects to act to attempt to consummate them as quickly as possible.
There can be no assurance that any of the discussions in which the Company is
currently engaged will result in the completion of any acquisitions, that the
Company will in the future succeed in locating or acquiring appropriate
companies on attractive terms or that the Company will be successful in
integrating acquired companies or realizing desired benefits of such
acquisitions.

The Company believes that successful implementation of this strategy will
require significant capital expenditures which it might not be able to fund from
its cash from operations. Therefore, the Company may be required to borrow money
or otherwise obtain financing for future acquisitions.

DIVESTITURES

In February 1998, the Company divested its minority interest in G. Bruss GmbH &
Co. KG, a German manufacturer of seals and gaskets. As part of the divestiture
agreement the Company increased its ownership in Summerton. The Company received
net proceeds of approximately $47 million related to the divestiture agreement
and recognized a gain on the divestiture of $6.0 million. The gain on the
divestiture is included as a component of other expense.

In addition, the Company closed or sold certain retail aftermarket operations
during the first half of 1998.

ASBESTOS LIABILITY AND LEGAL PROCEEDINGS

T&N Asbestos

As of June 30, 1998, the Company has provided $1.309 billion as its estimate for
future costs related to resolving asbestos claims. In the United States, the
Company's subsidiary, T&N, and two of T&N's U.S. subsidiaries (the T&N
Companies) are among many defendants named in numerous court actions alleging
personal injury resulting from exposure to asbestos or asbestos-containing
products. T&N is also subject to asbestos-disease litigation, to a lesser
extent, in the United Kingdom and to property damage litigation based upon
asbestos in the United States. Because of the slow onset of asbestos-related
diseases, management anticipates that similar claims will be made in the future.
It is not known how many such claims may be made nor the expenditure which may
arise therefrom. T&N has appointed the Center for Claims Resolution (CCR) as its
exclusive representative in relation to all asbestos-related personal injury
claims made against the T&N Companies in the United States.

Prior to its acquisition, T&N secured a 500 million pounds sterling 
(approximately $834 million at the June 30, 1998 exchange rate of $1.6698:1
pound sterling) layer of insurance which will be triggered should the


                                      -27-
<PAGE>   28

aggregate amount of claims filed after June 30, 1996, where the exposure
occurred prior to that date, exceed 690 million pounds sterling (approximately
$1,151 million at the June 30, 1998 exchange rate). At June 30, 1998 the Company
has recorded reserves for incurred but not reported claims up to the insurance
level, which is 690 million pounds sterling.

While management believes that reserves are appropriate for anticipated
losses arising from T&N's asbestos related claims, no assurance can be given
that T&N will not be subject to material additional liabilities and significant
additional litigation relating to asbestos. Any such liabilities or litigation
in amounts in excess of the reserves recorded by the Company and the additional
500 million pounds sterling of insurnace coverage could have a material adverse
effect on the Company's results of operations, business, liquidity and
financial condition.

Federal-Mogul and Fel-Pro Asbestos

Federal-Mogul Corporation also is one of a large number of defendants in a
number of lawsuits brought by claimants alleging injury due to exposure to
asbestos. In addition, Fel-Pro has been named as a defendant in a large number
of product liability cases involving asbestos, primarily involving gasket or
packing products sold to ship owners. The majority of these cases are
administratively dismissed as received by the court due to the expiration of the
statute of limitations. The Company is defending all such claims vigorously and
believes that it and Fel-Pro have substantial defenses to liability and adequate
insurance coverage for defense and indemnity. While the outcome of litigation
cannot be predicted with certainty, management believes that asbestos claims
pending against Federal-Mogul Corporation and Fel-Pro as of June 30, 1998 will
not have a material effect on the Company's financial position. At June 30,
1998, approximately $2 million in related reserves has been provided related to
asbestos claims pending against Federal-Mogul Corporation and Fel-Pro.

Other

The Company is involved in various other legal actions and claims, directly and
through its subsidiaries (including T&N and Fel-Pro). After taking into
consideration legal counsel's evaluation of such actions, management is of the
opinion that its outcomes are not reasonably likely to have a material adverse
affect on the Company's financial position, operating results, or cash flows.

THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED
JUNE 30, 1997

RESULTS OF OPERATIONS

Following the acquisitions of T&N and Fel-Pro, Federal-Mogul's integrated
operations have been reorganized to realize synergies and effectively coordinate
operations. Operations are conducted through three manufacturing operating units
corresponding to major product areas: Powertrain Systems, Sealing Systems and
General Products. The major product categories in Powertrain Systems include
engine bearings and piston products. Sealing Systems includes dynamic seals and
gaskets. General Products include camshafts, friction products, sintered
products, systems protection products and a number of smaller product lines. The
Worldwide Aftermarket organization is responsible for the Company's global
aftermarket sales, marketing and distribution.


                                      -28-
<PAGE>   29

Net Sales

Sales for the second quarter of 1998 were $1,214.0 million compared to $481.8
million in the same quarter of 1997. The 152.0% increase in net sales is
primarily attributable to the acquisitions of T&N and Fel-Pro, the results of
which were included from their respective dates of acquisition. Excluding the
impact of the T&N and Fel-Pro acquisitions and the impact of previously divested
retail aftermarket businesses, net sales decreased 4.3%.

Powertrain Systems sales were $531.8 million for the second quarter of 1998
compared to $222.4 million for the same 1997 quarter. Approximately $326 million
of the 139.1% increase related to sales of T&N. Excluding the acquisition of T&N
and powertrain products previously sold through the divested retail aftermarket
businesses, sales decreased 4.2% due to effects from the General Motors strike
as well as softness in the North American aftermarket business.

Sealing Systems sales were $256.0 million in the second quarter of 1998 compared
to $73.6 million in the second quarter of 1997. Approximately $72 million of the
247.8% increase related to sales of T&N and approximately $110 million related
to sales of Fel-Pro. Excluding the acquisitions of T&N and Fel-Pro and sealing
products previously sold through the divested retail aftermarket businesses,
sales increased 2.2% due to new cylinder head, exhaust gasket and crankshaft
programs with General Motors. 

General Products sales were $426.2 million in the second quarter of 1998
compared to $185.8 million in 1997. Approximately $269 million of the 129.4%
increase related to sales of T&N. Excluding the acquisitions of T&N and general
products previously sold through the divested retail aftermarket businesses,
sales decreased 7.3% primarily due to continuing softness in the North American
aftermarket business.

Cost of Products Sold

Cost of products sold as a percent of net sales decreased to 73.9% for the
second quarter of 1998 from 76.1% for the same 1997 quarter. Management
attributes this decrease to productivity improvements, cost controls,
streamlined operations, the divestiture of underperforming assets and the
acquisitions previously discussed.

Selling , General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses as a percent of net sales
increased to 14.9% for the second quarter of 1998 compared to 14.7% for the
second quarter of 1997. The slight increase is primarily attributable to
approximately $2 million increase related to Year 2000 costs.

Amortization Expense

Amortization expense in the second quarter of 1998 was $25.0 million compared to
$2.7 million for the second quarter of 1997. The increase in amortization
expense was attributable to the expense related to the increase in goodwill and
other intangible assets associated with the T&N and Fel-Pro acquisitions.


                                      -29-
<PAGE>   30

Adjustment of Assets Held for Sale to Fair Value

In the second quarter, the Company recognized a $1.0 million benefit associated
with the adjustment of the assets of Chile to its estimated fair value.

As part of its 1996 restructuring plan, the Company continued to close or sell
certain retail aftermarket operations during the second quarter of 1998. As of
June 30, 1998, retail aftermarket operations that continue to be held for sale
include those in Puerto Rico. Net cash proceeds received for those retail
aftermarket locations sold in the second quarter approximated $3 million. No
gain or loss was recognized on the dispositions of those retail aftermarket
locations, as the related assets had been previously adjusted to fair value.

Integration Costs

In the second quarter of 1998, the Company incurred $4.7 million in expenses
directly related to the integration of the T&N and Fel-Pro acquisitions
previously discussed. In addition, the Company expects to incur additional
expenses of approximately $38 million necessary to complete the integration of
the acquired companies.

