##### Table of Contents

---



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



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



For the quarterly period ended September 30, 2005



or



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



For the transition period from
 to



Commission File Number: 1-1511



FEDERAL-MOGUL CORPORATION

(Exact
name of Registrant as specified in its charter)



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



(248) 354-7700

(Registrants telephone number, including area code)



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.



Yes  x    No ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).



Yes ̈No  x



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):



Yes ̈No  x



As of October 25, 2005, there were 89,077,696 outstanding shares of the registrants $5.00 stated value common stock.



---



---

##### Table of Contents

FEDERAL-MOGUL CORPORATION



Form 10-Q



For the Quarterly Period Ended September 30, 2005



INDEX



|                                                                                               |  |         
|---------------------------------------------------------------------------------------------- |  | --------
|                                                                                               |  | Page No.
|Forward-Looking Statements                                                                     |  | 2       
|Part I  Financial Information                                                                 |  |         
|Item 1  Financial Statements                                                                  |  |         
|Consolidated Statements of Operations                                                          |  | 4       
|Consolidated Balance Sheets                                                                    |  | 5       
|Consolidated Statements of Cash Flows                                                          |  | 6       
|Notes to the Consolidated Financial Statements                                                 |  | 7       
|Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 43      
|Item 3  Quantitative and Qualitative Disclosures about Market Risk                            |  | 59      
|Item 4  Controls and Procedures                                                               |  | 61      
|Part II  Other Information                                                                    |  |         
|Item 1  Legal Proceedings                                                                     |  | 62      
|Item 3  Defaults Upon Senior Securities                                                       |  | 62      
|Item 6  Exhibits                                                                              |  | 62      
|Signatures                                                                                     |  | 63      
|Exhibits                                                                                       |  | 64      



1



---

##### Table of Contents

FORWARD-LOOKING STATEMENTS



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



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



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



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



Chapter 11 Filing



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



Legal and Environmental Proceedings



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



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



Business Environment and Economic Conditions



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



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



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



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



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



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



2



---

##### Table of Contents

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



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



Other Factors



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



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



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



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



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



3



---

##### Table of Contents



PART I

FINANCIAL INFORMATION



|ITEM 1. | FINANCIAL STATEMENTS
|------- | --------------------



FEDERAL-MOGUL CORPORATION

Consolidated Statements of Operations (Unaudited)



|                                                                     |  |                                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------- |  | ----------------------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                     |  | Three Months Ended September 30                 |         |   | Nine Months Ended September 30 |  
|                                                                     |  | 2005                                            |         |   | 2004                           |   |         | 2005 |  |   | 2004    |  
|                                                                     |  | (Millions of Dollars, Except Per Share Amounts) |        
|Net sales                                                            |  | $                                               | 1,500.4 |   |                                | $ | 1,508.0 |      |  | $ | 4,799.0 |   |  | $ | 4,625.7 |  
|Cost of products sold                                                |  |                                                 | 1,266.0 |   |                                |   | 1,224.6 |      |  |   | 3,997.9 |   |  |   | 3,725.8 |  
|                                                                     |  |                                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Gross margin                                                         |  |                                                 | 234.4   |   |                                |   | 283.4   |      |  |   | 801.1   |   |  |   | 899.9   |  
|                                                                     |  |                                                 |         |  
|Selling, general and administrative expenses                         |  |                                                 | 215.9   |   |                                |   | 235.4   |      |  |   | 691.9   |   |  |   | 711.2   |  
|Adjustment of long-lived assets to fair value                        |  |                                                 | 9.1     |   |                                |   | 12.9    |      |  |   | 13.1    |   |  |   | 36.0    |  
|Interest expense, net                                                |  |                                                 | 34.5    |   |                                |   | 23.2    |      |  |   | 97.1    |   |  |   | 73.1    |  
|Chapter 11 and Administration related reorganization expenses        |  |                                                 | 28.9    |   |                                |   | 6.4     |      |  |   | 79.1    |   |  |   | 66.8    |  
|Equity earnings of unconsolidated affiliates                         |  |                                                 | (8.9    | ) |                                |   | (8.2    | )    |  |   | (30.2   | ) |  |   | (28.4   | )
|Other expense, net                                                   |  |                                                 | 2.5     |   |                                |   | 7.7     |      |  |   | 6.4     |   |  |   | 19.8    |  
|                                                                     |  |                                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Earnings (loss) from continuing operations before income tax expense |  |                                                 | (47.6   | ) |                                |   | 6.0     |      |  |   | (56.3   | ) |  |   | 21.4    |  
|Income tax expense                                                   |  |                                                 | 22.3    |   |                                |   | 31.8    |      |  |   | 73.5    |   |  |   | 72.4    |  
|                                                                     |  |                                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Loss from continuing operations                                      |  |                                                 | (69.9   | ) |                                |   | (25.8   | )    |  |   | (129.8  | ) |  |   | (51.0   | )
|Loss from discontinued operations, net of income tax benefit         |  |                                                 |        |   |                                |   | (8.4    | )    |  |   |        |   |  |   | (12.6   | )
|                                                                     |  |                                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net loss                                                             |  | $                                               | (69.9   | ) |                                | $ | (34.2   | )    |  | $ | (129.8  | ) |  | $ | (63.6   | )
|                                                                     |  |                                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Basic and diluted loss per common share:                             |  |                                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Loss from continuing operations                                      |  | $                                               | (0.79   | ) |                                | $ | (0.30   | )    |  | $ | (1.46   | ) |  | $ | (0.59   | )
|Loss from discontinued operations, net of income tax benefit         |  |                                                 |        |   |                                |   | (0.09   | )    |  |   |        |   |  |   | (0.14   | )
|                                                                     |  |                                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net loss per common share                                            |  | $                                               | (0.79   | ) |                                | $ | (0.39   | )    |  | $ | (1.46   | ) |  | $ | (0.73   | )
|                                                                     |  |                                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  



See accompanying notes
to unaudited consolidated financial statements.



4



---

##### Table of Contents



FEDERAL-MOGUL CORPORATION

Consolidated Balance Sheets



|                                                             |  |                              |          |   |                  |   |          |  
|------------------------------------------------------------ |  | ---------------------------- | -------- | - | ---------------- | - | -------- | -
|                                                             |  | (Unaudited) September 302005 |          |   | December 31 2004 |  
|                                                             |  | (Millions of Dollars)        |         
|ASSETS                                                       |  |                              |          |   |                  |   |          |  
|Current assets:                                              |  |                              |          |   |                  |   |          |  
|Cash and equivalents                                         |  | $                            | 746.1    |   |                  | $ | 700.6    |  
|Accounts receivable, net                                     |  |                              | 1,089.0  |   |                  |   | 1,049.5  |  
|Inventories, net                                             |  |                              | 865.8    |   |                  |   | 952.9    |  
|Prepaid expenses and other current assets                    |  |                              | 227.7    |   |                  |   | 230.9    |  
|                                                             |  |                              |          |   |                  |   |          |  
|Total current assets                                         |  |                              | 2,928.6  |   |                  |   | 2,933.9  |  
|                                                             |  |                             
|Property, plant and equipment, net                           |  |                              | 2,093.6  |   |                  |   | 2,363.9  |  
|Goodwill and indefinite-lived intangible assets              |  |                              | 1,278.7  |   |                  |   | 1,283.7  |  
|Definite-lived intangible assets, net                        |  |                              | 305.7    |   |                  |   | 335.3    |  
|Asbestos-related insurance recoverable                       |  |                              | 797.0    |   |                  |   | 853.8    |  
|Prepaid pension costs                                        |  |                              | 149.8    |   |                  |   | 257.4    |  
|Other noncurrent assets                                      |  |                              | 227.6    |   |                  |   | 237.2    |  
|                                                             |  |                              |          |   |                  |   |          |  
|                                                             |  | $                            | 7,781.0  |   |                  | $ | 8,265.2  |  
|                                                             |  |                              |          |   |                  |   |          |  
|LIABILITIES AND SHAREHOLDERS DEFICIT                        |  |                              |          |   |                  |   |          |  
|Current liabilities:                                         |  |                              |          |   |                  |   |          |  
|Short-term debt, including current portion of long-term debt |  | $                            | 356.6    |   |                  | $ | 309.6    |  
|Accounts payable                                             |  |                              | 385.4    |   |                  |   | 435.9    |  
|Accrued liabilities                                          |  |                              | 535.9    |   |                  |   | 559.7    |  
|Other current liabilities                                    |  |                              | 120.9    |   |                  |   | 145.6    |  
|                                                             |  |                              |          |   |                  |   |          |  
|Total current liabilities                                    |  |                              | 1,398.8  |   |                  |   | 1,450.8  |  
|                                                             |  |                             
|Liabilities subject to compromise                            |  |                              | 5,996.4  |   |                  |   | 6,018.5  |  
|                                                             |  |                             
|Long-term debt                                               |  |                              | 6.8      |   |                  |   | 10.1     |  
|Postemployment benefits                                      |  |                              | 2,215.2  |   |                  |   | 2,355.9  |  
|Long-term portion of deferred income taxes                   |  |                              | 103.2    |   |                  |   | 102.0    |  
|Other accrued liabilities                                    |  |                              | 211.9    |   |                  |   | 221.2    |  
|Minority interest in consolidated affiliates                 |  |                              | 31.8     |   |                  |   | 32.4     |  
|                                                             |  |                             
|Shareholders deficit:                                       |  |                              |          |   |                  |   |          |  
|Series C ESOP preferred stock                                |  |                              | 28.0     |   |                  |   | 28.0     |  
|Common stock                                                 |  |                              | 445.3    |   |                  |   | 445.3    |  
|Additional paid-in capital                                   |  |                              | 2,152.1  |   |                  |   | 2,148.0  |  
|Accumulated deficit                                          |  |                              | (3,397.7 | ) |                  |   | (3,267.9 | )
|Accumulated other comprehensive loss                         |  |                              | (1,410.8 | ) |                  |   | (1,279.1 | )
|                                                             |  |                              |          |   |                  |   |          |  
|Total shareholders deficit                                  |  |                              | (2,183.1 | ) |                  |   | (1,925.7 | )
|                                                             |  |                              |          |   |                  |   |          |  
|                                                             |  | $                            | 7,781.0  |   |                  | $ | 8,265.2  |  
|                                                             |  |                              |          |   |                  |   |          |  



See accompanying notes
to unaudited consolidated financial statements.



5



---

##### Table of Contents



FEDERAL-MOGUL CORPORATION

Consolidated Statements of Cash Flows (Unaudited)



|                                                                                  |  |                                |        |   |      |   |        |  
|--------------------------------------------------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ------ | -
|                                                                                  |  | Nine Months Ended September 30 |       
|                                                                                  |  | 2005                           |        |   | 2004 |  
|                                                                                  |  | (Millions of Dollars)          |       
|Cash provided from (used by) operating activities                                 |  |                                |        |   |      |   |        |  
|Net loss                                                                          |  | $                              | (129.8 | ) |      | $ | (63.6  | )
|Adjustments to reconcile net loss to net cash provided from operating activities: |  |                                |        |   |      |   |        |  
|Depreciation and amortization                                                     |  |                                | 263.6  |   |      |   | 251.4  |  
|Adjustment of long-lived assets to fair value                                     |  |                                | 13.1   |   |      |   | 36.0   |  
|Change in postemployment benefits, including pensions                             |  |                                | 95.2   |   |      |   | 56.8   |  
|Change in deferred taxes                                                          |  |                                | 5.0    |   |      |   | 18.8   |  
|Changes in operating assets and liabilities:                                      |  |                                |        |   |      |   |        |  
|Increase in accounts receivable                                                   |  |                                | (87.9  | ) |      |   | (112.5 | )
|Decrease (increase) in inventories, net of involuntary conversion in 2004         |  |                                | 41.1   |   |      |   | (141.7 | )
|(Decrease) increase in accounts payable                                           |  |                                | (23.5  | ) |      |   | 78.5   |  
|Changes in other assets and liabilities, net of involuntary conversion in 2004    |  |                                | (18.3  | ) |      |   | 81.2   |  
|Insurance proceeds from involuntary conversion                                    |  |                                |       |   |      |   | 55.5   |  
|                                                                                  |  |                                |        |   |      |   |        |  
|Net cash provided from operating activities                                       |  |                                | 158.5  |   |      |   | 260.4  |  
|                                                                                  |  |                               
|Cash provided from (used by) investing activities                                 |  |                                |        |   |      |   |        |  
|Expenditures for property, plant and equipment                                    |  |                                | (125.7 | ) |      |   | (190.0 | )
|Net proceeds from the sale of property, plant and equipment                       |  |                                | 14.0   |   |      |   | 13.0   |  
|                                                                                  |  |                                |        |   |      |   |        |  
|Net cash used by investing activities                                             |  |                                | (111.7 | ) |      |   | (177.0 | )
|                                                                                  |  |                               
|Cash provided from (used by) financing activities                                 |  |                                |        |   |      |   |        |  
|Proceeds from borrowings on DIP credit facility                                   |  |                                | 50.7   |   |      |   | 90.0   |  
|Principal payments on DIP credit facility                                         |  |                                |       |   |      |   | (51.7  | )
|(Decrease) increase in short-term debt                                            |  |                                | (0.4   | ) |      |   | 4.4    |  
|Decrease in other long-term debt                                                  |  |                                | (2.4   | ) |      |   | (0.2   | )
|                                                                                  |  |                                |        |   |      |   |        |  
|Net cash provided from financing activities                                       |  |                                | 47.9   |   |      |   | 42.5   |  
|                                                                                  |  |                               
|Effect of foreign currency exchange rate fluctuations on cash                     |  |                                | (49.2  | ) |      |   | (0.7   | )
|                                                                                  |  |                                |        |   |      |   |        |  
|Increase in cash and equivalents                                                  |  |                                | 45.5   |   |      |   | 125.2  |  
|                                                                                  |  |                               
|Cash and equivalents at beginning of period                                       |  |                                | 700.6  |   |      |   | 472.4  |  
|                                                                                  |  |                                |        |   |      |   |        |  
|Cash and equivalents at end of period                                             |  | $                              | 746.1  |   |      | $ | 597.6  |  
|                                                                                  |  |                                |        |   |      |   |        |  



See accompanying notes
to unaudited consolidated financial statements.



6



---

##### Table of Contents

FEDERAL-MOGUL CORPORATION

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2005



|1. | Basis of Presentation
|-- | ---------------------



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



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



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



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



The appropriateness of using the going concern basis for the Companys financial statements is dependent upon, among other things: (i) the Companys ability to comply with the terms of the DIP credit
facility and any cash management order entered by the Bankruptcy Court in connection with the Chapter 11 Cases; (ii) the ability of the Company to maintain adequate cash on hand; (iii) the ability of the Company to generate cash from
operations;



7



---

##### Table of Contents

(iv) confirmation of a plan(s) of reorganization under the Bankruptcy Code; (v) confirmation of a scheme(s) of arrangement or company voluntary
arrangement(s) in the U.K. under Administration; and (vi) the Companys ability to achieve profitability following such confirmations.



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



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



Trade Accounts Receivable:Federal-Mogul subsidiaries in Germany, France, Italy and Spain are party to accounts receivable factoring arrangements. Amounts factored
or discounted under these facilities was $140 million as of September 30, 2005 compared to $186 million as of December 31, 2004, of which $130 million and $172 million were factored without recourse, respectively. Expenses associated with
receivables factored or discounted are recorded in the statement of operations as other expense, net. Under terms of the French factoring arrangement, the Company is not obligated to draw cash immediately upon the factoring of accounts
receivable. Thus, as of September 30, 2005 and December 31, 2004, the Company has outstanding factoring amounts of $12 million and $10 million, respectively, for which cash has not yet been drawn.



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



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



|2. | Voluntary Reorganization under Chapter 11 and Administration
|-- | ------------------------------------------------------------



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



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



8



---

##### Table of Contents

Consequences of the Restructuring Proceedings



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



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



On June 4, 2004, the Third Amended Joint Plan of Reorganization (the Plan)
for the Company and the other U.S. and U.K. Debtors was filed with the Bankruptcy Court. The Plan was jointly proposed by the Company, the Unsecured Creditors Committee, the Asbestos Claimants Committee, the Future Asbestos Claimants Representative,
the Agent for the Prepetition Bank Lenders and the Equity Security Holders Committee (collectively referred to as the Plan Proponents). Also on June 4, 2004, a Disclosure Statement to be used in soliciting votes to accept or reject
the Plan (the Disclosure Statement) was approved by the Bankruptcy Court and a December 2004 hearing was scheduled to determine whether the Bankruptcy Court should approve the Plan. On December 7, 2004, the Bankruptcy Court delayed
this confirmation hearing pending a hearing to estimate asbestos personal injury claims against the U.K. Debtors.



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



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



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



On February 2, 2005, the Company entered into an employment agreement with
José Maria Alapont under which Mr. Alapont became the Companys president and chief executive officer. As part of this employment agreement, the Plan Proponents have agreed to amend the Plan to provide Mr. Alapont with
non-qualified stock options to purchase common stock of the reorganized Company. Significant terms and conditions of the contemplated stock



9



---

##### Table of Contents

options are outlined in the employment agreement previously filed with the SEC on Form 8-K dated February 2, 2005.



On June 14, 2005, the District Court overseeing the Chapter 11 Cases commenced its
hearing to estimate the aggregate present value of pending and future asbestos personal injury and wrongful death claims against the U.K. Debtors. Closing arguments were completed on July 14, 2005, after which the District Court estimated the
total liability for such claims at $9 billion in the United States and $500 million in the United Kingdom. The District Court objective of the estimation hearing was to determine an aggregate claims value for purposes of formulating the
reorganization plan and not to determine the liability for U.S. GAAP purposes. The Company has evaluated its currently recorded liability for such claims and, given the settlement terms and value as proposed in the Plan, determined that the amount
recorded is appropriate.



On September 26, 2005, the Company announced an
agreement between the Administrators of the U.K. Debtors and the Plan Proponents to allow the Company to retain the businesses and other assets of the U.K. affiliates in exchange for monetary amounts and reserves that will be used by the
Administrators to provide a distribution to creditors of the U.K. Debtors (U.K. Settlement Agreement). Among other things, the U.K. Settlement Agreement permits i) the Company to make an offer to the Administrators for certain long-term
intercompany notes held by T&N Limited (Loan Notes), which the Administrator had previously arranged to sell to a third-party bidder, or ii) the Administrator to sell the Loan Notes to the third-party if the Company elects not to
make an offer.



There are two possible types of U.K. schemes of arrangement.
The first is under Section 425 of the Companies Act of 1985, which may involve a Scheme of Arrangement for the reconstruction of the Company. The other possible type of scheme arises under Section 1 of the Insolvency Act of 1986 in
relation to Company Voluntary Arrangements (CVA). Under English and Scottish law, the Administrators are the only persons with authority to recommend and submit Schemes of Arrangement and/or CVAs.



The U.K. Settlement Agreement sets forth the terms of various amendments to the Plan, the
Schemes of Arrangement and the CVAs that will be used to reorganize the U.K. Debtors including a delineation of distributions to U.K. and U.S. domiciled creditors. The U.K. Settlement Agreement is subject to various approvals and determinations by
the Bankruptcy Court and High Court. A copy of the U.K. Settlement Agreement was filed with the SEC on Form 8-K on September 30, 2005.



Also on September 26, 2005, the Plan Proponents and High River Limited Partnership agreed to make certain amendments to the Plan whereby i) the U.S. asbestos trust
will make a payment to the reorganized Company (or pay a portion of the stock in reorganized Company to be issued to the asbestos trust in lieu thereof) for the agreed amounts that will be used by the Administrators to provide distributions on
account of U.K. asbestos personal injury claims under the terms of the U.K. Settlement Agreement; ii) the U.S. asbestos trust will provide an option to Mr. Carl Icahn for the purchase of the remaining shares of the reorganized Company held by
such trust; and (iii) if Mr. Carl Icahn does not exercise such option, he or one of his entities will provide certain financing to the U.S. asbestos trust. Terms of these Plan amendments were filed with the SEC on Form 8-K on
September 30, 2005.



The Company cannot predict at this time whether the
Plan or the Schemes of Arrangement and CVAs that will be proposed pursuant to the terms of the U.K. Settlement Agreement and the other agreed Plan amendments will be confirmed or approved.