Net Interest Expense

Interest expense in the second quarter of 1998 was $50.6 million compared to
$7.9 million for the second quarter of 1997. The increase in interest expense is
attributable to the interest expense related to the financing of the T&N and
Fel-Pro acquisitions slightly offset by reduced preacquisition debt levels as
compared to the second quarter of 1997.

Income Tax Expense

During the second quarter of 1998, due to the acquisitions of T&N and Fel-Pro,
the Company recognized approximately $14 million in non-deductible goodwill
amortization expense.

Pro Forma Results

The following unaudited pro forma financial information for the three month
period ended June 30, 1998 assumes the T&N and Fel-Pro acquisitions occurred as
of the beginning of the period, after giving effect to certain adjustments,
including the amortization of intangible assets, interest expense on acquisition
debt, divestitures of the T&N Bearings Business and Fel-Pro Chemical Business,
and income tax effects. The pro forma results (in millions of dollars, except
per share data) have been prepared for comparative purposes only and are not
necessarily indicative of the results of operations which may occur in the
future or that would have occurred had the acquisitions of T&N and Fel-Pro been
consummated on the dates indicated, nor are they necessarily indicative of the
Company's future results of operations.

<TABLE>
<CAPTION>
                                                Unaudited Pro Forma Financial Information
                                                        Three Months Ended June 30
                                                        --------------------------
                                                         1998               1997
                                                        ------             ------
<S>                                                    <C>                <C>     
Net sales                                              $1,214.0           $1,270.7
Net earnings before extraordinary item                    $28.4              $47.1
Earnings per share                                         $.63              $1.27
Earnings per share assuming dilution                       $.55              $1.12
</TABLE>


                                      -30-
<PAGE>   31

The unaudited pro forma financial information for the three months ended June
30, 1997 includes the recognition of an income tax benefit and the recognition
of a gain, both related to the sale of businesses. The net after-tax effect of
these transactions was a benefit of approximately $23 million ($.56 per diluted
share).

SIX MONTHS ENDED JUNE, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997

RESULTS OF OPERATIONS

Net Sales

Sales for the six months ended June 30, 1998 were $1,872.0 million compared to
$967.4 million for the same 1997 period. The 93.5% increase in net sales is
primarily attributable to the acquisitions of T&N and Fel-Pro the results of
which were included from their respective dates of acquisition. Excluding the
impact of the T&N and Fel-Pro acquisitions and the impact of previously divested
retail aftermarket businesses, net sales decreased 4.2%.

Powertrain Systems sales were $810.8 million for the first half of 1998 compared
to $431.6 million for the first half of 1997. Approximately $409 million of the
87.9% increase related to sales of T&N. Excluding the acquisition of T&N and
powertrain products previously sold through the divested retail aftermarket
businesses, sales decreased 2.8%. The decrease in sales is attributable to
effects from the General Motors strike as well as softness in the North American
aftermarket business.

Sealing Systems sales were $424.3 million in the first half of 1998 compared to
$157.4 million in the first half of 1997. Approximately $92 million of the
169.6% increase related to sales of T&N and approximately $168 million related
to sales of Fel-Pro. Excluding the acquisitions of T&N and Fel-Pro and sealing
products previously sold through the divested retail aftermarket businesses,
sales increased 5.4% due to strong heavy duty and industrial sales.

General Products sales were $636.9 million in the first half of 1998 compared to
$378.4 million in 1997. Approximately $338 million of the 68.3% increase related
to sales of T&N. Excluding the acquisitions of T&N and general products
previously sold through the divested retail aftermarket businesses, sales
decreased 10.4% primarily due to continuing softness in the North American
aftermarket business.

Cost of Products Sold

Cost of products sold as a percent of net sales decreased to 74.4% for the first
half of 1998 from 76.5% for the first half of 1997. Excluding the effect of a
$10.9 million charge in the first quarter of 1998 associated with the purchase
accounting write-up of acquired inventory to fair value and the subsequent sale
of this inventory at the higher cost, as well as a $4.5 million write-down of
inventory associated with the Puerto Rico and Chile retail aftermarket to be
divested, cost of products sold as a percent of sales decreased to 73.6%.
Management attributes this decrease to productivity improvements, cost controls,
streamlined operations, the divestiture of underperforming assets and the
acquisitions previously discussed.