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



10



---

##### Table of Contents

Chapter 11 Financing



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



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



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



In the U.S., the Bankruptcy Court further ordered additional adequate protection to the noteholders in the form of either cash payment of one-half of one percent (0.5%) of the outstanding notes per year or the granting of an administrative
expense claim pursuant to Section 507(b) of the Bankruptcy Code in the amount of one percent (1.0%) of the outstanding notes per year. The Company has elected to grant an administrative expense claim in favor of the noteholders for this
additional adequate protection. All adequate protection administrative expense claims inured in favor of the noteholders are provisional in nature and subject to challenge by all parties-in-interest to the Restructuring Proceedings. Thus, the
ultimate amount and related payment terms, if any, for these administrative expense claims will be established in connection with the Restructuring Proceedings. Accordingly, such additional administrative expense claims, approximating $83 million as
of September 30, 2005, have not been recorded in the accompanying financial statements.



Financial Statement Classification



Virtually all of the Companys pre-petition debt is in default. At September 30, 2005, the Debtors pre-petition debt is classified under the caption Liabilities subject to compromise. This includes debt
outstanding of $1,962.1 million under the pre-petition Senior Credit Agreements and $2,117.3 million of other outstanding debt, primarily notes payable at various unsecured rates, less capitalized debt issuance fees of $29.1 million. The carrying
value of the pre-petition debt will be adjusted once it has become an allowed claim by the Bankruptcy Court to the extent the related carrying value differs from the amount of the allowed claim. Such adjustment may be material to the consolidated
financial statements.



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



11



---

##### Table of Contents

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



Liabilities subject to compromise include the following:



|                                                    |  |                       |         |                  |   |        
|--------------------------------------------------- |  | --------------------- | ------- | ---------------- | - | -------
|                                                    |  | September 30 2005     |         | December 31 2004
|                                                    |  | (Millions of Dollars)
|Debt                                                |  | $                     | 4,050.3 |                  | $ | 4,026.9
|Asbestos liabilities                                |  |                       | 1,537.4 |                  |   | 1,584.0
|Accounts payable                                    |  |                       | 203.4   |                  |   | 204.5  
|Company-obligated mandatorily redeemable securities |  |                       | 114.6   |                  |   | 114.6  
|Interest payable                                    |  |                       | 44.0    |                  |   | 43.9   
|Environmental liabilities                           |  |                       | 24.7    |                  |   | 23.6   
|Other accrued liabilities                           |  |                       | 22.0    |                  |   | 21.0   
|                                                    |  |                       |         |                  |   |        
|                                                    |  |                       | 5,996.4 |                  |   | 6,018.5
|Intercompany payables to affiliates                 |  |                       | 3,198.7 |                  |   | 3,301.3
|                                                    |  |                       |         |                  |   |        
|                                                    |  | $                     | 9,195.1 |                  | $ | 9,319.8
|                                                    |  |                       |         |                  |   |        



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



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



Cash in the United Kingdom is available only for the use by the U.K. Debtors and is not
available for use outside of such entities. At September 30, 2005 and December 31, 2004, such cash balances were approximately $412 million and $425 million, respectively.



12



---

##### Table of Contents

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



|                                                 |  |                                 |      |      |                                |       |      |  |      |      |  |   |       |  
|------------------------------------------------ |  | ------------------------------- | ---- | ---- | ------------------------------ | ----- | ---- |  | ---- | ---- |  | - | ----- | -
|                                                 |  | Three Months Ended September 30 |      |      | Nine Months Ended September 30 |      
|                                                 |  | 2005                            |      | 2004 |                                |       | 2005 |  | 2004 |     
|                                                 |  | (Millions of Dollars)           |     
|Professional fees directly related to the filing |  | $                               | 24.0 |      | $                              | 21.7  |      |  | $    | 68.4 |  | $ | 75.6  |  
|Critical employee retention costs                |  |                                 | 2.8  |      |                                | 2.0   |      |  |      | 8.4  |  |   | 6.0   |  
|Other direct costs                               |  |                                 | 2.1  |      |                                | 1.2   |      |  |      | 2.3  |  |   | 3.7   |  
|Gain on settlement of outstanding claim          |  |                                 |     |      |                                | (18.5 | )    |  |      |     |  |   | (18.5 | )
|                                                 |  |                                 |      |      |                                |       |      |  |      |      |  |   |       |  
|                                                 |  | $                               | 28.9 |      | $                              | 6.4   |      |  | $    | 79.1 |  | $ | 66.8  |  
|                                                 |  |                                 |      |      |                                |       |      |  |      |      |  |   |       |  



Pursuant to the Bankruptcy Code, the
Debtors have filed schedules with the Bankruptcy Court setting forth the assets and liabilities of the Debtors as of the Petition Date. On October 4, 2002, the Debtors issued approximately 100,000 proof of claim forms to their current and prior
employees, known creditors, vendors and other parties with whom the Debtors have previously conducted business. To the extent that recipients disagree with the claims as quantified on these forms, the recipient may file discrepancies with the
Bankruptcy Court. Differences between amounts recorded by the Debtors and claims filed by creditors will be investigated and resolved as part of the Restructuring Proceedings. The Bankruptcy Court ultimately will determine liability amounts that
will be allowed for these claims in the Chapter 11 Cases. A March 3, 2003 bar date was set for the filing of proofs of claim against the Debtors. Because the Debtors have not completed evaluation of the claims received in connection with this
process, the ultimate number and allowed amount of such claims are not presently known. The resolution of such claims could result in a material adjustment to the Companys financial statements.



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



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



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



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



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



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



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



13



---

##### Table of Contents

Additional claims may be filed after the general bar date, which could be allowed by the Bankruptcy Court. Accordingly,
the ultimate number and allowed amount of such claims are not presently known and cannot be reasonably estimated at this time. The resolution of such claims could result in a material adjustment to the Companys financial statements.



Debtors Financial Statements



The condensed consolidated financial statements of the Debtors are presented below. These
statements reflect the financial position, results of operations and cash flows of the combined Debtor subsidiaries, including certain amounts and activities between Debtor and non-Debtor subsidiaries of the Company, which are eliminated in the
consolidated financial statements. In 2005, the Company finalized the phase two calculation and allocation of the 2004 Sealing Systems goodwill impairment charge, resulting in a reclassification of goodwill from the Debtor subsidiaries to the
Non-debtor subsidiaries in the December 31, 2004 balance sheet.



FEDERAL-MOGUL CORPORATION

Debtors Condensed Consolidated Statements of Operations (Unaudited)



|                                                                                                          |  |                                |       |   |                               |   |       |      |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ----- | - | ----------------------------- | - | ----- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                          |  | Three Months EndedSeptember 30 |       |   | Nine Months EndedSeptember 30 |  
|                                                                                                          |  | 2005                           |       |   | 2004                          |   |       | 2005 |  |   | 2004    |  
|                                                                                                          |  | (Millions of Dollars)          |      
|Net sales                                                                                                 |  | $                              | 902.0 |   |                               | $ | 892.3 |      |  | $ | 2,865.1 |   |  | $ | 2,723.9 |  
|Cost of products sold                                                                                     |  |                                | 785.9 |   |                               |   | 754.4 |      |  |   | 2,476.5 |   |  |   | 2,262.1 |  
|                                                                                                          |  |                                |       |   |                               |   |       |      |  |   |         |   |  |   |         |  
|Gross margin                                                                                              |  |                                | 116.1 |   |                               |   | 137.9 |      |  |   | 388.6   |   |  |   | 461.8   |  
|                                                                                                          |  |                                |       |  
|Selling, general and administrative expenses                                                              |  |                                | 138.5 |   |                               |   | 152.3 |      |  |   | 449.8   |   |  |   | 470.8   |  
|Adjustment of other long-lived assets to fair value                                                       |  |                                | 9.1   |   |                               |   | 9.0   |      |  |   | 9.6     |   |  |   | 9.3     |  
|Interest expense, net                                                                                     |  |                                | 33.4  |   |                               |   | 23.0  |      |  |   | 93.8    |   |  |   | 69.7    |  
|Chapter 11 and Administration related reorganization expenses                                             |  |                                | 28.9  |   |                               |   | 6.4   |      |  |   | 79.1    |   |  |   | 66.8    |  
|Intercompany interest income from non-filers                                                              |  |                                | (81.5 | ) |                               |   | (96.6 | )    |  |   | (240.6  | ) |  |   | (276.2  | )
|Other income, net                                                                                         |  |                                | 4.5   |   |                               |   | 15.1  |      |  |   | (17.0   | ) |  |   | 1.0     |  
|                                                                                                          |  |                                |       |   |                               |   |       |      |  |   |         |   |  |   |         |  
|Earnings (loss) from continuing operations before income taxes and equity loss of non-Debtor subsidiaries |  |                                | (16.8 | ) |                               |   | 28.7  |      |  |   | 13.9    |   |  |   | 120.4   |  
|Income tax expense                                                                                        |  |                                | 6.7   |   |                               |   | 10.4  |      |  |   | 22.6    |   |  |   | 9.9     |  
|                                                                                                          |  |                                |       |   |                               |   |       |      |  |   |         |   |  |   |         |  
|Earnings (loss) from continuing operations before equity loss of non-Debtor subsidiaries                  |  |                                | (23.5 | ) |                               |   | 18.3  |      |  |   | (8.7    | ) |  |   | 110.5   |  
|Equity loss from continuing operations of non-Debtor Subsidiaries                                         |  |                                | (46.4 | ) |                               |   | (44.1 | )    |  |   | (121.1  | ) |  |   | (161.5  | )
|                                                                                                          |  |                                |       |   |                               |   |       |      |  |   |         |   |  |   |         |  
|Loss from continuing operations                                                                           |  |                                | (69.9 | ) |                               |   | (25.8 | )    |  |   | (129.8  | ) |  |   | (51.0   | )
|Loss from discontinued operations, net of income taxes, Debtors                                           |  |                                |      |   |                               |   | (0.7  | )    |  |   |        |   |  |   | (1.2    | )
|Loss from discontinued operations, net of income taxes, non-Debtors                                       |  |                                |      |   |                               |   | (7.7  | )    |  |   |        |   |  |   | (11.4   | )
|                                                                                                          |  |                                |       |   |                               |   |       |      |  |   |         |   |  |   |         |  
|Net loss                                                                                                  |  | $                              | (69.9 | ) |                               | $ | (34.2 | )    |  | $ | (129.8  | ) |  | $ | (63.6   | )
|                                                                                                          |  |                                |       |   |                               |   |       |      |  |   |         |   |  |   |         |  



14



---

##### Table of Contents

FEDERAL-MOGUL CORPORATION

Debtors Condensed Consolidated Balance Sheets



|                                                             |  |                               |          |   |                  |   |          |  
|------------------------------------------------------------ |  | ----------------------------- | -------- | - | ---------------- | - | -------- | -
|                                                             |  | (Unaudited) September 30 2005 |          |   | December 31 2004 |  
|                                                             |  | (Millions of Dollars)         |         
|ASSETS                                                       |  |                               |          |   |                  |   |          |  
|Current assets:                                              |  |                               |          |   |                  |   |          |  
|Cash and equivalents                                         |  | $                             | 419.9    |   |                  | $ | 433.5    |  
|Accounts receivable, net                                     |  |                               | 616.2    |   |                  |   | 582.8    |  
|Accounts receivable, non-Debtors                             |  |                               | 466.5    |   |                  |   | 458.0    |  
|Inventories, net                                             |  |                               | 464.6    |   |                  |   | 483.6    |  
|Prepaid expenses and other current assets                    |  |                               | 105.9    |   |                  |   | 101.9    |  
|                                                             |  |                               |          |   |                  |   |          |  
|Total current assets                                         |  |                               | 2,073.1  |   |                  |   | 2,059.8  |  
|                                                             |  |                              
|Property, plant and equipment, net                           |  |                               | 951.4    |   |                  |   | 1,016.4  |  
|Goodwill and indefinite-lived intangible assets              |  |                               | 1,175.1  |   |                  |   | 1,183.5  |  
|Definite-lived intangible assets, net                        |  |                               | 259.0    |   |                  |   | 280.3    |  
|Asbestos-related insurance recoverable                       |  |                               | 797.0    |   |                  |   | 853.8    |  
|Loans receivable from and investments in non-Debtors         |  |                               | 4,701.8  |   |                  |   | 4,803.6  |  
|Other noncurrent assets                                      |  |                               | 275.3    |   |                  |   | 402.1    |  
|                                                             |  |                               |          |   |                  |   |          |  
|                                                             |  | $                             | 10,232.7 |   |                  | $ | 10,599.5 |  
|                                                             |  |                               |          |   |                  |   |          |  
|LIABILITIES AND SHAREHOLDERS DEFICIT                        |  |                               |          |   |                  |   |          |  
|Current liabilities:                                         |  |                               |          |   |                  |   |          |  
|Short-term debt, including current portion of long-term debt |  | $                             | 328.3    |   |                  | $ | 277.8    |  
|Accounts payable and accrued compensation                    |  |                               | 271.7    |   |                  |   | 269.1    |  
|Accounts payable, non-Debtors                                |  |                               | 324.8    |   |                  |   | 249.0    |  
|Other accrued liabilities                                    |  |                               | 252.4    |   |                  |   | 256.4    |  
|                                                             |  |                               |          |   |                  |   |          |  
|Total current liabilities                                    |  |                               | 1,177.2  |   |                  |   | 1,052.3  |  
|                                                             |  |                              
|Postemployment benefits                                      |  |                               | 1,926.2  |   |                  |   | 2,033.5  |  
|Other accrued liabilities                                    |  |                               | 117.3    |   |                  |   | 119.6    |  
|Liabilities subject to compromise                            |  |                               | 9,195.1  |   |                  |   | 9,319.8  |  
|Shareholders deficit                                        |  |                               | (2,183.1 | ) |                  |   | (1,925.7 | )
|                                                             |  |                               |          |   |                  |   |          |  
|                                                             |  | $                             | 10,232.7 |   |                  | $ | 10,599.5 |  
|                                                             |  |                               |          |   |                  |   |          |  



15



---

##### Table of Contents

FEDERAL-MOGUL CORPORATION

Debtors Condensed Consolidated Statements of Cash Flows (Unaudited)



|                                                              |  |                                |       |   |      |   |       |  
|------------------------------------------------------------- |  | ------------------------------ | ----- | - | ---- | - | ----- | -
|                                                              |  | Nine Months Ended September 30 |      
|                                                              |  | 2005                           |       |   | 2004 |  
|                                                              |  | (Millions of Dollars)          |      
|Net cash provided from (used by) operating activities         |  | $                              | 28.3  |   |      | $ | 83.2  |  
|                                                              |  |                               
|Cash provided from (used by) investing activities             |  |                                |       |   |      |   |       |  
|Expenditures for property, plant and equipment                |  |                                | (57.0 | ) |      |   | (92.3 | )
|                                                              |  |                                |       |   |      |   |       |  
|Net cash used by investing activities                         |  |                                | (57.0 | ) |      |   | (92.3 | )
|                                                              |  |                               
|Cash provided from (used by) financing activities             |  |                                |       |   |      |   |       |  
|Proceeds from borrowings on DIP credit facility               |  |                                | 50.7  |   |      |   | 90.0  |  
|Principal payments on DIP credit facility                     |  |                                |      |   |      |   | (51.7 | )
|                                                              |  |                                |       |   |      |   |       |  
|Net cash provided from financing activities                   |  |                                | 50.7  |   |      |   | 38.3  |  
|                                                              |  |                               
|Effect of foreign currency exchange rate fluctuations on cash |  |                                | (35.6 | ) |      |   | 4.5   |  
|                                                              |  |                                |       |   |      |   |       |  
|                                                              |  |                               
|Increase (decrease) in cash and equivalents                   |  |                                | (13.6 | ) |      |   | 33.7  |  
|                                                              |  |                               
|Cash and equivalents at beginning of period                   |  |                                | 433.5 |   |      |   | 281.5 |  
|                                                              |  |                                |       |   |      |   |       |  
|Cash and equivalents at end of period                         |  | $                              | 419.9 |   |      | $ | 315.2 |  
|                                                              |  |                                |       |   |      |   |       |  



16



---

##### Table of Contents

|3. | Adjustment of Long-Lived Assets to Fair Value
|-- | ---------------------------------------------



During the nine month periods ended September 30, 2005 and 2004, the Company recorded charges of $13.1 million and $36.0 million, respectively, to adjust property,
plant and equipment to their estimated fair values in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The fair value of property, plant and equipment is based upon estimated
discounted future cash flows and estimates of salvage value. The impairment charge represents the difference between the estimated fair values and the carrying value of the subject assets.



Impairment charges by reporting segment are as follows:



|                                  |  |                                 |     |                                |   |      |  |      |      |  |   |     
|--------------------------------- |  | ------------------------------- | --- | ------------------------------ | - | ---- |  | ---- | ---- |  | - | ----
|                                  |  | Three Months Ended September 30 |     | Nine Months Ended September 30
|                                  |  | 2005                            |     | 2004                           |   | 2005 |  | 2004
|                                  |  | (Millions of Dollars)          
|Powertrain                        |  | $                               |    |                                | $ | 11.9 |  | $    | 0.8  |  | $ | 32.1
|Sealing Systems                   |  |                                 |    |                                |   |     |  |      |     |  |   |    
|Vehicle Safety and Performance    |  |                                 | 9.1 |                                |   | 1.0  |  |      | 9.3  |  |   | 1.0 
|Aftermarket Products and Services |  |                                 |    |                                |   |     |  |      | 3.0  |  |   | 2.7 
|Corporate                         |  |                                 |    |                                |   |     |  |      |     |  |   | 0.2 
|                                  |  |                                 |     |                                |   |      |  |      |      |  |   |     
|                                  |  | $                               | 9.1 |                                | $ | 12.9 |  | $    | 13.1 |  | $ | 36.0
|                                  |  |                                 |     |                                |   |      |  |      |      |  |   |     



On July 20, 2005, the Company
announced the closure of its Scottsville, KY brake lining facility, with the transfer of associated production to other facilities in Glasgow, KY, Winchester, VA, and Smithville, TN. The Scottsville facility also served as a distribution point for
heavy duty block and linings to the Aftermarket. This activity will be transferred to the Smyrna, TN Aftermarket distribution facility. As a result of these actions, the buildings and associated production equipment have been impaired by a total of
$9.1 million to their estimated realizable values.



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



During the third quarter of
2004, the Company recorded impairment charges of $12.9 million to reflect the estimated fair value of certain property, plant and equipment. Of this amount, $9.0 million and $2.9 million relate to the impairment of property, plant and equipment
located in two piston manufacturing facilities in the United States and China, respectively. The United States impairment reflects the announcement of the closure and relocation of a piston manufacturing facility to other Powertrain facilities
primarily in the United States and Mexico. This closure is anticipated to be completed in 2005. The China impairment reflects an assessment of certain piston production assets in relation to current volumes and future business. The remaining $1.0
million impairment reflects the exit of a specific Friction product line resulting in the write down of the net book value of the production assets to estimated salvage value.



|4. | Restructuring
|-- | -------------



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



17



---

##### Table of Contents

an exit or disposal activity accounted for in accordance with SFAS Nos. 87 and 106.