                                      -31-
<PAGE>   32

Selling , General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses as percent of net sales
decreased to 14.9% for the first half of 1998 compared to 15.2% for the first
half of 1997. The decrease is primarily attributable to the benefits of prior
restructuring actions and the divestiture of retail aftermarket businesses,
slightly offset by approximately $3 million increase related to Year 2000 costs.

Amortization Expense

Amortization expense in the first half of 1998 was $35.1 million compared to
$5.2 million for the first half of 1997. The increase in amortization expense
was attributable to the expense related to the increase in goodwill and other
intangible assets associated with the T&N and Fel-Pro acquisitions.

Purchased In-Process Research and Development Charge

The Company recognized an $18.6 million charge in the first quarter of 1998
associated with the estimated fair value of in-process research and development
costs allocated in purchase accounting to a portion of the total consideration
paid.

Restructuring Charges

During the first quarter of 1998, the Company recognized a $10.5 million
restructuring charge related to operations in place prior to the acquisitions of
T&N and Fel-Pro. The restructuring charge included $10.2 million and $0.3
million for severance and exit costs, respectively. Employee severance costs
result from planned terminations in various business operations of the Company.
The severance costs were based on the estimated levels that will be paid to the
affected employees pursuant to the Company's workforce reduction policies and
certain foreign governmental regulations. The Company anticipates that the
actions related to the first quarter 1998 restructuring plan will be completed
primarily within one year.

Rationalization of Acquired Businesses

In connection with the previously discussed acquisitions, the Company recognized
approximately $151 million in reserves related to the rationalization and
integration of acquired businesses. The rationalization reserves provide for
approximately $125 million and $26 million in severance and exit costs,
respectively.

The components of the integration plan include: closure of certain manufacturing
facilities worldwide; relocation of highly manual manufacturing product lines to
lower cost regions or more suitable locations; consolidation of overlapping
manufacturing, technical and sales facilities and joint ventures; closure of two
aftermarket central warehouses and five in-country warehouses; consolidation of
aftermarket marketing and customer support functions; and streamlining of
administrative, sales, marketing and product engineering staffs worldwide. An
anticipated result of the integration plan and the restructuring will be a
reduction of approximately 4,200 full-time employees.


                                      -32-
<PAGE>   33

Adjustment of Assets Held for Sale to Fair Value

In addition to the T&N Bearings Business and the Fel-Pro Chemical Business held
for sale, during the first quarter of 1998, the Company decided to sell its
subsidiary, Bertolotti Pietro e Figli, S.r.l. (Bertolotti), conducting
aftermarket operations in Italy. The carrying value of Bertolotti's assets have
been reduced to its fair value based on estimates of selling values less costs
to sell, calculated using multiples of earnings similar to recent automotive
industry transactions in Italy. The Company recognized a $20.0 million first
quarter charge primarily associated with the write-down of Bertolotti's assets
to the estimated fair value. The Company expects to complete the sale of
Bertolotti within one year.

In the second quarter, the Company recognized a $1.0 million benefit associated
with the adjustment of the assets of Chile to its estimated fair value.

As part of its 1996 restructuring plan, the Company continued to close or sell
certain retail aftermarket operations during the first quarter of 1998. As of
June 30, 1998, retail aftermarket operations that continue to be held for sale
include those in Puerto Rico. Net cash proceeds received for those retail
aftermarket locations sold in the first half of 1998 approximated $5 million. No
gain or loss was recognized on the dispositions of those retail aftermarket
locations, as the related assets had been previously adjusted to fair value.

Integration Costs

In the first half of 1998, the Company incurred $4.7 million in expenses
directly related to the integration of the T&N and Fel-Pro acquisitions
previously discussed. In addition, the Company expects to incur additional
expenses of approximately $38 million necessary to complete the integration of
the acquired companies.

The anticipated annual synergy associated with the restructuring,
rationalization and integration is expected to be moderately in excess of these
cumulative costs in the year 2000.