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



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



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



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



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



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



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



|                                          |  |                       |      |   |    |   |      |     |  |   |      |   |  |           |      |   |       |   |      |   |  |   |      |  
|----------------------------------------- |  | --------------------- | ---- | - | -- | - | ---- | --- |  | - | ---- | - |  | --------- | ---- | - | ----- | - | ---- | - |  | - | ---- | -
|                                          |  | Powertrain            |      |   | SS |   |      | VSP |  |   | APS  |   |  | Corporate |      |   | Total |  
|                                          |  | (Millions of dollars) |     
|Balance of reserves at December 31, 2004  |  | $                     | 18.7 |   |    | $ | 3.8  |     |  | $ | 1.6  |   |  | $         | 2.9  |   |       | $ | 0.9  |   |  | $ | 27.9 |  
|Provisions                                |  |                       | 2.7  |   |    |   |     |     |  |   |     |   |  |           |     |   |       |   | 0.9  |   |  |   | 3.6  |  
|Reversals                                 |  |                       |     |   |    |   |     |     |  |   |     |   |  |           | (0.6 | ) |       |   | (0.2 | ) |  |   | (0.8 | )
|Payments                                  |  |                       | (3.1 | ) |    |   | (0.2 | )   |  |   | (0.1 | ) |  |           | (0.2 | ) |       |   |     |   |  |   | (3.6 | )
|Foreign currency                          |  |                       | (1.1 | ) |    |   | (0.2 | )   |  |   | 0.1  |   |  |           |     |   |       |   | 0.2  |   |  |   | (1.0 | )
|                                          |  |                       |      |   |    |   |      |     |  |   |      |   |  |           |      |   |       |   |      |   |  |   |      |  
|Balance of reserves at March 31, 2005     |  |                       | 17.2 |   |    |   | 3.4  |     |  |   | 1.6  |   |  |           | 2.1  |   |       |   | 1.8  |   |  |   | 26.1 |  
|Provisions                                |  |                       | 2.9  |   |    |   | 0.3  |     |  |   | 0.1  |   |  |           | 2.3  |   |       |   |     |   |  |   | 5.6  |  
|Reversals                                 |  |                       | (0.1 | ) |    |   |     |     |  |   | (0.4 | ) |  |           |     |   |       |   | (0.3 | ) |  |   | (0.8 | )
|Payments                                  |  |                       | (3.1 | ) |    |   | (0.7 | )   |  |   | (0.2 | ) |  |           | (0.2 | ) |       |   | (0.9 | ) |  |   | (5.1 | )
|Foreign currency                          |  |                       | (0.9 | ) |    |   | (0.2 | )   |  |   | (0.1 | ) |  |           | (0.1 | ) |       |   |     |   |  |   | (1.3 | )
|                                          |  |                       |      |   |    |   |      |     |  |   |      |   |  |           |      |   |       |   |      |   |  |   |      |  
|Balance of reserves at June 30, 2005      |  |                       | 16.0 |   |    |   | 2.8  |     |  |   | 1.0  |   |  |           | 4.1  |   |       |   | 0.6  |   |  |   | 24.5 |  
|Provisions                                |  |                       | 1.8  |   |    |   |     |     |  |   | 1.1  |   |  |           |     |   |       |   | 1.6  |   |  |   | 4.5  |  
|Reversals                                 |  |                       | (0.3 | ) |    |   |     |     |  |   |     |   |  |           |     |   |       |   |     |   |  |   | (0.3 | )
|Payments                                  |  |                       | (4.2 | ) |    |   | (0.8 | )   |  |   | (0.3 | ) |  |           | (0.1 | ) |       |   | (1.2 | ) |  |   | (6.6 | )
|Foreign currency                          |  |                       | (0.1 | ) |    |   |     |     |  |   |     |   |  |           |     |   |       |   |     |   |  |   | (0.1 | )
|                                          |  |                       |      |   |    |   |      |     |  |   |      |   |  |           |      |   |       |   |      |   |  |   |      |  
|Balance of reserves at September 30, 2005 |  | $                     | 13.2 |   |    | $ | 2.0  |     |  | $ | 1.8  |   |  | $         | 4.0  |   |       | $ | 1.0  |   |  | $ | 22.0 |  
|                                          |  |                       |      |   |    |   |      |     |  |   |      |   |  |           |      |   |       |   |      |   |  |   |      |  



18



---

##### Table of Contents

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



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



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



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



|5. | Other Expense, Net
|-- | ------------------



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



|                                               |  |                                 |      |   |                                |   |      |      |  |   |       |   |  |   |      |  
|---------------------------------------------- |  | ------------------------------- | ---- | - | ------------------------------ | - | ---- | ---- |  | - | ----- | - |  | - | ---- | -
|                                               |  | Three Months Ended September 30 |      |   | Nine Months Ended September 30 |  
|                                               |  | 2005                            |      |   | 2004                           |   |      | 2005 |  |   | 2004  |  
|                                               |  | (Millions of Dollars)           |     
|Amortization of intangible assets              |  | $                               | 4.5  |   |                                | $ | 4.3  |      |  | $ | 13.2  |   |  | $ | 12.7 |  
|Foreign currency exchange                      |  |                                 | (1.0 | ) |                                |   | (2.6 | )    |  |   | 7.6   |   |  |   | 5.5  |  
|Restructuring expense                          |  |                                 | 4.2  |   |                                |   | 5.5  |      |  |   | 11.8  |   |  |   | 5.5  |  
|Minority interest in consolidated subsidiaries |  |                                 | 0.8  |   |                                |   | 0.7  |      |  |   | 2.7   |   |  |   | 3.2  |  
|Royalty income                                 |  |                                 | (1.9 | ) |                                |   | (0.3 | )    |  |   | (3.0  | ) |  |   | (1.3 | )
|Loss (gain) on sale of assets                  |  |                                 | (0.4 | ) |                                |   | 3.9  |      |  |   | (7.8  | ) |  |   | 3.8  |  
|Adjustment of 2004 goodwill impairment charge  |  |                                 |     |   |                                |   |     |      |  |   | (7.7  | ) |  |   |     |  
|Other                                          |  |                                 | (3.7 | ) |                                |   | (3.8 | )    |  |   | (10.4 | ) |  |   | (9.6 | )
|                                               |  |                                 |      |   |                                |   |      |      |  |   |       |   |  |   |      |  
|                                               |  | $                               | 2.5  |   |                                | $ | 7.7  |      |  | $ | 6.4   |   |  | $ | 19.8 |  
|                                               |  |                                 |      |   |                                |   |      |      |  |   |       |   |  |   |      |  



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



19



---

##### Table of Contents

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



|6. | Discontinued Operations
|-- | -----------------------



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



|                                             |  |                                       |      |   |                                      |   |       |  
|-------------------------------------------- |  | ------------------------------------- | ---- | - | ------------------------------------ | - | ----- | -
|                                             |  | Three Months Ended September 30, 2004 |      |   | Nine Months Ended September 30, 2004 |  
|                                             |  | (Millions of Dollars)                 |     
|Net sales                                    |  | $                                     | 3.1  |   |                                      | $ | 14.9  |  
|Cost of products sold                        |  |                                       | 6.4  |   |                                      |   | 19.3  |  
|                                             |  |                                       |      |   |                                      |   |       |  
|Gross margin                                 |  |                                       | (3.3 | ) |                                      |   | (4.4  | )
|Selling, general and administrative expenses |  |                                       | 0.1  |   |                                      |   | 2.3   |  
|Net loss on divestitures                     |  |                                       | 1.7  |   |                                      |   | 1.7   |  
|Other expense, net                           |  |                                       | 4.5  |   |                                      |   | 6.4   |  
|                                             |  |                                       |      |   |                                      |   |       |  
|Loss before income taxes                     |  |                                       | (9.6 | ) |                                      |   | (14.8 | )
|Income tax benefit                           |  |                                       | (1.2 | ) |                                      |   | (2.2  | )
|                                             |  |                                       |      |   |                                      |   |       |  
|Net loss from discontinued operations        |  | $                                     | (8.4 | ) |                                      | $ | (12.6 | )
|                                             |  |                                       |      |   |                                      |   |       |  



|7. | Inventories
|-- | -----------



Inventories are stated at the lower of cost or market. Cost determined by the last-in, first-out (LIFO) method was used for 46% and 45% of inventories at September 30, 2005 and December 31, 2004,
respectively. The remaining inventories are recorded using the first-in, first-out (FIFO) method. Inventories are reduced by an allowance for excess and obsolete inventories based on managements review of on-hand inventories compared to
historical and estimated future sales and usage. A summary of inventories is provided in the table below:



|                   |  |                       |       |   |                  |   |         |  
|------------------ |  | --------------------- | ----- | - | ---------------- | - | ------- | -
|                   |  | September 30 2005     |       |   | December 31 2004 |  
|                   |  | (Millions of Dollars) |      
|Raw materials      |  | $                     | 171.0 |   |                  | $ | 185.8   |  
|Work-in-process    |  |                       | 151.2 |   |                  |   | 157.7   |  
|Finished products  |  |                       | 611.3 |   |                  |   | 680.1   |  
|                   |  |                       |       |   |                  |   |         |  
|                   |  |                       | 933.5 |   |                  |   | 1,023.6 |  
|Valuation reserves |  |                       | (67.7 | ) |                  |   | (70.7   | )
|                   |  |                       |       |   |                  |   |         |  
|                   |  | $                     | 865.8 |   |                  | $ | 952.9   |  
|                   |  |                       |       |   |                  |   |         |  



|8. | Investments in Non-Consolidated Affiliates
|-- | ------------------------------------------



The Company has invested in various non-consolidated affiliates, which are located in Turkey, China, Korea, India, Japan, the United States and Mexico. The Companys
direct ownership in such affiliates ranges from approximately 20% to 50%. The aggregate investment in these affiliates approximates $160 million at both September 30, 2005 and December 31, 2004, and is included in the consolidated balance
sheets as other noncurrent assets. The



20



---

##### Table of Contents

Companys equity earnings of such affiliates amounted to approximately $30 million and $28 million for the nine-month periods ended September 30,
2005 and 2004, respectively. During the nine months ended September 30, 2005, these entities generated sales of approximately $162 million, net income of approximately $21 million, and had total net assets at September 30, 2005 of
approximately $356 million.



The Company holds a 50% non-controlling interest
in a joint venture located in Turkey. This joint venture was established for the purpose of manufacturing and marketing automotive parts, including pistons, pins, piston rings, and cylinder liners, to Original Equipment (OE) and
Aftermarket customers. Pursuant to the joint venture agreement, the Companys partner holds an option to put its shares to a subsidiary of the Company at the higher of the current fair value or at a guaranteed minimum amount. The guaranteed
minimum amount represents a contingent guarantee of the initial investment of the investment partner. The contingent guarantee can be exercised at the discretion of the joint venture partner. The term of the contingent guarantee is indefinite,
consistent with the terms of the joint venture agreement. However, the contingent guarantee would not survive termination of the joint venture agreement. As of September 30, 2005, the total amount of the contingent guarantee, were all
triggering events to occur, was $58.6 million. Management believes that this contingent guarantee is substantially less than the estimated current fair value of the guarantees interest in the affiliate. Management also believes that exercise
of the put option is not reasonably likely within the foreseeable future. However, if this put option were exercised at its estimated current fair value, such exercise would have a material effect on the Companys liquidity. Any value in excess
of the minimum guaranteed amount of the put option would be the subject of negotiation between the Company and its investment partner.



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



|9. | Accrued Liabilities
|-- | -------------------



Accrued liabilities consisted of the following:



|                                               |  |                       |       |                  |   |      
|---------------------------------------------- |  | --------------------- | ----- | ---------------- | - | -----
|                                               |  | September 30 2005     |       | December 31 2004
|                                               |  | (Millions of Dollars)
|Accrued compensation                           |  | $                     | 250.8 |                  | $ | 255.5
|Accrued rebates                                |  |                       | 74.4  |                  |   | 73.2 
|Accrued income taxes                           |  |                       | 68.9  |                  |   | 75.9 
|Accrued Chapter 11 and Administration expenses |  |                       | 38.2  |                  |   | 44.8 
|Non-income taxes payable                       |  |                       | 35.0  |                  |   | 34.5 
|Restructuring reserves                         |  |                       | 22.0  |                  |   | 27.9 
|Accrued product returns                        |  |                       | 19.9  |                  |   | 20.4 
|Accrued professional services                  |  |                       | 15.3  |                  |   | 12.7 
|Accrued warranty                               |  |                       | 11.4  |                  |   | 14.8 
|                                               |  |                       |       |                  |   |      
|                                               |  | $                     | 535.9 |                  | $ | 559.7
|                                               |  |                       |       |                  |   |      



21



---

##### Table of Contents

|10. | Debt
|--- | ----



Long-term debt consisted of the following:



|                                                     |  |                       |        |   |                 |   |        |  
|---------------------------------------------------- |  | --------------------- | ------ | - | --------------- | - | ------ | -
|                                                     |  | September 302005      |        |   | December 312004 |  
|                                                     |  | (Millions of Dollars) |       
|DIP credit facility                                  |  | $                     | 328.3  |   |                 | $ | 277.7  |  
|Other                                                |  |                       | 35.1   |   |                 |   | 42.0   |  
|                                                     |  |                       |        |   |                 |   |        |  
|                                                     |  |                       | 363.4  |   |                 |   | 319.7  |  
|Less: current maturities included in short-term debt |  |                       | (356.6 | ) |                 |   | (309.6 | )
|                                                     |  |                       |        |   |                 |   |        |  
|                                                     |  | $                     | 6.8    |   |                 | $ | 10.1   |  
|                                                     |  |                       |        |   |                 |   |        |  



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



|                         |  |                       |       |                 |   |      
|------------------------ |  | --------------------- | ----- | --------------- | - | -----
|                         |  | September 302005      |       | December 312004
|                         |  | (Millions of Dollars)
|Contractual commitment   |  | $                     | 500.0 |                 | $ | 500.0
|Less: current borrowings |  |                       | 328.3 |                 |   | 277.7
|Less: letters of credit  |  |                       | 23.0  |                 |   | 45.3 
|                         |  |                       |       |                 |   |      
|Available to borrow      |  | $                     | 148.7 |                 | $ | 177.0
|                         |  |                       |       |                 |   |      



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



|11. | Other Comprehensive Loss
|--- | ------------------------



The Companys comprehensive loss consists of the following:



|                                         |  |                                |       |   |                               |   |       |      |  |   |        |   |  |   |       |  
|---------------------------------------- |  | ------------------------------ | ----- | - | ----------------------------- | - | ----- | ---- |  | - | ------ | - |  | - | ----- | -
|                                         |  | Three Months EndedSeptember 30 |       |   | Nine Months EndedSeptember 30 |  
|                                         |  | 2005                           |       |   | 2004                          |   |       | 2005 |  |   | 2004   |  
|                                         |  | (Millions of Dollars)          |      
|Net loss                                 |  | $                              | (69.9 | ) |                               | $ | (34.2 | )    |  | $ | (129.8 | ) |  | $ | (63.6 | )
|Foreign currency translation adjustments |  |                                | 15.3  |   |                               |   | 21.7  |      |  |   | (131.7 | ) |  |   | 8.5   |  
|                                         |  |                                |       |   |                               |   |       |      |  |   |        |   |  |   |       |  
|                                         |  | $                              | (54.6 | ) |                               | $ | (12.5 | )    |  | $ | (261.5 | ) |  | $ | (55.1 | )
|                                         |  |                                |       |   |                               |   |       |      |  |   |        |   |  |   |       |  



|12. | Income Taxes
|--- | ------------



For the nine months ended September 30, 2005, the Company recorded income tax expense of $73.5 million on a loss from continuing operations before income taxes of $56.3 million. This compares to income tax
expense of $72.4 million on earnings from continuing operations before income taxes of $21.4 million in the same period of 2004. Income tax expense for the nine month period ended September 30, 2005 resulted primarily from taxable income
generated by certain international subsidiaries, non-recognition of income tax benefits on certain United Kingdom operating losses and certain non-deductible items in various jurisdictions.



22



---

##### Table of Contents

|13. | Loss Per Common Share
|--- | ---------------------



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



|                                                                     |  |                                                           |       |   |                                |   |       |      |  |   |        |   |  |   |       |  
|-------------------------------------------------------------------- |  | --------------------------------------------------------- | ----- | - | ------------------------------ | - | ----- | ---- |  | - | ------ | - |  | - | ----- | -
|                                                                     |  | Three Months Ended September 30                           |       |   | Nine Months Ended September 30 |  
|                                                                     |  | 2005                                                      |       |   | 2004                           |   |       | 2005 |  |   | 2004   |  
|                                                                     |  | (Millions of Dollars, Except Share and Per Share Amounts) |      
|Numerator:                                                           |  |                                                           |       |   |                                |   |       |      |  |   |        |   |  |   |       |  
|Loss from continuing operations                                      |  | $                                                         | (69.9 | ) |                                | $ | (25.8 | )    |  | $ | (129.8 | ) |  | $ | (51.0 | )
|Loss from discontinued operations                                    |  |                                                           |      |   |                                |   | (8.4  | )    |  |   |       |   |  |   | (12.6 | )
|                                                                     |  |                                                           |       |   |                                |   |       |      |  |   |        |   |  |   |       |  
|Numerator for basic and diluted loss per common share                |  | $                                                         | (69.9 | ) |                                | $ | (34.2 | )    |  | $ | (129.8 | ) |  | $ | (63.6 | )
|                                                                     |  |                                                           |       |   |                                |   |       |      |  |   |        |   |  |   |       |  
|Denominator:                                                         |  |                                                           |       |   |                                |   |       |      |  |   |        |   |  |   |       |  
|Weighted average shares outstanding, basic and diluted (in millions) |  |                                                           | 89.1  |   |                                |   | 87.1  |      |  |   | 89.1   |   |  |   | 87.1  |  
|                                                                     |  |                                                           |       |   |                                |   |       |      |  |   |        |   |  |   |       |  
|Loss from continuing operations                                      |  | $                                                         | (0.79 | ) |                                | $ | (0.30 | )    |  | $ | (1.46  | ) |  | $ | (0.59 | )
|Loss from discontinued operations, net of income tax expense         |  |                                                           |      |   |                                |   | (0.09 | )    |  |   |       |   |  |   | (0.14 | )
|                                                                     |  |                                                           |       |   |                                |   |       |      |  |   |        |   |  |   |       |  
|Basic and diluted loss per common share                              |  | $                                                         | (0.79 | ) |                                | $ | (0.39 | )    |  | $ | (1.46  | ) |  | $ | (0.73 | )
|                                                                     |  |                                                           |       |   |                                |   |       |      |  |   |        |   |  |   |       |  



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



|14. | Pensions and Other Postretirement Benefits
|--- | ------------------------------------------



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



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



|                                                |  |                       |       |   |               |   |       |                |  |   |       |   |  |      |       |   |      |   |      |   |  |   |      |  
|----------------------------------------------- |  | --------------------- | ----- | - | ------------- | - | ----- | -------------- |  | - | ----- | - |  | ---- | ----- | - | ---- | - | ---- | - |  | - | ---- | -
|                                                |  | Pension Benefits      |       |   |               |   |       |                | 
|                                                |  | United States         |       |   | International |   |       | Other Benefits | 
|                                                |  | 2005                  |       |   | 2004          |   |       | 2005           |  |   | 2004  |   |  | 2005 |       |   | 2004 |  
|                                                |  | (Millions of Dollars) |      
|Service cost                                    |  | $                     | 7.7   |   |               | $ | 5.6   |                |  | $ | 1.5   |   |  | $    | 4.8   |   |      | $ | 0.8  |   |  | $ | 0.2  |  
|Interest cost                                   |  |                       | 14.3  |   |               |   | 15.0  |                |  |   | 39.9  |   |  |      | 34.4  |   |      |   | 7.1  |   |  |   | 9.6  |  
|Expected return on plan assets                  |  |                       | (14.7 | ) |               |   | (13.4 | )              |  |   | (29.6 | ) |  |      | (32.3 | ) |      |   |     |   |  |   |     |  
|Curtailment                                     |  |                       |      |   |               |   | 3.6   |                |  |   |      |   |  |      |      |   |      |   |     |   |  |   |     |  
|Amortization of unrecognized loss               |  |                       | 6.6   |   |               |   | 6.4   |                |  |   | 25.6  |   |  |      | 14.4  |   |      |   | 1.4  |   |  |   | 5.6  |  
|Amortization of unrecognized prior service cost |  |                       | 1.9   |   |               |   | 1.8   |                |  |   |      |   |  |      |      |   |      |   | (1.0 | ) |  |   | (2.7 | )
|                                                |  |                       |       |   |               |   |       |                |  |   |       |   |  |      |       |   |      |   |      |   |  |   |      |  
|Net periodic benefit cost                       |  | $                     | 15.8  |   |               | $ | 19.0  |                |  | $ | 37.4  |   |  | $    | 21.3  |   |      | $ | 8.3  |   |  | $ | 12.7 |  
|                                                |  |                       |       |   |               |   |       |                |  |   |       |   |  |      |       |   |      |   |      |   |  |   |      |  



23



---

##### Table of Contents

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



|                                                |  |                       |       |   |               |   |       |                |  |   |       |   |  |      |       |   |      |   |      |   |  |   |      |  
|----------------------------------------------- |  | --------------------- | ----- | - | ------------- | - | ----- | -------------- |  | - | ----- | - |  | ---- | ----- | - | ---- | - | ---- | - |  | - | ---- | -
|                                                |  | Pension Benefits      |       |   |               |   |       |                | 
|                                                |  | United States         |       |   | International |   |       | Other Benefits | 
|                                                |  | 2005                  |       |   | 2004          |   |       | 2005           |  |   | 2004  |   |  | 2005 |       |   | 2004 |  
|                                                |  | (Millions of Dollars) |      
|Service cost                                    |  | $                     | 23.1  |   |               | $ | 19.4  |                |  | $ | 6.6   |   |  | $    | 14.4  |   |      | $ | 3.4  |   |  | $ | 1.7  |  
|Interest cost                                   |  |                       | 42.9  |   |               |   | 44.0  |                |  |   | 123.5 |   |  |      | 102.6 |   |      |   | 24.1 |   |  |   | 26.3 |  
|Expected return on plan assets                  |  |                       | (44.1 | ) |               |   | (40.7 | )              |  |   | (91.8 | ) |  |      | (96.5 | ) |      |   |     |   |  |   |     |  
|Unrecognized transition obligation              |  |                       | 2.4   |   |               |   |      |                |  |   |      |   |  |      |      |   |      |   |     |   |  |   |     |  
|Curtailment                                     |  |                       |      |   |               |   | 3.6   |                |  |   |      |   |  |      |      |   |      |   |     |   |  |   |     |  
|Amortization of unrecognized loss               |  |                       | 19.8  |   |               |   | 19.0  |                |  |   | 79.3  |   |  |      | 43.1  |   |      |   | 7.4  |   |  |   | 8.6  |  
|Amortization of unrecognized prior service cost |  |                       | 5.7   |   |               |   | 5.9   |                |  |   |      |   |  |      |      |   |      |   | (3.0 | ) |  |   | (3.1 | )
|                                                |  |                       |       |   |               |   |       |                |  |   |       |   |  |      |       |   |      |   |      |   |  |   |      |  
|Net periodic benefit cost                       |  | $                     | 49.8  |   |               | $ | 51.2  |                |  | $ | 117.6 |   |  | $    | 63.6  |   |      | $ | 31.9 |   |  | $ | 33.5 |  
|                                                |  |                       |       |   |               |   |       |                |  |   |       |   |  |      |       |   |      |   |      |   |  |   |      |  



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



|15. | Litigation and Environmental Matters
|--- | ------------------------------------



T&N Companies Asbestos Litigation



Background



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



Recorded Liability



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



24



---

##### Table of Contents

interests of potential future asbestos claimants. In the U.K. a creditors committee consisting in large part of representatives of asbestos claimants
has been appointed. The Companys obligations with respect to present and future claims could be determined through litigation in the Bankruptcy Court, the High Court, and/or through negotiations with each of the official committees appointed.



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



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



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



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



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



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



25



---

##### Table of Contents

Insurance Recoverable



In 1996, T&N Ltd. (formerly T&N, plc) purchased for itself and its then defined global subsidiaries a £500 million layer of insurance which will be
triggered should the aggregate costs of claims made or brought after June 30, 1996, where the exposure occurred prior to that date, exceed £690 million. During 2000, the Company concluded that the aggregate cost of the claims filed after
June 30, 1996 would exceed the trigger point and recorded an insurance recoverable asset under the T&N policy of $577 million. As of September 30, 2005, the recorded insurance recoverable was $631 million. In December 2001, one of
the three reinsurers, European International Reinsurance Company Ltd. (EIR), filed suit in a London, England court to challenge the validity of its insurance contract with the T&N Companies. As a result of this lawsuit, a claim was
made against the broker (Sedgwick) that assisted in procuring this policy for breach of its duties as a broker. This trial commenced in October 2003. Prior to the conclusion of the trial, the parties were able to reach a settlement. As a result of
this settlement, the Company recorded a $38.9 million asbestos charge during the fourth quarter of 2003. Under the terms of the settlement, EIR would be liable for 65.5% of its one-third share of the reinsurance policy. By separate agreement,
Sedgwick agreed to be liable for an additional 17.25% of the EIR share of the reinsurance policy. T&N Ltd. has also agreed to indemnify the insurer for sums paid under the policy for which the insurer is liable to T&N Ltd. for which the
insurer has no recovery from the reinsurers or Sedgwick. The settlement agreements referenced above are being held in escrow pending approval by the Bankruptcy Court and the Administrators of T&N Ltd. of those portions of the above-described
settlement agreements that affect the Debtors. A motion seeking the Bankruptcy Courts approval of the settlement was filed on March 1, 2004.



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



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



On September 20, 2005, the Administrators of T&N issued an ordinary application for declarations regarding (among other things) whether a claimant with respect to a future asbestos claim would be considered a
creditor of a debtor so as to be capable of being bound by any compromise, scheme or arrangement sanctioned by a court in connection with the Administration Proceedings. An initial hearing on this application was held in October 2005 with a decision
expected shortly.



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



During the first quarter of 2004, the security rating of Centre Reinsurance International Co. was downgraded by several major credit rating
providers. As a result of the downgrade, the Company obtained a guarantee of all CRICs obligations under the policy from Centre Reinsurance (US) Limited (CRUS), an affiliate of CRIC. The security



26



---

##### Table of Contents

rating of CRUS has not been affected by the downgrade of CRIC and remains unchanged since the inception of the policy. If the reinsurers and/or the related
affiliate are not able to meet their obligations under the policy, the Companys results of operations and financial condition could be materially affected.



The Company has reviewed the financial viability and legal obligations of the three reinsurance companies involved and has concluded that
there is little risk that the reinsurers will not be able to meet their obligations under the policy based upon their financial condition. The U.S. claims costs applied against this policy are converted at a fixed exchange rate of
$1.69/£. As such, if the market exchange rate is greater than $1.69/£, the Company will effectively have a premium on 100% recovery on claims paid. As of September 30, 2005, the $631 million insurance recoverable asset includes an
exchange rate premium of approximately $25 million.



Abex and Wagner Asbestos Litigation



Background



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



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



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



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



Recorded Liability



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



As a result of the Restructuring Proceedings, pending asbestos-related litigation is stayed. The Company issued various letters of credit in connection with asbestos
lawsuits that had resulted in verdicts against the Company prior to its filing for bankruptcy protection. The letters of credit were issued as security for judgments entered against the Company to permit the Company to pursue appeals to these
judgments. During 2004, the final appeal in one case



27



---

##### Table of Contents

was denied, the Bankruptcy Court lifted the automatic stay related to one letter of credit associated with this appeal, and a net draw was made upon this
letter of credit of approximately $1 million.



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



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



Insurance Recoverable



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



Wagner also maintained product liability insurance coverage for some of the time that it manufactured products that contained asbestos. This
coverage is shared with other third-party companies. One of the companies, Dresser Industries, Inc. (Dresser) initiated an adversary action against the Debtors and a number of insurance carriers in the Companys Restructuring
Proceedings. In its complaint, Dresser alleged that it has rights under certain primary and excess general liability insurance policies that may be shared with one of the Debtors, Federal-Mogul Products (FMP) as the successor to Wagner
Electric Corporation. Dresser seeks, among other things, a declaration of the parties respective rights and obligations under the policies and a partition of the competing rights of Dresser and FMP under the policies. FMP answered
Dressers complaint and filed cross-claims against all of the defendant-insurers seeking a declaration of FMPs rights to the policies. The subsidiary of the Company that may be liable for asbestos claims against Wagner has the benefit of
that insurance, subject to the rights of other potential insureds under the policies. Primary layer liability insurance coverage for asbestos claims against Wagner is the subject of an agreement with Wagners solvent primary carriers. The
agreement provides for partial reimbursement of indemnity and defense costs for Wagner asbestos claims until exhaustion of aggregate limits. Wagner also has substantial excess layer liability insurance coverage which, barring unforeseen insolvencies
of excess carriers or other adverse events, should provide coverage for asbestos claims against Wagner. The Wagner insurance recoverable was $53 million as of September 30, 2005. On November 4, 2004, FMP, Dresser and Cooper Industries,
Inc. (Cooper) and certain of the insurers (Parties) entered into a partitioning agreement, by which the Parties agreed as to the manner in which the limits of liability, self-insured retentions, deductibles and any other
self-insurance features, and the erosion thereof, are to be partitioned among FMP, Dresser and Cooper. The partitioning agreement effectively disposes of Dressers claims in the Dresser adversary proceeding. However, FMPs cross claim
against the defendant-insurers remains, but is currently stayed pursuant to the agreement of the remaining parties and the court.



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



28



---

##### Table of Contents

While the Restructuring Proceedings will impact the timing and amount of the asbestos claims and the insurance recoverable, there has been no change to the
recorded amounts due to the uncertainties created by the Restructuring Proceedings. Accordingly, the recorded amounts for this insurance recoverable asset could change materially based upon events that occur from the Restructuring Proceedings.



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



Federal-Mogul and Fel-Pro Asbestos Litigation



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



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



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



Aggregate of Asbestos Liability and Insurance Recoverable Asset



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



|                              |  |                       |         |   |      |   |        |  |   |       |   |       |   |     |  |   |         |  
|----------------------------- |  | --------------------- | ------- | - | ---- | - | ------ |  | - | ----- | - | ----- | - | --- |  | - | ------- | -
|                              |  | T&N Companies         |         |   | Abex |   | Wagner |  |   | Other |   | Total |  
|                              |  | (Millions of Dollars) |        
|Liability:                    |  |                       |         |   |      |   |        |  |   |       |   |       |   |     |  |   |         |  
|Balance at December 31, 2004  |  | $                     | 1,367.7 |   |      | $ | 129.5  |  | $ | 84.1  |   |       | $ | 2.7 |  | $ | 1,584.0 |  
|CCR/ Surety settlement        |  |                       | (29.0   | ) |      |   |       |  |   |      |   |       |   |    |  |   | (29.0   | )
|Foreign exchange              |  |                       | (17.6   | ) |      |   |       |  |   |      |   |       |   |    |  |   | (17.6   | )
|                              |  |                       |         |   |      |   |        |  |   |       |   |       |   |     |  |   |         |  
|Balance at September 30, 2005 |  | $                     | 1,321.1 |   |      | $ | 129.5  |  | $ | 84.1  |   |       | $ | 2.7 |  | $ | 1,537.4 |  
|                              |  |                       |         |   |      |   |        |  |   |       |   |       |   |     |  |   |         |  
|Asset:                        |  |                       |         |   |      |   |        |  |   |       |   |       |   |     |  |   |         |  
|Balance at December 31, 2004  |  | $                     | 687.7   |   |      | $ | 112.6  |  | $ | 53.5  |   |       | $ |    |  | $ | 853.8   |  
|Cash receipts                 |  |                       |        |   |      |   |       |  |   | (0.5  | ) |       |   |    |  |   | (0.5    | )
|Foreign exchange              |  |                       | (56.3   | ) |      |   |       |  |   |      |   |       |   |    |  |   | (56.3   | )
|                              |  |                       |         |   |      |   |        |  |   |       |   |       |   |     |  |   |         |  
|Balance at September 30, 2005 |  | $                     | 631.4   |   |      | $ | 112.6  |  | $ | 53.0  |   |       | $ |    |  | $ | 797.0   |  
|                              |  |                       |         |   |      |   |        |  |   |       |   |       |   |     |  |   |         |  



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



29



---

##### Table of Contents

Fairness in Asbestos Injury Resolution Act of 2005



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



Other Matters



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



Environmental Matters



The Company is a defendant in lawsuits filed, or the recipient of administrative orders issued, in various jurisdictions pursuant to the
Federal Comprehensive Environmental Response Compensation and Liability Act of 1980 (CERCLA) or other similar national or state environmental laws. These laws require responsible parties to pay for remediating contamination resulting
from hazardous substances that were discharged into the environment by them, or by others to whom they sent such substances for treatment or other disposition. In addition, the Company has been notified by the United States Environmental Protection
Agency, other national environmental agencies, and various state agencies that it may be a potentially responsible party (PRP) under such laws for the cost of remediating hazardous substances pursuant to CERCLA and other national and
state environmental laws. PRP designation requires the funding of site investigations and subsequent remedial activities.



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



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



Although difficult
to quantify based on the complexity of the issues, the Company has accrued amounts corresponding to its best estimate of the costs associated with such regulatory and contractual matters based upon current available information from site
investigations and consultants. Environmental reserves were $56.6 million and $61.0 million at September 30, 2005 and December 31, 2004, respectively, and are included in the consolidated balance sheets as follows:



|                                    |  |                       |      |                 |   |     
|----------------------------------- |  | --------------------- | ---- | --------------- | - | ----
|                                    |  | September 302005      |      | December 312004
|                                    |  | (Millions of Dollars)
|Other current liabilities           |  | $                     | 8.6  |                 | $ | 11.5
|Other long-term accrued liabilities |  |                       | 23.3 |                 |   | 25.9
|Liabilities subject to compromise   |  |                       | 24.7 |                 |   | 23.6
|                                    |  |                       |      |                 |   |     
|                                    |  | $                     | 56.6 |                 | $ | 61.0
|                                    |  |                       |      |                 |   |     



30



---

##### Table of Contents

Management believes that such accruals will be adequate to cover the Companys estimated liability for its exposure
in respect to such matters. In the event that such liabilities were to significantly exceed the amounts recorded by the Company, the Companys results of operations and financial condition could be materially affected. At September 30,
2005, management estimates that reasonably possible material additional losses above and beyond managements best estimate of required remediation costs as recorded approximates $66 million.



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



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



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



|16. | Operations by Reporting Segment
|--- | -------------------------------



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



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



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



31



---

##### Table of Contents

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



|                                                                                                                                                                            |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ----- | - | ------------------------------ | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                                                                                                                                            |  | Net Sales                       |      
|                                                                                                                                                                            |  | Three Months Ended September 30 |       |   | Nine Months Ended September 30 |  
|                                                                                                                                                                            |  | 2005                            |       |   | 2004                           |   |       | 2005 |  |   | 2004  |  
|                                                                                                                                                                            |  | (Millions of Dollars)           |      
|Powertrain                                                                                                                                                                  |  | $                               | 499   |   |                                | $ | 503   |      |  | $ | 1,666 |   |  | $ | 1,596 |  
|Sealing Systems                                                                                                                                                             |  |                                 | 114   |   |                                |   | 121   |      |  |   | 368   |   |  |   | 385   |  
|Vehicle Safety and Performance                                                                                                                                              |  |                                 | 180   |   |                                |   | 173   |      |  |   | 570   |   |  |   | 524   |  
|Aftermarket Products and Services                                                                                                                                           |  |                                 | 707   |   |                                |   | 711   |      |  |   | 2,195 |   |  |   | 2,121 |  
|                                                                                                                                                                            |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|                                                                                                                                                                            |  | $                               | 1,500 |   |                                | $ | 1,508 |      |  | $ | 4,799 |   |  | $ | 4,626 |  
|                                                                                                                                                                            |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|                                                                                                                                                                            | 
|                                                                                                                                                                            |  | Gross Margin                    |      
|                                                                                                                                                                            |  | Three Months Ended September 30 |       |   | Nine Months Ended September 30 |  
|                                                                                                                                                                            |  | 2005                            |       |   | 2004                           |   |       | 2005 |  |   | 2004  |  
|                                                                                                                                                                            |  | (Millions of Dollars)           |      
|Powertrain                                                                                                                                                                  |  | $                               | 62    |   |                                | $ | 70    |      |  | $ | 234   |   |  | $ | 234   |  
|Sealing Systems                                                                                                                                                             |  |                                 | 2     |   |                                |   | 7     |      |  |   | 14    |   |  |   | 37    |  
|Vehicle Safety and Performance                                                                                                                                              |  |                                 | 43    |   |                                |   | 45    |      |  |   | 139   |   |  |   | 143   |  
|Aftermarket Products and Services                                                                                                                                           |  |                                 | 150   |   |                                |   | 166   |      |  |   | 486   |   |  |   | 509   |  
|Corporate                                                                                                                                                                   |  |                                 | (23   | ) |                                |   | (5    | )    |  |   | (72   | ) |  |   | (23   | )
|                                                                                                                                                                            |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|                                                                                                                                                                            |  | $                               | 234   |   |                                | $ | 283   |      |  | $ | 801   |   |  | $ | 900   |  
|                                                                                                                                                                            |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|                                                                                                                                                                           
|Operational EBITDA by reporting segment and the reconciliation of Operational EBITDA to earnings (loss) from continuing operations before income tax expense is as
follows: | 
|                                                                                                                                                                            |  |                                
|                                                                                                                                                                            |  | Three Months Ended September 30 |       |   | Nine Months Ended September 30 |  
|                                                                                                                                                                            |  | 2005                            |       |   | 2004                           |   |       | 2005 |  |   | 2004  |  
|                                                                                                                                                                            |  | (Millions of Dollars)           |      
|Powertrain                                                                                                                                                                  |  | $                               | 76    |   |                                | $ | 70    |      |  | $ | 274   |   |  | $ | 243   |  
|Sealing Systems                                                                                                                                                             |  |                                 | 1     |   |                                |   | 6     |      |  |   | 10    |   |  |   | 38    |  
|Vehicle Safety and Performance                                                                                                                                              |  |                                 | 40    |   |                                |   | 39    |      |  |   | 126   |   |  |   | 125   |  
|Aftermarket Products and Services                                                                                                                                           |  |                                 | 105   |   |                                |   | 117   |      |  |   | 329   |   |  |   | 349   |  
|Corporate                                                                                                                                                                   |  |                                 | (107  | ) |                                |   | (97   | )    |  |   | (339  | ) |  |   | (309  | )
|                                                                                                                                                                            |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|Total Operational EBITDA                                                                                                                                                    |  |                                 | 115   |   |                                |   | 135   |      |  |   | 400   |   |  |   | 446   |  
|                                                                                                                                                                            |  |                                 |       |  
|Adjustment of long-lived assets to fair value                                                                                                                               |  |                                 | (9    | ) |                                |   | (13   | )    |  |   | (13   | ) |  |   | (36   | )
|Depreciation and amortization                                                                                                                                               |  |                                 | (85   | ) |                                |   | (84   | )    |  |   | (264  | ) |  |   | (251  | )
|Interest expense, net                                                                                                                                                       |  |                                 | (35   | ) |                                |   | (23   | )    |  |   | (97   | ) |  |   | (73   | )
|Chapter 11 and Administration related reorganization expenses                                                                                                               |  |                                 | (29   | ) |                                |   | (6    | )    |  |   | (79   | ) |  |   | (67   | )
|Discontinued operations and other                                                                                                                                           |  |                                 | (5    | ) |                                |   | (3    | )    |  |   | (3    | ) |  |   | 2     |  
|                                                                                                                                                                            |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|Earnings (loss) from continuing operations before income tax expense                                                                                                        |  | $                               | (48   | ) |                                | $ | 6     |      |  | $ | (56   | ) |  | $ | 21    |  
|                                                                                                                                                                            |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  



32



---

##### Table of Contents

Total assets by reportable segment are as follows:



|                                  |  |                       |       |                  |   |      
|--------------------------------- |  | --------------------- | ----- | ---------------- | - | -----
|                                  |  | September 30 2005     |       | December 31 2004
|                                  |  | (Millions of Dollars)
|Powertrain                        |  | $                     | 1,855 |                  | $ | 2,032
|Sealing Systems                   |  |                       | 799   |                  |   | 791  
|Vehicle Safety and Performance    |  |                       | 1,059 |                  |   | 1,017
|Aftermarket Products and Services |  |                       | 2,967 |                  |   | 3,057
|Corporate                         |  |                       | 1,101 |                  |   | 1,368
|                                  |  |                       |       |                  |   |      
|                                  |  | $                     | 7,781 |                  | $ | 8,265
|                                  |  |                       |       |                  |   |      



|17. | Stock-Based Compensation
|--- | ------------------------



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



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



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



|                                                          |  |                       |   |  |                       |  
|--------------------------------------------------------- |  | --------------------- | - |  | --------------------- | -
|                                                          |  | Plain Vanilla Options |   |  | Options with Exchange |  
|Valuation model                                           |  | Black-Scholes         |   |  | Modified Binomial     |  
|Expected volatility                                       |  | 40                    | % |  | 40                    | %
|Expected dividend yield                                   |  | 0                     | % |  | 0                     | %
|Risk-free rate over the estimated expected life of option |  | 3.93  4.34           | % |  | 3.93  4.34           | %
|Expected term (in years)                                  |  | 4.39                  |   |  | 5.46                  |  



Until the date of grant, the Company
is required to reassess the value of the Options quarterly and adjust the aggregate compensation expense recognized to reflect any change in the value of the Options. During the three and nine month periods ended September 30, 2005, the Company
recorded compensation expense of $1.4 million and $4.2 million, respectively. As of September 30, 2005, there was approximately $32 million of total unrecognized compensation cost related to non-vested stock-options under the employment
agreement, which is expected to be recognized ratably over the remaining term of the employment agreement.



33



---

##### Table of Contents

18. Consolidating Condensed Financial Information of Guarantor Subsidiaries



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



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



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



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



In 2005, the Company finalized the phase two calculation and
allocation of the 2004 Sealing Systems goodwill impairment charge, resulting in a reclassification of goodwill from the Parent subsidiaries to the Guarantor and Non-guarantor subsidiaries in the December 31, 2004 balance sheet.