Net Interest Expense

Interest expense in the first half of 1998 was $59.4 million compared to $17.0
million for the first half of 1997. The increase in interest expense is
attributable to the interest expense related to the financing of the T&N and
Fel-Pro acquisitions slightly offset by reduced preacquisition debt levels as
compared to the first half of 1997.

Net Gain on British Pound Currency Option and Forward Contract

In the fourth quarter of 1997, in anticipation of the then pending T&N
acquisition, the Company purchased a British pound currency option for $28.1
million with a notional amount of $2.5 billion. In January 1998, the Company
settled the option and recognized a loss of $17.3 million.

Also in January 1998, in anticipation of the then pending T&N acquisition, the
Company entered into a forward contract to purchase 1.5 billion pounds sterling
for a notional amount of approximately $2.45 billion. As a result of favorable
exchange fluctuations in the British pound/U.S. dollar exchange rate experienced
during the contract period, the Company recognized a $30.6 million gain.


                                      -33-
<PAGE>   34

The Company entered into the above transactions to effectively serve as economic
hedges for the purchase of T&N. Such transactions, however, do not qualify for
"hedge accounting" under U.S. GAAP, and therefore the loss on the British pound
currency option and the gain on the British pound forward contract are reflected
in the statement of operations caption "Net gain on British pound currency
option and forward contract."

Income Tax Expense

During the first half of 1998, the Company recognized charges for adjustment of
assets held for sale to fair value and purchased in-process research and
development and recognized a net gain on the British pound currency option and
forward contract. These transactions resulted in a pre-tax net charge of $25.3
million. The net income tax benefit related to these transactions totaled $2.1
million. In addition, due to the acquisitions of T&N and Fel-Pro, the Company
recognized approximately $14 million in non-deductible goodwill amortization
expense.

Pro Forma Results

The following unaudited pro forma financial information for the six month period
ended June 30, 1998 assumes the T&N and Fel-Pro acquisitions occurred as of the
beginning of the period, after giving effect to certain adjustments, including
the amortization of intangible assets, interest expense on acquisition debt,
divestitures of the T&N Bearings Business and Fel-Pro Chemical Business, and
income tax effects. The pro forma results (in millions of dollars, except per
share data) have been prepared for comparative purposes only and are not
necessarily indicative of the results of operations which may occur in the
future or that would have occurred had the acquisitions of T&N and Fel-Pro been
consummated on the dates indicated, nor are they necessarily indicative of the
Company's future results of operations.

<TABLE>
<CAPTION>
                                                Unaudited Pro Forma Financial Information
                                                         Six Months Ended June 30
                                                        --------------------------
                                                         1998               1997
                                                        ------             ------
<S>                                                    <C>                <C>     
Net sales                                              $2,407.7           $2,518.6
Net earnings                                              $11.9              $45.7
Earnings per share                                         $.24              $1.17
Earnings per share assuming dilution                       $.23              $1.08
</TABLE>

The unaudited pro forma financial information for the six months ended June 30,
1998 include charges for adjustment of assets held for sale to fair value,
restructuring, the effects of the previously described purchase accounting
write-up of acquired inventory to fair value and of inventory associated with
the Puerto Rico retail aftermarket business to be divested, and certain other
charges. Also included in the 1998 unaudited pro forma financial information
were the recognized net gain on the British pound currency option and forward
contract and the gain on the Bruss divestiture. The net after tax effect of
these transactions was a charge of approximately $19 million ($.48 per diluted
share).

The unaudited pro forma financial information for the six months ended June 30,
1997 includes the recognition of an income tax benefit and the recognition of a
gain, both related to the sale of businesses. The net after tax effect of these
transactions was a benefit of approximately $23 million ($.56 per diluted
share).