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



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



|                                                    |  |                       |         |                        |   |                            |  |              |         |  |   |        
|--------------------------------------------------- |  | --------------------- | ------- | ---------------------- | - | -------------------------- |  | ------------ | ------- |  | - | -------
|                                                    |  | Parent                |         | Guarantor Subsidiaries |   | Non-Guarantor Subsidiaries |  | Consolidated
|                                                    |  | (Millions of Dollars)
|Debt                                                |  | $                     | 4,050.1 |                        | $ | 0.2                        |  | $            |        |  | $ | 4,050.3
|Asbestos liabilities                                |  |                       | 1.4     |                        |   | 236.3                      |  |              | 1,299.7 |  |   | 1,537.4
|Accounts payable                                    |  |                       | 59.0    |                        |   | 116.4                      |  |              | 28.0    |  |   | 203.4  
|Company-obligated mandatorily redeemable securities |  |                       |        |                        |   |                           |  |              | 114.6   |  |   | 114.6  
|Interest payable                                    |  |                       | 43.8    |                        |   | 0.2                        |  |              |        |  |   | 44.0   
|Environmental liabilities                           |  |                       | 24.7    |                        |   |                           |  |              |        |  |   | 24.7   
|Other accrued liabilities                           |  |                       | 9.9     |                        |   | 0.9                        |  |              | 11.2    |  |   | 22.0   
|                                                    |  |                       |         |                        |   |                            |  |              |         |  |   |        
|                                                    |  | $                     | 4,188.9 |                        | $ | 354.0                      |  | $            | 1,453.5 |  | $ | 5,996.4
|                                                    |  |                       |         |                        |   |                            |  |              |         |  |   |        



34



---

##### Table of Contents

Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Operations

Three Months Ended September 30, 2005



|                                                                               |  |                       |       |   |                        |   |       |                             |  |   |              |   |  |              |        |   |  |   |         |  
|------------------------------------------------------------------------------ |  | --------------------- | ----- | - | ---------------------- | - | ----- | --------------------------- |  | - | ------------ | - |  | ------------ | ------ | - |  | - | ------- | -
|                                                                               |  | Unconsolidated        |       |   |                        |   |       |                             | 
|                                                                               |  | Parent                |       |   | Guarantor Subsidiaries |   |       | Non- Guarantor Subsidiaries |  |   | Eliminations |   |  | Consolidated |       
|                                                                               |  | (Millions of Dollars) |      
|Net sales                                                                      |  | $                     | 294.2 |   |                        | $ | 668.7 |                             |  | $ | 964.4        |   |  | $            | (426.9 | ) |  | $ | 1,500.4 |  
|Cost of products sold                                                          |  |                       | 253.7 |   |                        |   | 579.0 |                             |  |   | 860.2        |   |  |              | (426.9 | ) |  |   | 1,266.0 |  
|                                                                               |  |                       |       |   |                        |   |       |                             |  |   |              |   |  |              |        |   |  |   |         |  
|Gross margin                                                                   |  |                       | 40.5  |   |                        |   | 89.7  |                             |  |   | 104.2        |   |  |              |       |   |  |   | 234.4   |  
|                                                                               |  |                       |       |   |                       
|Selling, general and administrative expenses                                   |  |                       | 55.3  |   |                        |   | 61.2  |                             |  |   | 99.4         |   |  |              |       |   |  |   | 215.9   |  
|Adjustment of long-lived assets to fair value                                  |  |                       |      |   |                        |   | 9.2   |                             |  |   | (0.1         | ) |  |              |       |   |  |   | 9.1     |  
|Interest expense (income), net                                                 |  |                       | 38.2  |   |                        |   |      |                             |  |   | (3.7         | ) |  |              |       |   |  |   | 34.5    |  
|Chapter 11 and Administration related reorganization expenses                  |  |                       | 28.9  |   |                        |   |      |                             |  |   |             |   |  |              |       |   |  |   | 28.9    |  
|Equity earnings of unconsolidated subsidiaries                                 |  |                       |      |   |                        |   | (1.3  | )                           |  |   | (7.6         | ) |  |              |       |   |  |   | (8.9    | )
|Other (income) expense, net                                                    |  |                       | (8.7  | ) |                        |   | (26.9 | )                           |  |   | 38.1         |   |  |              |       |   |  |   | 2.5     |  
|                                                                               |  |                       |       |   |                        |   |       |                             |  |   |              |   |  |              |        |   |  |   |         |  
|Earnings (loss) before income taxes and equity earnings (loss) of subsidiaries |  |                       | (73.2 | ) |                        |   | 47.5  |                             |  |   | (21.9        | ) |  |              |       |   |  |   | (47.6   | )
|Income tax expense (benefit)                                                   |  |                       | 1.2   |   |                        |   | 1.0   |                             |  |   | 20.1         |   |  |              |       |   |  |   | 22.3    |  
|                                                                               |  |                       |       |   |                        |   |       |                             |  |   |              |   |  |              |        |   |  |   |         |  
|Earnings (loss) before equity earnings (loss) of subsidiaries                  |  |                       | (74.4 | ) |                        |   | 46.5  |                             |  |   | (42.0        | ) |  |              |       |   |  |   | (69.9   | )
|Equity earnings (loss) of subsidiaries                                         |  |                       | 4.5   |   |                        |   | 24.8  |                             |  |   |             |   |  |              | (29.3  | ) |  |   |        |  
|                                                                               |  |                       |       |   |                        |   |       |                             |  |   |              |   |  |              |        |   |  |   |         |  
|Net earnings (loss)                                                            |  | $                     | (69.9 | ) |                        | $ | 71.3  |                             |  | $ | (42.0        | ) |  | $            | (29.3  | ) |  | $ | (69.9   | )
|                                                                               |  |                       |       |   |                        |   |       |                             |  |   |              |   |  |              |        |   |  |   |         |  



35



---

##### Table of Contents

Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Operations

Nine Months Ended September 30, 2005



|                                                                               |  |                       |        |   |                        |   |         |                             |  |   |              |   |  |              |          |   |  |   |         |  
|------------------------------------------------------------------------------ |  | --------------------- | ------ | - | ---------------------- | - | ------- | --------------------------- |  | - | ------------ | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                                               |  | Unconsolidated        |        |   |                        |   |         |                             | 
|                                                                               |  | Parent                |        |   | Guarantor Subsidiaries |   |         | Non- Guarantor Subsidiaries |  |   | Eliminations |   |  | Consolidated |         
|                                                                               |  | (Millions of Dollars) |       
|Net sales                                                                      |  | $                     | 932.9  |   |                        | $ | 2,080.8 |                             |  | $ | 3,178.0      |   |  | $            | (1,392.7 | ) |  | $ | 4,799.0 |  
|Cost of products sold                                                          |  |                       | 816.2  |   |                        |   | 1,795.0 |                             |  |   | 2,779.4      |   |  |              | (1,392.7 | ) |  |   | 3,997.9 |  
|                                                                               |  |                       |        |   |                        |   |         |                             |  |   |              |   |  |              |          |   |  |   |         |  
|Gross margin                                                                   |  |                       | 116.7  |   |                        |   | 285.8   |                             |  |   | 398.6        |   |  |              |         |   |  |   | 801.1   |  
|                                                                               |  |                       |        |   |                       
|Selling, general and administrative expenses                                   |  |                       | 185.7  |   |                        |   | 185.0   |                             |  |   | 321.2        |   |  |              |         |   |  |   | 691.9   |  
|Adjustment of long-lived assets to fair value                                  |  |                       | 3.0    |   |                        |   | 9.2     |                             |  |   | 0.9          |   |  |              |         |   |  |   | 13.1    |  
|Interest expense (income), net                                                 |  |                       | 108.1  |   |                        |   |        |                             |  |   | (11.0        | ) |  |              |         |   |  |   | 97.1    |  
|Chapter 11 and Administration related reorganization expenses                  |  |                       | 79.1   |   |                        |   |        |                             |  |   |             |   |  |              |         |   |  |   | 79.1    |  
|Equity earnings of unconsolidated subsidiaries                                 |  |                       |       |   |                        |   | (4.2    | )                           |  |   | (26.0        | ) |  |              |         |   |  |   | (30.2   | )
|Other (income) expense, net                                                    |  |                       | (39.6  | ) |                        |   | (93.2   | )                           |  |   | 139.2        |   |  |              |         |   |  |   | 6.4     |  
|                                                                               |  |                       |        |   |                        |   |         |                             |  |   |              |   |  |              |          |   |  |   |         |  
|Earnings (loss) before income taxes and equity earnings (loss) of subsidiaries |  |                       | (219.6 | ) |                        |   | 189.0   |                             |  |   | (25.7        | ) |  |              |         |   |  |   | (56.3   | )
|Income tax expense                                                             |  |                       | 1.9    |   |                        |   | 3.3     |                             |  |   | 68.3         |   |  |              |         |   |  |   | 73.5    |  
|                                                                               |  |                       |        |   |                        |   |         |                             |  |   |              |   |  |              |          |   |  |   |         |  
|Earnings (loss) before equity earnings (loss) of subsidiaries                  |  |                       | (221.5 | ) |                        |   | 185.7   |                             |  |   | (94.0        | ) |  |              |         |   |  |   | (129.8  | )
|Equity earnings (loss) of subsidiaries                                         |  |                       | 91.7   |   |                        |   | 74.4    |                             |  |   |             |   |  |              | (166.1   | ) |  |   |        |  
|                                                                               |  |                       |        |   |                        |   |         |                             |  |   |              |   |  |              |          |   |  |   |         |  
|Net earnings (loss)                                                            |  | $                     | (129.8 | ) |                        | $ | 260.1   |                             |  | $ | (94.0        | ) |  | $            | (166.1   | ) |  | $ | (129.8  | )
|                                                                               |  |                       |        |   |                        |   |         |                             |  |   |              |   |  |              |          |   |  |   |         |  



36



---

##### Table of Contents

Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Operations

Three Months Ended September 30, 2004



|                                                                                                          |  |                       |       |   |                        |   |       |                             |  |   |                         |   |  |                |      |   |              |   |        |   |  |   |         |  
|--------------------------------------------------------------------------------------------------------- |  | --------------------- | ----- | - | ---------------------- | - | ----- | --------------------------- |  | - | ----------------------- | - |  | -------------- | ---- | - | ------------ | - | ------ | - |  | - | ------- | -
|                                                                                                          |  | Unconsolidated        |       |   | Eliminations           |   |       |                             | 
|                                                                                                          |  | Parent                |       |   | Guarantor Subsidiaries |   |       | Non- Guarantor Subsidiaries |  |   | Discontinued Operations |   |  | Inter- Company |      |   | Consolidated |  
|                                                                                                          |  | (Millions of Dollars) |      
|Net sales                                                                                                 |  | $                     | 287.9 |   |                        | $ | 542.9 |                             |  | $ | 1,003.1                 |   |  | $              | (3.1 | ) |              | $ | (322.8 | ) |  | $ | 1,508.0 |  
|Cost of products sold                                                                                     |  |                       | 233.7 |   |                        |   | 444.7 |                             |  |   | 875.4                   |   |  |                | (6.4 | ) |              |   | (322.8 | ) |  |   | 1,224.6 |  
|                                                                                                          |  |                       |       |   |                        |   |       |                             |  |   |                         |   |  |                |      |   |              |   |        |   |  |   |         |  
|Gross margin                                                                                              |  |                       | 54.2  |   |                        |   | 98.2  |                             |  |   | 127.7                   |   |  |                | 3.3  |   |              |   |       |   |  |   | 283.4   |  
|                                                                                                          |  |                       |       |   |                        |  
|Selling, general and administrative expenses                                                              |  |                       | 73.6  |   |                        |   | 56.1  |                             |  |   | 105.8                   |   |  |                | (0.1 | ) |              |   |       |   |  |   | 235.4   |  
|Adjustment of long-lived assets to fair value                                                             |  |                       |      |   |                        |   | 9.0   |                             |  |   | 3.9                     |   |  |                |     |   |              |   |       |   |  |   | 12.9    |  
|Interest expense (income), net                                                                            |  |                       | 26.3  |   |                        |   |      |                             |  |   | (3.1                    | ) |  |                |     |   |              |   |       |   |  |   | 23.2    |  
|Chapter 11 and Administration related reorganization expenses                                             |  |                       | 24.9  |   |                        |   | (18.5 | )                           |  |   |                        |   |  |                |     |   |              |   |       |   |  |   | 6.4     |  
|Equity earnings of unconsolidated subsidiaries                                                            |  |                       |      |   |                        |   | (1.5  | )                           |  |   | (6.7                    | ) |  |                |     |   |              |   |       |   |  |   | (8.2    | )
|Other (income) expense, net                                                                               |  |                       | (9.5  | ) |                        |   | (25.1 | )                           |  |   | 48.5                    |   |  |                | (6.2 | ) |              |   |       |   |  |   | 7.7     |  
|                                                                                                          |  |                       |       |   |                        |   |       |                             |  |   |                         |   |  |                |      |   |              |   |        |   |  |   |         |  
|Earnings (loss) from continuing operations before income taxes and equity earnings (loss) of subsidiaries |  |                       | (61.1 | ) |                        |   | 78.2  |                             |  |   | (20.7                   | ) |  |                | 9.6  |   |              |   |       |   |  |   | 6.0     |  
|Income tax expense (benefit)                                                                              |  |                       | 1.0   |   |                        |   | 1.1   |                             |  |   | 28.5                    |   |  |                | 1.2  |   |              |   |       |   |  |   | 31.8    |  
|                                                                                                          |  |                       |       |   |                        |   |       |                             |  |   |                         |   |  |                |      |   |              |   |        |   |  |   |         |  
|Earnings (loss) from continuing operations before equity earnings (loss) of subsidiaries                  |  |                       | (62.1 | ) |                        |   | 77.1  |                             |  |   | (49.2                   | ) |  |                | 8.4  |   |              |   |       |   |  |   | (25.8   | )
|Earnings from discontinued operations, net of income taxes                                                |  |                       |      |   |                        |   |      |                             |  |   |                        |   |  |                | (8.4 | ) |              |   |       |   |  |   | (8.4    | )
|Equity earnings (loss) of subsidiaries                                                                    |  |                       | 27.9  |   |                        |   | 24.8  |                             |  |   |                        |   |  |                |     |   |              |   | (52.7  | ) |  |   |        |  
|                                                                                                          |  |                       |       |   |                        |   |       |                             |  |   |                         |   |  |                |      |   |              |   |        |   |  |   |         |  
|Net earnings (loss)                                                                                       |  | $                     | (34.2 | ) |                        | $ | 101.9 |                             |  | $ | (49.2                   | ) |  | $              |     |   |              | $ | (52.7  | ) |  | $ | (34.2   | )
|                                                                                                          |  |                       |       |   |                        |   |       |                             |  |   |                         |   |  |                |      |   |              |   |        |   |  |   |         |  



37



---

##### Table of Contents

Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Operations

Nine Months Ended September 30, 2004



|                                                                                                          |  |                       |        |   |                        |   |         |                             |  |   |                         |   |  |                |       |   |              |   |        |   |  |   |         |  
|--------------------------------------------------------------------------------------------------------- |  | --------------------- | ------ | - | ---------------------- | - | ------- | --------------------------- |  | - | ----------------------- | - |  | -------------- | ----- | - | ------------ | - | ------ | - |  | - | ------- | -
|                                                                                                          |  | Unconsolidated        |        |   | Eliminations           |   |         |                             | 
|                                                                                                          |  | Parent                |        |   | Guarantor Subsidiaries |   |         | Non- Guarantor Subsidiaries |  |   | Discontinued Operations |   |  | Inter- Company |       |   | Consolidated |  
|                                                                                                          |  | (Millions of Dollars) |       
|Net sales                                                                                                 |  | $                     | 885.2  |   |                        | $ | 1,625.0 |                             |  | $ | 3,094.3                 |   |  | $              | (14.9 | ) |              | $ | (963.9 | ) |  | $ | 4,625.7 |  
|Cost of products sold                                                                                     |  |                       | 729.7  |   |                        |   | 1,311.4 |                             |  |   | 2,667.9                 |   |  |                | (19.3 | ) |              |   | (963.9 | ) |  |   | 3,725.8 |  
|                                                                                                          |  |                       |        |   |                        |   |         |                             |  |   |                         |   |  |                |       |   |              |   |        |   |  |   |         |  
|Gross margin                                                                                              |  |                       | 155.5  |   |                        |   | 313.6   |                             |  |   | 426.4                   |   |  |                | 4.4   |   |              |   |       |   |  |   | 899.9   |  
|                                                                                                          |  |                       |        |   |                        |  
|Selling, general and administrative expenses                                                              |  |                       | 230.3  |   |                        |   | 165.5   |                             |  |   | 317.7                   |   |  |                | (2.3  | ) |              |   |       |   |  |   | 711.2   |  
|Adjustment of long-lived assets to fair value                                                             |  |                       |       |   |                        |   | 9.0     |                             |  |   | 27.0                    |   |  |                |      |   |              |   |       |   |  |   | 36.0    |  
|Interest expense (income), net                                                                            |  |                       | 78.0   |   |                        |   |        |                             |  |   | (4.9                    | ) |  |                |      |   |              |   |       |   |  |   | 73.1    |  
|Chapter 11 and Administration related reorganization expenses                                             |  |                       | 85.3   |   |                        |   | (18.5   | )                           |  |   |                        |   |  |                |      |   |              |   |       |   |  |   | 66.8    |  
|Equity earnings of unconsolidated subsidiaries                                                            |  |                       |       |   |                        |   | (5.4    | )                           |  |   | (23.0                   | ) |  |                |      |   |              |   |       |   |  |   | (28.4   | )
|Other (income) expense, net                                                                               |  |                       | (27.2  | ) |                        |   | (90.6   | )                           |  |   | 145.7                   |   |  |                | (8.1  | ) |              |   |       |   |  |   | 19.8    |  
|                                                                                                          |  |                       |        |   |                        |   |         |                             |  |   |                         |   |  |                |       |   |              |   |        |   |  |   |         |  
|Earnings (loss) from continuing operations before income taxes and equity earnings (loss) of subsidiaries |  |                       | (210.9 | ) |                        |   | 253.6   |                             |  |   | (36.1                   | ) |  |                | 14.8  |   |              |   |       |   |  |   | 21.4    |  
|Income tax expense (benefit)                                                                              |  |                       | (5.3   | ) |                        |   | 3.3     |                             |  |   | 72.2                    |   |  |                | 2.2   |   |              |   |       |   |  |   | 72.4    |  
|                                                                                                          |  |                       |        |   |                        |   |         |                             |  |   |                         |   |  |                |       |   |              |   |        |   |  |   |         |  
|Earnings (loss) from continuing operations before equity earnings (loss) of subsidiaries                  |  |                       | (205.6 | ) |                        |   | 250.3   |                             |  |   | (108.3                  | ) |  |                | 12.6  |   |              |   |       |   |  |   | (51.0   | )
|Earnings from discontinued operations, net of income taxes                                                |  |                       |       |   |                        |   |        |                             |  |   |                        |   |  |                | (12.6 | ) |              |   |       |   |  |   | (12.6   | )
|Equity earnings (loss) of subsidiaries                                                                    |  |                       | 142.0  |   |                        |   | 64.0    |                             |  |   |                        |   |  |                |      |   |              |   | (206.0 | ) |  |   |        |  
|                                                                                                          |  |                       |        |   |                        |   |         |                             |  |   |                         |   |  |                |       |   |              |   |        |   |  |   |         |  
|Net earnings (loss)                                                                                       |  | $                     | (63.6  | ) |                        | $ | 314.3   |                             |  | $ | (108.3                  | ) |  | $              |      |   |              | $ | (206.0 | ) |  | $ | (63.6   | )
|                                                                                                          |  |                       |        |   |                        |   |         |                             |  |   |                         |   |  |                |       |   |              |   |        |   |  |   |         |  



38



---

##### Table of Contents

Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Balance Sheet

September 30, 2005



|                                                             |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  
|------------------------------------------------------------ |  | --------------------- | -------- | - | ---------------------- | - | --------------------------- |  | ------------ | ------- |  | ------------ | -------- | - |  | - | -------- | -
|                                                             |  | Unconsolidated        |          |   |                        |   |                             | 
|                                                             |  | Parent                |          |   | Guarantor Subsidiaries |   | Non- Guarantor Subsidiaries |  | Eliminations |         |  | Consolidated |         
|                                                             |  | (Millions of Dollars) |         
|ASSETS                                                       |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  
|Current assets:                                              |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  
|Cash and equivalents                                         |  | $                     | 7.3      |   |                        | $ |                            |  | $            | 738.8   |  | $            |         |   |  | $ | 746.1    |  
|Accounts receivable, net                                     |  |                       | 215.5    |   |                        |   | 314.8                       |  |              | 558.7   |  |              |         |   |  |   | 1,089.0  |  
|Inventories, net                                             |  |                       | 105.9    |   |                        |   | 305.8                       |  |              | 454.1   |  |              |         |   |  |   | 865.8    |  
|Prepaid expenses and other current assets                    |  |                       | 57.5     |   |                        |   | 32.2                        |  |              | 138.0   |  |              |         |   |  |   | 227.7    |  
|                                                             |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  
|Total current assets                                         |  |                       | 386.2    |   |                        |   | 652.8                       |  |              | 1,889.6 |  |              |         |   |  |   | 2,928.6  |  
|                                                             |  |                       |          |   |                       
|Property, plant and equipment, net                           |  |                       | 253.9    |   |                        |   | 537.1                       |  |              | 1,302.6 |  |              |         |   |  |   | 2,093.6  |  
|Goodwill and indefinite-lived intangible assets              |  |                       | 488.2    |   |                        |   | 595.6                       |  |              | 194.9   |  |              |         |   |  |   | 1,278.7  |  
|Definite-lived intangible assets, net                        |  |                       | 65.9     |   |                        |   | 78.9                        |  |              | 160.9   |  |              |         |   |  |   | 305.7    |  
|Investment in subsidiaries                                   |  |                       | 6,480.7  |   |                        |   | 3,028.0                     |  |              |        |  |              | (9,508.7 | ) |  |   |         |  
|Intercompany accounts, net                                   |  |                       | (4,280.3 | ) |                        |   | 3,562.3                     |  |              | 718.0   |  |              |         |   |  |   |         |  
|Asbestos-related insurance recoverable                       |  |                       |         |   |                        |   | 165.6                       |  |              | 631.4   |  |              |         |   |  |   | 797.0    |  
|Prepaid pension costs                                        |  |                       |         |   |                        |   |                            |  |              | 149.8   |  |              |         |   |  |   | 149.8    |  
|Other noncurrent assets                                      |  |                       | 27.8     |   |                        |   | 25.2                        |  |              | 174.6   |  |              |         |   |  |   | 227.6    |  
|                                                             |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  
|                                                             |  | $                     | 3,422.4  |   |                        | $ | 8,645.5                     |  | $            | 5,221.8 |  | $            | (9,508.7 | ) |  | $ | 7,781.0  |  
|                                                             |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  
|LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)               |  |                       |          |  
|Current liabilities:                                         |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  
|Short-term debt, including current portion of long-term debt |  | $                     | 328.3    |   |                        | $ |                            |  | $            | 28.3    |  | $            |         |   |  | $ | 356.6    |  
|Accounts payable                                             |  |                       | 71.2     |   |                        |   | 92.2                        |  |              | 222.0   |  |              |         |   |  |   | 385.4    |  
|Accrued liabilities                                          |  |                       | 114.2    |   |                        |   | 58.4                        |  |              | 363.3   |  |              |         |   |  |   | 535.9    |  
|Other current liabilities                                    |  |                       | 30.5     |   |                        |   | 12.7                        |  |              | 77.7    |  |              |         |   |  |   | 120.9    |  
|                                                             |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  
|Total current liabilities                                    |  |                       | 544.2    |   |                        |   | 163.3                       |  |              | 691.3   |  |              |         |   |  |   | 1,398.8  |  
|                                                             |  |                       |          |   |                       
|Liabilities subject to compromise                            |  |                       | 4,188.9  |   |                        |   | 354.0                       |  |              | 1,453.5 |  |              |         |   |  |   | 5,996.4  |  
|                                                             |  |                       |          |   |                       
|Long-term debt                                               |  |                       |         |   |                        |   |                            |  |              | 6.8     |  |              |         |   |  |   | 6.8      |  
|Postemployment benefits                                      |  |                       | 741.2    |   |                        |   |                            |  |              | 1,474.0 |  |              |         |   |  |   | 2,215.2  |  
|Long-term portion of deferred income taxes                   |  |                       |         |   |                        |   |                            |  |              | 103.2   |  |              |         |   |  |   | 103.2    |  
|Other accrued liabilities                                    |  |                       | 105.0    |   |                        |   |                            |  |              | 106.9   |  |              |         |   |  |   | 211.9    |  
|Minority interest in consolidated subsidiaries               |  |                       | 26.2     |   |                        |   | 5.6                         |  |              |        |  |              |         |   |  |   | 31.8     |  
|Shareholders equity (deficit)                               |  |                       | (2,183.1 | ) |                        |   | 8,122.6                     |  |              | 1,386.1 |  |              | (9,508.7 | ) |  |   | (2,183.1 | )
|                                                             |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  
|                                                             |  | $                     | 3,422.4  |   |                        | $ | 8,645.5                     |  | $            | 5,221.8 |  | $            | (9,508.7 | ) |  | $ | 7,781.0  |  
|                                                             |  |                       |          |   |                        |   |                             |  |              |         |  |              |          |   |  |   |          |  



39



---

##### Table of Contents

Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Consolidating Condensed Balance Sheet

December 31, 2004



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



40



---

##### Table of Contents

Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Cash Flows

Nine Months Ended September 30, 2005



|                                                              |  |                       |       |   |                        |   |        |                             |  |   |              |   |              |   |   |  |   |        |  
|------------------------------------------------------------- |  | --------------------- | ----- | - | ---------------------- | - | ------ | --------------------------- |  | - | ------------ | - | ------------ | - | - |  | - | ------ | -
|                                                              |  | (Unconsolidated)      |       |   |                        |   |        |                            
|                                                              |  | Parent                |       |   | Guarantor Subsidiaries |   |        | Non- Guarantor Subsidiaries |  |   | Eliminations |   | Consolidated |  
|                                                              |  | (Millions of Dollars) |      
|Net cash provided from (used by) operating activities         |  | $                     | (47.6 | ) |                        | $ | 296.2  |                             |  | $ | (90.1        | ) |              | $ |  |  | $ | 158.5  |  
|                                                              |  |                       |       |   |                       
|Cash provided from (used by) investing activities:            |  |                       |       |   |                        |   |        |                             |  |   |              |   |              |   |   |  |   |        |  
|Expenditures for property, plant and equipment                |  |                       | (6.8  | ) |                        |   | (9.0   | )                           |  |   | (109.9       | ) |              |   |  |  |   | (125.7 | )
|Net proceeds from sale of property, plant and equipment       |  |                       |      |   |                        |   |       |                             |  |   | 14.0         |   |              |   |  |  |   | 14.0   |  
|                                                              |  |                       |       |   |                        |   |        |                             |  |   |              |   |              |   |   |  |   |        |  
|Net cash used by investing activities                         |  |                       | (6.8  | ) |                        |   | (9.0   | )                           |  |   | (95.9        | ) |              |   |  |  |   | (111.7 | )
|                                                              |  |                       |       |   |                       
|Cash provided from (used by) financing activities:            |  |                       |       |   |                        |   |        |                             |  |   |              |   |              |   |   |  |   |        |  
|Proceeds from borrowings on DIP credit facility               |  |                       | 50.7  |   |                        |   |       |                             |  |   |             |   |              |   |  |  |   | 50.7   |  
|Increase in short-term debt                                   |  |                       |      |   |                        |   |       |                             |  |   | (0.4         | ) |              |   |  |  |   | (0.4   | )
|Decrease in other long-term debt                              |  |                       |      |   |                        |   |       |                             |  |   | (2.4         | ) |              |   |  |  |   | (2.4   | )
|Change in intercompany accounts                               |  |                       | 51.3  |   |                        |   | (287.2 | )                           |  |   | 235.9        |   |              |   |  |  |   |       |  
|                                                              |  |                       |       |   |                        |   |        |                             |  |   |              |   |              |   |   |  |   |        |  
|Net cash provided from (used by) financing activities         |  |                       | 102.0 |   |                        |   | (287.2 | )                           |  |   | 233.1        |   |              |   |  |  |   | 47.9   |  
|                                                              |  |                       |       |   |                       
|Effect of foreign currency exchange rate fluctuations on cash |  |                       | (49.2 | ) |                        |   |       |                             |  |   |             |   |              |   |  |  |   | (49.2  | )
|                                                              |  |                       |       |   |                        |   |        |                             |  |   |              |   |              |   |   |  |   |        |  
|Net increase (decrease) in cash and equivalents               |  | $                     | (1.6  | ) |                        | $ |       |                             |  | $ | 47.1         |   |              | $ |  |  | $ | 45.5   |  
|                                                              |  |                       |       |   |                        |   |        |                             |  |   |              |   |              |   |   |  |   |        |  



41



---

##### Table of Contents

Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Cash Flows

Nine Months Ended September 30, 2004



|                                                              |  |                       |       |   |                        |   |        |                             |  |   |              |   |              |   |   |  |   |        |  
|------------------------------------------------------------- |  | --------------------- | ----- | - | ---------------------- | - | ------ | --------------------------- |  | - | ------------ | - | ------------ | - | - |  | - | ------ | -
|                                                              |  | (Unconsolidated)      |       |   |                        |   |        |                            
|                                                              |  | Parent                |       |   | Guarantor Subsidiaries |   |        | Non- Guarantor Subsidiaries |  |   | Eliminations |   | Consolidated |  
|                                                              |  | (Millions of Dollars) |      
|Net cash provided from (used by) operating activities         |  | $                     | (75.9 | ) |                        | $ | 327.2  |                             |  | $ | 9.1          |   |              | $ |  |  | $ | 260.4  |  
|                                                              |  |                       |       |   |                       
|Cash provided from (used by) investing activities:            |  |                       |       |   |                        |   |        |                             |  |   |              |   |              |   |   |  |   |        |  
|Expenditures for property, plant and equipment                |  |                       | (29.0 | ) |                        |   | (49.6  | )                           |  |   | (111.4       | ) |              |   |  |  |   | (190.0 | )
|Net proceeds from the sale of property, plant and equipment   |  |                       |      |   |                        |   |       |                             |  |   | 13.0         |   |              |   |  |  |   | 13.0   |  
|                                                              |  |                       |       |   |                        |   |        |                             |  |   |              |   |              |   |   |  |   |        |  
|Net cash used by investing activities                         |  |                       | (29.0 | ) |                        |   | (49.6  | )                           |  |   | (98.4        | ) |              |   |  |  |   | (177.0 | )
|                                                              |  |                       |       |   |                       
|Cash provided from (used by) financing activities:            |  |                       |       |   |                        |   |        |                             |  |   |              |   |              |   |   |  |   |        |  
|Proceeds from borrowings on DIP credit facility               |  |                       | 90.0  |   |                        |   |       |                             |  |   |             |   |              |   |  |  |   | 90.0   |  
|Principal payments on DIP credit facility                     |  |                       | (51.7 | ) |                        |   |       |                             |  |   |             |   |              |   |  |  |   | (51.7  | )
|Decrease in short-term debt                                   |  |                       |      |   |                        |   |       |                             |  |   | 4.4          |   |              |   |  |  |   | 4.4    |  
|Decrease in other long-term debt                              |  |                       |      |   |                        |   |       |                             |  |   | (0.2         | ) |              |   |  |  |   | (0.2   | )
|Change in intercompany accounts                               |  |                       | 66.4  |   |                        |   | (277.6 | )                           |  |   | 211.2        |   |              |   |  |  |   |       |  
|                                                              |  |                       |       |   |                        |   |        |                             |  |   |              |   |              |   |   |  |   |        |  
|Net cash provided from (used by) financing activities         |  |                       | 104.7 |   |                        |   | (277.6 | )                           |  |   | 215.4        |   |              |   |  |  |   | 42.5   |  
|                                                              |  |                       |       |   |                       
|Effect of foreign currency exchange rate fluctuations on cash |  |                       | (0.7  | ) |                        |   |       |                             |  |   |             |   |              |   |  |  |   | (0.7   | )
|                                                              |  |                       |       |   |                        |   |        |                             |  |   |              |   |              |   |   |  |   |        |  
|Net increase in cash and equivalents                          |  | $                     | (0.9  | ) |                        | $ |       |                             |  | $ | 126.1        |   |              | $ |  |  | $ | 125.2  |  
|                                                              |  |                       |       |   |                        |   |        |                             |  |   |              |   |              |   |   |  |   |        |  



42



---

##### Table of Contents

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



Overview



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



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



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



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



Voluntary
reorganization under Chapter 11 and Administration



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



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



43



---

##### Table of Contents

Consequences of the Restructuring Proceedings



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



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



On June 4, 2004, the Third Amended Joint Plan of Reorganization (the Plan)
for the Company and the other U.S. and U.K. Debtors was filed with the Bankruptcy Court. The Plan was jointly proposed by the Company, the Unsecured Creditors Committee, the Asbestos Claimants Committee, the Future Asbestos Claimants Representative,
the Agent for the Prepetition Bank Lenders and the Equity Security Holders Committee (collectively referred to as the Plan Proponents). Also on June 4, 2004, a Disclosure Statement to be used in soliciting votes to accept or reject
the Plan (the Disclosure Statement) was approved by the Bankruptcy Court and a December 2004 hearing was scheduled to determine whether the Bankruptcy Court should approve the Plan. On December 7, 2004, the Bankruptcy Court delayed
this confirmation hearing pending a hearing to estimate asbestos personal injury claims against the U.K. Debtors.



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



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



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



On February 2, 2005, the Company entered into an employment agreement with
José Maria Alapont under which Mr. Alapont became the Companys president and chief executive officer. As part of this employment agreement, the Plan Proponents have agreed to amend the Plan to provide Mr. Alapont with
non-qualified stock options to purchase common stock of the reorganized Company. Significant terms and conditions of the contemplated stock



44



---

##### Table of Contents

options are outlined in the employment agreement previously filed with the SEC on Form 8-K dated February 2, 2005.



On June 14, 2005, the District Court overseeing the Chapter 11 Cases commenced its
hearing to estimate the aggregate present value of pending and future asbestos personal injury and wrongful death claims against the U.K. Debtors. Closing arguments were completed on July 14, 2005, after which the District Court estimated the
total liability for such claims at $9 billion in the United States and $500 million in the United Kingdom. The objective of the estimation hearing was to determine an aggregate claims value for purposes of formulating the reorganization plan and not
to determine the liability for U.S. GAAP purposes. The Company has evaluated its currently recorded liability for such claims and, given the settlement terms and value as proposed in the Plan, determined that the amount recorded is appropriate.



On September 26, 2005, the Company announced an agreement between the
Administrators of the U.K. Debtors and the Plan Proponents to allow the Company to retain the businesses and other assets of the U.K. affiliates in exchange for monetary amounts and reserves that will be used by the Administrators to provide a
distribution to creditors of the U.K. Debtors (U.K. Settlement Agreement). Among other things, the U.K. Settlement Agreement permits i) the Company to make an offer to the Administrators for certain long-term intercompany notes held by
T&N Limited (Loan Notes), which the Administrator had previously arranged to sell to a third-party bidder, or ii) the Administrator to sell the Loan Notes to the third-party if the Company elects not to make an offer.



There are two possible types of U.K. schemes of arrangement. The first is under
Section 425 of the Companies Act of 1985, which may involve a Scheme of Arrangement for the reconstruction of the Company. The other possible type of scheme arises under Section 1 of the Insolvency Act of 1986 in relation to Company
Voluntary Arrangements (CVA). Under English and Scottish law, the Administrators are the only persons with authority to recommend and submit Schemes of Arrangement and/or CVAs.



The U.K. Settlement Agreement sets forth the terms of various amendments to the Plan, the
Schemes of Arrangement and the CVAs that will be used to reorganize the U.K. Debtors including a delineation of distributions to U.K. and U.S. domiciled creditors. The U.K. Settlement Agreement is subject to various approvals and determinations by
the Bankruptcy Court and High Court. A copy of the U.K. Settlement Agreement was filed with the SEC on Form 8-K on September 30, 2005.



Also on September 26, 2005, the Plan Proponents and High River Limited Partnership agreed to make certain amendments to the Plan whereby i) the U.S. asbestos trust
will make a payment to the reorganized Company (or pay a portion of the stock in reorganized Company to be issued to the asbestos trust in lieu thereof) for the agreed amounts that will be used by the Administrators to provide distributions on
account of U.K. asbestos personal injury claims under the terms of the U.K. Settlement Agreement; ii) the U.S. asbestos trust will provide an option to Mr. Carl Icahn for the purchase of the remaining shares of the reorganized Company held by such
trust; and (iii) if Mr. Carl Icahn does not exercise such option, he or one of his entities will provide certain financing to the U.S. asbestos trust. Terms of these Plan amendments were filed with the SEC on Form 8-K on September 30,
2005.



The Company cannot predict at this time whether the Plan or the Schemes
of Arrangement and CVAs that will be proposed pursuant to the terms of the U.K. Settlement Agreement and the other agreed Plan amendments will be confirmed or approved.



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



45



---

##### Table of Contents

Asbestos Liabilities and Related Insurance Recoverable



In 1996, T&N Ltd. (formerly T&N, plc) purchased for itself and its then defined
global subsidiaries a £500 million layer of insurance which will be triggered should the aggregate costs of claims made or brought after June 30, 1996, where the exposure occurred prior to that date, exceed £690 million. During
2000, the Company concluded that the aggregate cost of the claims filed after June 30, 1996 would exceed the trigger point and recorded an insurance recoverable asset under the T&N policy of $577 million. As of September 30, 2005, the
recorded insurance recoverable was $631 million. In December 2001, one of the three reinsurers, European International Reinsurance Company Ltd. (EIR), filed suit in a London, England court to challenge the validity of its insurance
contract with the T&N Companies. As a result of this lawsuit, a claim was made against the broker (Sedgwick) that assisted in procuring this policy for breach of its duties as a broker. This trial commenced in October 2003. Prior to the
conclusion of the trial, the parties were able to reach a settlement. As a result of this settlement, the Company recorded $38.9 million asbestos charge during the fourth quarter of 2003. Under the terms of the settlement, EIR would be liable for
65.5% of its one-third share of the reinsurance policy. By separate agreement, Sedgwick agreed to be liable for an additional 17.25% of the EIR share of the reinsurance policy. T&N Ltd. has also agreed to indemnify the insurer for sums paid
under the policy for which the insurer is liable to T&N Ltd. for which the insurer has no recovery from the reinsurers of Sedgwick. The settlement agreements referenced above are being held in escrow pending approval by the Bankruptcy Court and
the Administrators of T&N Ltd. of those portions of the above-described settlement agreements that affect the Debtors. A motion seeking the Bankruptcy Courts approval of the settlement was filed on March 1, 2004.



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



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



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



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



The Company has reviewed the financial viability and legal obligations of the three
reinsurance companies involved and has concluded that there is little risk that the reinsurers will not be able to meet their obligations under the policy



46



---

##### Table of Contents

based upon their financial condition. The U.S. claims costs applied against this policy is converted at a fixed exchange rate of $1.69/£. As
such, if the market exchange rate is greater than $1.69/£, the Company will effectively have a premium on 100% recovery on claims paid. As of September 30, 2005, the $631 million insurance recoverable asset includes an exchange rate
premium of approximately $25.0 million.



Fairness in Asbestos Injury
Resolution Act of 2005



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



Results of Operations



The following Managements Discussion and Analysis of financial condition and results of operations (MD&A) should be read in conjunction with the
MD&A included in the Companys Annual Report on Form 10-K for the year ended December 31, 2004.