                                      -34-
<PAGE>   35

The $18.6 million charge for purchased in-process research and development has
been excluded from the 1998 unaudited pro forma financial information.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flow Provided from Operating Activities

Cash flow provided from operating activities was $185.6 million for the six
months ended June 30, 1998. Cash flow was generated primarily from a decrease in
inventories of $43.8 million, an increase in other accrued liabilities of $50.1
million and net earnings adjusted for the loss on early retirement of debt and
the non-cash charges of depreciation and amortization, purchased in-process
research and development, restructuring and adjustment of assets held for sale
to fair value. Partially offsetting these items was an increase in accounts
receivable of $30.0 million, payments against the asbestos liability of $32.7
million and payments against restructuring, reengineering and rationalization
reserves of $20.7 million.

Cash Flow Used by Investing Activities

Cash flow used by investing activities was $2,774.6 million and was primarily
related to the acquisitions of T&N, Fel-Pro, Bimet and the increase in ownership
of Summerton and KFM partially reduced by the sale of the Company's interest in
G. Bruss GmbH & Co. KG and the sale of certain retail aftermarket locations.
Partially offsetting the acquisitions, the Company received proceeds from the
sale of options which were acquired with the acquisition of T&N. In addition,
capital expenditures of $81.1 million were made for property, plant and
equipment to implement process improvements, information technology and new
product introductions. Capital expenditures are anticipated to be approximately
$235 million in 1998, primarily for enhanced manufacturing capabilities and
process improvements.

Cash Flow Provided from Financing Activities

Cash flow provided from financing activities was $2,189.7 million for the first
half of 1998 primarily from the increase in debt related to the acquisitions of
T&N and Fel-Pro and the issuance of common stock detailed below, partially
offset by the related debt issuance fees of $49.4 million and fees paid for the
early retirement of debt of $27.4 million.

On April 17, 1998, in connection with the Company's efforts to put into place a
permanent capital structure, the Company filed a shelf Registration Statement on
Form S-3 with the Securities and Exchange Commission for the offering from time
to time of up to an aggregate $2.5 billion of debt or equity securities
(including shares of common stock registered for the account of certain
securityholders).

On June 6, 1998, the Company issued 12,650,000 shares of common stock under the
registration statement previously discussed, including 2.1 million shares which
were converted from Series E Stock. The net proceeds from the sale of the common
stock of $592 million was used to prepay the entire outstanding principal amount
under the Senior Subordinated Credit Agreement and partially repay the Senior
Credit Agreement


                                      -35-
<PAGE>   36

In addition, under the above registration statement, the Company issued $1.0
billion of bonds on June 25, 1998. The bonds have maturities ranging from 6 to
12 years, a weighted average yield of 7.76% and a weighted average coupon of
7.73%. The net proceeds were used to reduce floating rate bank debt.

As of June 30, 1998, the Company had $1.2 billion outstanding related to the
Senior Credit Agreement with maturities ranging from March of 1999 through the
year 2005.

In addition, the Company funded a portion of the T&N acquisition through the
December 1997 sale of 11.5 million shares of 7% Trust Convertible Preferred
Securities (generating gross proceeds of $575 million) by Federal-Mogul
Financing Trust, a subsidiary of the Company.

The early retirement of the Senior Subordinated Credit Agreement and the partial
repayment of the Senior Credit Agreement, as well as the early retirement in
April 1998 of $251 million in private placement debt assumed in connection with
the acquisition of T&N, resulted in a $47.1 million pretax ($31.3 million after
tax) extraordinary loss in the second quarter of 1998.

In connection with the Fel-Pro acquisition, the Company issued 1,030,325.6
million shares Series E Stock with an imputed value of $225 million. The shares
of Series E Stock are exchangeable into shares of the Company's common stock at
a rate of five shares of common stock per share of Series E Stock. Subsequently,
in June 1998, in conjunction with the common stock offering, the Company
converted 422,581 shares of Series E Stock into 2.1 million shares of common
stock. The remaining 607,745 million shares of Series E Stock are required to be
exchanged into shares of the Company's common stock no later than February 24,
1999, subject to certain conditions and such shares are paid quarterly dividends
at a rate of $0.12 per common stock equivalent.

The Company believes that cash flow from operations, together with borrowings
available under the Company's revolving credit facility, will continue to be
sufficient to meet its ongoing working capital requirements.