Consolidated Results



Net sales by reporting segment were:



|                                  |  |                                 |       |      |   |        |  |   |    |  
|--------------------------------- |  | ------------------------------- | ----- | ---- | - | ------ |  | - | -- | -
|                                  |  | Three Months Ended September 30 |      
|                                  |  | 2005                            |       | 2004 |   | Change | 
|                                  |  | (Millions of Dollars)           |      
|Powertrain                        |  | $                               | 499   |      | $ | 503    |  | $ | (4 | )
|Sealing Systems                   |  |                                 | 114   |      |   | 121    |  |   | (7 | )
|Vehicle Safety and Performance    |  |                                 | 180   |      |   | 173    |  |   | 7  |  
|Aftermarket Products and Services |  |                                 | 707   |      |   | 711    |  |   | (4 | )
|                                  |  |                                 |       |      |   |        |  |   |    |  
|                                  |  | $                               | 1,500 |      | $ | 1,508  |  | $ | (8 | )
|                                  |  |                                 |       |      |   |        |  |   |    |  



Net Sales by group and region were:



|         |  |                                 |   |  |    |   |  |     |   |  |     |   |  |       |  
|-------- |  | ------------------------------- | - |  | -- | - |  | --- | - |  | --- | - |  | ----- | -
|         |  | Three Months Ended September 30 |  
|         |  | Powertrain                      |   |  | SS |   |  | VSP |   |  | APS |   |  | Total |  
|2005     |  |                                 |   |  |    |   |  |     |   |  |     |   |  |       |  
|Americas |  | 30                              | % |  | 69 | % |  | 36  | % |  | 75  | % |  | 55    | %
|Europe   |  | 68                              | % |  | 30 | % |  | 59  | % |  | 24  | % |  | 43    | %
|Asia     |  | 2                               | % |  | 1  | % |  | 5   | % |  | 1   | % |  | 2     | %
|         |  |                                 |   |  |   
|2004     |  |                                 |   |  |    |   |  |     |   |  |     |   |  |       |  
|Americas |  | 29                              | % |  | 68 | % |  | 36  | % |  | 75  | % |  | 55    | %
|Europe   |  | 69                              | % |  | 31 | % |  | 59  | % |  | 24  | % |  | 43    | %
|Asia     |  | 2                               | % |  | 1  | % |  | 5   | % |  | 1   | % |  | 2     | %



47



---

##### Table of Contents

Gross margin by reporting segment was:



|                                  |  |                                 |     |   |      |   |     |        |  |   |     |  
|--------------------------------- |  | ------------------------------- | --- | - | ---- | - | --- | ------ |  | - | --- | -
|                                  |  | Three Months Ended September 30 |    
|                                  |  | 2005                            |     |   | 2004 |   |     | Change | 
|                                  |  | (Millions of Dollars)           |    
|Powertrain                        |  | $                               | 62  |   |      | $ | 70  |        |  | $ | (8  | )
|Sealing Systems                   |  |                                 | 2   |   |      |   | 7   |        |  |   | (5  | )
|Vehicle Safety and Performance    |  |                                 | 43  |   |      |   | 45  |        |  |   | (2  | )
|Aftermarket Products and Services |  |                                 | 150 |   |      |   | 166 |        |  |   | (16 | )
|Corporate                         |  |                                 | (23 | ) |      |   | (5  | )      |  |   | (18 | )
|                                  |  |                                 |     |   |      |   |     |        |  |   |     |  
|                                  |  | $                               | 234 |   |      | $ | 283 |        |  | $ | (49 | )
|                                  |  |                                 |     |   |      |   |     |        |  |   |     |  



Net sales decreased by $8 million, or
less than 1%, to $1,500 million for the third quarter of 2005 from $1,508 million in the same period of 2004. The decrease resulted from reduced sales volumes of $17 million across both the OE and Aftermarket segments, partially offset by favorable
foreign currency of $6 million and net customer price increases in the Aftermarket.



Gross margin decreased by $49 million, or 17%, to $234 million for the third quarter of 2005 from $283 million in the same period of 2004. The significant factors contributing to this decrease were increased pension costs of $14 million and
unfavorable sales volumes and mix, which reduced margin by $40 million. In addition to these factors, productivity gains in excess of inflation of $7 million, reduced depreciation expense of $1 million, and favorable customer pricing of $3 million
were partially offset by unfavorable foreign currency of $6 million.



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



Through its centralized supply chain functions, the Company continues to work with its suppliers to reduce its global material costs. While
the costs of steel, non-ferrous and hydrocarbon based raw materials have stabilized since their costs began significantly increasing during mid-2004, the Company expects raw material steel supply will continue to be constrained, and continued
increases in material costs or disruptions in supply over the remainder of the year or longer term would continue to pressure the Companys operating results.



48



---

##### Table of Contents

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



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



|                                      |  |                       |     |   |    |   |     |     |  |   |     |   |  |           |     |   |       |   |     |   |  |   |       |  
|------------------------------------- |  | --------------------- | --- | - | -- | - | --- | --- |  | - | --- | - |  | --------- | --- | - | ----- | - | --- | - |  | - | ----- | -
|                                      |  | Powertrain            |     |   | SS |   |     | VSP |  |   | APS |   |  | Corporate |     |   | Total |  
|                                      |  | (Millions of Dollars) |    
|Net Sales                             |  |                       |     |   |    |   |     |     |  |   |     |   |  |           |     |   |       |   |     |   |  |   |       |  
|Three months ended September 30, 2004 |  | $                     | 503 |   |    | $ | 121 |     |  | $ | 173 |   |  | $         | 711 |   |       | $ |    |   |  | $ | 1,508 |  
|Foreign currency                      |  |                       |    |   |    |   |    |     |  |   |    |   |  |           | 6   |   |       |   |    |   |  |   | 6     |  
|Sales volumes                         |  |                       |    |   |    |   | (6  | )   |  |   | 7   |   |  |           | (18 | ) |       |   |    |   |  |   | (17   | )
|Customer pricing                      |  |                       | (4  | ) |    |   | (1  | )   |  |   |    |   |  |           | 8   |   |       |   |    |   |  |   | 3     |  
|                                      |  |                       |     |   |    |   |     |     |  |   |     |   |  |           |     |   |       |   |     |   |  |   |       |  
|Three months ended September 30, 2005 |  | $                     | 499 |   |    | $ | 114 |     |  | $ | 180 |   |  | $         | 707 |   |       | $ |    |   |  | $ | 1,500 |  
|                                      |  |                       |     |   |    |   |     |     |  |   |     |   |  |           |     |   |       |   |     |   |  |   |       |  
|                                      |  |                       |     |   |    |  
|                                      |  | Powertrain            |     |   | SS |   |     | VSP |  |   | APS |   |  | Corporate |     |   | Total |  
|                                      |  | (Millions of Dollars) |    
|Gross Margin                          |  |                       |     |   |    |   |     |     |  |   |     |   |  |           |     |   |       |   |     |   |  |   |       |  
|Three months ended September 30, 2004 |  | $                     | 70  |   |    | $ | 7   |     |  | $ | 45  |   |  | $         | 166 |   |       | $ | (5  | ) |  | $ | 283   |  
|Foreign currency                      |  |                       | (5  | ) |    |   |    |     |  |   | (2  | ) |  |           | 1   |   |       |   |    |   |  |   | (6    | )
|Sales volumes / mix                   |  |                       | (9  | ) |    |   | (6  | )   |  |   | 2   |   |  |           | (27 | ) |       |   |    |   |  |   | (40   | )
|Customer pricing                      |  |                       | (4  | ) |    |   | (1  | )   |  |   |    |   |  |           | 8   |   |       |   |    |   |  |   | 3     |  
|Depreciation and pension expense      |  |                       | 2   |   |    |   | 1   |     |  |   | (2  | ) |  |           |    |   |       |   | (14 | ) |  |   | (13   | )
|Productivity, net of inflation        |  |                       | 8   |   |    |   | 1   |     |  |   |    |   |  |           | 2   |   |       |   | (4  | ) |  |   | 7     |  
|                                      |  |                       |     |   |    |   |     |     |  |   |     |   |  |           |     |   |       |   |     |   |  |   |       |  
|Three months ended September 30, 2005 |  | $                     | 62  |   |    | $ | 2   |     |  | $ | 43  |   |  | $         | 150 |   |       | $ | (23 | ) |  | $ | 234   |  
|                                      |  |                       |     |   |    |   |     |     |  |   |     |   |  |           |     |   |       |   |     |   |  |   |       |  



Powertrain



Sales volumes remained unchanged from the prior year as a
small reduction in European OEM market demand was offset by new program launches in Asia and the Americas. Net price reductions to OEM customers were $4 million. However, these price reductions represent the net impact of reductions in the ordinary
course of business partially offset by escalations in prices as some of the increases in the costs of raw materials are passed on to OEM customers.



Gross margin decreased by $8 million primarily as a result of unfavorable product mix, by $4 million as a result of customer price reductions and $5 million due to
foreign currency. These adverse factors were partially offset by $8 million of productivity gains in excess of labor and benefit inflation, largely resulting from the continued consolidation of production activities.



Sealing Systems



Market demand decreased slightly in both Europe and the Americas due primarily to the
reduced production levels of light vehicle automotive OEMs on both continents. This reduction in demand was compounded slightly in North America by some minor program losses, but were partially offset by program wins in Europe. These factors
combined to reduce sales by $7 million. Net price reductions to OEM customers were $1 million.



Gross margin decreased by $5 million. Combined with unfavorable product mix, the impact of the reduced sales volumes was $6 million, further compounded by the price reductions of $1 million. Reduced depreciation and
productivity in excess of labor and benefits inflation of $2 million partially offset these adverse factors.



Vehicle Safety and Performance



Reductions in market demand, in both Europe and North America, were more than offset by new program launches in both regions - resulting in a sales volume increase of $7
million. Pricing to OEM customers and other automotive suppliers remained stable compared to the prior year.



49



---

##### Table of Contents

Gross margin decreased by $2 million. Increased sales volumes produced an additional $2 million in gross margin, which
was more than offset by increased depreciation of $2 million and adverse currency impacts of $2 million.



Aftermarket Products and Services



Reduced market demand in the Americas was partially offset by new customer acquisitions, whereas in Europe, market demand fell slightly. These factors combined to reduce
net sales by $18 million. However, net prices to Aftermarket customers increased by $8 million, and favorable currency impacts primarily in South America increased sales by a an additional $6 million.



Gross margin was $150 million for the third quarter of 2005 compared with $166 million in the
same period of 2004. The lower sales volumes combined with an unfavorable shift in the mix of products sold and the cost of new customers and product launches reduced margin by $27 million. This was partially offset by increased customer pricing of
$8 million, productivity gains in excess of labor and benefits inflation of $2 million, and currency impacts of $1 million.



Corporate



Corporate expenses are comprised primarily of certain central headquarters functions as well as employee post-retirement benefits and other general insurance coverages.
The increase of $18 million in Corporate expenses is primarily due to increased pension expense attributable to actual versus expected returns on pension plan assets in prior years and changes in underlying assumptions.



Selling, General and Administrative Expenses



Selling, general and administrative expenses were $216 million, or 14% of net sales, for the
third quarter of 2005 as compared to $235 million, or 16% of net sales, for the same quarter of 2004. Selling, general and administrative expenses decreased primarily due to cost reduction and restructuring activities, resulting in lower
administrative overheads, and lower medical and benefit costs in North America.



Interest Expense, Net



Interest expense, net was $35 million in the third quarter of 2005 compared to $23 million for the same quarter of 2004. This increase represents higher interest expense
relating to higher average interest rates.



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



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



Restructuring Activities



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



50



---

##### Table of Contents

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



|                                          |  |                       |      |   |    |   |      |     |  |   |      |   |  |           |      |   |       |   |      |   |  |   |      |  
|----------------------------------------- |  | --------------------- | ---- | - | -- | - | ---- | --- |  | - | ---- | - |  | --------- | ---- | - | ----- | - | ---- | - |  | - | ---- | -
|                                          |  | Powertrain            |      |   | SS |   |      | VSP |  |   | APS  |   |  | Corporate |      |   | Total |  
|                                          |  | (Millions of dollars) |     
|Balance of reserves at June 30, 2005      |  | $                     | 16.0 |   |    | $ | 2.8  |     |  | $ | 1.0  |   |  | $         | 4.1  |   |       | $ | 0.6  |   |  | $ | 24.5 |  
|Provisions                                |  |                       | 1.8  |   |    |   |     |     |  |   | 1.1  |   |  |           |     |   |       |   | 1.6  |   |  |   | 4.5  |  
|Reversals                                 |  |                       | (0.3 | ) |    |   |     |     |  |   |     |   |  |           |     |   |       |   |     |   |  |   | (0.3 | )
|Payments                                  |  |                       | (4.2 | ) |    |   | (0.8 | )   |  |   | (0.3 | ) |  |           | (0.1 | ) |       |   | (1.2 | ) |  |   | (6.6 | )
|Foreign currency                          |  |                       | (0.1 | ) |    |   |     |     |  |   |     |   |  |           |     |   |       |   |     |   |  |   | (0.1 | )
|                                          |  |                       |      |   |    |   |      |     |  |   |      |   |  |           |      |   |       |   |      |   |  |   |      |  
|Balance of reserves at September 30, 2005 |  | $                     | 13.2 |   |    | $ | 2.0  |     |  | $ | 1.8  |   |  | $         | 4.0  |   |       | $ | 1.0  |   |  | $ | 22.0 |  
|                                          |  |                       |      |   |    |   |      |     |  |   |      |   |  |           |      |   |       |   |      |   |  |   |      |  



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



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



Chapter 11 and Administration Related Reorganization Expenses



During the three months ended September 30, 2005 and 2004, the
Company recorded Chapter 11 and Administration related reorganization expenses of $29 million and $6 million, respectively. These expenses fluctuate largely based upon the necessity for professional services by third-party advisors in connection
with the Restructuring Proceedings. Chapter 11 and Administration related reorganization expenses in the consolidated statements of operations consist of legal, financial and advisory fees, including fees of the U.K. Administrators, critical
employee retention costs, and other directly related internal costs as follows:



|                                                 |  |                                 |      |      |   |       |  
|------------------------------------------------ |  | ------------------------------- | ---- | ---- | - | ----- | -
|                                                 |  | Three Months Ended September 30 |     
|                                                 |  | 2005                            |      | 2004 |  
|                                                 |  | (Millions of Dollars)           |     
|Professional fees directly related to the filing |  | $                               | 24.0 |      | $ | 21.7  |  
|Critical employee retention costs                |  |                                 | 2.8  |      |   | 2.0   |  
|Other direct costs                               |  |                                 | 2.1  |      |   | 1.2   |  
|Gain on settlement of outstanding claim          |  |                                 |     |      |   | (18.5 | )
|                                                 |  |                                 |      |      |   |       |  
|                                                 |  | $                               | 28.9 |      | $ | 6.4   |  
|                                                 |  |                                 |      |      |   |       |  



Cash payments for Chapter 11 and
Administration related reorganization expenses totaled $27 million and $33 million for the three months ended September 30, 2005 and 2004, respectively.



Income Tax Expense



For the three months ended September 30, 2005, the Company recorded income tax expense of $22 million on losses from continuing operations before income taxes of $48 million. This compares to income tax expense
of $32 million on earnings from continuing operations before income taxes of $6 million in the same period of 2004. Income tax expense for the three month period ended September 30, 2005 resulted primarily from taxable income generated by
certain international subsidiaries, non-recognition of income tax benefits on certain United Kingdom operating losses and certain non-deductible items in various jurisdictions.



51



---

##### Table of Contents

Consolidated Results Nine Months Ended September 30, 2005 compared to September 30, 2004



Net sales by reporting segment were:



|                                  |  |                                |       |      |   |        |  |   |     |  
|--------------------------------- |  | ------------------------------ | ----- | ---- | - | ------ |  | - | --- | -
|                                  |  | Nine Months Ended September 30 |      
|                                  |  | 2005                           |       | 2004 |   | Change | 
|                                  |  | (Millions of Dollars)          |      
|Powertrain                        |  | $                              | 1,666 |      | $ | 1,596  |  | $ | 70  |  
|Sealing Systems                   |  |                                | 368   |      |   | 385    |  |   | (17 | )
|Vehicle Safety and Performance    |  |                                | 570   |      |   | 524    |  |   | 46  |  
|Aftermarket Products and Services |  |                                | 2,195 |      |   | 2,121  |  |   | 74  |  
|                                  |  |                                |       |      |   |        |  |   |     |  
|                                  |  | $                              | 4,799 |      | $ | 4,626  |  | $ | 173 |  
|                                  |  |                                |       |      |   |        |  |   |     |  



Net Sales by group and region were:



|         |  |                                |   |  |    |   |  |     |   |  |     |   |  |       |  
|-------- |  | ------------------------------ | - |  | -- | - |  | --- | - |  | --- | - |  | ----- | -
|         |  | Nine Months Ended September 30 |  
|         |  | Powertrain                     |   |  | SS |   |  | VSP |   |  | APS |   |  | Total |  
|2005     |  |                                |   |  |    |   |  |     |   |  |     |   |  |       |  
|Americas |  | 29                             | % |  | 67 | % |  | 34  | % |  | 74  | % |  | 55    | %
|Europe   |  | 69                             | % |  | 32 | % |  | 61  | % |  | 24  | % |  | 43    | %
|Asia     |  | 2                              | % |  | 1  | % |  | 5   | % |  | 2   | % |  | 2     | %
|         |  |                                |   |  |   
|2004     |  |                                |   |  |    |   |  |     |   |  |     |   |  |       |  
|Americas |  | 28                             | % |  | 68 | % |  | 37  | % |  | 73  | % |  | 55    | %
|Europe   |  | 70                             | % |  | 31 | % |  | 60  | % |  | 25  | % |  | 43    | %
|Asia     |  | 2                              | % |  | 1  | % |  | 3   | % |  | 2   | % |  | 2     | %



Gross margin by reporting segment was:



|                                  |  |                                |     |   |      |   |     |        |  |   |     |  
|--------------------------------- |  | ------------------------------ | --- | - | ---- | - | --- | ------ |  | - | --- | -
|                                  |  | Nine Months Ended September 30 |    
|                                  |  | 2005                           |     |   | 2004 |   |     | Change | 
|                                  |  | (Millions of Dollars)          |    
|Powertrain                        |  | $                              | 234 |   |      | $ | 234 |        |  | $ |    |  
|Sealing Systems                   |  |                                | 14  |   |      |   | 37  |        |  |   | (23 | )
|Vehicle Safety and Performance    |  |                                | 139 |   |      |   | 143 |        |  |   | (4  | )
|Aftermarket Products and Services |  |                                | 486 |   |      |   | 509 |        |  |   | (23 | )
|Corporate                         |  |                                | (72 | ) |      |   | (23 | )      |  |   | (49 | )
|                                  |  |                                |     |   |      |   |     |        |  |   |     |  
|                                  |  | $                              | 801 |   |      | $ | 900 |        |  | $ | (99 | )
|                                  |  |                                |     |   |      |   |     |        |  |   |     |  



Net sales increased by $173 million,
or 4%, to $4,799 million for the nine months ended September 30, 2005 from $4,626 million in the same period of 2004. Net sales were favorably impacted by $94 million in sales volumes and $82 million of foreign currency, partially offset by net
customer price reductions of $3 million. Increased sales volumes reflect the impact of increased heavy-duty vehicle production which offset the decline in light vehicle automotive production in North America and Europe. Additionally, the Company
benefited from new program launches in both the OE market and the Aftermarket.



Gross margin decreased by $99 million, or 11%, to $801 million for the nine months ended September 30, 2005 from $900 million in the same period of 2004. The significant adverse factors contributing to this decrease were increased
pension costs of $43 million, material price inflation of $40 million, and unfavorable product sales and mix of $20 million. These adverse factors were partially offset by productivity gains in excess of labor and benefits inflation of $16 million.



52



---

##### Table of Contents

Reporting Segment Results  Nine Months Ended September 30, 2005 compared to September 30, 2004



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



|                                     |  |                       |       |   |    |   |     |     |  |   |     |   |           |   |       |  |   |   |  |   |       |  
|------------------------------------ |  | --------------------- | ----- | - | -- | - | --- | --- |  | - | --- | - | --------- | - | ----- |  | - | - |  | - | ----- | -
|                                     |  | Powertrain            |       |   | SS |   |     | VSP |  |   | APS |   | Corporate |   | Total | 
|                                     |  | (Millions of Dollars) |      
|Sales                                |  |                       |       |   |    |   |     |     |  |   |     |   |           |   |       |  |   |   |  |   |       |  
|Nine months ended September 30, 2004 |  | $                     | 1,596 |   |    | $ | 385 |     |  | $ | 524 |   |           | $ | 2,121 |  | $ |  |  | $ | 4,626 |  
|Foreign currency                     |  |                       | 38    |   |    |   | 4   |     |  |   | 9   |   |           |   | 31    |  |   |  |  |   | 82    |  
|Sales volumes                        |  |                       | 43    |   |    |   | (18 | )   |  |   | 39  |   |           |   | 30    |  |   |  |  |   | 94    |  
|Customer pricing                     |  |                       | (11   | ) |    |   | (3  | )   |  |   | (2  | ) |           |   | 13    |  |   |  |  |   | (3    | )
|                                     |  |                       |       |   |    |   |     |     |  |   |     |   |           |   |       |  |   |   |  |   |       |  
|Nine months ended September 30, 2005 |  | $                     | 1,666 |   |    | $ | 368 |     |  | $ | 570 |   |           | $ | 2,195 |  | $ |  |  | $ | 4,799 |  
|                                     |  |                       |       |   |    |   |     |     |  |   |     |   |           |   |       |  |   |   |  |   |       |  



|                                     |  |                       |     |   |    |   |     |     |  |   |     |   |  |           |     |   |       |   |     |   |  |   |     |  
|------------------------------------ |  | --------------------- | --- | - | -- | - | --- | --- |  | - | --- | - |  | --------- | --- | - | ----- | - | --- | - |  | - | --- | -
|                                     |  | Powertrain            |     |   | SS |   |     | VSP |  |   | APS |   |  | Corporate |     |   | Total |  
|                                     |  | (Millions of Dollars) |    
|Gross Margin                         |  |                       |     |   |    |   |     |     |  |   |     |   |  |           |     |   |       |   |     |   |  |   |     |  
|Nine months ended September 30, 2004 |  | $                     | 234 |   |    | $ | 37  |     |  | $ | 143 |   |  | $         | 509 |   |       | $ | (23 | ) |  | $ | 900 |  
|Foreign currency                     |  |                       | (4  | ) |    |   | 1   |     |  |   | (3  | ) |  |           | 5   |   |       |   |     |   |  |   | (1  | )
|Sales volumes / mix                  |  |                       | 4   |   |    |   | (18 | )   |  |   | 17  |   |  |           | (23 | ) |       |   |    |   |  |   | (20 | )
|Customer pricing                     |  |                       | (11 | ) |    |   | (3  | )   |  |   | (2  | ) |  |           | 13  |   |       |   |    |   |  |   | (3  | )
|Depreciation and pension expense     |  |                       | 2   |   |    |   | (1  | )   |  |   | (5  | ) |  |           | (2  | ) |       |   | (43 | ) |  |   | (49 | )
|Material price inflation             |  |                       | (12 | ) |    |   | (9  | )   |  |   | (17 | ) |  |           | (1  | ) |       |   | (1  | ) |  |   | (40 | )
|Productivity, net of inflation       |  |                       | 21  |   |    |   | 7   |     |  |   | 6   |   |  |           | (15 | ) |       |   | (5  | ) |  |   | 14  |  
|                                     |  |                       |     |   |    |   |     |     |  |   |     |   |  |           |     |   |       |   |     |   |  |   |     |  
|Nine months ended September 30, 2005 |  | $                     | 234 |   |    | $ | 14  |     |  | $ | 139 |   |  | $         | 486 |   |       | $ | (72 | ) |  | $ | 801 |  
|                                     |  |                       |     |   |    |   |     |     |  |   |     |   |  |           |     |   |       |   |     |   |  |   |     |  



Powertrain



Increased market demand in both Europe and North America,
primarily from the heavy duty sector, combined with new program launches in the Americas and Asia more than offset the impact of minor program losses in Europe. As a result of these factors, net sales volumes increased by $43 million, with Europe,
the Americas and Asia all increasing. The favorable impact of foreign currency was $38 million, primarily in Europe and the impact of price reductions to OEM customers was $11 million.



Gross margin was unchanged from the prior year. The increased volumes, when combined with unfavorable changes in product and customer mix,
increased gross margin by $4 million. This was offset by adverse currency impacts of $4 million. Productivity gains in excess of labor and benefits inflation, combined with reduced depreciation expense were $23 million, primarily as a result of
significant activities undertaken in 2004 to relocate production to low cost regions. These favorable impacts were offset by $11 million in net customer price reductions and $12 million in increased costs of steel, aluminum, copper, tin and other
non-ferrous materials used in the manufacture of Powertrains products.



Sealing Systems



Net sales decreased by $17
million, with the reduction entirely in the Americas where the segment experienced reduced production volumes for key customers and platforms, primarily SUVs. In Europe, new program launches mostly offset the reduced demand for existing
applications. Favorable currency impacts, mostly in Europe, increased sales by $4 million, and net price reductions to OEM customers were $3 million.



Gross margin was reduced by $23 million. The impact of lower sales volumes, when combined with unfavorable product mix changes, was $18 million. This factor was further
compounded by $9 million of material price inflation, primarily stainless steel, aluminum, oil based resins and other materials used in the manufacture of gaskets and seals. Productivity net of labor and benefits inflation was $7 million, which was
partially offset by $3 million of customer price reductions.



53



---

##### Table of Contents

Vehicle Safety and Performance



Reduced market demand in the Americas was more than offset by new program launches with OEMs
and other automotive suppliers in the region. Europe experienced increased demand as well as significant program launches. These factors combined to increase sales volumes by $39 million. The favorable impact of foreign currency on sales was $9
million, partially offset by $2 million in net customer price reductions.



Gross margin decreased by $4 million. The higher sales volumes increased gross margins by $17 million but this was offset by the increased cost of raw materials of $17 million, primarily steel backing plates used in disc pad production,
molybdenum, and other chemicals and resins used in friction formulations and bonding processes. Productivity in excess of labor and benefits inflation was $6 million, which was more than offset by increased depreciation expense of $5 million,
customer pricing of $2 million and currency impacts of $3 million.



Aftermarket Products and Services



Net sales
increased due to $30 million of sales volumes, $31 million in foreign currency and $13 million in customer pricing. Sales volumes increased by $25 million due to the non-recurrence of a fire that destroyed the Smithville, TN distribution center in
2004, and temporarily halted shipments to customers during the first quarter of 2004. New business gains were primarily in North America, reflecting continued market share performance of the Companys products, particularly under-car
applications such as vehicle safety and performance, drum and rotor and wheel-end products. In Europe, market volumes fell, where reduced demand for engine applications offset increased demand for other product offerings.



Gross margin was $486 million for the nine months ended September 30, 2005 compared to
$509 million for the same quarter of 2004. The favorable impact of higher sales volumes was more than offset by an unfavorable shift in the mix of products, reducing margin by $23 million. Increased product scrap, depreciation, logistics, freight
and distribution costs combined with labor and benefits inflation more than offset other productivity improvements by $16 million. This decline was partially offset by $13 million in favorable customer pricing and $5 million of foreign currency. Raw
material prices increased just $1 million from the previous year: the impact of raw material inflation on APS being minimal as the majority of the product sold is manufactured internally by the other segments of the Company.



Corporate



Corporate expenses are comprised primarily of certain central headquarters functions as well
as employee post-retirement benefits and other general insurance coverages. The increase of $49 million in Corporate expenses is primarily due to increased pension expense attributable to actual versus expected returns on pension plan assets in
prior years and changes to underlying assumptions.



Selling, General and Administrative Expenses



Selling, general and
administrative expenses were $692 million, or 14% of net sales, for the nine months ended September 30, 2005 as compared to $711 million, or 15% of net sales, for the same period of 2004. The reduction is due to a continuing focus on
administrative overheads including professional fees, North American labor and benefits expenses, insurances, and infrastructure costs.



Interest Expense, Net



Interest expense, net was $97 million for the nine months ended September 30, 2005 compared to $73 million for the same period of 2004. This increase represents
higher interest expense on the DIP credit facility resulting from higher average outstanding borrowings and higher average interest rates on all outstanding debt.



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



54



---

##### Table of Contents

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



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



Restructuring Activities



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



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



|                                          |  |                       |      |   |    |   |      |     |  |   |      |   |  |           |      |   |       |   |      |   |  |   |      |  
|----------------------------------------- |  | --------------------- | ---- | - | -- | - | ---- | --- |  | - | ---- | - |  | --------- | ---- | - | ----- | - | ---- | - |  | - | ---- | -
|                                          |  | Powertrain            |      |   | SS |   |      | VSP |  |   | APS  |   |  | Corporate |      |   | Total |  
|                                          |  | (Millions of dollars) |     
|Balance of reserves at December 31, 2004  |  | $                     | 18.7 |   |    | $ | 3.8  |     |  | $ | 1.6  |   |  | $         | 2.9  |   |       | $ | 0.9  |   |  | $ | 27.9 |  
|Provisions                                |  |                       | 2.7  |   |    |   |     |     |  |   |     |   |  |           |     |   |       |   | 0.9  |   |  |   | 3.6  |  
|Reversals                                 |  |                       |     |   |    |   |     |     |  |   |     |   |  |           | (0.6 | ) |       |   | (0.2 | ) |  |   | (0.8 | )
|Payments                                  |  |                       | (3.1 | ) |    |   | (0.2 | )   |  |   | (0.1 | ) |  |           | (0.2 | ) |       |   |     |   |  |   | (3.6 | )
|Foreign currency                          |  |                       | (1.1 | ) |    |   | (0.2 | )   |  |   | 0.1  |   |  |           |     |   |       |   | 0.2  |   |  |   | (1.0 | )
|                                          |  |                       |      |   |    |   |      |     |  |   |      |   |  |           |      |   |       |   |      |   |  |   |      |  
|Balance of reserves at March 31, 2005     |  |                       | 17.2 |   |    |   | 3.4  |     |  |   | 1.6  |   |  |           | 2.1  |   |       |   | 1.8  |   |  |   | 26.1 |  
|Provisions                                |  |                       | 2.9  |   |    |   | 0.3  |     |  |   | 0.1  |   |  |           | 2.3  |   |       |   |     |   |  |   | 5.6  |  
|Reversals                                 |  |                       | (0.1 | ) |    |   |     |     |  |   | (0.4 | ) |  |           |     |   |       |   | (0.3 | ) |  |   | (0.8 | )
|Payments                                  |  |                       | (3.1 | ) |    |   | (0.7 | )   |  |   | (0.2 | ) |  |           | (0.2 | ) |       |   | (0.9 | ) |  |   | (5.1 | )
|Foreign currency                          |  |                       | (0.9 | ) |    |   | (0.2 | )   |  |   | (0.1 | ) |  |           | (0.1 | ) |       |   |     |   |  |   | (1.3 | )
|                                          |  |                       |      |   |    |   |      |     |  |   |      |   |  |           |      |   |       |   |      |   |  |   |      |  
|Balance of reserves at June 30, 2005      |  |                       | 16.0 |   |    |   | 2.8  |     |  |   | 1.0  |   |  |           | 4.1  |   |       |   | 0.6  |   |  |   | 24.5 |  
|Provisions                                |  |                       | 1.8  |   |    |   |     |     |  |   | 1.1  |   |  |           |     |   |       |   | 1.6  |   |  |   | 4.5  |  
|Reversals                                 |  |                       | (0.3 | ) |    |   |     |     |  |   |     |   |  |           |     |   |       |   |     |   |  |   | (0.3 | )
|Payments                                  |  |                       | (4.2 | ) |    |   | (0.8 | )   |  |   | (0.3 | ) |  |           | (0.1 | ) |       |   | (1.2 | ) |  |   | (6.6 | )
|Foreign currency                          |  |                       | (0.1 | ) |    |   |     |     |  |   |     |   |  |           |     |   |       |   |     |   |  |   | (0.1 | )
|                                          |  |                       |      |   |    |   |      |     |  |   |      |   |  |           |      |   |       |   |      |   |  |   |      |  
|Balance of reserves at September 30, 2005 |  | $                     | 13.2 |   |    | $ | 2.0  |     |  | $ | 1.8  |   |  | $         | 4.0  |   |       | $ | 1.0  |   |  | $ | 22.0 |  
|                                          |  |                       |      |   |    |   |      |     |  |   |      |   |  |           |      |   |       |   |      |   |  |   |      |  



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



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



55



---

##### Table of Contents

Chapter 11 and Administration Related Reorganization Expenses



During the nine months ended September 30, 2005 and 2004, the Company recorded Chapter
11 and Administration related reorganization expenses of $79 million and $67 million, respectively. These expenses fluctuate largely based upon the necessity for professional services by third-party advisors in connection with the Restructuring
Proceedings.



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



|                                                 |  |                                |      |      |   |       |  
|------------------------------------------------ |  | ------------------------------ | ---- | ---- | - | ----- | -
|                                                 |  | Nine Months Ended September 30 |     
|                                                 |  | 2005                           |      | 2004 |  
|                                                 |  | (Millions of Dollars)          |     
|Professional fees directly related to the filing |  | $                              | 68.4 |      | $ | 75.6  |  
|Critical employee retention costs                |  |                                | 8.4  |      |   | 6.0   |  
|Other direct costs                               |  |                                | 2.3  |      |   | 3.7   |  
|Gain on settlement of outstanding claim          |  |                                |     |      |   | (18.5 | )
|                                                 |  |                                |      |      |   |       |  
|                                                 |  | $                              | 79.1 |      | $ | 66.8  |  
|                                                 |  |                                |      |      |   |       |  



Cash payments for Chapter 11 and
Administration related reorganization expenses totaled $86 million and $77 million for the nine months ended September 30, 2005 and 2004, respectively.



Income Tax Expense



For the nine months ended September 30, 2005, the Company recorded income tax expense of $74 million on a loss from continuing operations before income taxes of $56 million. This compares to income tax expense of
$72 million on earnings from continuing operations before income taxes of $21 million in the same period of 2004. Income tax expense for the nine month period ended September 30, 2005 resulted primarily from taxable income generated by certain
international subsidiaries, non-recognition of income tax benefits on certain United Kingdom operating losses and certain non-deductible items in various jurisdictions.



Litigation and Environmental Contingencies



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



Liquidity and Capital Resources



Cash Flow



Cash flow provided from operating activities was $158.5 million for the nine months ended
September 30, 2005, representing a decline of $101.9 million as compared to the same period of 2004. The net change in cash provided from operating activities was primarily attributable to a decrease in the Companys 2005 net earnings and
the inclusion of the involuntary conversion of assets associated with a fire at the Companys Smithville, TN distribution center during the nine-month period ended September 30, 2004, which did not reoccur during the same period of 2005.



The 2005 impact of changes in working capital reduced cash flow by $70.3
million, resulting from increased accounts receivable of $87.9 million and decreased accounts payable of $23.5 million, which were only partially offset by decreased inventories of $41.1 million. In 2004, working capital reduced cashflow by $175.7
million, resulting from increased accounts receivable of $112.5 million and increased inventories of $141.7 million, partially offset by increased accounts payable of $78.5 million.



56



---

##### Table of Contents

Federal-Mogul subsidiaries in Germany, France, Italy and Spain are party to accounts receivable factoring arrangements.
Amounts factored or discounted under these facilities was $140 million as of September 30, 2005 compared to $186 million as of December 31, 2004, of which $130 million and $172 million were factored without recourse, respectively. Expenses
associated with receivables factored or discounted are recorded in the statement of operations as other expense, net. Under terms of the French factoring arrangement, the Company is not obligated to draw cash immediately upon the
factoring of accounts receivable. Thus, as of September 30, 2005 and December 31, 2004, the Company has outstanding factoring amounts of $12 million and $10 million, respectively, for which cash has not yet been drawn.



Cash flow used by investing activities was $111.7 million in the first nine months of 2005.
Capital expenditures of $125.7 million were partially offset by proceeds from the sale of property, plant and equipment of $14.0 million. Cash flow provided from financing activities was $47.9 million for the first nine months of 2005 resulting from
a net increase in borrowing on the Companys debtor-in-possession (DIP) credit facility of $50.7 million.



Chapter 11 Financing



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



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



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



The Company has pledged 100% of the capital stock of
certain U.S. subsidiaries, 65% of capital stock of certain foreign subsidiaries and certain intercompany loans to secure the Senior Credit Agreements of the Company. Certain of such pledges also extend to the Notes, Medium-Term Notes and Senior
Notes . In addition, certain subsidiaries of the Company have guaranteed the senior debt (refer to Note 18, Consolidating Condensed Financial Information of Guarantor Subsidiaries.)



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



57



---

##### Table of Contents

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



Restricted Cash



Under the U.K. Restructuring Proceedings, cash in the United Kingdom is
available only for use by the debtor entities within the United Kingdom and is not available for use outside of such entities. At September 30, 2005 and December 31, 2004, such cash balances were $412 million and $425 million,
respectively.



Other Liquidity and Capital Resource Items



The Company maintains investments in various non-consolidated affiliates, which are located
in Turkey, China, Korea, India, Japan, the United States and Mexico. The Companys direct ownership in such affiliates ranges from approximately 5% to 50%. The aggregate investment in these affiliates approximated $160 million at both
September 30, 2005 and December 31, 2004.



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



The Company holds a 50%
non-controlling interest in a joint venture located in Turkey. This joint venture was established for the purpose of manufacturing and marketing automotive parts including pistons, pins, piston rings, and cylinder liners to original equipment
(OE) and Aftermarket customers. Pursuant to the joint venture agreement, the Companys partner holds an option to put its shares to a subsidiary of the Company at the higher of the current fair value or at a guaranteed minimum
amount. The guaranteed minimum amount represents a contingent guarantee of the initial investment of the investment partner. The contingent guarantee can be exercised at the discretion of the joint venture partner. The term of the contingent
guarantee is indefinite, consistent with the terms of the joint venture agreement. However, the contingent guarantee would not survive termination of the joint venture agreement. As of September 30, 2005, the total amount of the contingent
guarantee, were all triggering events to occur, approximated $58.6 million. Management believes that this contingent guarantee is substantially less than the estimated current fair value of the guarantees interest in the affiliate. Management
also believes that exercise of the put option is not reasonably likely within the foreseeable future. However, if this put option is exercised at its estimated current fair value, such exercise would have a material effect on the Companys
liquidity. Any value in excess of the minimum guaranteed amount of the put option would be the subject of negotiation between the Company and its investment partner.



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



58



---

##### Table of Contents

|ITEM 3. | QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------



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



Foreign Currency Risk



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



As currency exchange rates change, translation of the statements of operations of the Companys international businesses into United States dollars affects year-over-year comparability of operating results. The
Company does not generally hedge operating translation risks because cash flows from international operations are generally reinvested locally. Changes in foreign currency exchange rates are generally reported as a component of stockholders
equity for the Companys foreign subsidiaries reporting in local currencies and as a component of income for its foreign subsidiaries using the U.S. dollar as the functional currency. The Companys other comprehensive loss was increased by
$132 million and decreased by $13 million for the nine months ended September 30, 2005 and 2004, respectively, due to cumulative translation adjustments resulting primarily from changes in the U.S. Dollar to the Euro and British Pound.



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



Interest Rate
Risk



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



In connection with the Restructuring Proceedings, the Company entered into a debtor-in-possession (DIP) credit facility to
supplement liquidity and fund operations during the restructuring proceedings. The December 2004 DIP credit facility expires in December 2005, and the interest rate is either the alternate base rate (ABR) plus 11/4percentage points or a formula based on the London Inter-Bank Offered Rate (LIBOR) plus 21/4percentage points. The ABR is the greater of either the banks base rate or the federal funds rate plus 1/2percentage point. The commitment available under the DIP credit facility is mandatorily reduced by a portion
of proceeds received from future asset or business divestitures. The amount outstanding from the DIP facility as of September 30, 2005 was approximately $351.3 million. The Company is currently negotiating the renewal of its DIP credit facility
and anticipates completing these negotiations prior to the December 2005 expiration date of its current facility.



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



Commodity Price Risk



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



59



---

##### Table of Contents

monitors its commodity price risk exposures periodically to maximize the overall effectiveness of its commodity forward contracts. Principal raw materials
hedged include natural gas, copper, nickel, lead, high-grade aluminum and aluminum alloy. Forward contracts used to mitigate commodity price risk associated with raw materials, for up to eighteen months in the future, are designated as cash flow
hedging instruments. These instruments are intended to offset the effect of changes in raw materials prices on forecasted purchases. The Company had twenty-five contracts outstanding with a combined notional value of $17.2 million at
September 30, 2005, and three contracts outstanding with a combined notional value of $6.5 million at December 31, 2004.



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



60



---

##### Table of Contents

|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------



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



Disclosure Controls and Procedures



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



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



Changes to Internal Control Over Financial Reporting



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



Pursuant to ongoing integration efforts
associated with previous acquisitions, the Company converted its financial systems at certain of it North American operating units to an existing common information technology platform during the third quarter of 2005.



61



---

##### Table of Contents

PART II

OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------



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



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



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES
|------- | -------------------------------



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



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



|ITEM 6. | EXHIBITS
|------- | --------



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



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



62



---

##### Table of Contents

SIGNATURES



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



FEDERAL-MOGUL CORPORATIONBy:

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

/s/ Alan J. HaughieAlan J. HaughieVice President, Controller and Chief Accounting Officer




Dated: October 28, 2005



63