Foreign Currency and Commodity Contracts

The financial condition and results of operations of certain of the Company's
operating entities are reported in various foreign currencies (principally
pounds sterling, German marks, and to a lesser extent South African rand and
French francs, among others) and then translated into U.S. dollars at the
applicable exchange rate for inclusion in the Company's financial statements. As
a result, the appreciation of the dollar against these foreign currencies will
have a negative impact on the reported sales and operating margin of T&N and
other subsidiaries as consolidated into the Company. Conversely, the
depreciation of the dollar against these foreign currencies will have a positive
impact.

In addition, the Company incurs currency transaction risk whenever it or one of
its foreign subsidiaries enters into either a purchase or sales transaction
using a different currency than the relevant entity's functional currency.
Currency transaction risk is reduced by matching revenues and costs with the
same currency. Given the volatility of currency exchange rates, there can be no
assurance that the Company will be able to effectively manage its currency
transaction risks or that any volatility in currency exchange rates will not
have a material adverse effect on the Company's financial condition or results
of operations.


                                      -36-
<PAGE>   37

OTHER MATTERS

New Dividend Policy

Dividends on the capital stock of the Company are payable at the discretion of
the Company's Board of Directors. Historically, quarterly dividends had been
$.12 per share. In May 1998, the Board of Directors reduced the quarterly
dividend and subsequently declared a cash dividend payable in the second quarter
of 1998 in the amount of $.0025 per share of common stock. The Company,
consistent with its growth strategy, presently intends to retain future earnings
in the business and therefore anticipates paying dividends at a comparable level
in the foreseeable future.

Year 2000 Costs

The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. The Company has
established a team that has completed an awareness program and assessment
project to address the Year 2000 issue including information technology (IT) and
non-IT systems. In addition, the Board of Directors has received status reports
related to the Company's progress in addressing the Year 2000 issue. The Company
has determined that it will be required to modify or replace portions of its
software so that its computer systems will properly utilize dates beyond
December 31, 1999. The Company has initiated remediation and testing, and is
implementing the action plan to address the Year 2000 issue and estimates that
the majority of testing will be completed by the end of the first quarter of
1999.  A number of independent third party audits have been performed and
others are planned.  The Company presently believes that with modifications to
existing software and conversions to new software, the Year 2000 issue can be
mitigated. However, if such modifications and conversions are not made, or are
not completed timely, the Year 2000 issue could cause production
interruptions that could have a material impact on the operations of the
Company. The Company has initiated development of contingency plans and will
continue to do so  throughout the program.

The Company has initiated formal communications with a substantial majority of
its significant suppliers and large customers to determine their plans to
address the Year 2000 issue. While the Company expects a successful resolution
of all issues, there can be no guarantee that the systems of other companies on
which the Company's systems rely will be converted in a timely manner, or that a
failure to convert by a supplier or customer, or a conversion that is
incompatible with the Company's systems, would not have a material adverse
effect on the Company. The Company has determined it has no exposure to
contingencies related to the Year 2000 issue for the products it has sold.

The Company has contracts in place with external resources and has allocated 
internal resources to reprogram or replace, and test the software for Year 2000 
modifications. The Company plans to complete the Year 2000 project within one 
year. The total cost of the Year 2000 project is estimated to be $25 million 
and is being funded through operating cash flows.  Of the total project cost, 
approximately $11 million is attributable to the purchase of new software which 
will be  capitalized. The remaining $14 million represents maintenance and 
repair of  existing systems and will be expensed as incurred. The Company 
expects a substantial majority of the costs will be incurred in 1998, and early
1999.  As of June 30, 1998, the Company had incurred and expensed approximately
$5  million related to the completed awareness program and assessment project
and  the implementation of their remediation plan.


                                      -37-
<PAGE>   38

The costs of the project and the date which the Company plans to complete the
Year 2000 modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes and similar uncertainties.

Effect of Accounting Pronouncements

In 1997, the Financial Accounting Standards Board issued Statement No. 130,
("SFAS No. 130") "Reporting Comprehensive Income". SFAS No. 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. The company
adopted Statement 130 as of January 1, 1998. The adoption of this statement had
no impact on Federal Mogul's net earnings (loss) or shareholders' equity. SFAS
No. 130 requires foreign currency translation adjustments and unrealized gains
or losses on investments and derivative instruments to be included in other
comprehensive income. Prior to the adoption of SFAS No. 130 these items were
reported as a component of shareholders' equity.

Total comprehensive income (loss), net of the related estimated tax, was $(19.7)
million and $22.0 million for the three months ended June 30, 1998 and 1997,
respectively and $(24.2) million and $27.3 million for the six months ended June
30, 1998 and 1997, respectively. In June 1998, the Financial Accounting
Standards Board issued Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities, which is required to be adopted in years beginning after
June 15, 1999. The Company currently makes minimal use of derivatives.
Management does not anticipate, under current circumstances, that the adoption
of the new Statement will have a significant effect on earnings or the financial
position of the Company.

PART II - OTHER INFORMATION

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

          The Company held its Annual Meeting of Shareholders on May 20, 1998,
          at which time the shareholders considered and voted on (i) the
          election of nine directors, (ii) the approval of the appointment of
          Ernst & Young LLP as independent accountants for 1998, and (iii) the
          approval of the Amended and Restated 1997 Long Term Incentive Plan;
          and (iv) the approval of the amendment and restatement of the
          Corporation's Articles of Incorporation to increase the number of the
          Corporation's authorized common shares

          Seven of the nominees for director at the meeting were incumbents and
          two (Messers. Lewis and Whalen) are new to the Board, all nominees
          were elected. The following table sets forth the number of votes for
          and withheld with respect to each nominee:

               NOMINEE                    VOTES FOR            VOTES WITHHELD

               J. J.  Fannon              36,647,001              112,475
               R. M. Hills                36,653,092              116,384
               P. S. Lewis                36,648,912              120,564
               A. Madero                  36,653,375              116,101
               R. S. Miller, Jr.          36,645,691              123,785
               J. C. Pope                 36,647,177              122,299
               H. M. Sekyra               36,648,333              121,143
               R. A. Snell                36,655,200              114,276
               G. Whalen                  36,655,988              113,488


                                      -38-
<PAGE>   39

          The appointment of Ernst & Young LLP as independent accountants for
          1998 was approved, with 36,601,254 votes cast "For", 78,167 votes cast
          "Against" and 95,055 abstentions. The Amended and Restated 1997 Long
          Term Incentive Plan was approved with 27,021,261 votes cast "For",
          6,875,016 votes cast "Against" and 228,793 abstentions. The Amendment
          and Restatement of the Articles of Incorporation to increase the
          Corporation's authorized common stock was approved with 32,436,620
          "For", 1,410,240 votes cast "Against" and 260,210 abstentions.

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

          (a)  Exhibits:

               *3.2  The Company's Bylaws, as amended.

                27   Financial Data Schedule

          (b)  Reports on Form 8-K:

               (b)   Reports on Form 8-K:

          On April 7, 1998, the Company filed a Current Report on Form 8-K/A to
          amend and restate Item 7 of its Current Reports on Form 8-K dated
          March 11, 1998 and March 23, 1998.

          On April 17, 1998, the Company filed a Current Report on Form 8-K to
          file the audited consolidated financial statements of Felt Products
          Mfg. Co. and Subsidiaries.

          On June 11, 1998, the Company filed a Current Report on Form 8-K to
          file the audited consolidated financial statement of certain Guarantor
          subsidiaries to the Company's Shelf Registration Statement.

          On June 24, 1998 the Company filed a Current Report on Form 8-K/A
          (amendment #2 to amend and restate Item 7 of its Current Reports filed
          on March 11, 1998, March 23, 1998 and April 7, 1998.

----------------- 
*Filed herewith.





                                      -39-
<PAGE>   40

                                    SIGNATURE

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


                            FEDERAL-MOGUL CORPORATION



                        By:    /s/ Thomas W. Ryan
                           ------------------------------
                                 THOMAS W. RYAN
                          Executive Vice President and
                             Chief Financial Officer



                        By:  /s/ Kenneth P. Slaby
                           ------------------------------
                                KENNETH P. SLABY
                         Vice President and Controller,
                            Chief Accounting Officer



Dated:  August 14, 1998








                                      -40-